TAUBMAN CENTERS INC, 10-Q filed on 8/2/2010
Quarterly Report
CONSOLIDATED BALANCE SHEET (USD $)
In Thousands
6 Months Ended
Jun. 30, 2010
Dec. 31, 2009
Assets:
 
 
Properties
$ 3,495,599 
$ 3,496,853 
Accumulated depreciation and amortization
(1,148,314)
(1,100,610)
Properties, net
2,347,285 
2,396,243 
Investment in Unconsolidated Joint Ventures (Note 3)
89,007 
89,804 
Cash and cash equivalents
9,227 
16,176 
Accounts and notes receivable, less allowance for doubtful accounts of $8,049 and $6,894 in 2010 and 2009
39,383 
44,503 
Accounts receivable from related parties
1,702 
1,558 
Deferred charges and other assets
74,326 
58,569 
Total Assets
2,560,930 
2,606,853 
Liabilities:
 
 
Notes payable (Note 4)
2,688,242 
2,691,019 
Accounts payable and accrued liabilities
224,057 
230,276 
Distributions in excess of investments in and net income of Unconsolidated Joint Ventures (Note 3)
159,090 
160,305 
Liabilities
3,071,389 
3,081,600 
Commitments and contingencies (Notes 4, 6, 7, and 8)
 
 
Equity:
 
 
Series B Non-Participating Convertible Preferred Stock, $0.001 par and liquidation value, 40,000,000 shares authorized, 26,233,126 and 26,359,235 shares issued and outstanding at June 30, 2010 and December 31, 2009
26 
26 
Common Stock, $0.01 par value, 250,000,000 shares authorized, 54,679,545 and 54,321,586 shares issued and outstanding at June 30, 2010 and December 31, 2009
547 
543 
Additional paid-in capital
585,668 
579,983 
Accumulated other comprehensive income (loss)
(21,654)
(24,443)
Dividends in excess of net income
(916,328)
(884,666)
Total Shareowners
(351,741)
(328,557)
Noncontrolling interests (Note 5)
(158,718)
(146,190)
Stockholders' Equity, including Portion Attributable to Noncontrolling Interest
(510,459)
(474,747)
Liabilities and equity
2,560,930 
2,606,853 
Series G Preferred Stock [Member]
 
 
Equity:
 
 
Preferred Stock Value
0 
0 
Series H Preferred Stock [Member]
 
 
Equity:
 
 
Preferred Stock Value
$ 0 
$ 0 
PARENTHETICAL DATA TO THE CONSOLIDATED BALANCE SHEET (USD $)
In Thousands, except Share data
Jun. 30, 2010
Dec. 31, 2009
Assets:
 
 
Allowance for doubtful accounts
$ 8,049 
$ 6,894 
Equity:
 
 
Common stock, par value
0.01 
0.01 
Common stock, shares authorized
250,000,000 
250,000,000 
Common stock, shares issued
54,679,545 
54,321,586 
Common stock, shares outstanding
54,679,545 
54,321,586 
Series B Preferred Stock [Member]
 
 
Equity:
 
 
Series B Non-Participating Convertible Preferred Stock, par value
0.001 
0.001 
Series B Non-Participating Convertible Preferred Stock, liquidation value
0.001 
0.001 
Series B Non-Participating Convertible Preferred Stock, shares authorized
40,000,000 
40,000,000 
Series B Non-Participating Convertible Preferred Stock, shares issued
26,233,126 
26,359,235 
Series B Non-Participating Convertible Preferred Stock, shares outstanding
26,233,126 
26,359,235 
Series G Preferred Stock [Member]
 
 
Equity:
 
 
Preferred stock, no par value
0 
0 
Preferred stock, liquidation preference
100,000,000 
100,000,000 
Preferred stock, shares authorized
4,000,000 
4,000,000 
Preferred stock, shares issued
4,000,000 
4,000,000 
Preferred stock, shares outstanding
4,000,000 
4,000,000 
Series H Preferred Stock [Member]
 
 
Equity:
 
 
Preferred stock, no par value
0 
0 
Preferred stock, liquidation preference
$ 87,000,000 
$ 87,000,000 
Preferred stock, shares authorized
3,480,000 
3,480,000 
Preferred stock, shares issued
3,480,000 
3,480,000 
Preferred stock, shares outstanding
3,480,000 
3,480,000 
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (USD $)
In Thousands, except Share data
3 Months Ended
Jun. 30,		 6 Months Ended
Jun. 30,
2010
2009
2010
2009
Revenues:
 
 
 
 
Minimum rents
$ 84,081 
$ 84,016 
$ 167,435 
$ 171,452 
Percentage rents
1,061 
561 
3,135 
2,721 
Expense recoveries
56,334 
58,525 
109,255 
115,283 
Management, leasing, and development services
4,007 
3,189 
7,063 
6,745 
Other
8,599 
12,648 
18,683 
20,428 
Total Revenue
154,082 
158,939 
305,571 
316,629 
Expenses:
 
 
 
 
Maintenance, taxes, and utilities
44,535 
46,946 
87,611 
91,487 
Other operating
18,542 
16,352 
36,347 
31,317 
Restructuring charge (Note 1)
 
169 
 
2,630 
Management, leasing, and development services
2,185 
1,930 
3,778 
3,836 
General and administrative
7,036 
6,847 
14,425 
13,735 
Interest expense
37,923 
36,473 
75,340 
72,706 
Depreciation and amortization
35,918 
36,058 
73,002 
72,351 
Total Expenses
146,139 
144,775 
290,503 
288,062 
Nonoperating income
1,150 
198 
1,299 
433 
Impairment loss on marketable securities (Note 10)
 
(1,666)
 
(1,666)
Income before income tax expense and equity in income of Unconsolidated Joint Ventures
9,093 
12,696 
16,367 
27,334 
Income tax expense (Note 2)
(114)
(198)
(310)
(468)
Equity in income of Unconsolidated Joint Ventures (Note 3)
9,505 
8,368 
19,240 
18,526 
Net income
18,484 
20,866 
35,297 
45,392 
Net income attributable to noncontrolling interests (Note 5)
(7,011)
(7,938)
(13,521)
(16,832)
Net income attributable to Taubman Centers, Inc.
11,473 
12,928 
21,776 
28,560 
Distributions to participating securities of TRG (Note 7)
(361)
(361)
(723)
(836)
Preferred stock dividends
(3,659)
(3,659)
(7,317)
(7,317)
Net income attributable to Taubman Centers, Inc. common shareowners
7,453 
8,908 
13,736 
20,407 
Net income
18,484 
20,866 
35,297 
45,392 
Other comprehensive income:
 
 
 
 
Unrealized gain on interest rate instruments and other
3,466 
4,064 
5,899 
4,280 
Impairment loss on marketable securities
 
1,666 
 
1,666 
Other
316 
314 
631 
631 
Comprehensive income
22,266 
26,910 
41,827 
51,969 
Comprehensive income attributable to noncontrolling interests
(9,206)
(10,807)
(17,296)
(20,129)
Comprehensive income attributable to Taubman Centers, Inc.
13,060 
16,103 
24,531 
31,840 
Basic earnings per common share (Note 9)
0.14 
0.17 
0.25 
0.38 
Diluted earnings per common share (Note 9)
0.14 
0.17 
0.25 
0.38 
Cash dividends declared per common share
$ 0.415 
$ 0.415 
$ 0.83 
$ 0.83 
Weighted average number of common shares outstanding - basic
54,550,964 
53,120,769 
54,454,579 
53,093,988 
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (USD $)
In Thousands, except Share data
Preferred Stock [Member]
Common Stock [Member]
Additional Paid-in Capital [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Dividends in Excess of Net Income [Member]
Noncontrolling Interest [Member]
Total
Balance, shares at Dec. 31, 2008
33,909,235 
53,018,987 
 
 
 
 
 
Balance at Dec. 31, 2008
$ 26 
$ 530 
$ 556,145 
$ (29,778)
$ (726,097)
$ (61,034)
$ (260,208)
Issuance of stock pursuant to Continuing Offer (Notes 5, 7, and 8)
 
 
4 
 
 
(4)
 
Issuance of stock pursuant to Continuing Offer, shares
(10,000)
24,759 
 
 
 
 
 
Share-based compensation under employee and director benefit plans (Note 7)
 
1 
3,091 
 
 
 
3,092 
Share-based compensation under employee and director benefit plans, shares
 
77,023 
 
 
 
 
 
Dividend equivalents (Note 7)
 
 
 
 
(179)
 
(179)
Dividends and distributions
 
 
 
 
(52,249)
(32,328)
(84,577)
Net income
 
 
 
 
28,560 
16,832 
45,392 
Unrealized gain on interest rate instruments and other
 
 
 
1,747 
 
2,533 
4,280 
Impairment loss on marketable securities
 
 
 
1,112 
 
554 
1,666 
Other
 
 
 
421 
 
210 
631 
Balance, shares at Jun. 30, 2009
33,899,235 
53,120,769 
 
 
 
 
 
Balance at Jun. 30, 2009
26 
531 
559,240 
(26,498)
(749,965)
(73,237)
(289,903)
Balance, shares at Dec. 31, 2009
33,839,235 
54,321,586 
 
 
 
 
 
Balance at Dec. 31, 2009
26 
543 
579,983 
(24,443)
(884,666)
(146,190)
(474,747)
Issuance of stock pursuant to Continuing Offer (Notes 5, 7, and 8)
 
1 
(624)
34 
 
589 
 
Issuance of stock pursuant to Continuing Offer, shares
(126,109)
126,116 
 
 
 
 
 
Share-based compensation under employee and director benefit plans (Note 7)
 
3 
6,309 
 
 
 
6,312 
Share-based compensation under employee and director benefit plans, shares
 
231,843 
 
 
 
 
 
Dividend equivalents (Note 7)
 
 
 
 
(94)
 
(94)
Dividends and distributions
 
 
 
 
(53,344)
(30,413)
(83,757)
Net income
 
 
 
 
21,776 
13,521 
35,297 
Unrealized gain on interest rate instruments and other
 
 
 
2,330 
 
3,569 
5,899 
Other
 
 
 
425 
 
206 
631 
Balance, shares at Jun. 30, 2010
33,713,126 
54,679,545 
 
 
 
 
 
Balance at Jun. 30, 2010
$ 26 
$ 547 
$ 585,668 
$ (21,654)
$ (916,328)
$ (158,718)
$ (510,459)
CONSOLIDATED STATEMENT OF CASH FLOWS (USD $)
In Thousands
6 Months Ended
Jun. 30,
2010
2009
Cash Flows From Operating Activities:
 
 
Net income
$ 35,297 
$ 45,392 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
Depreciation and amortization
73,002 
72,351 
Provision for bad debts
2,204 
3,114 
Impairment Of Investments
 
1,666 
Gains on sales of land
(1,040)
 
Other
5,528 
4,913 
Increase (decrease) in cash attributable to changes in assets and liabilities:
 
 
Receivables, deferred charges, and other assets
(8,150)
3,472 
Accounts payable and other liabilities
2,050 
(18,786)
Net Cash Provided By Operating Activities
108,891 
112,122 
Cash Flows From Investing Activities:
 
 
Additions to properties
(32,153)
(24,824)
Proceeds from sales of land
1,557 
 
Repayments of notes receivable
719 
4,500 
Issuances of notes receivable
(2,948)
 
Contributions to Unconsolidated Joint Ventures
(6,820)
(1,445)
Distributions from Unconsolidated Joint Ventures in excess of income
7,524 
5,060 
Other
 
868 
Net Cash Used In Investing Activities
(32,121)
(15,841)
Cash Flows From Financing Activities:
 
 
Debt proceeds
82,500 
871 
Debt payments
(83,444)
(38,378)
Debt issuance costs
(869)
 
Issuance of common stock and/or partnership units in connection with incentive plans
1,928 
(1,204)
Distributions to noncontrolling interests
(30,413)
(32,328)
Distributions to participating securities of TRG
(723)
(836)
Cash dividends to preferred shareowners
(7,317)
(7,317)
Cash dividends to common shareowners
(45,237)
(66,092)
Other
(144)
(980)
Net Cash Used In Financing Activities
(83,719)
(146,264)
Net Decrease In Cash and Cash Equivalents
(6,949)
(49,983)
Cash and Cash Equivalents at Beginning of Period
16,176 
59,188 
Cash and Cash Equivalents at End of Period
$ 9,227 
$ 9,205 
Interim Financial Statements
Interim Financial Statements
Note 1 – Interim Financial Statements

General

Taubman Centers, Inc. (the Company or TCO) is a Michigan corporation that operates as a self-administered and self-managed real estate investment trust (REIT). The Taubman Realty Group Limited Partnership (the Operating Partnership or TRG) is a majority-owned partnership subsidiary of TCO that owns direct or indirect interests in all of the company’s real estate properties. In this report, the term “Company" refers to TCO, the Operating Partnership, and/or the Operating Partnership's subsidiaries as the context may require. The Company engages in the ownership, management, leasing, acquisition, disposition, development, and expansion of regional and super-regional retail shopping centers and interests therein. The Company’s owned portfolio as of June 30, 2010 included 23 urban and suburban shopping centers in ten states.

Taubman Properties Asia LLC and its subsidiaries (Taubman Asia), which is the platform for the Company’s expansion into the Asia-Pacific region, is headquartered in Hong Kong.

The unaudited interim financial statements should be read in conjunction with the audited financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2009. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial statements for the interim periods have been made. The results of interim periods are not necessarily indicative of the results for a full year.

Dollar amounts presented in tables within the notes to the financial statements are stated in thousands, except share data or as otherwise noted. Certain reclassifications have been made to 2009 amounts to conform with current year classifications.

Consolidation

The consolidated financial statements of the Company include all accounts of the Company, the Operating Partnership, and its consolidated subsidiaries, including The Taubman Company LLC (the Manager) and Taubman Asia.

Investments in entities not controlled but over which the Company may exercise significant influence (Unconsolidated Joint Ventures or UJVs) are accounted for under the equity method. The Company has evaluated its investments in the Unconsolidated Joint Ventures under guidance for determining whether an entity is a variable interest entity, including new amendments to ASC Topic 810 "Consolidation" that became effective January 1, 2010, and has concluded that the ventures are not variable interest entities. Accordingly, the Company accounts for its interests in these entities under general accounting standards for investments in real estate ventures (including guidance for determining effective control of a limited partnership or similar entity). The Company’s partners or other owners in these Unconsolidated Joint Ventures have substantive participating rights including approval rights over annual operating budgets, capital spending, financing, admission of new partners/members, or sale of the properties and the Company has concluded that the equity method of accounting is appropriate for these interests. Specifically, the Company’s 79% investment in Westfarms is through a general partnership in which the other general partners have approval rights over annual operating budgets, capital spending, refinancing, or sale of the property.

Ownership

In addition to the Company’s common stock, there are three classes of preferred stock (Series B, G, and H) outstanding as of June 30, 2010. Dividends on the 8% Series G and 7.625% Series H Preferred Stock are cumulative and are paid on the last day of each calendar quarter. The Company owns corresponding Series G and Series H Preferred Equity interests in the Operating Partnership that entitle the Company to income and distributions (in the form of guaranteed payments) in amounts equal to the dividends payable on the Company’s Series G and Series H Preferred Stock.
 
The Company also is obligated to issue to partners in the Operating Partnership other than the Company, upon subscription, one share of nonparticipating Series B Preferred Stock per each Operating Partnership unit. The Series B Preferred Stock entitles its holders to one vote per share on all matters submitted to the Company’s shareowners and votes together with the common stock on all matters as a single class. The holders of Series B Preferred Stock are not entitled to dividends or earnings. The Series B Preferred Stock is convertible into the Company’s common stock at a ratio of 14,000 shares of Series B Preferred Stock for one share of common stock.

The Operating Partnership

At June 30, 2010, the Operating Partnership’s equity included three classes of preferred equity (Series F, G, and H) and the net equity of the partnership unitholders. Net income and distributions of the Operating Partnership are allocable first to the preferred equity interests, and the remaining amounts to the general and limited partners in the Operating Partnership in accordance with their percentage ownership. The Series G and Series H Preferred Equity are owned by the Company and are eliminated in consolidation. The Series F Preferred Equity is owned by an institutional investor and accounted for as a noncontrolling interest of the Company.

The Company's ownership in the Operating Partnership at June 30, 2010 consisted of a 68% managing general partnership interest, as well as the Series G and H Preferred Equity interests. The Company's average ownership percentage in the Operating Partnership for the six months ended June 30, 2010 and 2009 was 67%. At June 30, 2010, the Operating Partnership had 80,931,121 partnership units outstanding, of which the Company owned 54,679,545 units.

Finite Life Entities

ASC Topic 480, “Distinguishing Liabilities from Equity” establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. At June 30, 2010, the Company held controlling interests in consolidated entities with specified termination dates in 2081 and 2083. The noncontrolling owners’ interests in these entities are to be settled upon termination by distribution or transfer of either cash or specific assets of the underlying entity. The estimated fair value of these noncontrolling interests was approximately $107 million at June 30, 2010, compared to a book value of $(99.5) million that is classified in Noncontrolling Interests in the Company’s Consolidated Balance Sheet.

Restructuring

In 2009, in response to the decreased level of active projects due to the downturn in the economy, the Company reduced its workforce by about 40 positions, primarily in areas that directly or indirectly affect its development initiatives in the U.S. and Asia. The charge for the six months ended June 30, 2009 was $2.6 million, which primarily represented the cost of terminations of personnel.
Income Taxes
Income Taxes
Note 2 – Income Taxes

Income Tax Expense

The Company’s state income tax expense for the three and six months ended June 30, 2010 and 2009 is as follows:

   
Three Months Ended June 30
    
Six Months Ended    June 30
  
   
2010
    
2009
    
2010
    
2009
  
Current
   $ 219     $ 362     $ 495     $ 680  
Deferred
     (105 )     (164 )     (185 )     (212 )
Total income tax expense
   $ 114     $ 198     $ 310     $ 468  

The Company expects to have less than $0.1 million of federal alternative minimum tax payable in 2010. The Company had no other federal or foreign income tax during these periods as a result of net operating losses incurred by the Company’s Taxable REIT Subsidiaries.
 
Deferred Taxes

Deferred tax assets and liabilities as of June 30, 2010 and December 31, 2009 are as follows:

   
2010
    
2009
  
Deferred tax assets:
            
Federal
   $ 7,795     $ 8,697  
Foreign
     1,971       1,513  
State
     6,540       6,467  
Total deferred tax assets
   $ 16,306     $ 16,677  
Valuation allowances
     (8,732 )     (9,090 )
Net deferred tax assets
   $ 7,574     $ 7,587  
Deferred tax liabilities:
                
Federal
   $ 616     $ 615  
State
     4,236       4,396  
Total deferred tax liabilities
   $ 4,852     $ 5,011  

The Company believes that it is more likely than not the results of future operations will generate sufficient taxable income to recognize the net deferred tax assets. These future operations are primarily dependent upon the Manager’s profitability, the timing and amounts of gains on land sales, the profitability of the Company’s Asian operations, the future profitability of the Company’s unitary filing group for Michigan Business Tax purposes, and other factors affecting the results of operations of the Taxable REIT Subsidiaries. The valuation allowances relate to net operating loss carryforwards and tax basis differences where there is uncertainty regarding their realizability.
Investments in Unconsolidated Joint Ventures
Investments in Unconsolidated Joint Ventures
Note 3 – Investments in Unconsolidated Joint Ventures

General Information

The Company owns beneficial interests in joint ventures that own shopping centers. The Operating Partnership is the direct or indirect managing general partner or managing member of these Unconsolidated Joint Ventures, except for the ventures that own Arizona Mills, The Mall at Millenia, and Waterside Shops.

Shopping Center
Ownership as of June 30, 2010 and December 31, 2009
Arizona Mills
   50%
Fair Oaks
50
The Mall at Millenia
50
Stamford Town Center
50
Sunvalley
50
Waterside Shops
25
Westfarms
79

The Company's carrying value of its Investment in Unconsolidated Joint Ventures differs from its share of the partnership or members’ equity reported in the combined balance sheet of the Unconsolidated Joint Ventures due to (i) the Company's cost of its investment in excess of the historical net book values of the Unconsolidated Joint Ventures and (ii) the Operating Partnership’s adjustments to the book basis, including intercompany profits on sales of services that are capitalized by the Unconsolidated Joint Ventures. The Company's additional basis allocated to depreciable assets is recognized on a straight-line basis over 40 years. The Operating Partnership’s differences in bases are amortized over the useful lives of the related assets.

In its Consolidated Balance Sheet, the Company separately reports its investment in Unconsolidated Joint Ventures for which accumulated distributions have exceeded investments in and net income of the Unconsolidated Joint Ventures. The net equity of certain joint ventures is less than zero because distributions are usually greater than net income, as net income includes non-cash charges for depreciation and amortization.
 
Combined Financial Information

Combined balance sheet and results of operations information is presented in the following table for the Unconsolidated Joint Ventures, followed by the Operating Partnership's beneficial interest in the combined operations information. Beneficial interest is calculated based on the Operating Partnership's ownership interest in each of the Unconsolidated Joint Ventures.


   
June 30
2010
    
December 31
2009
  
Assets:
            
Properties
   $ 1,095,311     $ 1,094,963  
Accumulated depreciation and amortization
     (410,494 )     (396,518 )
    $ 684,817     $ 698,445  
Cash and cash equivalents
     17,229       18,544  
Accounts and notes receivable, less allowance for doubtful accounts of $1,482 and $1,703 in 2010 and 2009
     19,488       26,982  
Deferred charges and other assets
     25,744       22,310  
    $ 747,278     $ 766,281  
                 
Liabilities and accumulated deficiency in assets:
                
Notes payable
   $ 1,087,056     $ 1,092,806  
Accounts payable and other liabilities
     36,858       50,615  
TRG's accumulated deficiency in assets
     (203,234 )     (205,566 )
Unconsolidated Joint Venture Partners' accumulated deficiency in assets
     (173,402 )     (171,574 )
    $ 747,278     $ 766,281  
                 
TRG's accumulated deficiency in assets (above)
   $ (203,234 )   $ (205,566 )
TRG basis adjustments, including elimination of intercompany profit
     69,430       70,371  
TCO's additional basis
     63,721       64,694  
Net Investment in Unconsolidated Joint Ventures
   $ (70,083 )   $ (70,501 )
Distributions in excess of investments in and net income of Unconsolidated Joint Ventures
     159,090       160,305  
Investment in Unconsolidated Joint Ventures
   $ 89,007     $ 89,804  

 
   
Three Months Ended June 30
    
Six Months Ended June 30
  
   
2010
    
2009
    
2010
    
2009
  
Revenues
   $ 63,722     $ 63,654     $ 127,062     $ 129,744  
Maintenance, taxes, utilities, and other operating expenses
   $ 22,845     $ 23,363     $ 43,675     $ 46,368  
Interest expense
     15,916       16,120       31,734       32,068  
Depreciation and amortization
     8,880       9,757       18,172       18,960  
Total operating costs
   $ 47,641     $ 49,240     $ 93,581     $ 97,396  
Nonoperating income
     (11 )     3       1       57  
Net income
   $ 16,070     $ 14,417     $ 33,482     $ 32,405  
                                 
Net income attributable to TRG
   $ 9,345     $ 8,005     $ 19,238     $ 18,265  
Realized intercompany profit, net of depreciation on TRG’s basis adjustments
     646       849       975       1,234  
Depreciation of TCO's additional basis
     (486 )     (486 )     (973 )     (973 )
Equity in income of Unconsolidated Joint Ventures
   $ 9,505     $ 8,368     $ 19,240     $ 18,526  
                                 
Beneficial interest in Unconsolidated Joint Ventures’ operations:
                                
Revenues less maintenance, taxes, utilities, and other operating expenses
   $ 23,076     $ 22,536     $ 46,491     $ 46,484  
Interest expense
     (8,248 )     (8,369 )     (16,450 )     (16,653 )
Depreciation and amortization
     (5,323 )     (5,799 )     (10,801 )     (11,305 )
Equity in income of Unconsolidated Joint Ventures
   $ 9,505     $ 8,368     $ 19,240     $ 18,526  

The estimated fair value of the Unconsolidated Joint Ventures’ notes payable was $1.1 billion at June 30, 2010 and December 31, 2009.
Beneficial Interest in Debt and Interest Expense
Beneficial Interest in Debt and Interest Expense
Note 4 – Beneficial Interest in Debt and Interest Expense

The Operating Partnership's beneficial interest in the debt, capitalized interest, and interest expense of its consolidated subsidiaries and its Unconsolidated Joint Ventures is summarized in the following table. The Operating Partnership's beneficial interest in the consolidated subsidiaries excludes debt and interest related to the noncontrolling interests in Cherry Creek Shopping Center (50%), International Plaza (49.9%), The Pier Shops (22.5%), The Mall at Wellington Green (10%), and MacArthur Center (MacArthur) (5%).

   
At 100%
    
At Beneficial Interest
  
   
Consolidated Subsidiaries
    
Unconsolidated Joint Ventures
    
Consolidated Subsidiaries
    
Unconsolidated Joint Ventures
  
Debt as of:
                        
June 30, 2010
   $ 2,688,242     $ 1,087,056     $ 2,329,317     $ 556,378  
December 31, 2009
     2,691,019       1,092,806       2,332,030       559,817  
                                 
Capitalized interest:
                                
Six months ended June 30, 2010
   $ 59             $ 59          
Six months ended June 30, 2009
     598     $ 23       588     $ 11  
                                 
Interest expense:
                                
Six months ended June 30, 2010
   $ 75,340     $ 31,734     $ 64,827     $ 16,450  
Six months ended June 30, 2009
     72,706       32,068       62,898       16,653  

Debt Covenants and Guarantees

Certain loan agreements contain various restrictive covenants, including a minimum net worth requirement, a maximum payout ratio on distributions, a minimum debt yield ratio, a maximum leverage ratio, minimum interest coverage ratios and a minimum fixed charges coverage ratio, the latter being the most restrictive. Other than The Pier Shops’ loan, which is in default, the Company is in compliance with all of its covenants and loan obligations as of June 30, 2010. The default on this loan did not trigger any cross defaults on the Company’s other indebtedness. The maximum payout ratio on distributions covenant limits the payment of distributions generally to 95% of funds from operations, as defined in the loan agreements, except as required to maintain the Company's tax status, pay preferred distributions, and for distributions related to the sale of certain assets.

Payments of principal and interest on the loans in the following table are guaranteed by the Operating Partnership as of June 30, 2010.

Center
  
Loan Balance
as of 6/30/10
    
TRG's Beneficial Interest in Loan Balance
as of 6/30/10
    
Amount of Loan Balance Guaranteed by TRG
as of 6/30/10
    
% of Loan Balance Guaranteed by TRG
    
% of Interest Guaranteed by TRG
  
   
(in millions)
              
Dolphin Mall
   $ 45.0     $ 45.0     $ 45.0       100 %     100 %
Fairlane Town Center
     80.0       80.0       80.0       100 %     100 %
Twelve Oaks Mall
     –       –       –       100 %     100 %

The Company is required to escrow cash balances for specific uses stipulated by certain of its lenders. As of June 30, 2010 and December 31, 2009, the Company’s cash balances restricted for these uses were $13.3 million and $3.5 million, respectively. Such amounts are included within Deferred Charges and Other Assets in the Company’s Consolidated Balance Sheet.

Debt Maturing in 2010

In June 2010, the Company completed a 10-year, $82.5 million non-recourse financing on The Mall at Partridge Creek that bears interest at an all-in-rate of 6.25%. The loan payments are based on amortizing principal over 30 years. The existing $73.8 million floating rate loan was paid off and the excess proceeds were used to pay down the Company’s revolving line of credit.

The Company is currently working on the refinancing of the $128 million loan on MacArthur, which matures in October 2010. The new loan is expected to have a 10-year term. The proceeds on the loan are expected to be approximately equal to the current principal amount.

See Note 12 for information on the July 2010 refinancing of Arizona Mills.

The Pier Shops Loan Default

The $135 million loan encumbering The Pier Shops is currently in default. Under the terms of the agreement, interest accrues at the original stated rate of 6.01% plus a 4% default rate. The Company will continue to record the operations of the center in its results until the loan obligation is extinguished upon transfer of the title of The Pier Shops (Note 8). In addition, a non-cash accounting gain will be recognized when the loan obligation is extinguished upon transfer of title of The Pier Shops.
Noncontrolling Interests
Noncontrolling Interests
Note 5 – Noncontrolling Interests

As of June 30, 2010 and December 31, 2009, noncontrolling interests in the Company are comprised of the ownership interests of (1) noncontrolling interests in the Operating Partnership and (2) the noncontrolling interests in joint ventures controlled by the Company through ownership or contractual arrangements. These noncontrolling interests reported in equity are not subject to any mandatory redemption requirements or other redemption features outside of the Company's control that would result in presentation outside of permanent equity pursuant to general accounting standards regarding the classification and measurement of redeemable equity instruments.

The net equity balance of the noncontrolling interests as of June 30, 2010 and December 31, 2009 includes the following:

   
2010
    
2009
  
Noncontrolling interests:
            
Noncontrolling interests in consolidated joint ventures
   $ (100,636 )   $ (100,014 )
Noncontrolling interests in partnership equity of TRG
     (87,299 )     (75,393 )
Preferred equity of TRG
     29,217       29,217  
    $ (158,718 )   $ (146,190 )

Net income attributable to the noncontrolling interests for the three months ended June 30, 2010 and June 30, 2009 includes the following:

   
2010
    
2009
  
Net income attributable to noncontrolling interests:
            
Noncontrolling share of income of consolidated joint ventures
   $ (1,968 )   $ (2,033 )
TRG Series F preferred distributions
     (615 )     (615 )
Noncontrolling share of income of TRG
     (4,428 )     (5,290 )
    $ (7,011 )   $ (7,938 )

Net income attributable to the noncontrolling interests for the six months ended June 30, 2010 and June 30, 2009 includes the following:

   
2010
    
2009
  
Net income attributable to noncontrolling interests:
            
Noncontrolling share of income of consolidated joint ventures
   $ (3,981 )   $ (3,726 )
TRG Series F preferred distributions
     (1,230 )     (1,230 )
Noncontrolling share of income of TRG
     (8,310 )     (11,876 )
    $ (13,521 )   $ (16,832 )

Equity Transactions

The following schedule presents the effects of changes in Taubman Centers, Inc.’s ownership interest in consolidated subsidiaries on Taubman Centers, Inc.’s equity for the six months ended June 30, 2010 and June 30, 2009:

   
2010
    
2009
  
Net income attributable to Taubman Centers, Inc. common shareowners
   $ 13,736     $ 20,407  
Transfers (to) from the noncontrolling interest –
                
Increase in Taubman Centers, Inc.’s paid-in capital for the acquisition of additional units of TRG under the Continuing Offer
     (589 )     (4 )
Net transfers (to) from noncontrolling interests
     (589 )     (4 )
Change from net income attributable to Taubman Centers, Inc. and transfers (to) from noncontrolling interests
   $ 13,147     $ 20,403  
Derivative and Hedging Activities
Derivative and Hedging Activities
Note 6 – Derivative and Hedging Activities

Risk Management Objective and Strategies for Using Derivatives

The Company uses derivative instruments, such as interest rate swaps and interest rate caps, primarily to manage exposure to interest rate risks inherent in variable rate debt and refinancings. The Company may also enter into forward starting swaps or treasury lock agreements to set the effective interest rate on a planned fixed-rate financing. The Company’s interest rate swaps involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. In a forward starting swap or treasury lock agreement that the Company cash settles in anticipation of a fixed rate financing or refinancing, the Company will receive or pay an amount equal to the present value of future cash flow payments based on the difference between the contract rate and market rate on the settlement date.

The Company does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedging instruments under the accounting requirements for derivatives and hedging.

As of June 30, 2010, the Company has exposure to three outstanding derivatives. Two of the derivatives are receive-variable (LIBOR) /pay-fixed interest rate swaps held by 50% owned Unconsolidated Joint Ventures that have total notional balances of $250 million and $30 million with swapped rates of 4.22% (including credit spread of 1.40% on the loan) expiring April 2011 and 5.95% (including credit spread of 0.90% on the loan) expiring November 2012, respectively. The third derivative is a receive-variable (LIBOR)/pay-fixed interest rate swap held by a 50.1% owned consolidated joint venture with a total notional balance of $325 million with a swap rate of 5.01% (including credit spread of 1.15% on the loan) expiring January 2011. All three of the swaps have been designated and are expected to be effective as cash flow hedges of the interest payments on the associated debt.

Cash Flow Hedges of Interest Rate Risk

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the unrealized gain or loss on the derivative is reported as a component of Other Comprehensive Income (OCI). The ineffective portion of the change in fair value is recognized directly in earnings. Net realized gains or losses resulting from derivatives that were settled in conjunction with planned fixed-rate financings or refinancings continue to be included in Accumulated Other Comprehensive Income (Loss) (AOCI) during the term of the hedged debt transaction.

Amounts reported in AOCI related to currently outstanding derivatives are recognized as an adjustment to income as interest payments are made on the Company’s variable-rate debt. Realized gains or losses on settled derivative instruments included in AOCI are recognized as an adjustment to income over the term of the hedged debt transaction.

The Company expects that approximately $10.0 million of the AOCI of Taubman Centers, Inc. and the noncontrolling interests will be reclassified from AOCI and recognized as a reduction of income in the following 12 months.

As of June 30, 2010, the Company had $3.2 million of net realized losses included in AOCI resulting from settled derivative instruments, which were designated as cash flow hedges, that are being recognized as a reduction of income over the term of the hedged debt.

The tables below present the effect of derivative instruments on the Company’s Consolidated Statement of Operations and Comprehensive Income for the three and six months ended June 30, 2010 and June 30, 2009. The tables include the location and amount of unrealized gains and losses on outstanding derivative instruments in cash flow hedging relationships and the location and amount of realized losses reclassified from AOCI into income resulting from settled derivative instruments associated with hedged debt.
 
During the three months ended June 30, 2010 and June 30, 2009, the Company did not have any hedge ineffectiveness or amounts that were excluded from the assessment of hedge effectiveness recorded in earnings.

   
Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
  
Location of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
  
Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
  
   
Three months ended
June 30
      
Three months ended
June 30
  
   
2010
    
2009
      
2010
    
2009
  
Derivatives in cash flow hedging relationships:
                          
Interest rate contract – consolidated subsidiaries
   $ 2,868     $ 2,582  
Interest Expense
   $ (2,932 )   $ (2,830 )
Interest rate contracts – UJVs
     694       1,167  
Equity in Income of UJVs
     (979 )     (905 )
Total derivatives in cash flow hedging relationships
   $ 3,562     $ 3,749       $ (3,911 )   $ (3,735 )
                                   
Realized losses on settled cash flow hedges:
                                  
Interest rate contracts – consolidated subsidiaries
                
Interest Expense
   $ (222 )   $ (222 )
Interest rate contract – UJVs
                
Equity in Income of UJVs
     (94 )     (94 )
Total realized losses on settled cash flow hedges
                     $ (316 )   $ (316 )

During the six months ended June 30, 2010 and June 30, 2009, the Company did not have any hedge ineffectiveness or amounts that were excluded from the assessment of hedge effectiveness recorded in earnings.

   
Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
  
Location of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
  
Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
  
   
Six months ended
June 30
      
Six months ended
June 30
  
   
2010
    
2009
      
2010
    
2009
  
Derivatives in cash flow hedging relationships:
                          
Interest rate contract – consolidated subsidiaries
   $ 4,900     $ 3,336  
Interest Expense
   $ (5,880 )   $ (5,501 )
Interest rate contracts – UJVs
     934       1,130  
Equity in Income of UJVs
     (1,968 )     (1,774 )
Total derivatives in cash flow hedging relationships
   $ 5,834     $ 4,466       $ (7,848 )   $ (7,275 )
                                   
Realized losses on settled cash flow hedges:
                                  
Interest rate contracts – consolidated subsidiaries
                
Interest Expense
   $ (443 )   $ (443 )
Interest rate contract – UJVs
                
Equity in Income of UJVs
     (188 )     (188 )
Total realized losses on settled cash flow hedges
                     $ (631 )   $ (631 )
 
The Company records all derivative instruments at fair value in the Consolidated Balance Sheet. The following table presents the location and fair value of the Company’s derivative financial instruments as reported in the Consolidated Balance Sheet as of June 30, 2010 and December 31, 2009. As of June 30, 2010 and December 31, 2009, the Company does not have any derivatives in an asset position.

     
Liability Derivatives
  
 
Consolidated Balance Sheet Location
  
June 30 2010
    
December 31 2009
  
Derivatives designated as hedging instruments:
              
Interest rate contract – consolidated subsidiaries
Accounts Payable and Accrued Liabilities
   $ 5,886     $ 10,786  
Interest rate contracts – UJVs
Investment in UJVs
     3,524       4,458  
Total derivatives designated as hedging instruments
     $ 9,410     $ 15,244  
Total derivatives
     $ 9,410     $ 15,244  

Contingent Features

As of June 30, 2010 and December 31, 2009, all three of the Company's outstanding derivatives contain provisions that state if the hedged entity defaults on any of its indebtedness in excess of $1 million, then the derivative obligation could also be declared in default. In addition, one of the three outstanding derivatives contains a provision that if the Company defaults on any of its indebtedness in excess of $1 million, then the derivative obligation could also be declared in default. Although the Company is currently in default on the debt relating to The Pier Shops, the Company is not in default on any debt obligations that would trigger a credit risk related default on its current outstanding derivatives.

As of June 30, 2010 and December 31, 2009, the fair value of derivative instruments with credit-risk-related contingent features that are in a liability position was $9.4 million and $15.2 million, respectively. As of June 30, 2010 and December 31, 2009, the Company was not required to post any collateral related to these agreements. If the Company breached any of these provisions it would be required to settle its obligations under the agreements at their fair value. See Note 10 for fair value information on derivatives.
Share-Based Compensation
Share-Based Compensation
Note 7 – Share-Based Compensation

In May 2008, the Company’s shareowners approved The Taubman Company 2008 Omnibus Long-Term Incentive Plan (2008 Omnibus Plan). The 2008 Omnibus Plan provides for the award to directors, officers, employees, and other service providers of the Company of restricted shares, restricted units of limited partnership in the Operating Partnership, options to purchase shares or Operating Partnership units, unrestricted shares or Operating Partnership units, and other awards to acquire up to an aggregate of 6.1 million Company common shares or Operating Partnership units. In addition, non-employee directors have the option to defer their compensation, other than their meeting fees, under a deferred compensation plan.

In May 2010, the Company’s shareowners approved an amendment to the 2008 Omnibus Plan to increase the Company common shares or Operating Partnership units available for awards by 2.4 million from an aggregate of 6.1 million to 8.5 million. This amendment also revised the methodology used to determine the amount of Company common shares or Operating Partnership units available for future grants. Under the 2008 Omnibus Plan (as amended) non-option awards granted after the May 2010 amendment are deducted at a ratio of 1.85 Company common shares or Operating Partnership units while non-option awards granted prior to the amendment continue to be deducted at a ratio of 2.85. Options are deducted on a one-for-one basis.  The amount available for future grants is adjusted when the number of contingently issuable shares or units are settled, for grants that are forfeited, and for options that expire without being exercised.

Prior to the adoption of the 2008 Omnibus Plan, the Company provided share-based compensation through an incentive option plan, a long-term incentive plan, and non-employee directors' stock grant and deferred compensation plans.
 
The compensation cost charged to income for the Company’s share-based compensation plans was $2.4 million and $3.9 million for the three and six months ended June 30, 2010, respectively. The compensation cost charged to income for the Company’s share-based compensation plans was $1.9 million and $3.6 million for the three and six months ended June 30, 2009, respectively. Compensation cost capitalized as part of properties and deferred leasing costs was approximately $0.1 million and $0.2 million for the three and six months ended June 30, 2010, respectively, and $0.1 million for both the three and six months ended June 30, 2009, respectively.

Options

A summary of option activity for the six months ended June 30, 2010 is presented below:

   
Number of Options
    
Weighted Average   Exercise Price
    
Weighted Average Remaining Contractual Term (in years)
    
Range of  Exercise Prices
  
Outstanding at January 1, 2010
     1,629,609     $ 35.24       6.8     $ 13.83 - $55.90  
Exercised
     (160,931 )     19.05                  
Outstanding at June 30, 2010
     1,468,678     $ 37.01       6.2     $ 13.83 - $55.90  
                                 
Fully vested options at June 30, 2010
     1,170,162     $ 37.32       6.3          

The aggregate intrinsic value (the difference between the period end stock price and the option exercise price) of in-the-money options outstanding and in-the-money fully vested options as of June 30, 2010 was $8.8 million and $6.9 million, respectively.

The total intrinsic value of options exercised during the six months ended June 30, 2010 was $3.9 million. Cash received from option exercises for the six months ended June 30, 2010 was $3.1 million. No options were exercised during the six months ended June 30, 2009.

As of June 30, 2010 there were 0.3 million nonvested options outstanding, and $0.4 million of total unrecognized compensation cost related to nonvested options. That cost is expected to be recognized over a weighted average period of 1.4 years.

Under both the prior option plan and the 2008 Omnibus Plan, vested unit options can be exercised by tendering mature units with a market value equal to the exercise price of the unit options. In 2002, Robert S. Taubman, the Company’s chief executive officer, exercised options for 3.0 million units by tendering 2.1 million mature units and deferring receipt of 0.9 million units under the unit option deferral election. As the Operating Partnership pays distributions, the deferred option units receive their proportionate share of the distributions in the form of cash payments. Beginning with the ten year anniversary of the date of exercise (unless Mr. Taubman retires earlier), the deferred partnership units will be issued in ten annual installments. The deferred units are accounted for as participating securities of the Operating Partnership.

Performance Share Units

In May 2010, the Company granted Performance Share Units (PSU) under the 2008 Omnibus Plan (as amended). Each PSU represents the right to receive, upon vesting, shares of the Company’s common stock ranging from 0-300% of the PSU based on the Company’s market performance relative to that of a peer group. The vesting date is in March 2013 if continuous service has been provided or upon retirement or certain other events if earlier. No dividends accumulate during the vesting period.

The Company estimated the value of the PSU granted during the six months ended June 30, 2010 using a Monte Carlo simulation, considering historical returns of the Company and the peer group of companies, a risk-free interest rate of 1.1%, and a measurement period of 2.78 years. When used in the simulation, the value of the Company’s stock was reduced by the discounted present value of expected dividends during the vesting period. The resulting weighted average grant-date fair value was $63.54 per PSU.
 
A summary of PSU activity for the six months ended June 30, 2010 is presented below:

   
Number of Performance Stock Units
    
Weighted Average Grant Date Fair Value
  
Outstanding at January 1, 2010
     196,943     $ 15.60  
Granted
     75,413       63.54  
Outstanding at June 30, 2010
     272,356     $ 28.88  

None of the PSU outstanding at June 30, 2010 were vested. As of June 30, 2010, there was $6.0 million of total unrecognized compensation cost related to nonvested PSU outstanding. This cost is expected to be recognized over an average period of 2.4 years.

Restricted Share Units

In 2010, restricted share units (RSU) were issued under the 2008 Omnibus Plan (as amended) and represent the right to receive upon vesting one share of the Company’s common stock. The vesting date is March 2013 if continuous service has been provided for that period, or upon retirement or certain other events if earlier. No dividends accumulate during the vesting period.

The Company estimated the value of the RSU granted during the six months ended June 30, 2010 using the Company’s common stock at the grant date deducting the present value of expected dividends during the vesting period using a risk-free rate of 1.1%. The result of the Company’s valuation was a weighted average grant-date fair value of $35.37.

A summary of Restricted Share Units (RSU) activity for the six months ended June 30, 2010 is presented below:

   
Number of Restricted Stock Units
    
Weighted Average Grant Date Fair Value
  
Outstanding at January 1, 2010
     567,110     $ 24.92  
Granted
     144,588       35.37  
Redeemed
     (91,757 )     56.44  
Forfeited
     (2,057 )     14.71  
Outstanding at June 30, 2010
     617,884     $ 22.72  

All of the RSU outstanding at June 30, 2010 were nonvested. As of June 30, 2010, there was $7.0 million of total unrecognized compensation cost related to nonvested RSU outstanding. This cost is expected to be recognized over an average period of 2.1 years.
Commitments and Contingencies
Commitments and Contingencies
Note 8 – Commitments and Contingencies

Cash Tender

At the time of the Company's initial public offering and acquisition of its partnership interest in the Operating Partnership in 1992, the Company entered into an agreement (the Cash Tender Agreement) with A. Alfred Taubman, who owns an interest in the Operating Partnership, whereby he has the annual right to tender to the Company partnership units in the Operating Partnership (provided that the aggregate value is at least $50 million) and cause the Company to purchase the tendered interests at a purchase price based on a market valuation of the Company on the trading date immediately preceding the date of the tender. At A. Alfred Taubman's election, his family may participate in tenders. The Company will have the option to pay for these interests from available cash, borrowed funds, or from the proceeds of an offering of the Company's common stock. Generally, the Company expects to finance these purchases through the sale of new shares of its stock. The tendering partner will bear all market risk if the market price at closing is less than the purchase price and will bear the costs of sale. Any proceeds of the offering in excess of the purchase price will be for the sole benefit of the Company. The Company accounts for the Cash Tender Agreement between the Company and Mr. Taubman as a freestanding written put option. As the option put price is defined by the current market price of the Company's stock at the time of tender, the fair value of the written option defined by the Cash Tender Agreement is considered to be zero.

Based on a market value at June 30, 2010 of $37.63 per common share, the aggregate value of interests in the Operating Partnership that may be tendered under the Cash Tender Agreement was approximately $0.9 billion. The purchase of these interests at June 30, 2010 would have resulted in the Company owning an additional 30% interest in the Operating Partnership.

Continuing Offer

The Company has made a continuing, irrevocable offer to all present holders (other than certain excluded holders, including A. Alfred Taubman), permitted assignees of all present holders, those future holders of partnership interests in the Operating Partnership as the Company may, in its sole discretion, agree to include in the continuing offer, all existing optionees under the previous option plan, and all existing and future optionees under the 2008 Omnibus Plan (as amended) to exchange shares of common stock for partnership interests in the Operating Partnership (the Continuing Offer). Under the Continuing Offer agreement, one unit of the Operating Partnership interest is exchangeable for one share of the Company's common stock. Upon a tender of Operating Partnership units, the corresponding shares of Series B Preferred Stock, if any, will automatically be converted into the Company’s common stock at a rate of 14,000 shares of Series B Preferred Stock for one common share.

Litigation

In September 2009, a restaurant owner filed a lawsuit in Superior Court of the State of California for the County of Los Angeles (Case No. BC 421212) against Taubman Centers, Inc., the Operating Partnership, and the Manager. The plaintiff is alleging breach of oral agreement, promissory estoppel, specific performance, and fraud related to a proposed lease. The plaintiff is seeking damages exceeding $10 million, lost profits, restitution on its current lease, exemplary or punitive damages, and specific performance. The lawsuit is in its discovery phase and the Company is vigorously defending it. The outcome of this lawsuit cannot be predicted with any certainty and management is currently unable to estimate an amount or range of potential loss that could result if an unfavorable outcome occurs.

In April 2009, two restaurant owners, their two restaurants, and their principal filed a lawsuit in United States District Court for the Eastern District of Pennsylvania (Case No. CV01619) against Atlantic Pier Associates LLC ("APA", the owner of the leasehold interest in The Pier Shops), the Operating Partnership, Taubman Centers, Inc., the owners of APA and certain affiliates of such owners, and a former employee of one of such affiliates. The plaintiffs are alleging the defendants misrepresented and concealed the status of certain tenant leases at The Pier Shops and that such status was relied upon by the plaintiffs in making decisions about their own leases. The plaintiffs are seeking damages exceeding $20 million, rescission of their leases, exemplary or punitive damages, costs and expenses, attorney’s fees, return of certain rent, and other relief as the court may determine. The lawsuit is in its early legal stages and the defendants are vigorously defending it. The outcome of this lawsuit cannot be predicted with any certainty and management is currently unable to estimate an amount or range of potential loss that could result if an unfavorable outcome occurs.

While management does not believe that an adverse outcome in either or both of the above lawsuits would have a material adverse effect on the Company's financial condition, there can be no assurance that adverse outcomes would not have material effects on the Company's results of operations for any particular period.

In April 2010, the holder of the mortgage on The Pier Shops filed a mortgage foreclosure complaint in the United States District Court for the District of New Jersey (Case No. CV01755) against APA. The plaintiff seeks to establish the amounts due under The Pier Shops’ mortgage loan agreement, foreclose all right, title, and lien which APA has in The Pier Shops’ leasehold interest, obtain possession of the property, and order a foreclosure sale of the property to satisfy the amounts due under the loan. The Company anticipates that the foreclosure will be completed in the third quarter of 2010, at which time ownership of The Pier Shops will be transferred in satisfaction of the obligations under the debt. However, the foreclosure process is not in the Company’s control and possibly transfer of title may not be completed until later.

Other

See Note 4 for the Operating Partnership's guarantees of certain notes payable, Note 6 for contingent features relating to derivative instruments, and Note 7 for obligations under existing share-based compensation plans.
Earnings Per Share
Earnings Per Share
Note 9 – Earnings Per Share

Basic earnings per share amounts are based on the weighted average of common shares outstanding for the respective periods. Diluted earnings per share amounts are based on the weighted average of common shares outstanding plus the dilutive effect of potential common stock. Potential common stock includes outstanding partnership units exchangeable for common shares under the Continuing Offer (Note 8), outstanding options for partnership units, PSU, RSU, deferred shares under the Non-Employee Directors’ Deferred Compensation Plan, and unissued partnership units under a unit option deferral election. In computing the potentially dilutive effect of potential common stock, partnership units are assumed to be exchanged for common shares under the Continuing Offer, increasing the weighted average number of shares outstanding. The potentially dilutive effects of partnership units outstanding and/or issuable under the unit option deferral elections are calculated using the if-converted method, while the effects of other potential common stock are calculated using the treasury method. Contingently issuable shares are included in diluted EPS based on the number of shares, if any, that would be issuable if the end of the reporting period were the end of the contingency period.
 
As of June 30, 2010, there were 8.5 million partnership units outstanding and 0.9 million unissued partnership units under unit option deferral elections that may be exchanged for common shares of the Company under the Continuing Offer. These outstanding partnership units and unissued units were excluded from the computation of diluted earnings per share as they were anti-dilutive in all periods presented. Also, there were out-of-the-money options for 0.5 million and 0.6 million shares for the three and six months ended June 30, 2010, respectively, and 1.4 million shares for both the three and six months ended June 30, 2009 that were excluded from the computation of diluted EPS because they were anti-dilutive in these periods.

   
Three Months Ended
    
Six Months Ended
  
   
June 30
    
June 30
  
   
2010
    
2009
    
2010
    
2009
  
Net income attributable to Taubman Centers, Inc. common shareowners (Numerator):
                        
Basic
   $ 7,453     $ 8,908     $ 13,736     $ 20,407  
Impact of additional ownership of TRG
     56       36       104       55  
Diluted
   $ 7,509     $ 8,944     $ 13,840     $ 20,462  
                                 
Shares (Denominator) – basic
     54,550,964       53,120,769       54,454,579       53,093,988  
Effect of dilutive securities
     1,060,923       546,099       1,036,356       372,575  
Shares (Denominator) – diluted
     55,611,887       53,666,868       55,490,935       53,466,563  
                                 
Earnings per common share – basic
   $ 0.14     $ 0.17     $ 0.25     $ 0.38  
Earnings per common share – diluted
   $ 0.14     $ 0.17     $ 0.25     $ 0.38  
Fair Value Disclosures
Fair Value Disclosures
Note 10 – Fair Value Disclosures

This note contains required fair value disclosures for assets and liabilities remeasured at fair value on a recurring basis and financial instruments carried at other than fair value, as well as assumptions employed in deriving these fair values.

Recurring Valuations

Derivative Instruments

The fair value of interest rate hedging instruments is the amount that the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the reporting date. The Company’s valuations of its derivative instruments are determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative, and therefore fall into Level 2 of the fair value hierarchy. The valuations reflect the contractual terms of the derivatives, including the period to maturity, and use observable market-based inputs, including forward curves. The fair values of interest rate hedging instruments also incorporate credit valuation adjustments to appropriately reflect both the Company’s own nonperformance risk and the respective counterparty's nonperformance risk.

Marketable Securities

The Company's valuations of marketable securities, which are considered to be available-for-sale, and an insurance deposit utilize unadjusted quoted prices determined by active markets for the specific securities the Company has invested in, and therefore fall into Level 1 of the fair value hierarchy.

For assets and liabilities measured at fair value on a recurring basis, quantitative disclosure of the fair value for each major category of assets and liabilities is presented below:

   
Fair Value Measurements as of
June 30, 2010 Using
    
Fair Value Measurements as of
December 31, 2009 Using
  
Description
  
Quoted Prices in Active Markets for Identical Assets
(Level 1)
    
Significant Other Observable Inputs
(Level 2)
    
Quoted Prices in Active Markets for Identical Assets
(Level 1)
    
Significant Other Observable Inputs
(Level 2)
  
Available-for-sale securities
   $ 1,730           $ 1,665        
Insurance deposit
     10,359             9,689        
Total assets
   $ 12,089           $ 11,354        
                             
Derivative interest rate contract (Note 6)
           $ (5,886 )           $ (10,786 )
Total liabilities
           $ (5,886 )           $ (10,786 )

The insurance deposit shown above represents an escrow account maintained in connection with a property and casualty insurance arrangement for the Company’s shopping centers, and is classified within Deferred Charges and Other Assets. Corresponding deferred revenue relating to amounts billed to tenants for this arrangement has been classified within Accounts Payable and Other Liabilities.

The available-for-sale securities shown above consist of marketable securities that represent shares in a Vanguard REIT fund that were purchased to facilitate a tax efficient structure for the 2005 disposition of Woodland mall and is classified within Deferred Charges and Other Assets. In the second quarter of 2009, the Company concluded that a decrease in value was other than temporary, and therefore recognized a $1.7 million impairment loss.

Financial Instruments Carried at Other Than Fair Values

Community Development District Obligation

One shopping center pays annual special assessment levies of a Community Development District (CDD), which provided certain infrastructure assets and improvements. As the amount and period of the special assessments were determinable, the Company capitalized the infrastructure assets and improvements and recognized an obligation for the future special assessments to be levied. At June 30, 2010 and December 31, 2009, the book value of the infrastructure assets and improvements, net of depreciation, was $44.8 million and $45.8 million, respectively. The related obligation is classified within Accounts Payable and Accrued Liabilities and had a balance of $63.3 million at June 30, 2010 and December 31, 2009. The fair value of this obligation, derived from quoted market prices, was $61.6 million at June 30, 2010 and $59.8 million at December 31, 2009.

Notes Payable

The fair value of notes payable is estimated based on quoted market prices, if available. If no quoted market prices are available, the fair value of mortgages and other notes payable are estimated using cash flows discounted at current market rates. When selecting discount rates for purposes of estimating the fair value of notes payable at June 30, 2010 and December 31, 2009, the Company employed the credit spreads at which the debt was originally issued plus an additional 1.5% and 2% credit spread at June 30, 2010 and December 31, 2009, respectively, to account for current market conditions. This additional spread is an estimate and is not necessarily indicative of what the Company could obtain in the market at the reporting date. The Company does not believe that the use of different interest rate assumptions would have resulted in a materially different fair value of notes payable as of June 30, 2010 or December 31, 2009. To further assist financial statement users, the Company has included with its fair value disclosures an analysis of interest rate sensitivity. The fair values of the loans on The Pier Shops and Regency Square, at June 30, 2010 and December 31, 2009, have been estimated at the fair value of the centers, which are collateral for the loans.

The estimated fair values of notes payable at June 30, 2010 and December 31, 2009 are as follows:

   
2010
    
2009
  
   
Carrying Value
    
Fair Value
    
Carrying Value
    
Fair Value
  
Notes payable
   $ 2,688,242     $ 2,652,417     $ 2,691,019     $ 2,523,759  

The fair values of the notes payable are dependent on the interest rates used in estimating the values. An overall 1% increase in rates employed in making these estimates would have decreased the fair values of the debt shown above at June 30, 2010 by $85.0 million or 3.3%.

See Note 3 regarding the fair value of the Unconsolidated Joint Ventures’ notes payable, and Note 6 regarding additional information on derivatives.

New Accounting Pronouncements
New Accounting Pronouncement
Note 11 – New Accounting Pronouncement

In September 2009, the FASB ratified the EITF’s consensus on “Multiple-Deliverable Revenue Arrangements”, contained in Accounting Standards Update No. 2009-13. This consensus amends previous accounting guidance on separating consideration in multiple-deliverable arrangements. This consensus eliminates the residual method of allocation in previous guidance and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price. This consensus also establishes a selling price hierarchy based on available evidence for determining the selling price of a deliverable, (i) first on vendor-specific objective evidence, (ii) then third party evidence, and (iii) then the estimated selling price. This consensus also requires that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis. This consensus is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company is currently evaluating the application of the EITF’s consensus on its results of operations and financial position.
Subsequent Event
Subsequent Event
Note 12 – Subsequent Event

In July 2010, a 10-year, $175 million non-recourse refinancing was completed on Arizona Mills, a 50% owned joint venture, which bears interest at an all-in-rate of 5.83%. The payments are based on amortizing principal over 30 years. The proceeds were used to pay off the existing $131 million 7.90% fixed rate loan and the Company’s share of excess proceeds was used to pay down the Company’s revolving line of credit.
Document Information
6 Months Ended
Jun. 30, 2010
Document Type
10-Q 
Amendment Flag
FALSE 
Document Period End Date
2010-06-30 
Entity Information
6 Months Ended
Jun. 30, 2010
Jun. 30, 2009
Entity Registrant Name
TAUBMAN CENTERS INC 
 
Entity Central Index Key
0000890319 
 
Current Fiscal Year End Date
12/31 
 
Entity Well-known Seasoned Issuer
Yes 
 
Entity Voluntary Filers
No 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Public Float
 
1,400,000,000 
Entity Common Stock, Shares Outstanding
 
52,059,790 
Document Fiscal Year Focus
2010 
 
Document Fiscal Period Focus
Q2