TAUBMAN CENTERS INC, 10-Q filed on 10/29/2013
Quarterly Report
Document and Entity Information Document (USD $)
In Billions, except Share data, unless otherwise specified
9 Months Ended
Sep. 30, 2013
Oct. 28, 2013
Jun. 30, 2012
Entity Information [Line Items]
 
 
 
Entity Registrant Name
TAUBMAN CENTERS INC. 
 
 
Entity Central Index Key
0000890319 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Document Type
10-Q 
 
 
Document Period End Date
Sep. 30, 2013 
 
 
Document Fiscal Year Focus
2013 
 
 
Document Fiscal Period Focus
Q3 
 
 
Amendment Flag
false 
 
 
Entity Common Stock, Shares Outstanding
 
63,553,519 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Public Float
 
 
$ 4.4 
CONSOLIDATED BALANCE SHEET (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2013
Dec. 31, 2012
Assets:
 
 
Properties
$ 4,397,434 
$ 4,246,000 
Accumulated depreciation and amortization
(1,484,052)
(1,395,876)
Properties, net
2,913,382 
2,850,124 
Investment in Unconsolidated Joint Ventures (Notes 2 and 4)
335,393 
214,152 
Cash and cash equivalents
32,377 
32,057 
Restricted cash (Note 5)
7,164 
6,138 
Accounts and notes receivable, less allowance for doubtful accounts of $3,663 and $3,424 in 2013 and 2012
61,103 
69,033 
Accounts receivable from related parties
1,900 
2,009 
Deferred charges and other assets (Note 2)
87,520 
94,982 
Total Assets
3,438,839 
3,268,495 
Liabilities:
 
 
Notes payable (Note 5)
2,985,952 
2,952,030 
Accounts payable and accrued liabilities
285,763 
278,098 
Distributions in excess of investments in and net income of Unconsolidated Joint Ventures (Note 4)
378,650 
383,293 
Total Liabilities
3,650,365 
3,613,421 
Commitments and contingencies (Notes 5, 7, 8, 9, and 10)
   
   
Equity (Note 6):
 
 
Series B Non-Participating Convertible Preferred Stock, $0.001 par and liquidation value, 40,000,000 shares authorized, 25,159,072 and 25,327,699 shares issued and outstanding at September 30, 2013 and December 31, 2012
25 
25 
Common Stock, $0.01 par value, 250,000,000 shares authorized, 63,524,788 and 63,310,148 shares issued and outstanding at September 30, 2013 and December 31, 2012
635 
633 
Additional paid-in capital
813,139 
657,071 
Accumulated other comprehensive income (loss)
(14,274)
(22,064)
Dividends in excess of net income
(916,977)
(891,283)
Stockholders' Equity Attributable to Parent
(117,452)
(255,618)
Noncontrolling interests (Note 7)
(94,074)
(89,308)
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest
(211,526)
(344,926)
Total Liabilities and Equity
$ 3,438,839 
$ 3,268,495 
CONSOLIDATED BALANCE SHEET (Parenthetical) (USD $)
Sep. 30, 2013
Dec. 31, 2012
Allowance for doubtful accounts
$ 3,663,000 
$ 3,424,000 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
250,000,000 
250,000,000 
Common stock, shares issued
63,524,788 
63,310,148 
Common stock, shares outstanding
63,524,788 
63,310,148 
Series B Preferred Stock [Member]
 
 
Preferred Stock, par or value
$ 0.001 
$ 0.001 
Preferred Stock, liquidation preference per share
$ 0.001 
$ 0.001 
Preferred Stock, shares authorized
40,000,000 
40,000,000 
Preferred Stock, shares issued
25,159,072 
25,327,699 
Preferred Stock, shares outstanding
25,159,072 
25,327,699 
Series J Preferred Stock [Member]
 
 
Preferred Stock, par or value
$ 0 
$ 0 
Preferred Stock, liquidation preference
192,500,000 
192,500,000 
Preferred Stock, shares authorized
7,700,000 
7,700,000 
Preferred Stock, shares issued
7,700,000 
7,700,000 
Preferred Stock, shares outstanding
7,700,000 
7,700,000 
Series K Preferred Stock [Member]
 
 
Preferred Stock, par or value
$ 0 
 
Preferred Stock, liquidation preference
$ 170,000,000 
 
Preferred Stock, liquidation preference per share
$ 25 
 
Preferred Stock, shares authorized
6,800,000 
 
Preferred Stock, shares issued
6,800,000 
 
Preferred Stock, shares outstanding
6,800,000 
 
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2013
Sep. 30, 2012
Revenues:
 
 
 
 
Minimum rents
$ 103,501 
$ 99,564 
$ 309,043 
$ 292,248 
Percentage rents
7,021 
6,315 
13,732 
12,767 
Expense recoveries
67,943 
66,633 
197,549 
185,325 
Management, leasing, and development services
8,753 
10,234 
13,954 
27,441 
Other
6,720 
6,793 
21,104 
20,487 
Total Revenues
193,938 
189,539 
555,382 
538,268 
Expenses:
 
 
 
 
Maintenance, taxes, utilities, and promotion
55,375 
53,253 
154,694 
143,854 
Other operating
19,295 
16,128 
53,950 
52,360 
Management, leasing, and development services
1,027 
6,165 
4,172 
21,674 
General and administrative
11,812 
9,571 
36,676 
28,021 
Interest expense
32,515 
34,943 
99,589 
109,146 
Depreciation and amortization
40,982 
36,414 
116,262 
109,083 
Total Expenses
161,006 
156,474 
465,343 
464,138 
Nonoperating Income (Expense)
(456)
56 
1,831 
251 
Income before income tax expense and equity in income of Unconsolidated Joint Ventures
32,476 
33,121 
91,870 
74,381 
Income tax expense (Note 3)
(1,453)
(732)
(2,715)
(1,438)
Equity in income of Unconsolidated Joint Ventures (Note 4)
12,220 
12,672 
34,047 
35,743 
Net income
43,243 
45,061 
123,202 
108,686 
Net income attributable to noncontrolling interests (Note 7)
(12,536)
(12,295)
(36,667)
(33,893)
Net income attributable to Taubman Centers, Inc.
30,707 
32,766 
86,535 
74,793 
Distributions to participating securities of TRG (Note 9)
(435)
(403)
(1,313)
(1,209)
Preferred stock dividends (Note 6)
(5,784)
(10,663)
(15,148)
(17,980)
Net income attributable to Taubman Centers, Inc. common shareowners
24,488 
21,700 
70,074 
55,604 
Other comprehensive income (Note 13):
 
 
 
 
Unrealized gain (loss) on interest rate instruments and other
(1,984)
(1,822)
5,757 
(6,260)
Cumulative translation adjustment
5,086 
 
1,574 
 
Reclassification adjustment for amounts recognized in net income
1,740 
151 
3,834 
641 
Other comprehensive income (loss)
4,842 
(1,671)
11,165 
(5,619)
Comprehensive income
48,085 
43,390 
134,367 
103,067 
Comprehensive income attributable to noncontrolling interests
(13,900)
(11,834)
(40,064)
(32,111)
Comprehensive income attributable to Taubman Centers, Inc.
$ 34,185 
$ 31,556 
$ 94,303 
$ 70,956 
Basic earnings per common share (Note 11)
$ 0.38 
$ 0.36 
$ 1.10 
$ 0.94 
Diluted earnings per common share (Note 11)
$ 0.38 
$ 0.35 
$ 1.09 
$ 0.92 
Cash dividends declared per common share
$ 0.5000 
$ 0.4625 
$ 1.5000 
$ 1.3875 
Weighted average number of common shares outstanding – basic
63,753,748 
60,571,612 
63,653,155 
59,207,828 
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (USD $)
In Thousands, except Share data, unless otherwise specified
Total
Preferred Stock [Member]
Common Stock [Member]
Additional Paid-in Capital [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Accumulated Distributions in Excess of Net Income [Member]
Noncontrolling Interest [Member]
Balance at Dec. 31, 2011
$ (340,448)
$ 26 
$ 580 
$ 673,923 
$ (27,613)
$ (863,040)
$ (124,324)
Balance (in shares) at Dec. 31, 2011
 
33,941,958 
58,022,475 
 
 
 
 
Preferred Stock Issued During Period, Shares, New Issues
 
7,700,000 
 
 
 
 
 
Preferred Stock Issued During Period, Value, New Issues
186,215 
 
 
186,215 
 
 
 
Stock Redeemed or Called During Period, Shares
 
(7,480,000)
 
 
 
 
 
Stock Redeemed or Called During Period, Value
(180,588)
 
 
(180,588)
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
Stock Issued During Period, Value, New Issues
208,939 
 
29 
208,910 
 
 
 
Partners' Capital Account, Units, Period Increase (Decrease)
 
(56,900)
56,902 
 
 
 
 
Stock Issued During Period, Shares, New Issues
 
 
2,875,000 
 
 
 
 
Stock Issued During Period, Value, Conversion of Units
 
   
(1)
 
 
 
Share-based compensation under employee and director benefit plans (Note 9)
(497)
 
(504)
 
 
 
Share-based compensation under employee and director benefit plans (in shares)
 
 
744,241 
 
 
 
 
Tax impact of share-based compensation (Note 3)
766 
 
 
766 
 
 
 
Adjustments of noncontrolling interests (Note 7)
(585)
 
 
(62,127)
43 
 
61,499 
Adjustments of noncontrolling interests, in shares
 
(1,900)
 
 
 
 
 
Contributions from Noncontrolling Interests (excludes contribution from redeemable noncontrolling interests)
 
 
 
 
 
 
3,924 
Contributions from noncontrolling interests
3,924 
 
 
 
 
 
 
Dividend equivalents (Note 9)
(103)
 
 
 
 
(103)
 
Dividend and distributions (excludes dividends attributable to redeemable noncontrolling interests)
(149,916)
 
 
 
 
(102,076)
(47,840)
Net income
108,686 
 
 
 
 
 
 
Net income (excludes net loss attributable to redeemable noncontrolling interests)
110,270 
 
 
 
 
74,793 
35,477 
Unrealized gain (loss) on interest rate instruments and other
(6,260)
 
 
 
 
 
 
Unrealized gain (loss) on interest rate instruments and other (excludes other comprehensive income attritbutable to redeemable noncontrolling interests)
(6,178)
 
 
 
(4,286)
 
(1,892)
Reclassification adjustment for amounts recognized in net income
641 
 
 
 
(449)
 
(192)
Balance at Sep. 30, 2012
(167,560)
26 
617 
826,594 
(31,407)
(890,426)
(72,964)
Balance (in shares) at Sep. 30, 2012
 
34,103,158 
61,698,618 
 
 
 
 
Balance at Dec. 31, 2012
(344,926)
25 
633 
657,071 
(22,064)
(891,283)
(89,308)
Balance (in shares) at Dec. 31, 2012
 
33,027,699 
63,310,148 
 
 
 
 
Stock Redeemed or Called During Period, Shares
 
   
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
Stock Issued During Period, Value, New Issues
164,395 
 
 
164,395 
 
 
 
Partners' Capital Account, Units, Period Increase (Decrease)
 
(168,627)
168,637 
 
 
 
 
Stock Issued During Period, Shares, New Issues
 
6,800,000 
 
 
 
 
 
Stock Issued During Period, Value, Conversion of Units
 
 
(2)
 
 
 
Repurchase of common stock (Note 6)
(21,189)
 
(3)
(21,186)
 
 
 
Share-based compensation under employee and director benefit plans (Note 9)
7,514 
 
7,511 
 
 
 
Share-based compensation under employee and director benefit plans (in shares)
 
 
359,045 
 
 
 
 
Tax impact of share-based compensation (Note 3)
405 
 
 
405 
 
 
 
Redemption of redeemable noncontrolling interest (Note 7)
(1,050)
 
 
(1,050)
 
 
 
Adjustments of noncontrolling interests (Note 7)
   
 
 
5,995 
22 
 
(6,017)
Adjustments of noncontrolling interests, in shares
(313,042)
 
(313,042)
 
 
 
 
Contributions from Noncontrolling Interests (excludes contribution from redeemable noncontrolling interests)
4,729 
 
 
 
 
 
4,729 
Dividend equivalents (Note 9)
(129)
 
 
 
 
(129)
 
Dividends and distributions
 
 
 
 
 
(112,100)
 
Dividend and distributions (excludes dividends attributable to redeemable noncontrolling interests)
(155,642)
 
 
 
 
 
 
Noncontrolling Interest, Decrease from Distributions to Noncontrolling Interest Holders
 
 
 
 
 
 
43,542 
Net income
123,202 
 
 
 
 
86,535 
36,667 
Unrealized gain (loss) on interest rate instruments and other
5,757 
 
 
 
3,981 
 
1,776 
Cumulative translation adjustment
1,574 
 
 
 
1,127 
 
447 
Reclassification adjustment for amounts recognized in net income
3,834 
 
 
 
2,660 
 
1,174 
Balance at Sep. 30, 2013
$ (211,526)
$ 25 
$ 635 
$ 813,139 
$ (14,274)
$ (916,977)
$ (94,074)
Balance (in shares) at Sep. 30, 2013
 
39,659,072 
63,524,788 
 
 
 
 
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Mar. 31, 2012
Sep. 30, 2012
Contributions To Redeemable Noncontrolling Interest
$ 231 
 
Distributions attributable to noncontrolling interests
 
(1,846)
Net loss attributable to redeemable noncontrolling interest
 
(1,584)
Other comprehensive income attributable to redeemable noncontrolling interests
 
$ (82)
CONSOLIDATED STATEMENT OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Cash Flows From Operating Activities:
 
 
Net income
$ 123,202 
$ 108,686 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
116,262 
109,083 
Provision for bad debts
1,868 
1,974 
Gain on sale of peripheral land
(863)
   
Gain on sale of marketable securities (Note 12)
(1,323)
 
Other
9,907 
8,786 
Increase (decrease) in cash attributable to changes in assets and liabilities:
 
 
Receivables, restricted cash, deferred charges, and other assets
357 
(678)
Accounts payable and other liabilities
19,701 
17,089 
Net Cash Provided By Operating Activities
269,111 
244,940 
Cash Flows From Investing Activities:
 
 
Additions to properties
(193,027)
(201,916)
Proceeds from sale of marketable securities (Note 12)
2,493 
 
Repayments of notes receivable
500 
5,802 
Issuances of notes receivable
(1,489)
 
Proceeds from sale of peripheral land
6,916 
   
Collection and release of TCBL related proceeds (Note 2)
12,903 
 
Release of restricted cash
 
289,389 
Contributions to Unconsolidated Joint Ventures (Note 2)
(120,676)
(48,910)
Distributions from Unconsolidated Joint Ventures in excess of income
3,927 
145,383 
Net Cash Provided By (Used In) Investing Activities
(288,453)
189,748 
Cash Flows From Financing Activities:
 
 
Debt proceeds
183,964 
   
Debt payments
(145,112)
(204,693)
Repayment of installment notes
   
(281,467)
Debt issuance costs
(7,010)
   
Repurchase of common stock (Note 6)
(21,189)
 
Issuance of common stock, net of offering costs
 
208,939 
Issuance of common stock and/or partnership units in connection with incentive plans
(3,422)
(10,118)
Issuance of Series K Preferred Stock, net of offering costs
164,395 
 
Issuance of Series J Preferred Stock, net of offering costs
 
186,215 
Redemptions of Series G and H Preferred Stock
 
(187,000)
Redemption of redeemable noncontrolling interest (Note 7)
(1,050)
 
Distributions to noncontrolling interests
(43,542)
(49,686)
Distributions to participating securities of TRG
(1,313)
(1,209)
Contributions from noncontrolling interests
4,729 
4,155 
Cash dividends to preferred shareowners
(15,148)
(11,568)
Cash dividends to common shareowners
(95,640)
(82,887)
Other
   
(106)
Net Cash Provided By (Used In) Financing Activities
19,662 
(429,425)
Net Increase In Cash and Cash Equivalents
320 
5,263 
Cash and Cash Equivalents at Beginning of Period
32,057 
24,033 
Cash and Cash Equivalents at End of Period
$ 32,377 
$ 29,296 
Interim Financial Statements
Interim Financial Statements
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 September 30, 2013 included 25 operating urban and suburban shopping centers in 13 states.

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

The unaudited interim financial statements should be read in conjunction with the audited financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012. 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.

Consolidation

The consolidated financial statements of the Company include all accounts of the Company, the Operating Partnership, and its consolidated subsidiaries, including The Taubman Company LLC (the Manager) and Taubman Asia. All intercompany transactions have been eliminated. The entities included in these consolidated financial statements are separate legal entities and maintain records and books of account separate from any other entity. However, inclusion of these separate entities in the consolidated financial statements does not mean that the assets and credit of each of these legal entities are available to satisfy the debts or other obligations of any other such legal entity included in the consolidated financial statements.

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

Ownership

In addition to the Company’s common stock, there were three classes of preferred stock outstanding (Series B, J and K) as of September 30, 2013. Dividends on the 6.5% Series J Cumulative Redeemable Preferred Stock (Series J Preferred Stock) and the 6.25% Series K Cumulative Redeemable Preferred Stock (Series K Preferred Stock) are cumulative and are paid on the last day of each calendar quarter. The Company owns corresponding Series J and Series K 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 J and Series K Preferred Stock. See "Note 6 - Equity Transactions" for further details on the Series K Preferred Stock issuance.

The Company also is obligated to issue to partners in the Operating Partnership other than the Company, upon subscription, one share of nonparticipating Series B Preferred Stock per each Operating Partnership unit. The Series B Preferred Stock entitles its holders to one vote per share on all matters submitted to the Company’s shareowners and votes together with the common stock on all matters as a single class. The holders of Series B Preferred Stock are not entitled to dividends or earnings. The Series B Preferred Stock is convertible into the Company’s common stock at a ratio of 14,000 shares of Series B Preferred Stock for one share of common stock.

Outstanding voting securities of the Company at September 30, 2013 consisted of 25,159,072 shares of Series B Preferred Stock and 63,524,788 shares of common stock.

The Operating Partnership

At September 30, 2013, the Operating Partnership’s equity included two classes of preferred equity (Series J and K) 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 J and Series K Preferred Equity are owned by the Company and are eliminated in consolidation.

The Company's ownership in the Operating Partnership at September 30, 2013 consisted of a 72% managing general partnership interest, as well as the Series J and Series K Preferred Equity interests. The Company's average ownership percentage in the Operating Partnership for the nine months ended September 30, 2013 and 2012 was 72% and 69%, respectively. At September 30, 2013, the Operating Partnership had 88,702,310 partnership units outstanding, of which the Company owned 63,524,788 units.
Acquisitions, Dispositions, and Development
Mergers, Acquisitions and Dispositions Disclosures [Text Block]
Acquisitions, Developments, and Dispositions

Acquisitions

International Plaza

In December 2012, the Company acquired an additional 49.9% interest in International Plaza from CSAT, LP, which increased its ownership in the center to 100%.

Waterside Shops

In December 2012, the Company acquired an additional 25% interest in Waterside Shops, which brought the Company's ownership interest in the center to 50%. After the acquisition, the Company continues to recognize its investment in Waterside Shops in Investment in Unconsolidated Joint Ventures on the Consolidated Balance Sheet. The Company's share of the difference between the purchase price and the net book value of the additional interest in the Unconsolidated Joint Venture was estimated to be $52.7 million, which has been preliminarily allocated to land, buildings, improvements, and equipment. In addition, beneficial interest in debt was increased by a $3.9 million purchase accounting premium to record the debt at fair value. The premium is being amortized as a reduction to interest expense over the remaining term of the debt and had a balance of $3.2 million as of September 30, 2013.

Redemption of Joint Venture Outlet Interest

In September 2013, the Company redeemed the outlet joint venture partner's 10% interest, which increased the Company's ownership to 100%. See "Note 7 - Noncontrolling Interests" for further details on the redemption.


Developments

International Market Place

In August 2013, the Company announced plans to move forward with the redevelopment of International Market Place, a 0.4 million square foot center, in Waikiki, Honolulu, Hawaii. The center will be anchored by Saks Fifth Avenue and is expected to open in spring 2016. The Company owns a 93.5% interest in the project and is funding all construction costs. This project is subject to a participating ground lease. As of September 30, 2013, the Company's capitalized costs for the project were $12.5 million.

The Mall at University Town Center

The Mall at University Town Center, a 0.9 million square foot center, is under construction in Sarasota, Florida. The Company is funding its 50% share of the project. The center will be anchored by Saks Fifth Avenue, Macy's, and Dillard's and is expected to open in October 2014. As of September 30, 2013, the Company had invested $75.8 million. This investment is classified within Investment in Unconsolidated Joint Ventures on the Consolidated Balance Sheet.

The Mall of San Juan

The Mall of San Juan, a 0.7 million square foot center, is under construction in San Juan, Puerto Rico. The Company owns 80% of the retail portion of the project. The center will be anchored by Nordstrom and Saks Fifth Avenue and is expected to open in March 2015. As of September 30, 2013, the Company had capitalized costs of $104.2 million ($83.4 million at TRG's share).

Taubman Prestige Outlets Chesterfield

Taubman Prestige Outlets Chesterfield, a 0.3 million square foot outlet project in Chesterfield, Missouri, opened in August 2013. The Company increased its ownership in the project to 100% as a result of the Company's September 2013 redemption of the outlet joint venture partner (Note 7). The Company previously had a 90% interest in the outlet venture. As of September 30, 2013, the Company had capitalized costs of $116.5 million.

Asia

Hanam Union Square

The Company has partnered with Shinsegae Group, South Korea's largest retailer, to build an approximately 1.7 million square foot shopping mall in Hanam, Gyeonggi Province, South Korea. The Company has a 30% interest in the development, which is scheduled to open in late 2016. As of September 30, 2013, the Company had invested $91.8 million in the project, after cumulative currency translation adjustments. This investment is classified within Investment in Unconsolidated Joint Ventures on the Consolidated Balance Sheet.

Retail component of Xi'an Saigao City Plaza

In 2012, the Company formed a joint venture with Beijing Wangfujing Department Store (Group) Co., Ltd, one of China's largest department store chains. The joint venture will own a 60% controlling interest in and manage an approximately 1.0 million square foot shopping center to be located at Xi'an Saigao City Plaza, a large-scale mixed-use development in Xi'an, China. Through this joint venture, the Company will beneficially own a 30% interest in the shopping center, which is scheduled to open in late 2015. As of September 30, 2013, the Company had invested $54 million in the project, after cumulative currency translation adjustments. This investment is classified within Investment in Unconsolidated Joint Ventures on the Consolidated Balance Sheet.

Zhengzhou Vancouver Times Square

In 2013, the Company formed a joint venture with Beijing Wangfujing Department Store (Group) Co., Ltd. The joint venture owns a majority interest in and will manage an approximately 1.0 million square foot multi-level shopping center to be located in Zhengzhou, China. Through this joint venture, the Company beneficially owns a 32% interest in the shopping center, which is scheduled to open in late 2015. As of September 30, 2013, the Company had invested $38.4 million in the project, which is classified within Investment in Unconsolidated Joint Ventures on the Consolidated Balance Sheet.


Dispositions

TCBL

In 2012, the Company sold assets of the Taubman TCBL business. In connection with the sale, the Company received cash of approximately $4.4 million, while the remaining consideration consisted of approximately $3.6 million held in an escrow account that was pending receipt of consideration in an equivalent amount of Chinese Renminbi, a note receivable of approximately $8.5 million, and other receivables of approximately $0.8 million. In 2013, the Company collected this remaining consideration from the sale. As of December 31, 2012, the cash held in escrow was included within Deferred Charges and Other Assets on the Consolidated Balance Sheet and the note receivable and other receivables were included within Accounts and Notes Receivable on the Consolidated Balance Sheet.

Peripheral Land Sale - Non-Cash Investing Activity

In 2013, the Company recognized a $0.9 million gain on the sale of peripheral land. In connection with this sale, the Company received a $7.4 million note as part of the purchase price consideration. The note, which bears interest at 1% during the first year and 7% in the second year, is due in February 2015 and is collateralized by the land.
Income Taxes
Income Taxes
Income Taxes

Income Tax Expense

The Company’s income tax expense (benefit) for the three and nine months ended September 30, 2013 and 2012 was as follows:

 
Three Months Ended September 30
 
Nine Months Ended September 30
 
2013
 
2012
 
2013
 
2012
State current
$
47

 
$
38

 
$
298

 
$
103

State deferred
(34
)
 
(4
)
 
(59
)
 
(16
)
Federal current
160

 
223

 
468

 
761

Federal deferred
(38
)
 
(65
)
 
251

 
100

Foreign current
1,353

 
748

 
1,983

 
698

Foreign deferred
(35
)
 
(208
)
 
(226
)
 
(208
)
Total income tax expense
$
1,453

 
$
732

 
$
2,715

 
$
1,438



Deferred Taxes

Deferred tax assets and liabilities as of September 30, 2013 and December 31, 2012 were as follows:
 
2013
 
2012
Deferred tax assets:
 
 
 
Federal
$
3,148

 
$
3,378

Foreign
1,932

 
1,090

State
434

 
182

Total deferred tax assets
$
5,514

 
$
4,650

Valuation allowances
(1,787
)
 
(991
)
Net deferred tax assets
$
3,727

 
$
3,659

Deferred tax liabilities:
 

 
 

Federal
$
623

 
$
609

Foreign
404

 
401

State
121

 
107

Total deferred tax liabilities
$
1,148

 
$
1,117



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 peripheral land sales, the profitability of Taubman Asia's operations, and other factors affecting the results of operations of the Taxable REIT Subsidiaries. The valuation allowances relate to net operating loss carryforwards and tax basis differences where there is uncertainty regarding their realizability.

The Company realized a tax benefit as additional paid-in capital relating to the redemption of certain share-based compensation awards of $0.4 million and $0.8 million during the nine months ended September 30, 2013 and 2012, respectively. This benefit represents the amount of reduced Federal income tax attributed to the tax deduction that exceeds the recognized deferred tax asset relating to the awards, which was based on their cumulative book compensation cost. This excess tax deduction is due to changes in the fair value of the Company's shares between the grant date (the measurement date for book purposes) and the exercise date (the measurement date for tax purposes) of the awards.
Investments in Unconsolidated Joint Ventures
Investments in Unconsolidated Joint Ventures
Investments in Unconsolidated Joint Ventures

General Information

The Company owns beneficial interests in joint ventures that own shopping centers. The Operating Partnership is the sole direct or indirect managing general partner or managing member of Fair Oaks, Stamford Town Center, Sunvalley, and Westfarms. The Operating Partnership also provides certain management, leasing, and/or development services to the other shopping centers noted below.
Shopping Center
 
Ownership as of
September 30, 2013 and
December 31, 2012
Arizona Mills
 
50%
Fair Oaks
 
50
Hanam Union Square (under development)
 
Note 2
The Mall at Millenia
 
50
The Mall at University Town Center (under development)
 
Note 2
Stamford Town Center
 
50
Sunvalley
 
50
Waterside Shops
 
50
Westfarms
 
79
Retail component of Xi'an Saigao City Plaza (under development)
 
Note 2
Zhengzhou Vancouver Times Square (under development)
 
Note 2


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 or terms of the related assets and liabilities.

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

The estimated fair value of the Unconsolidated Joint Ventures’ notes payable was $1.5 billion at September 30, 2013 and December 31, 2012. The methodology for determining this fair value is consistent with that used for determining the fair value of consolidated mortgage notes payable (Note 12).

In October 2013, a $225 million construction financing was completed for The Mall at University Town Center, a 50% owned Unconsolidated Joint Venture (Note 14).

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. The combined information of the Unconsolidated Joint Ventures as of September 30, 2013 excluded the balances of Hanam Union Square, The Mall at University Town Center, the retail component of Xi'an Saigao City Plaza, and Zhengzhou Vancouver Times Square, which are currently under development (Note 2). Beneficial interest is calculated based on the Operating Partnership's ownership interest in each of the Unconsolidated Joint Ventures.
 
September 30
2013
 
December 31
2012
Assets:
 
 
 
Properties
$
1,142,770

 
$
1,129,647

Accumulated depreciation and amortization
(489,626
)
 
(473,101
)
 
$
653,144

 
$
656,546

Cash and cash equivalents
22,954

 
30,070

Accounts and notes receivable, less allowance for doubtful accounts of $1,101 and $1,072 in 2013 and 2012
24,067

 
26,032

Deferred charges and other assets
26,039

 
31,282

 
$
726,204

 
$
743,930

 
 
 
 
Liabilities and accumulated deficiency in assets:
 

 
 

Mortgage notes payable
$
1,482,584

 
$
1,490,857

Accounts payable and other liabilities
53,629

 
68,282

TRG's accumulated deficiency in assets
(466,391
)
 
(470,411
)
Unconsolidated Joint Venture Partners' accumulated deficiency in assets
(343,618
)
 
(344,798
)
 
$
726,204

 
$
743,930

 
 
 
 
TRG's accumulated deficiency in assets (above)
$
(466,391
)
 
$
(470,411
)
TRG's investment in properties under development (Note 2)
248,030

 
128,279

TRG basis adjustments, including elimination of intercompany profit
117,709

 
114,136

TCO's additional basis
57,395

 
58,855

Net investment in Unconsolidated Joint Ventures
$
(43,257
)
 
$
(169,141
)
Distributions in excess of investments in and net income of Unconsolidated Joint Ventures
378,650

 
383,293

Investment in Unconsolidated Joint Ventures
$
335,393

 
$
214,152

 
Three Months Ended September 30
 
Nine Months Ended September 30
 
2013
 
2012
 
2013
 
2012
Revenues
$
71,858

 
$
70,435

 
$
209,183

 
$
202,516

Maintenance, taxes, utilities, promotion, and other operating expenses
$
22,933

 
$
23,365

 
$
67,037

 
$
65,695

Interest expense
17,302

 
16,617

 
51,758

 
48,107

Depreciation and amortization
9,237

 
8,822

 
27,155

 
25,945

Total operating costs
$
49,472

 
$
48,804

 
$
145,950

 
$
139,747

Nonoperating income
(1
)
 
18

 
(1
)
 
19

Net income
$
22,385

 
$
21,649

 
$
63,232

 
$
62,788

 
 
 
 
 
 
 
 
Net income attributable to TRG
$
12,402

 
$
12,351

 
$
35,103

 
$
35,637

Realized intercompany profit, net of depreciation on TRG’s basis adjustments
306

 
809

 
405

 
1,566

Depreciation of TCO's additional basis
(488
)
 
(488
)
 
(1,461
)
 
(1,460
)
Equity in income of Unconsolidated Joint Ventures
$
12,220

 
$
12,672

 
$
34,047

 
$
35,743

 
 
 
 
 
 
 
 
Beneficial interest in Unconsolidated Joint Ventures’ operations:
 

 
 

 
 

 
 

Revenues less maintenance, taxes, utilities, promotion, and other operating expenses
$
28,000

 
$
26,748

 
$
80,777

 
$
76,613

Interest expense
(9,415
)
 
(8,765
)
 
(28,192
)
 
(25,084
)
Depreciation and amortization
(6,365
)
 
(5,311
)
 
(18,538
)
 
(15,786
)
Equity in income of Unconsolidated Joint Ventures
$
12,220

 
$
12,672

 
$
34,047

 
$
35,743

Beneficial Interest in Debt and Interest Expense
Beneficial interest in Debt and Interest Expense
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%) in 2012 (Note 2), The Mall at Wellington Green (10%), and MacArthur Center (5%).
 
At 100%
 
At Beneficial Interest
 
Consolidated Subsidiaries
 
Unconsolidated Joint Ventures
 
Consolidated Subsidiaries
 
Unconsolidated Joint Ventures
Debt as of:
 
 
 
 
 
 
 
September 30, 2013
$
2,985,952

 
$
1,482,584

 
$
2,819,474

 
$
835,303

December 31, 2012
2,952,030

 
1,490,857

 
2,785,501

 
841,363

 
 
 
 
 
 
 
 
Capitalized interest:
 

 
 

 
 

 
 

Nine Months Ended September 30, 2013
$
11,511

(1
)
$
73

 
$
11,169

 
$
46

Nine Months Ended September 30, 2012
1,239

 
26

 
1,193

 
13

 
 
 
 
 
 
 
 
Interest expense:
 

 
 

 
 

 
 

Nine Months Ended September 30, 2013
$
99,589

 
$
51,758

 
$
93,049

 
$
28,192

Nine Months Ended September 30, 2012
109,146

 
48,107

 
96,512

 
25,084




(1)
The Company capitalizes interest costs incurred in funding its equity contributions to development projects accounted for as UJVs. The capitalized interest cost is included in the Company's basis in its investment in UJVs. Such capitalized interest reduces interest expense in the Company's Consolidated Statement of Operations and Comprehensive Income and in the table above is included within Consolidated Subsidiaries.




2013 Financings

In July 2013, the Company completed a 10-year, $85 million non-recourse financing, secured by its leasehold interest in City Creek Center. The payments on the loan, which bears interest at an all-in fixed annual rate of 4.43%, are based on amortizing principal over 30 years. The proceeds, net of fees, were used to pay down the Company's revolving lines of credit. The Operating Partnership has provided a limited guarantee of the repayment of the loan, which could be triggered only upon a decline in center occupancy to a level that the Company believes is remote.

In February 2013, the Company refinanced its primary revolving line of credit. The new facility increased the borrowing capacity from a $650 million secured facility to a $1.1 billion unsecured line, which includes an accordion feature that would increase the borrowing capacity to as much as $1.5 billion, if fully exercised. The new line matures in March 2017 with a one-year extension option. The new facility bears interest at a range based on the Company's total leverage ratio. As of September 30, 2013, the leverage ratio resulted in a rate of LIBOR plus 1.45%, down from LIBOR plus 1.75% on the previous facility. TRG is the direct borrower with the entities that own Dolphin Mall, Fairlane Town Center, Twelve Oaks Mall, and The Shops at Willow Bend as guarantors under the line. Unamortized deferred financing costs of $1 million were written off in connection with the refinancing and recognized within interest expense.

In January 2013, a 10-year, $225 million non-recourse refinancing was completed on Great Lakes Crossing Outlets. The payments on the loan, which bears interest at an all-in rate of 3.63%, are based on amortizing principal over 30 years. The existing $126 million, 5.25% fixed rate loan, which was scheduled to mature in March 2013, was paid off and the approximately $100 million of excess proceeds were used to pay down the revolving lines of credit.

In October 2013, a $225 million construction financing was completed for The Mall at University Town Center, a 50% owned Unconsolidated Joint Venture (Note 14).

Debt Covenants

Certain loan agreements contain various restrictive covenants, including the following corporate covenants on the Company's primary revolving line of credit: a minimum net worth requirement, a maximum total leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a maximum recourse secured debt ratio, and a maximum payout ratio. In addition, the Company's primary revolving line of credit has unencumbered pool covenants, which currently apply to Dolphin Mall, Fairlane Town Center, Twelve Oaks Mall and The Shops at Willow Bend on a combined basis. These covenants include a minimum number and minimum value of eligible unencumbered assets, a maximum unencumbered leverage ratio, a minimum unencumbered interest coverage ratio, and a minimum unencumbered asset occupancy ratio. The corporate maximum secured leverage ratio is the most restrictive covenant for the Company's primary revolving line of credit. The Company was in compliance with all of its covenants and loan obligations as of September 30, 2013. The maximum payout ratio 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.

The Company is required to escrow cash balances for specific uses stipulated by certain of its lenders. As of September 30, 2013 and December 31, 2012, the Company’s cash balances restricted for these uses were $7.2 million and $6.1 million, respectively.
Equity Transactions
Stockholders' Equity Note Disclosure [Text Block]
Equity Transactions

In August 2013, the Company’s Board of Directors authorized a share repurchase program under which the Company may repurchase up to $200 million of its outstanding common stock. The Company plans to repurchase shares from time to time on the open market or in privately negotiated transactions or otherwise, depending on market prices and other conditions. As of September 30, 2013, the Company repurchased 313,042 shares of its common stock at an average price of $67.68 per share for a total of $21.2 million under the authorization. All shares repurchased have been cancelled. For each share of the Company’s stock repurchased, an equal number of the Company’s Operating Partnership units are redeemed. Repurchases of common stock were financed through general corporate funds, including borrowings under existing lines of credit.

In March 2013, the Company issued 6,800,000 shares of 6.25% Series K Preferred Stock. Net proceeds from the offering were $164.4 million, net of offering costs of $5.6 million. The Series K Preferred Stock has no stated maturity, sinking fund, or mandatory redemption requirements and generally is not convertible into any other security of the Company. The Series K Preferred Stock has a liquidation preference of $170.0 million ($25 per share). Dividends are cumulative and are paid in arrears on the last day of each calendar quarter. The Series K Preferred Stock will be redeemable by the Company at par, $25 per share, plus accrued dividends, generally beginning in March 2018. The Company owns corresponding Series K 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 K Preferred Stock. The Series K Preferred Stock is generally non-voting. The Company's Series K Preferred Stock ranks on parity with its Series J Preferred Stock with respect to the payment of dividends and distributions of assets upon liquidation, dissolution or winding up of its affairs.
Noncontrolling Interests
Noncontrolling Interests
Noncontrolling Interests

Redeemable Noncontrolling Interests

The Company's president of Taubman Asia (the Asia President) has an ownership interest in Taubman Asia, a consolidated subsidiary. The Asia President is entitled to 10% of Taubman Asia's dividends, with 85% of his dividends being withheld as contributions to capital. These withholdings will continue until he contributes and maintains his capital consistent with a 10% ownership interest, including all capital funded by the Operating Partnership for Taubman Asia's operating and investment activities subsequent to the Asia President obtaining his ownership interest. The Operating Partnership will have a preferred investment in Taubman Asia to the extent the Asia President has not yet contributed capital commensurate with his ownership interest. This preferred investment will accrue an annual preferential return equal to the Operating Partnership's average borrowing rate (with the preferred investment and accrued return together being referred to herein as the preferred interest). Due to this funding arrangement, the Operating Partnership is currently recognizing 100% of the results of operations of Taubman Asia. Taubman Asia has the ability to call, and the Asia President has the ability to put, the Asia President’s ownership interest upon specified terminations of the Asia President’s employment, although such put or call right may not be exercised for specified time periods after certain termination events. The redemption price for the ownership interest is generally a nominal amount through 2013 and subsequently 50% (increasing to 100% as early as May 2015) of the fair value of the ownership interest less the amount required to return the Operating Partnership's preferred interest. The Company has determined that the Asia President's ownership interest in Taubman Asia qualifies as an equity award, considering its specific redemption provisions, and accounts for it as a contingently redeemable noncontrolling interest, with a carrying value of zero at September 30, 2013 and December 31, 2012. Any adjustments to the redemption value are recorded through equity.

In July 2010, the Company formed a joint venture that focused on developing and owning outlet shopping centers. The Company owned a 90% controlling interest, while the joint venture partner owned a 10% interest. The Company had been funding substantially all of the outlet business. In September 2013, the Company redeemed this partner's interest for $1.1 million as part of a negotiated transaction, an amount modestly less than the partner's previously contributed capital. The joint venture partner's interest was previously accounted for as a redeemable noncontrolling interest.

The Company owns a 93.5% controlling interest in a joint venture that is redeveloping International Market Place in Waikiki, Honolulu, Hawaii. The 6.5% joint venture partner has no obligation nor the right to contribute capital. The Company will be entitled to a preferential return on its capital contributions. The Company has the right to purchase the joint venture partner's interest and the joint venture partner has the right to require the Company to purchase the joint venture partner's interest after the third anniversary of the opening of the center, and annually thereafter. The purchase price of the joint venture partner's interest will be based on fair value. Considering the redemption provisions, the Company accounts for the joint venture partner's interest as a contingently redeemable noncontrolling interest with a carrying value of zero at September 30, 2013. Any adjustments to the redemption value are recorded through equity.

Equity Balances of Nonredeemable Noncontrolling Interests

The net equity balance of the noncontrolling interests as of September 30, 2013 and December 31, 2012 included the following:
 
2013
 
2012
Non-redeemable noncontrolling interests:
 
 
 
Noncontrolling interests in consolidated joint ventures
$
(38,757
)
 
$
(45,066
)
Noncontrolling interests in partnership equity of TRG
(55,317
)
 
(44,242
)
 
$
(94,074
)
 
$
(89,308
)


Income Allocable to Noncontrolling Interests

Net income attributable to the noncontrolling interests for the three months ended September 30, 2013 and September 30, 2012 included the following:
 
2013
 
2012
Net income attributable to noncontrolling interests:
 
 
 
Non-redeemable noncontrolling interests:
 
 
 
Noncontrolling share of income of consolidated joint ventures
$
2,198

 
$
2,967

Noncontrolling share of income of TRG
10,338

 
9,706

 
$
12,536

 
$
12,673

Redeemable noncontrolling interests


 
(378
)
 
$
12,536

 
$
12,295



Net income attributable to the noncontrolling interests for the nine months ended September 30, 2013 and September 30, 2012 included the following:
 
2013
 
2012
Net income attributable to noncontrolling interests:
 
 
 
Non-redeemable noncontrolling interests:
 
 
 
Noncontrolling share of income of consolidated joint ventures
$
6,752

 
$
9,725

Noncontrolling share of income of TRG
29,915

 
25,752

 
$
36,667

 
$
35,477

Redeemable noncontrolling interests


 
(1,584
)
 
$
36,667

 
$
33,893



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 nine months ended September 30, 2013 and September 30, 2012:
 
2013
 
2012
Net income attributable to Taubman Centers, Inc. common shareowners
$
70,074

 
$
55,604

Transfers (to) from the noncontrolling interest –
 

 
 

Increase (Decrease) in Taubman Centers, Inc.’s paid-in capital for adjustments of noncontrolling interest (1)
5,995

 
(62,127
)
Decrease in Taubman Centers, Inc.’s paid-in capital related to the acquisition of additional ownership in the outlet joint venture
(1,050
)
 
 
Net transfers (to) from noncontrolling interests
4,945

 
(62,127
)
Change from net income attributable to Taubman Centers, Inc. and transfers (to) from noncontrolling interests
$
75,019

 
$
(6,523
)

(1)
In 2013 and 2012, adjustments of noncontrolling interests were made as a result of changes in the Company's ownership of the Operating Partnership in connection with the Company's share-based compensation under employee and director benefit plans (Note 9), issuances of stock pursuant to the Continuing Offer (Note 10), issuance of common stock in August 2012, redemption of a joint venture partner's interest, stock repurchases (Note 6), and redemptions of certain redeemable Operating Partnership Units.

Finite Life Entities

Accounting Standards Codification Topic 480, “Distinguishing Liabilities from Equity” establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. At September 30, 2013, the Company held a controlling interest in a consolidated entity with a specified termination date in 2083. The noncontrolling owner's interest in this entity is to be settled upon termination by distribution or transfer of either cash or specific assets of the underlying entity. The estimated fair value of this noncontrolling interest was approximately $350 million at September 30, 2013, compared to a book value of $(43.6) million that is classified in Noncontrolling Interests in the Company’s Consolidated Balance Sheet. The fair value of the noncontrolling interest was calculated as the noncontrolling interest's ownership share of the underlying property's fair value. The property's fair value was estimated by considering its in-place net operating income, current market capitalization rate, and mortgage debt outstanding.
Derivative and Hedging Activities
Derivative and Hedging Activities
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 September 30, 2013, the Company had the following outstanding interest rate derivatives that were designated and are expected to be effective as cash flow hedges of the interest payments on the associated debt.
Instrument Type
 
Ownership
 
Notional Amount
 
Swap Rate
 
Credit Spread on Loan
 
Total Swapped Rate on Loan
 
Maturity Date
Consolidated Subsidiary:
 
 
 
 
 
 
 
 
 
 
 
 
Receive variable (LIBOR) /pay-fixed swap (1)
 
95.0
%
 
$
129,554

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

 
 

 
 

 
 

 
 

 
 
Receive variable (LIBOR) /pay-fixed swap (2)
 
50.0
%
 
137,500

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

 
2.40
%
 
1.70
%
 
4.10
%
 
April 2018


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

Cash Flow Hedges of Interest Rate Risk

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

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

The Company expects that approximately $6.3 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 September 30, 2013, the Company had $0.2 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 following tables present the effect of derivative instruments on the Company’s Consolidated Statement of Operations and Comprehensive Income for the three and nine months ended September 30, 2013 and September 30, 2012. 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 September 30, 2013 and September 30, 2012, 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 September 30
 
 
 
Three Months Ended September 30
 
2013
 
2012
 
 
 
2013
 
2012
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
Interest rate contract – consolidated subsidiary
$
(67
)
 
$
(897
)
 
Interest Expense
 
$
(812
)
 
$
(802
)
Interest rate contracts – UJVs
(329
)
 
(893
)
 
Equity in Income of UJVs
 
(777
)
 
(935
)
Total derivatives in cash flow hedging relationships
$
(396
)
 
$
(1,790
)
 
 
 
$
(1,589
)
 
$
(1,737
)
 
 
 
 
 
 
 
 
 
 
Realized losses on settled cash flow hedges:
 

 
 

 
 
 
 

 
 

Interest rate contract – consolidated subsidiary
 

 
 

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

 
 

 
Equity in Income of UJVs
 
 
 


Total realized losses on settled cash flow hedges
 

 
 

 
 
 
$
(151
)
 
$
(151
)


During the nine months ended September 30, 2013 and September 30, 2012, 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)
 
Nine Months Ended September 30
 
 
 
Nine Months Ended September 30
 
2013
 
2012
 
 
 
2013
 
2012
Derivatives in cash flow hedging relationships:
 

 
 
 
 
 
 
 
 
Interest rate contract – consolidated subsidiary
$
6,375

 
$
(3,671
)
 
Interest Expense
 
$
(2,406
)
 
$
(2,380
)
Interest rate contracts – UJVs
4,039

 
(2,802
)
 
Equity in Income of UJVs
 
(2,297
)
 
(2,770
)
Total derivatives in cash flow hedging relationships
$
10,414

 
$
(6,473
)
 
 
 
$
(4,703
)
 
$
(5,150
)
 
 
 
 
 
 
 
 
 
 
Realized losses on settled cash flow hedges:
 

 
 

 
 
 
 

 
 

Interest rate contract – consolidated subsidiary
 

 
 

 
Interest Expense
 
$
(454
)
 
$
(453
)
Interest rate contract – UJVs
 

 
 

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

 
 

 
 
 
$
(454
)
 
$
(641
)


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 September 30, 2013 and December 31, 2012.
 
 
 
Fair Value
 
Consolidated Balance Sheet Location
 
September 30
2013
 
December 31
2012
Derivatives designated as hedging instruments:
 
 
 
 
 
Liability derivatives:
 
 
 

 
 

Interest rate contract – consolidated subsidiary
Accounts Payable and Accrued Liabilities
 
$
(5,490
)
 
$
(11,865
)
Interest rate contracts – UJVs
Investment in UJVs
 
(6,982
)
 
(11,021
)
Total liabilities designated as hedging instruments
 
 
$
(12,472
)
 
$
(22,886
)


Contingent Features

All of the Company's outstanding derivatives contain provisions that state if the hedged entity defaults on any of its indebtedness in excess of $1 million, then the derivative obligation could also be declared in default. As of September 30, 2013, the Company was not in default on any debt obligations that would trigger a credit risk related default on its current outstanding derivatives.

As of September 30, 2013 and December 31, 2012, the fair value of derivative instruments with credit-risk-related contingent features that were in a liability position was $12.5 million and $22.9 million, respectively. As of September 30, 2013 and December 31, 2012, 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 12 for fair value information on derivatives.
Share-Based Compensation
Share-Based Compensation
Share-Based Compensation

The Taubman Company 2008 Omnibus Long-Term Incentive Plan (2008 Omnibus Plan), as amended, which is shareowner approved, provides for the award to directors, officers, employees, and other service providers of the Company of restricted shares, restricted units of limited partnership in the Operating Partnership, options to purchase shares or Operating Partnership units, unrestricted shares or Operating Partnership units, and other awards to acquire up to an aggregate of 8.5 million Company common shares or Operating Partnership units. In addition, non-employee directors have the option to defer their compensation, other than their meeting fees, under a deferred compensation plan.

Non-option awards granted after an amendment of the 2008 Omnibus Plan in 2010 are deducted at a ratio of 1.85 Company common shares or Operating Partnership units, while non-option awards granted prior to the amendment are deducted at a ratio of 2.85. Options are deducted on a one-for-one basis. The amount available for future grants is adjusted when the number of contingently issuable shares or units are settled, for grants that are forfeited, and for options that expire without being exercised.

Prior to the adoption of the 2008 Omnibus Plan, the Company provided share-based compensation through an incentive option plan and non-employee directors' stock grant and deferred compensation plans.

The compensation cost charged to income for the Company’s share-based compensation plans was $3.6 million and $9.7 million for the three and nine months ended September 30, 2013, respectively. The compensation cost charged to income for the Company’s share-based compensation plans was $2.5 million and $8.7 million for the three and nine months ended September 30, 2012, respectively. Compensation cost capitalized as part of properties and deferred leasing costs was $0.4 million and $1.2 million for the three and nine months ended September 30, 2013, respectively, and $0.2 million and $0.8 million for the three and nine months ended September 30, 2012, respectively.

The Company estimated the grant-date fair values of options, performance share units, and restricted share units using the methods discussed in the separate sections below for each type of grant. Expected volatility and dividend yields are based on historical volatility and yields of the Company’s common stock, respectively, as well as other factors. The risk-free interest rates used are based on the U.S. Treasury yield curves in effect at the times of grants. The Company assumes no forfeitures of options or performance share units due to the small number of participants and low turnover rate.

Options

A summary of option activity for the nine months ended September 30, 2013 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, 2013
689,802

 
$
42.50

 
3.8

 
$
24.74

-
$
55.90

Exercised
(84,225
)
 
33.92

 
 
 
 
 
 
Outstanding at September 30, 2013
605,577

 
$
43.70

 
2.9

 
$
29.38

-
$
55.90

 
 
 
 
 
 
 
 
 
 
Fully vested options at September 30, 2013
605,577

 
$
43.70

 
2.9

 
 

 
 


The aggregate intrinsic value (the difference between the period end stock price and the option exercise price) of in-the-money options outstanding was $14.3 million as of September 30, 2013.

The total intrinsic value of options exercised during the nine months ended September 30, 2013 and 2012 was $3.6 million and $3.8 million, respectively. Cash received from option exercises for the nine months ended September 30, 2013 and 2012 was $2.9 million and $3.1 million, respectively.

As of September 30, 2013, all options outstanding were fully vested, and there was no unrecognized compensation cost related to options.
Under both the prior option plan and the 2008 Omnibus Plan, vested unit options can be exercised by tendering mature units with a market value equal to the exercise price of the unit options. In 2002, Robert S. Taubman, the Company’s chief executive officer, exercised options for 3.0 million units by tendering 2.1 million mature units and deferring receipt of 0.9 million units under the unit option deferral election. As the Operating Partnership pays distributions, the deferred option units receive their proportionate share of the distributions in the form of cash payments. Under an amendment executed in January 2011, beginning in December 2017 (unless Mr. Taubman retires earlier), the deferred partnership units will be issued in ten annual installments. The deferred units are accounted for as participating securities of the Operating Partnership.

Performance Share Units

In 2013, the Company granted Performance Share Units (PSU) under the 2008 Omnibus Plan. Each PSU represents the right to receive, upon vesting, shares of the Company’s common stock ranging from 0-300% of the PSU based on the Company’s market performance relative to that of a peer group. The units vest in March 2016 if continuous service has been provided, or upon retirement or certain other events (such as death or disability) if earlier. No dividends accumulate during the vesting period.

The Company estimated the value of these PSU granted using a Monte Carlo simulation, considering the Company’s common stock price at the grant dates less the present value of the expected dividends during the vesting periods, historical returns of the Company and the peer group of companies, a risk-free interest rate of 0.30% to 0.40% and a measurement period of approximately three years. The resulting weighted average grant-date fair value was $103.37 per PSU.

In 2013, the Company also granted a limited number of additional PSU that represent the right to receive, upon vesting, shares of the Company’s common stock ranging from 0-400% of the PSU based on the Company’s market performance relative to that of a peer group. The units vest in March 2017, if continuous service has been provided, or upon certain other events (such as death or disability) if earlier. No dividends accumulate during the vesting period. The Company estimated the value of these additional PSU using a Monte Carlo simulation, considering the Company's common stock price at the grant dates less the present value of the expected dividends during the vesting periods, historical returns of the Company and the peer group of companies, a risk-free interest rate of 0.46% to 0.62% and a measurement period of approximately four years. The resulting weighted average grant-date fair value was $171.05 per PSU.

A summary of PSU activity for the nine months ended September 30, 2013 is presented below:
 
Number of Performance Share Units
 
Weighted Average Grant Date Fair Value
Outstanding at January 1, 2013
262,740

 
$
122.52

Vested
(73,259
)
(1) 
65.29

Granted (three-year vesting)
42,178

 
103.37

Granted (four-year vesting)
15,444

 
171.05

Forfeited
(12,240
)
 
140.49

Outstanding at September 30, 2013
234,863

 
$
139.18



(1)
Based on the Company's market performance relative to that of a peer group, the actual number of shares of common stock issued upon vesting during the nine months ended September 30, 2013 equaled 300% of the number of PSU awards vested in the table above.

None of the PSU outstanding at September 30, 2013 were vested. As of September 30, 2013, there was $20.5 million of total unrecognized compensation cost related to nonvested PSU outstanding. This cost is expected to be recognized over an average period of 3.0 years.

Restricted Share Units

In 2013, Restricted Share Units (RSU) were issued under the 2008 Omnibus Plan and represent the right to receive upon vesting one share of the Company’s common stock. The units vest in March 2016, if continuous service has been provided through that period, or upon retirement or certain other events (such as death or disability) if earlier. No dividends accumulate during the vesting period. The Company estimated the values of these RSU using the Company’s common stock at the grant dates deducting the present value of expected dividends during the vesting periods using a risk-free rate of 0.30% to 0.49%. The result of the Company’s valuation was a weighted average grant-date fair value of $71.67 per RSU.

In 2013, the Company also granted a limited number of additional RSU that represent the right to receive upon vesting one share of the Company’s common stock. The units have staggered vesting dates from March 2014 to March 2015, if continuous service has been provided through those periods, or upon retirement or certain other events (such as death or disability) if earlier. No dividends accumulate during the vesting periods. The Company estimated the value of these additional RSU using the Company's common stock price at the grant date deducting the present value of expected dividends during the vesting periods using a risk-free rate of 0.10% to 0.19%. The result of the Company's valuation was a weighted average grant-date fair value of $81.38 per RSU.

A summary of RSU activity for the nine months ended September 30, 2013 is presented below:
 
Number of Restricted Share Units
 
Weighted Average Grant Date Fair Value
Outstanding at January 1, 2013
322,305

 
$
48.19

Vested
(138,028
)
 
37.03

Granted (three-year vesting)
92,103

 
71.67

Granted (staggered vesting)
5,197

 
81.38

Forfeited
(11,678
)
 
57.60

Outstanding at September 30, 2013
269,899

 
$
62.00



None of the RSU outstanding at September 30, 2013 were vested. As of September 30, 2013, there was $8.1 million of total unrecognized compensation cost related to nonvested RSU outstanding. This cost is expected to be recognized over an average period of 1.9 years.
Commitments and Contingencies
Commitments and Contingencies
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 September 30, 2013 of $67.31 per common share, the aggregate value of interests in the Operating Partnership that may be tendered under the Cash Tender Agreement was $1.6 billion. The purchase of these interests at September 30, 2013 would have resulted in the Company owning an additional 27% 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 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 ratio of 14,000 shares of Series B Preferred Stock for one share of common stock.

Litigation

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

Other

See Note 7 for contingent features relating to certain joint venture agreements, Note 8 for contingent features relating to derivative instruments, and Note 9 for obligations under existing share-based compensation plans.
Earnings Per Share
Earnings Per Share
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 10), outstanding options for partnership units, PSU, RSU, deferred shares under the Non-Employee Directors’ Deferred Compensation Plan, and unissued partnership units under a unit option deferral election (Note 9). 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. 
 
Three Months Ended September 30
 
Nine Months Ended September 30
 
2013
 
2012
 
2013
 
2012
Net income attributable to Taubman Centers, Inc. common shareowners (Numerator):
 

 
 
 
 
 
 
Basic
$
24,488

 
$
21,700

 
$
70,074

 
$
55,604

Impact of additional ownership of TRG
107

 
168

 
352

 
470

Diluted
$
24,595

 
$
21,868

 
$
70,426

 
$
56,074

 
 
 
 
 
 
 
 
Shares (Denominator) – basic
63,753,748

 
60,571,612

 
63,653,155

 
59,207,828

Effect of dilutive securities
937,161

 
1,453,710

 
1,049,493

 
1,508,690

Shares (Denominator) – diluted
64,690,909

 
62,025,322

 
64,702,648

 
60,716,518

 
 
 
 
 
 
 
 
Earnings per common share - basic
$
0.38

 
$
0.36

 
$
1.10

 
$
0.94

Earnings per common share – diluted
$
0.38

 
$
0.35

 
$
1.09

 
$
0.92



The calculation of diluted earnings per share excluded certain potential common stock including outstanding partnership units and unissued partnership units under a unit option deferral election, both of which may be exchanged for common shares of the Company under the Continuing Offer. The table below presents the potential common stock excluded from the calculation of diluted earnings per share as they were anti-dilutive in the period presented.

 
Three Months Ended September 30
 
Nine Months Ended September 30
 
2013
 
2012
 
2013
 
2012
Weighted average noncontrolling partnership units outstanding
4,494,470

 
4,235,782

 
4,557,851

 
5,221,040

Unissued partnership units under unit option deferral elections
871,262

 
871,262

 
871,262

 
871,262

Fair Value Disclosures
Fair Value Disclosures
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 were 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
September 30, 2013 Using
 
Fair Value Measurements as of
December 31, 2012 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
 


 
 

 
$
2,452

 
 
Insurance deposit
 
$
12,224

 
 

 
11,291

 
 

Total assets
 
$
12,224

 


 
$
13,743

 


 
 
 
 
 
 
 
 
 
Derivative interest rate contract
 
 

 
$
(5,490
)
 
 

 
$
(11,865
)
Total liabilities
 
 

 
$
(5,490
)
 
 

 
$
(11,865
)


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 on the Consolidated Balance Sheet. Corresponding deferred revenue relating to amounts billed to tenants for this arrangement has been classified within Accounts Payable and Accrued Liabilities on the Consolidated Balance Sheet.

The available-for-sale securities shown above consisted of marketable securities that represented shares in a Vanguard REIT fund that were purchased to facilitate a tax efficient structure for the 2005 disposition of Woodland mall and were classified within Deferred Charges and Other Assets on the Consolidated Balance Sheet as of December 31, 2012. In January 2013, these securities were sold for $2.5 million, resulting in a $1.3 million realized gain.
Financial Instruments Carried at Other Than Fair Values

Community Development District Obligation

The owner of 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 September 30, 2013 and December 31, 2012, the book value of the infrastructure assets and improvements, net of depreciation, was $38.3 million and $39.8 million, respectively. The related obligation is classified within Accounts Payable and Accrued Liabilities on the Consolidated Balance Sheet and had a balance of $60.8 million at both September 30, 2013 and December 31, 2012. The fair value of this obligation, derived from quoted market prices and therefore falling into Level 1 of the fair value hierarchy, was $59.7 million at September 30, 2013 and $60.9 million at December 31, 2012.

Notes Payable

The fair value of notes payable is estimated using cash flows discounted at current market rates and therefore fall into Level 2 of the fair value hierarchy. When selecting discount rates for purposes of estimating the fair value of notes payable at September 30, 2013 and December 31, 2012, the Company employed the credit spreads at which the debt was originally issued. Excluding 2010 through 2013 refinancings and debt assumed as part of the 2011 acquisitions, an additional 1.25% and 1.50% credit spread was added to the discount rate at September 30, 2013 and December 31, 2012, respectively, to estimate 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 September 30, 2013 or December 31, 2012. To further assist financial statement users, the Company has included with its fair value disclosures an analysis of interest rate sensitivity.

The estimated fair values of notes payable at September 30, 2013 and December 31, 2012 were as follows:
 
2013
 
2012
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Notes payable
$
2,985,952

 
$
3,055,058

 
$
2,952,030

 
$
3,082,265



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 September 30, 2013 by $76 million or 2.5%.

Cash Equivalents and Notes Receivable

The fair value of cash equivalents and notes receivable approximates their carrying value due to their short maturity. The fair value of cash equivalents is derived from quoted market prices and therefore falls into Level 1 of the fair value hierarchy. The fair value of notes receivable are estimated using cash flows discounted at current market rates and therefore fall into Level 2 of the fair value hierarchy.

See Note 4 regarding the fair value of the Unconsolidated Joint Ventures’ notes payable, and Note 8 regarding additional information on derivatives.
Accumulated Other Comprehensive Income (Notes)
Comprehensive Income (Loss) Note [Text Block]
Accumulated Other Comprehensive Income

Changes in the balance of each component of Accumulated Other Comprehensive Income (AOCI) for the nine months ended September 30, 2013 were as follows:
 
Taubman Centers, Inc. AOCI
 
Noncontrolling Interests AOCI
 
Cumulative translation adjustment
 
Unrealized gains (losses) on interest rate instruments and other
 
Total
 
Cumulative translation adjustment
 
Unrealized gains (losses) on interest rate instruments and other
 
Total
January 1, 2013
$
1,888

 
$
(23,952
)
 
$
(22,064
)
 
$
756

 
$
1,739

 
$
2,495

Other comprehensive income/(loss) before reclassifications
1,127

 
3,981

 
5,108

 
447

 
1,776

 
2,223

Amounts reclassified from AOCI
 
 
2,660

 
2,660

 
 
 
1,174

 
1,174

Net current period other comprehensive income/(loss)
1,127

 
6,641

 
7,768

 
447

 
2,950

 
3,397

Adjustments due to changes in ownership
5

 
17

 
22

 
(5
)
 
(17
)
 
(22
)
September 30, 2013
$
3,020

 
$
(17,294
)
 
$
(14,274
)
 
$
1,198

 
$
4,672

 
$
5,870



Changes in the balance of each component of AOCI for the nine months ended September 30, 2012 were as follows:
 
Taubman Centers, Inc. AOCI
 
Noncontrolling Interests AOCI
 
Cumulative translation adjustment
 
Unrealized gains (losses) on interest rate instruments and other
 
Total
 
Cumulative translation adjustment
 
Unrealized gains (losses) on interest rate instruments and other
 
Total
January 1, 2012
 
 
$
(27,613
)
 
$
(27,613
)
 
 
 
$
9,113

 
$
9,113

Current period other comprehensive income

 
(3,837
)
 
(3,837
)
 
 
 
(1,782
)
 
(1,782
)
Adjustments due to changes in ownership
 
 
43

 
43

 
 
 
(43
)
 
(43
)
September 30, 2012

 
$
(31,407
)
 
$
(31,407
)
 

 
$
7,288

 
$
7,288



The following table presents reclassifications out of AOCI for the nine months ended September 30, 2013:
Details about AOCI Components
 
Amounts reclassified from AOCI
 
Affected line item in Consolidated Statement of Operations
(Gains)/losses on interest rate instruments and other:
 
 
 
 
Realized loss on interest rate contracts - consolidated subsidiaries
 
$
2,860

 
Interest Expense
Realized loss on interest rate contracts - UJVs
 
2,297

 
Equity in Income of UJVs
Realized gain on sale of securities (Note 12)
 
(1,323
)
 
Nonoperating Income
Total reclassifications for the period
 
$
3,834

 
 
Subsequent Events
Subsequent Events [Text Block]
Subsequent Event