TAUBMAN CENTERS INC, 10-Q filed on 10/29/2015
Quarterly Report
Document and Entity Information Document
9 Months Ended
Sep. 30, 2015
Oct. 28, 2015
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, 2015 
 
Document Fiscal Year Focus
2015 
 
Document Fiscal Period Focus
Q3 
 
Amendment Flag
false 
 
Entity Common Stock, Shares Outstanding
 
60,233,561 
Entity Well-known Seasoned Issuer
Yes 
 
Entity Voluntary Filers
No 
 
Entity Current Reporting Status
Yes 
 
CONSOLIDATED BALANCE SHEET (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2015
Dec. 31, 2014
Assets:
 
 
Properties
$ 3,585,896 
$ 3,262,505 
Accumulated depreciation and amortization
(1,033,056)
(970,045)
Real Estate Investment Property, Net
2,552,840 
2,292,460 
Investment in Unconsolidated Joint Ventures (Notes 2 and 4)
420,889 
370,004 
Cash and cash equivalents
263,911 
276,423 
Restricted cash (Note 5)
10,798 
37,502 
Accounts and notes receivable, less allowance for doubtful accounts of $4,699 and $2,927 in 2015 and 2014
44,364 
49,245 
Accounts receivable from related parties
3,161 
832 
Deferred charges and other assets
198,561 
188,435 
Total Assets
3,494,524 
3,214,901 
Liabilities:
 
 
Notes payable (Note 5)
2,594,073 
2,025,505 
Accounts payable and accrued liabilities
306,892 
292,802 
Distributions in excess of investments in and net income of Unconsolidated Joint Ventures (Notes 2 and 4)
471,129 
476,651 
Total Liabilities
3,372,094 
2,794,958 
Commitments and contingencies (Notes 5, 7, 8, 9, and 10)
   
   
Equity:
 
 
Series B Non-Participating Convertible Preferred Stock, $0.001 par and liquidation value, 40,000,000 shares authorized, 25,044,939 and 25,117,000 shares issued and outstanding at September 30, 2015 and December 31, 2014
25 
25 
Common Stock, $0.01 par value, 250,000,000 shares authorized, 60,258,750 and 63,324,409 shares issued and outstanding at September 30, 2015 and December 31, 2014
603 
633 
Additional paid-in capital
649,550 
815,961 
Accumulated other comprehensive income (loss) (Note 13)
(32,837)
(15,068)
Dividends in excess of net income
(504,163)
(483,188)
Stockholders' Equity Attributable to Parent
113,178 
318,363 
Noncontrolling interests (Note 7)
9,252 
101,580 
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest
122,430 
419,943 
Total Liabilities and Equity
$ 3,494,524 
$ 3,214,901 
CONSOLIDATED BALANCE SHEET (Parenthetical) (USD $)
Sep. 30, 2015
Dec. 31, 2014
Allowance for doubtful accounts
$ 4,699,000 
$ 2,927,000 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
250,000,000 
250,000,000 
Common stock, shares issued
60,258,750 
63,324,409 
Common stock, shares outstanding
60,258,750 
63,324,409 
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
25,044,939 
25,117,000 
Preferred Stock, shares outstanding
25,044,939 
25,117,000 
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 
$ 0 
Preferred Stock, liquidation preference
$ 170,000,000 
$ 170,000,000 
Preferred Stock, shares authorized
6,800,000 
6,800,000 
Preferred Stock, shares issued
6,800,000 
6,800,000 
Preferred Stock, shares outstanding
6,800,000 
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, 2015
Sep. 30, 2014
Sep. 30, 2015
Sep. 30, 2014
Revenues:
 
 
 
 
Minimum rents
$ 77,484 
$ 96,691 
$ 228,920 
$ 291,113 
Percentage rents
5,032 
5,263 
9,039 
11,019 
Expense recoveries
47,206 
63,527 
137,138 
187,439 
Management, leasing, and development services
3,367 
3,135 
9,665 
8,605 
Other
6,894 
7,428 
16,183 
22,631 
Total Revenues
139,983 
176,044 
400,945 
520,807 
Expenses:
 
 
 
 
Maintenance, taxes, utilities, and promotion
37,230 
52,184 
103,970 
148,955 
Other operating
12,732 
18,036 
40,630 
49,582 
Management, leasing, and development services
1,558 
1,539 
4,099 
4,520 
General and administrative (Note 9)
8,615 
11,369 
32,595 
34,493 
Restructuring charge (Note 2)
 
3,031 
 
3,031 
Interest expense
16,145 
23,382 
44,451 
74,946 
Depreciation and amortization
27,156 
24,553 
77,575 
96,521 
Operating Expenses
103,436 
134,094 
303,320 
412,048 
Nonoperating income (expense) (Notes 2 and 8)
1,010 
891 
3,712 
(3,327)
Income before income tax expense, equity in income of Unconsolidated Joint Ventures, and gain on dispositions, net of tax
37,557 
42,841 
101,337 
105,432 
Income tax expense (Note 3)
(584)
(683)
(2,110)
(1,693)
Equity in income of Unconsolidated Joint Ventures (Note 4)
15,219 
14,479 
46,298 
41,222 
Income before gain on dispositions, net of tax
52,192 
56,637 
145,525 
144,961 
Gain on dispositions, net of tax (Note 2)
437 
   
437 
476,887 
Net income
52,629 
56,637 
145,962 
621,848 
Net income attributable to noncontrolling interests (Note 7)
(15,931)
(16,700)
(43,858)
(178,935)
Net income attributable to Taubman Centers, Inc.
36,698 
39,937 
102,104 
442,913 
Distributions to participating securities of TRG (Note 9)
(492)
(471)
(1,477)
(1,409)
Preferred stock dividends
(5,784)
(5,784)
(17,353)
(17,353)
Net income attributable to Taubman Centers, Inc. common shareowners
30,422 
33,682 
83,274 
424,151 
Other comprehensive income (Note 13):
 
 
 
 
Unrealized gain (loss) on interest rate instruments and other
(10,796)
2,593 
(18,341)
(11,994)
Cumulative translation adjustment
(11,433)
(4,282)
(15,458)
(2,432)
Reclassification adjustment for amounts recognized in net income
3,084 
2,599 
8,919 
14,073 
Other comprehensive income (loss)
(19,145)
910 
(24,880)
(353)
Comprehensive income
33,484 
57,547 
121,082 
621,495 
Comprehensive income attributable to noncontrolling interests
(10,294)
(16,969)
(36,549)
(178,956)
Comprehensive income attributable to Taubman Centers, Inc.
$ 23,190 
$ 40,578 
$ 84,533 
$ 442,539 
Basic earnings per common share (Note 11)
$ 0.50 
$ 0.53 
$ 1.35 
$ 6.71 
Diluted earnings per common share (Note 11)
$ 0.50 
$ 0.53 
$ 1.34 
$ 6.60 
Cash dividends declared per common share
$ 0.5650 
$ 0.5400 
$ 1.6950 
$ 1.6200 
Weighted average number of common shares outstanding – basic
60,713,379 
63,317,680 
61,778,051 
63,249,400 
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (USD $)
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, 2013
$ (215,660,000)
$ 25,000 
$ 631,000 
$ 796,787,000 
$ (8,914,000)
$ (908,656,000)
$ (95,533,000)
Balance (in shares) at Dec. 31, 2013
 
39,651,069 
63,101,614 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
Issuance of stock pursuant to Continuing Offer (Notes 9 and 10), shares
(35,500)
35,500 
 
 
 
 
Repurchase of common stock (Note 6), Shares
 
 
(266)
 
 
 
 
Repurchase of common stock (Note 6)
(17,000)
 
 
(17,000)
 
 
 
Share-based compensation under employee and director benefit plans (Note 9)
12,087,000 
 
2,000 
12,085,000 
 
 
 
Share-based compensation under employee and director benefit plans (Note 9), shares
 
 
182,691 
 
 
 
 
Adjustments of noncontrolling interests (Notes 2 and 7)
 
 
54,000 
29,000 
 
(83,000)
Contributions from noncontrolling interests
22,346,000 
 
 
 
 
 
22,346,000 
Dividends and distributions
(173,055,000)
 
 
 
 
(121,268,000)
 
Distributions to noncontrolling interests
 
 
 
 
 
 
(51,787,000)
Other, Shares
 
1,431 
 
 
 
 
 
Other
(108,000)
 
 
162,000 
 
(280,000)
10,000 
Net income
621,848,000 
 
 
 
 
442,913,000 
178,935,000 
Unrealized loss on interest rate instruments and other
(11,994,000)
 
 
 
(8,478,000)
 
(3,516,000)
Cumulative translation adjustment
(2,432,000)
 
 
 
(1,741,000)
 
(691,000)
Reclassification adjustment for amounts recognized in net income
14,073,000 
 
 
 
9,846,000 
 
4,227,000 
Balance at Sep. 30, 2014
267,088,000 
25,000 
633,000 
809,071,000 
(9,258,000)
(587,291,000)
53,908,000 
Balance (in shares) at Sep. 30, 2014
 
39,617,000 
63,319,539 
 
 
 
 
Balance at Dec. 31, 2014
419,943,000 
25,000 
633,000 
815,961,000 
(15,068,000)
(483,188,000)
101,580,000 
Balance (in shares) at Dec. 31, 2014
 
39,617,000 
63,324,409 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
Issuance of stock pursuant to Continuing Offer (Notes 9 and 10), shares
 
(72,061)
73,295 
 
 
 
 
Issuance of stock pursuant to Continuing Offer (Notes 9 and 10)
 
1,000 
(1,000)
 
 
 
Repurchase of common stock (Note 6), Shares
 
 
(3,434,703)
 
 
 
 
Repurchase of common stock (Note 6)
(250,808,000)
 
(34,000)
(250,774,000)
 
 
 
Share-based compensation under employee and director benefit plans (Note 9)
15,363,000 
 
3,000 
15,360,000 
 
 
 
Share-based compensation under employee and director benefit plans (Note 9), shares
 
 
295,749 
 
 
 
 
Adjustments of noncontrolling interests (Notes 2 and 7)
(9,296,000)
 
 
68,993,000 
(198,000)
 
(78,091,000)
Dividends and distributions
(173,434,000)
 
 
 
 
(122,648,000)
 
Distributions to noncontrolling interests
 
 
 
 
 
 
(50,786,000)
Other
(420,000)
 
 
11,000 
 
(431,000)
 
Net income
145,962,000 
 
 
 
 
102,104,000 
43,858,000 
Unrealized loss on interest rate instruments and other
(18,341,000)
 
 
 
(12,953,000)
 
(5,388,000)
Cumulative translation adjustment
(15,458,000)
 
 
 
(10,917,000)
 
(4,541,000)
Reclassification adjustment for amounts recognized in net income
8,919,000 
 
 
 
6,299,000 
 
2,620,000 
Balance at Sep. 30, 2015
$ 122,430,000 
$ 25,000 
$ 603,000 
$ 649,550,000 
$ (32,837,000)
$ (504,163,000)
$ 9,252,000 
Balance (in shares) at Sep. 30, 2015
 
39,544,939 
60,258,750 
 
 
 
 
CONSOLIDATED STATEMENT OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2015
Sep. 30, 2014
Cash Flows From Operating Activities:
 
 
Net income
$ 145,962 
$ 621,848 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
77,575 
96,521 
Provision for bad debts
2,209 
2,284 
Gain on dispositions
   
(486,620)
Discontinuation of hedge accounting (Note 2)
 
5,507 
Other
11,497 
7,637 
Increase (decrease) in cash attributable to changes in assets and liabilities:
 
 
Receivables, restricted cash, deferred charges, and other assets
(4,777)
4,665 
Accounts payable and accrued liabilities
886 
(2,300)
Net Cash Provided By Operating Activities
233,352 
249,542 
Cash Flows From Investing Activities:
 
 
Additions to properties
(335,169)
(292,523)
Cash drawn from (provided to) escrow related to a center construction project (Note 5)
25,061 
(39,630)
Proceeds from dispositions, net of transaction costs (Note 2)
 
385,598 
Contributions to Unconsolidated Joint Ventures
(73,746)
(44,109)
Distributions from Unconsolidated Joint Ventures in excess of income
136 
6,591 
Other
719 
7,304 
Net Cash Provided by (Used in) Investing Activities
(382,999)
23,231 
Cash Flows From Financing Activities:
 
 
Payments to revolving lines of credit, net
   
(121,845)
Debt proceeds
1,131,347 
115,969 
Debt payments
(561,680)
(105,099)
Debt issuance costs
(12,884)
(5,430)
Repurchase of common stock
(250,808)
(17)
Issuance of common stock and/or partnership units in connection with incentive plans
4,594 
(792)
Distributions to noncontrolling interests
(50,786)
(51,787)
Distributions to participating securities of TRG
(1,477)
(1,409)
Contributions from noncontrolling interests
 
22,346 
Cash dividends to preferred shareowners
(17,353)
(17,353)
Cash dividends to common shareowners
(103,818)
(102,624)
Net Cash Provided By (Used In) Financing Activities
137,135 
(268,041)
Net Increase (Decrease) In Cash and Cash Equivalents
(12,512)
4,732 
Cash and Cash Equivalents at Beginning of Period
276,423 
40,993 
Cash and Cash Equivalents at End of Period
$ 263,911 
$ 45,725 
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, 2015 included 19 urban and suburban shopping centers operating in 10 states and Puerto Rico.

Taubman Properties Asia LLC and its subsidiaries (Taubman Asia), which is the platform for the Company’s operations and developments in 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, 2014. 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% and 50.1% investments in Westfarms and International Plaza, respectively, are through general partnerships in which the other general partners have participating 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, 2015. 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.

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, 2015 consisted of 25,044,939 shares of Series B Preferred Stock and 60,258,750 shares of common stock.

The Operating Partnership

At September 30, 2015, 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, 2015 consisted of a 71% 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, 2015 and 2014 was 71% and 72%, respectively. At September 30, 2015, the Operating Partnership had 85,320,909 partnership units outstanding, of which the Company owned 60,258,750 units.
Dispositions, Acquisition, and Developments
Dispositions Acquisition, and Development [Text Block]
Dispositions, Acquisition, and Developments

Dispositions

Sale of Centers to Starwood

In October 2014, the Company completed the disposition of a portfolio of seven centers to an affiliate of the Starwood Capital Group (Starwood). The following centers were sold: MacArthur Center in Norfolk, Virginia, Stony Point Fashion Park in Richmond, Virginia, Northlake Mall in Charlotte, North Carolina, The Mall at Wellington Green in Wellington, Florida, The Shops at Willow Bend in Plano, Texas, The Mall at Partridge Creek in Clinton Township, Michigan, and Fairlane Town Center in Dearborn, Michigan. The results of the seven centers are in the Company's continuing operations for all periods prior to the October 2014 sale, pursuant to the Company's previous adoption of Accounting Standards Update (ASU) No. 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity" beginning January 1, 2014.

The Company incurred expenses of $5.5 million, $5.2 million at TRG's beneficial share, for the nine months ended September 30, 2014 related to the discontinuation of hedge accounting on the swap previously designated to hedge the MacArthur Center note payable (Note 8). Expenses incurred during the three months ended September 30, 2014 related to the discontinuation of hedge accounting were immaterial. The Company also incurred disposition costs of $0.5 million and $1.0 million for the three and nine months ended September 30, 2014, respectively, related to the sale of the centers to Starwood. These expenses are classified as Nonoperating Income (Expense) on the Consolidated Statement of Operations and Comprehensive Income.

As a result of the sale, the Company underwent a restructuring plan to reduce its workforce across various areas of the organization during the third quarter of 2014. As of September 30, 2014, the Company had incurred $3.0 million of expenses related to the reduction in workforce. These expenses are classified as Restructuring Charge on the Consolidated Statement of Operations and Comprehensive Income. As of September 30, 2015, substantially all of the restructuring costs have been paid.

International Plaza

In January 2014, the Company sold a total of 49.9% of the Company's interests in the entity that owns International Plaza, including certain governance rights, for $499 million (excluding transaction costs), which consisted of $337 million of cash and approximately $162 million of beneficial interest in debt. The Company's ownership in the center decreased to a noncontrolling 50.1% interest, which is accounted for under the equity method subsequent to the disposition. During 2014, a gain of $368 million (net of tax of $9.7 million) was recognized as a result of the sale. During the three months ended September 30, 2015, an adjustment of $0.4 million was made, reducing the tax recognized as a result of the sale.

Arizona Mills/Oyster Bay

In January 2014, the Company completed the sale of its 50% interest in Arizona Mills, an Unconsolidated Joint Venture, and land in Syosset, New York related to the former Oyster Bay project, to Simon Property Group (SPG). The consideration, excluding transaction costs, consisted of $60 million of cash and 555,150 partnership units in Simon Property Group Limited Partnership. The number of partnership units received was determined based on a value of $154.91 per unit. The fair value of the partnership units recognized for accounting purposes was $77.7 million, after considering the one-year restriction on the sale of these partnership units (Note 12). The number of partnership units subsequently increased to 590,124, in lieu of the Company's participation in a distribution of certain partnership units of another entity by SPG and Simon Property Group Limited Partnership. The increase in the number of partnership units was neutral to the market value of the Company's holdings as of the transaction date. The Company's investment in the partnership units is classified within Deferred Charges and Other Assets on the Consolidated Balance Sheet. As a result of the sale, the Company was relieved of its $84 million share of the $167 million mortgage loan outstanding on Arizona Mills at the time of the sale. A gain of $109 million was recognized as a result of the transaction.

Acquisition

Purchase of U.S. Headquarters Building

In February 2014, the Company purchased the U.S. headquarters building located in Bloomfield Hills, Michigan for approximately $16.1 million from an affiliate of the Taubman family. In exchange for the building, the Company assumed the $17.4 million, 5.90% fixed rate loan on the building, issued 1,431 Operating Partnership units (and a corresponding number of shares of Series B Preferred Stock), and received $1.4 million in escrowed and other cash from the affiliate. In March 2015, the Company refinanced the loan on the building (Note 5).

U.S. Development

International Market Place

International Market Place, a 0.4 million square foot center, is under construction in Waikiki, Honolulu, Hawaii. The center will be anchored by Saks Fifth Avenue and is expected to open in August 2016. The Company owns a 93.5% interest in the project, which is subject to a participating ground lease. As of September 30, 2015, the Company's capitalized costs for the project were $216.7 million ($203.1 million at TRG's share).

The Mall of San Juan

The Mall of San Juan, a 0.6 million square foot center in San Juan, Puerto Rico, opened in March 2015. The center is anchored by Nordstrom and Saks Fifth Avenue. As of September 30, 2015, the Company owned a 95% interest in the center subsequent to the acquisition of an additional 15% interest in April 2015. The additional interest was acquired at cost. In connection with the acquisition, the noncontrolling owner used $9.3 million of previously contributed capital to fund its obligation to reimburse the Company for certain shared infrastructure costs, which was classified as a reduction of the Noncontrolling interests and an offsetting reduction of Properties on the Consolidated Balance Sheet (Note 14).

Asia Development

CityOn.Xi'an

The Company has a joint venture with Beijing Wangfujing Department Store (Group) Co., Ltd (Wangfujing), one of China's largest department store chains, which will own a 60% controlling interest in and manage an approximately 1.0 million square foot shopping center, CityOn.Xi'an, to be located at Xi'an Saigao City Plaza, a large-scale mixed-use development under construction 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 spring 2016. As of September 30, 2015, the Company's share of total project costs were $93.8 million, as decreased by $1.8 million for the change in exchange rates. This investment is classified within Investment in Unconsolidated Joint Ventures on the Consolidated Balance Sheet.

CityOn.Zhengzhou

The Company also has a second joint venture with Wangfujing which owns a majority interest in and will manage an approximately 1.0 million square foot multi-level shopping center, CityOn.Zhengzhou, under construction in Zhengzhou, China. Through this joint venture, the Company beneficially owns a 32% interest in the shopping center, which is scheduled to open in fall 2016. As of September 30, 2015, the Company's share of total project costs were $58.1 million, as decreased by $1.2 million for the change in exchange rates. This investment is classified within Investment in Unconsolidated Joint Ventures on the Consolidated Balance Sheet.

Hanam Union Square

The Company's joint venture with Shinsegae Group, South Korea's largest retailer, is developing an approximately 1.7 million square foot shopping center, Hanam Union Square, under construction in Hanam, Gyeonggi Province, South Korea, which is scheduled to open in early fall 2016. The Company has partnered with a major institution in Asia for a 49% ownership interest in Hanam Union Square. The institutional partner owns 14.7% of the project, bringing the Company's effective ownership to 34.3%. As of September 30, 2015, the Company's share of total project costs were $203.3 million, as decreased by $13.7 million for the change in exchange rates. This investment is classified within Investment in Unconsolidated Joint Ventures on the Consolidated Balance Sheet.
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, 2015 and 2014 consisted of the following:

 
Three Months Ended September 30
 
Nine Months Ended September 30
 
2015

2014
 
2015
 
2014
Federal current
$
1,092

 
$
313

 
$
1,848

 
$
7,851

Federal deferred
134

 
(26
)
 
29

 
1,139

Foreign current
(178
)
 
399

 
588

 
980

Foreign deferred
(24
)
 


 
(180
)
 
(48
)
State current
(856
)
 
1

 
(601
)
 
1,520

State deferred
(21
)
 
(4
)
 
(11
)
 
(16
)
Total income tax expense
$
147


$
683


$
1,673

 
$
11,426

Less income tax (expense) benefit allocated to Gain on Dispositions (1)
437

 

 
437

 
(9,733
)
Income tax expense as reported on the Consolidated Statement of Operations and Comprehensive Income
$
584

 
$
683

 
$
2,110

 
$
1,693



(1)
Amount represents the income taxes incurred as part of the Company's sale of interests in International Plaza in January 2014. The tax on the sale is classified within Gain on Dispositions, Net of Tax on the Consolidated Statement of Operations and Comprehensive Income. During the three months ended September 30, 2015, an adjustment of $0.4 million was made to reduce the tax recognized as a result of the sale.


Deferred Taxes

Deferred tax assets and liabilities as of September 30, 2015 and December 31, 2014 were as follows:
 
2015
 
2014
Deferred tax assets:
 
 
 
Federal
$
1,371

 
$
1,382

Foreign
1,847

 
1,806

State
994

 
471

Total deferred tax assets
$
4,212

 
$
3,659

Valuation allowances
(2,112
)
 
(1,703
)
Net deferred tax assets
$
2,100

 
$
1,956

Deferred tax liabilities:
 
 
 

Federal
$
609

 
$
592

Foreign
476

 
473

State
109

 
89

Total deferred tax liabilities
$
1,194

 
$
1,154



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.
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, International Plaza, Stamford Town Center, Sunvalley, The Mall at University Town Center, 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, 2015 and
December 31, 2014
CityOn.Xi'an (under construction)
 
Note 2
CityOn.Zhengzhou (under construction)
 
Note 2
Fair Oaks
 
50%
Hanam Union Square (under construction)
 
Note 2
International Plaza
 
50.1
The Mall at Millenia
 
50
Stamford Town Center
 
50
Sunvalley
 
50
The Mall at University Town Center
 
50
Waterside Shops
 
50
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 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.
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, 2015 and December 31, 2014 excluded the balances of CityOn.Xi'an, CityOn.Zhengzhou, and Hanam Union Square which are currently under construction (Note 2). Beneficial interest is calculated based on the Operating Partnership's ownership interest in each of the Unconsolidated Joint Ventures.

 
September 30
2015
 
December 31
2014
Assets:
 
 
 
Properties
$
1,619,256

 
$
1,580,926

Accumulated depreciation and amortization
(581,144
)
 
(548,646
)
 
$
1,038,112

 
$
1,032,280

Cash and cash equivalents
33,738

 
49,765

Accounts and notes receivable, less allowance for doubtful accounts of $2,528 and $1,590 in 2015 and 2014
33,616

 
38,788

Deferred charges and other assets
38,462

 
33,200

 
$
1,143,928

 
$
1,154,033

 
 
 
 
Liabilities and accumulated deficiency in assets:
 

 
 

Notes payable (1)
$
2,004,712

 
$
1,989,546

Accounts payable and other liabilities
73,789

 
103,161

TRG's accumulated deficiency in assets
(522,627
)
 
(525,759
)
Unconsolidated Joint Venture Partners' accumulated deficiency in assets
(411,946
)
 
(412,915
)
 
$
1,143,928

 
$
1,154,033

 
 
 
 
TRG's accumulated deficiency in assets (above)
$
(522,627
)
 
$
(525,759
)
TRG's investment in properties under construction (Note 2)
289,372

 
232,091

TRG basis adjustments, including elimination of intercompany profit
129,511

 
132,058

TCO's additional basis
53,504

 
54,963

Net investment in Unconsolidated Joint Ventures
$
(50,240
)
 
$
(106,647
)
Distributions in excess of investments in and net income of Unconsolidated Joint Ventures
471,129

 
476,651

Investment in Unconsolidated Joint Ventures
$
420,889

 
$
370,004


(1)
As the balances presented exclude those of centers under development, the Notes Payable amount excludes the construction loan outstanding for Hanam Union Square of $52.1 million ($17.9 million at TRG's share) at September 30, 2015. See Note 5 regarding this loan.
 
Three Months Ended September 30
 
Nine Months Ended September 30
 
2015
 
2014
 
2015
 
2014
Revenues
$
91,000

 
$
80,671

 
$
271,332

 
$
238,190

Maintenance, taxes, utilities, promotion, and other operating expenses
$
28,922

 
$
25,040

 
$
85,203

 
$
75,486

Interest expense
21,390

 
18,518

 
63,937

 
55,065

Depreciation and amortization
13,899

 
11,417

 
40,305

 
32,613

Total operating costs
$
64,211

 
$
54,975

 
$
189,445

 
$
163,164

Nonoperating income (expense)
(1
)
 
(22
)
 
4

 
(25
)
Net income
$
26,788

 
$
25,674

 
$
81,891

 
$
75,001

 
 
 
 
 
 
 
 
Net income attributable to TRG
$
14,636

 
$
14,258

 
$
45,124

 
$
41,319

Realized intercompany profit, net of depreciation on TRG’s basis adjustments
1,071

 
707

 
2,634

 
1,363

Depreciation of TCO's additional basis
(488
)
 
(486
)
 
(1,460
)
 
(1,460
)
Equity in income of Unconsolidated Joint Ventures
$
15,219

 
$
14,479

 
$
46,298

 
$
41,222

 
 
 
 
 
 
 
 
Beneficial interest in Unconsolidated Joint Ventures’ operations:
 

 
 

 
 

 
 

Revenues less maintenance, taxes, utilities, promotion, and other operating expenses
$
35,308

 
$
31,762

 
$
105,725

 
$
92,336

Interest expense
(11,431
)
 
(10,006
)
 
(34,199
)
 
(29,805
)
Depreciation and amortization
(8,658
)
 
(7,277
)
 
(25,228
)
 
(21,309
)
Equity in income of Unconsolidated Joint Ventures
$
15,219

 
$
14,479

 
$
46,298

 
$
41,222

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 interest in Cherry Creek Shopping Center (50%), International Market Place (6.5%), and The Mall of San Juan (20% prior to April 2015, and subsequently 5%), as well as the noncontrolling interests in The Mall at Wellington Green (10%) and MacArthur Center (5%) through the disposition of the centers in October 2014 (Note 2).

 
At 100%
 
At Beneficial Interest
 
Consolidated Subsidiaries
 
Unconsolidated Joint Ventures
 
Consolidated Subsidiaries
 
Unconsolidated Joint Ventures
Debt as of:
 
 
 
 
 
 
 
September 30, 2015
$
2,594,073

 
$
2,056,778

 
$
2,439,329

 
$
1,109,397

December 31, 2014
2,025,505

 
1,989,546

 
1,852,749

 
1,085,991

 
 
 
 
 
 
 
 
Capitalized interest:
 

 
 

 
 

 
 

Nine Months Ended September 30, 2015
$
24,569

(1) 
$
289

 
$
23,693

 
$
145

Nine Months Ended September 30, 2014
18,844

(1) 
2,836

 
18,136

 
1,430

 
 
 
 
 
 
 
 
Interest expense:
 

 
 

 
 

 
 

Nine Months Ended September 30, 2015
$
44,451

 
$
63,937

 
$
39,357

 
$
34,199

Nine Months Ended September 30, 2014
74,946

 
55,065

 
68,687

 
29,805




(1)
The Company capitalizes interest costs incurred in funding its equity contributions to development projects accounted for as Unconsolidated Joint Ventures. The capitalized interest cost is included in the Company's basis in its investment in Unconsolidated Joint Ventures. 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.

2015 Financings

In September 2015, a 12-year, $1 billion non-recourse refinancing was completed for The Mall at Short Hills. The interest-only loan bears interest at an all-in fixed rate of 3.56%. The proceeds from the borrowing were used to repay the existing $540 million, 5.47% fixed rate loan, which was scheduled to mature in December 2015, and to pay off the Company's revolving lines of credit, with the remaining net proceeds held for general corporate purposes.

In August 2015, a $330.9 million construction facility was completed for International Market Place, a consolidated joint venture. The construction facility has an initial three-year term with two, one-year extension options, and no draws on the loan are permitted after the original maturity date. The loan is interest-only during the initial three-year term and bears interest at LIBOR plus 1.75%, which may be reduced to LIBOR plus 1.60% upon the achievement of certain performance measures. During the extension period, debt service payments also include principal payments based on an assumed interest rate of 6.0% and a 30-year amortization.

In July 2015, the Company's joint venture closed on a non-recourse construction facility for Hanam Union Square. The Company has an effective 34.3% interest in the Unconsolidated Joint Venture. The financing consists of a five-year, 520 billion Korean Won denominated construction facility (approximately $439 million U.S. dollars using the September 30, 2015 exchange rate) and a five-year U.S. dollar financing of $52.1 million. The U.S. dollar denominated portion of the financing is secured by an approximately $53 million standby letter of credit, which was drawn from the Korean Won denominated portion of the construction facility, thereby reducing the availability under the Korean Won denominated construction facility to approximately $386 million U.S. dollars as of September 30, 2015. The Korean Won denominated portion of the financing bears interest at the Korea Development Bank Five-Year Bond Yield plus 1.06% and is fixed upon each draw. Using bond yields as of September 30, 2015, the rate would be approximately 2.93%. The U.S. dollar denominated floating rate facility bears interest at three-month LIBOR plus 1.60%. A cross-currency interest rate swap was executed in August 2015 to fix the interest rate on the U.S. dollar portion of the financing and swap the U.S. dollar denomination from U.S. dollars to Korean Won. As a result of the swap, the effective interest rate of the U.S. dollar portion of the financing is 3.12% (Note 8). As of September 30, 2015, the U.S. dollar denominated portion of the financing was fully drawn, while no amounts were outstanding under the Korean Won denominated portion.
In March 2015, the Company completed a $12.0 million non-recourse refinancing for its U.S. headquarters building. The loan is interest-only for the entire nine-year term, bears interest at LIBOR plus 1.40%, and is prepayable at any time. The rate on the loan is fixed at 3.49% as a result of an interest rate swap (Note 8). The proceeds from the new loan and available cash were used to pay off the existing $17.0 million, 5.90% fixed rate loan.

Debt Covenants and Guarantees

Certain loan agreements contain various restrictive covenants, including the following corporate covenants on the Company’s unsecured primary revolving line of credit, unsecured term loan, and the construction facilities on The Mall at University Town Center, The Mall of San Juan, and International Market Place: a minimum net worth requirement, a maximum total leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a maximum recourse secured debt ratio, and a maximum payout ratio. In addition, the Company’s primary revolving line of credit and term loan have unencumbered pool covenants, which currently apply to Beverly Center, Dolphin Mall, and Twelve Oaks Mall 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. As of September 30, 2015, the corporate total leverage ratio was the most restrictive covenant. The Company was in compliance with all of its covenants and loan obligations as of September 30, 2015. 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.

In connection with the financing of the construction facility at International Market Place, the Operating Partnership has provided an unconditional guarantee of 50% of the construction loan principal balance and all accrued but unpaid interest during the term of the loan. The Operating Partnership has also provided a guarantee as to the completion of construction of the center. The maximum amount of the construction facility is $330.9 million. The outstanding balance of the International Market Place construction financing facility as of September 30, 2015 was $39.1 million. Accrued but unpaid interest as of September 30, 2015 was $0.1 million. The principal guaranty may be reduced to 25% of the outstanding principal balance upon stabilization and achievement of certain performance measures. The principal guaranty may be released upon achievement of further restrictive performance measures. The Company believes the likelihood of a payment under the guarantees to be remote.

In connection with the financing of the construction facility at The Mall at University Town Center, which is owned by an Unconsolidated Joint Venture, the Operating Partnership provided an unconditional guarantee of 25% of the construction loan principal balance and 50% of all accrued but unpaid interest during the term of the loan. The maximum amount of the construction facility is $225 million. The outstanding balance of The Mall at University Town Center construction financing facility as of September 30, 2015 was $218.8 million. Accrued but unpaid interest as of September 30, 2015 was $0.3 million. The principal guarantee may be reduced to 12.5% of the outstanding principal balance upon achievement of certain performance measures. Upon stabilization, the unconditional guarantee may be released. The Company believes the likelihood of a payment under the guarantee to be remote.

In connection with the financing of the construction facility at The Mall of San Juan, the Operating Partnership has provided an unconditional guarantee of the construction loan principal balance and all accrued but unpaid interest during the term of the loan. In addition, the Operating Partnership has provided a guarantee as to the completion of the center. The maximum amount of the construction facility is $320 million. The outstanding balance of The Mall of San Juan construction financing facility as of September 30, 2015 was $244.0 million. Accrued but unpaid interest as of September 30, 2015 was $0.2 million. The Company believes the likelihood of a payment under the guarantees to be remote.

In connection with the additional $175 million financing at International Plaza, which is owned by an Unconsolidated Joint Venture, the Operating Partnership provided an unconditional and several guarantee of 50.1% of all obligations and liabilities related to an interest rate swap that was required on the debt for the term of the loan. As of September 30, 2015, the interest rate swap was in a liability position of $3.8 million and had unpaid interest of $0.2 million. The Company believes the likelihood of a payment under the guarantee to be remote.

Other

The Company is required to escrow cash balances for specific uses stipulated by certain of its lenders. As of September 30, 2015 and December 31, 2014, the Company’s cash balances restricted for these uses were $10.8 million and $37.5 million, respectively. As of September 30, 2015, $8.5 million of the $10.8 million of restricted cash was required under a certain debt agreement to be in escrow for a major construction project.
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. In March 2015, the Company's Board of Directors increased the authorization by $250 million, bringing the total authorization to $450 million. 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, 2015, the Company repurchased 4,221,774 shares of its common stock at an average price of $71.80 per share for a total of $303.1 million under the authorization. As of September 30, 2015, $146.9 million remained available under the repurchase program. All shares repurchased have been cancelled. For each share of the Company’s stock repurchased, one of the Company’s Operating Partnership units was redeemed. Repurchases of common stock were financed through general corporate funds, including borrowings under existing revolving lines of credit.
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). The Taubman Asia operating agreement provides that so long as the Taubman Asia President is employed by Taubman Asia on April 1, 2016, then during the month ended April 30, 2016, he will have the right to exercise an option to put up to 40% of his ownership interest for cash in December 2016 at a valuation determined as of October 31, 2016. In addition, 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 50% (increasing to 100% as early as June 2017) 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 both September 30, 2015 and December 31, 2014. Any adjustments to the redemption value are recorded through equity.

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 is 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 both September 30, 2015 and December 31, 2014. Any adjustments to the redemption value are recorded through equity.

Equity Balances of Nonredeemable Noncontrolling Interests

The net equity balance of the nonredeemable noncontrolling interests as of September 30, 2015 and December 31, 2014 included the following:
 
2015
 
2014
Non-redeemable noncontrolling interests:
 
 
 
Noncontrolling interests in consolidated joint ventures
$
(23,277
)
 
$
(14,796
)
Noncontrolling interests in partnership equity of TRG
32,529

 
116,376

 
$
9,252

 
$
101,580



Income Allocable to Noncontrolling Interests

Net income attributable to the noncontrolling interests for the three months ended September 30, 2015 and September 30, 2014 included the following:
 
2015
 
2014
Net income attributable to non-redeemable noncontrolling interests:
 
 
 
Noncontrolling share of income of consolidated joint ventures
$
2,780

 
$
2,643

Noncontrolling share of income of TRG
13,151

 
14,057

 
$
15,931

 
$
16,700



Net income attributable to the noncontrolling interests for the nine months ended September 30, 2015 and September 30, 2014 included the following:

 
2015
 
2014
Net income attributable to non-redeemable noncontrolling interests:
 
 
 
Noncontrolling share of income of consolidated joint ventures
$
8,043

 
$
8,013

Noncontrolling share of income of TRG
35,815

 
170,922

 
$
43,858

 
$
178,935



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, 2015 and September 30, 2014:
 
2015
 
2014
Net income attributable to Taubman Centers, Inc. common shareowners
$
83,274

 
$
424,151

Transfers from the noncontrolling interest:
 

 
 

Increase in Taubman Centers, Inc.’s paid-in capital for adjustments of noncontrolling interest (1)
68,993

 
54

Net transfers from noncontrolling interests
68,993

 
54

Change from net income attributable to Taubman Centers, Inc. and transfers from noncontrolling interests
$
152,267

 
$
424,205


(1)
In 2015 and 2014 adjustments of the noncontrolling interest were made as a result of changes in the Company's ownership of the Operating Partnership in connection with the Company's share-based compensation under employee and director benefit plans (Note 9), issuances of stock pursuant to the Continuing Offer (Note 10), and stock repurchases (Note 6).

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, 2015, the Company held a controlling interest in a consolidated entity with a specified termination date in 2083. The noncontrolling owners' 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 $430 million at September 30, 2015, compared to a book value of $(23.3) 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 shares 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, 2015, the Company had the following outstanding derivatives that were designated and are expected to be effective as cash flow hedges of the interest payments and/or the currency exchange rate on the associated debt.
Instrument Type

Ownership

Notional Amount

Swap Rate

Credit Spread on Loan

Total Swapped Rate on Loan

Maturity Date
Consolidated Subsidiaries:

 

 
 
 
 
 
 
 
 
 
Receive variable (LIBOR) /pay-fixed swap (1)

100
%

$
200,000

 
1.64
%
 
1.35
%
(1) 
2.99
%
(1) 
February 2019
Receive variable (LIBOR) /pay-fixed swap (1)

100
%

175,000

 
1.65
%
 
1.35
%
(1) 
3.00
%
(1) 
February 2019
Receive variable (LIBOR) /pay-fixed swap (1)

100
%

100,000

 
1.64
%
 
1.35
%
(1) 
2.99
%
(1) 
February 2019
Receive variable (LIBOR) /pay-fixed swap (2)
 
100
%
 
12,000

 
2.09
%
 
1.40
%
 
3.49
%
 
March 2024
Unconsolidated Joint Ventures:

 


 

 
 

 
 

 
 

 
 
Receive variable (LIBOR) /pay-fixed swap (3)

50
%

135,214

 
2.40
%
 
1.70
%
 
4.10
%
 
April 2018
Receive variable (LIBOR) /pay-fixed swap (3)

50
%

135,214

 
2.40
%
 
1.70
%
 
4.10
%
 
April 2018
Receive variable (LIBOR) /pay-fixed swap (4)
 
50.1
%
 
172,959

 
1.83
%
 
1.75
%
 
3.58
%
 
December 2021
Receive variable (LIBOR) USD/pay-fixed KRW cross-currency interest rate swap (5)
 
34.3
%
 
52,065 USD / 60,500,000 KRW

 
1.52
%
 
1.60
%
 
3.12
%
 
September 2020

(1)
The hedged forecasted transaction for each of these swaps is the first previously unhedged one-month LIBOR-indexed interest payments accrued and made each month on a debt principal amount equal to the swap notional amount, regardless of the specific debt agreement from which they may flow. The Company is currently using these swaps to manage interest rate risk on the $475 million TRG Term Loan. The credit spread on this loan can also vary within a range of 1.35% to 1.90%, depending on the Company's leverage ratio at the measurement date.
(2)
The notional amount on this swap is equal to the outstanding principal balance of the floating rate loan on the U.S. headquarters building.
(3)
The notional amount on each of these swaps is equal to 50% of the outstanding principal balance of the loan on Fair Oaks.
(4)
The notional amount on this swap is equal to the outstanding principal balance of the floating rate loan on International Plaza.
(5)
In August 2015, in connection with the closing of the $52.1 million U.S. dollar loan for Hanam Union Square, the Company's joint venture with Shinsegae Group entered into a cross-currency interest rate swap to fix the interest rate on the loan and swap the related principal and interest payments from U.S. dollars to Korean Won in order to reduce the impact of fluctuations in interest rates and exchange rates on the cash flows of the joint venture. The currency swap exchange rate is 1,162.0.

Cash Flow Hedges

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

Amounts reported in AOCI related to currently outstanding interest rate 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. Amounts reported in AOCI related to the cross-currency interest rate swap are recognized as an adjustment to income as transaction gains or losses arising from the remeasurement of foreign currency denominated loans are recognized and as actual interest and principal obligations are repaid.

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.

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, 2015 and September 30, 2014. The tables include the amount of gains or losses on outstanding derivative instruments recognized in OCI in cash flow hedging relationships and the location and amount of gains or losses reclassified from AOCI into income resulting from outstanding derivative instruments and settled derivative instruments associated with hedged debt.

During the three months ended September 30, 2015, the Company had $0.3 million of hedge ineffectiveness related to the swaps used to hedge the TRG term loan which was recorded in Nonoperating Income (Expense) on the Consolidated Statement of Operations and Comprehensive Income. In addition, during the three months ended September 30, 2015, the Company recorded a loss of $0.2 million in Equity in Income of Unconsolidated Joint Ventures on the Consolidated Statement of Operations and Comprehensive Income related to the Hanam Union Square swap prior to its hedge inception in September 2015. During the three months ended September 30, 2014, the Company did not have any hedge ineffectiveness or amounts that were excluded from the assessment of hedge ineffectiveness 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
 
2015
 
2014
 
 
 
2015
 
2014
Derivatives in cash flow hedging relationships:
 
 
 
 

 
 
 
 
Interest rate contracts – consolidated subsidiaries
$
(5,108
)
 
$
3,692

 
Interest Expense
 
$
(1,825
)
 
$
(1,810
)
Interest rate contracts – UJVs
(2,434
)
 
1,266

 
Equity in Income of UJVs
 
(1,128
)
 
(789
)
Cross-currency interest rate swap – UJV
(170
)
 
 
 
Equity in Income of UJVs
 
(131
)
 
 
Total derivatives in cash flow hedging relationships
$
(7,712
)
 
$
4,958

 
 
 
$
(3,084
)
 
$
(2,599
)



During the nine months ended September 30, 2015, the Company had $0.5 million of hedge ineffectiveness related to the swaps used to hedge the TRG term loan which was recorded in Nonoperating Income (Expense) on the Consolidated Statement of Operations and Comprehensive Income. In addition, during the nine months ended September 30, 2015, the Company recorded a loss of $0.2 million in Equity in Income of Unconsolidated Joint Ventures on the Consolidated Statement of Operations and Comprehensive Income related to the Hanam Union Square swap prior to its hedge inception in September 2015. During the nine months ended September 30, 2014, the Company had an immaterial amount of hedge ineffectiveness related to the swap on MacArthur Center (prior to discontinuation of hedge accounting (Note 2)) recorded as Nonoperating Income (Expense) on the Consolidated Statement of Operations and Comprehensive Income.
 
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
 
2015
 
2014
 
 
 
2015
 
2014
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
Interest rate contract – consolidated subsidiary (1)
 
 
 
 
Nonoperating Income (Expense) (1)
 
 
 
$
(4,880
)
Interest rate contracts – consolidated subsidiaries (1)
$
(6,900
)
 
$
(4,043
)
 
Interest Expense (1)
 
$
(5,412
)
 
(6,853
)
Interest rate contracts – UJVs
(2,352
)
 
1,008

 
Equity in Income of UJVs
 
(3,376
)
 
(2,340
)
Cross-currency interest rate swap – UJV
(170
)
 
 
 
Equity in Income of UJVs
 
(131
)
 
 
Total derivatives in cash flow hedging relationships
$
(9,422
)
 
$
(3,035
)
 
 
 
$
(8,919
)
 
$
(14,073
)

(1) Includes MacArthur Center swap for the period that it was effective as a hedge until June 2014, when hedge accounting was discontinued.

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, 2015 and December 31, 2014.
 
 
 
Fair Value
 
Consolidated Balance Sheet Location
 
September 30
2015
 
December 31
2014
Derivatives designated as hedging instruments:
 
 
 
 
 
Asset derivative:
 
 
 
 
 
Interest rate contract – UJV
Investment in UJVs
 


 
$
109

Total assets designated as hedging instruments
 
 
$

 
$
109

 
 
 
 
 
 
Liability derivatives:
 
 
 

 
 
Interest rate contracts – consolidated subsidiaries
Accounts Payable and Accrued Liabilities
 
$
(11,439
)
 
$
(4,044
)
Interest rate contracts – UJVs
Investment in UJVs
 
(7,397
)
 
(5,154
)
Cross-currency interest rate swap – UJV
Investment in UJVs
 
(53
)
 
 
Total liabilities designated as hedging instruments
 
 
$
(18,889
)
 
$
(9,198
)


MacArthur Center Swap in Connection with Starwood Disposition

In June 2014, in connection with the discontinuation of hedge accounting on the MacArthur Center swap, the Company accelerated the reclassification of amounts in AOCI to earnings as a result of it becoming probable that the center's debt would be early extinguished and the hedged interest payments would not occur. For the nine months ended September 30, 2014, the accelerated amount was a loss of $4.9 million. The Company also recorded a gain of $0.2 million and a loss of $0.6 million for the three and nine months ended September 30, 2014, respectively, for changes in the fair value of this swap subsequent to the June 2014 discontinuation of hedge accounting. These amounts are classified as Nonoperating Income (Expense) on the Consolidated Statement of Operations and Comprehensive Income.

Contingent Features

All of the Company's outstanding derivatives contain provisions that state if the hedged entity defaults on its indebtedness above a certain threshold, then the derivative obligation could also be declared in default. The cross default thresholds vary for each agreement, ranging from $0.1 million of any indebtedness to $50 million of recourse indebtedness on the Company or the Operating Partnership's indebtedness. As of September 30, 2015, the Company is not in default on any indebtedness that would trigger a credit-risk-related default on its current outstanding derivatives.
As of September 30, 2015 and December 31, 2014, the fair value of derivative instruments with credit-risk-related contingent features that were in a liability position was $18.9 million and $9.2 million, respectively. As of September 30, 2015 and December 31, 2014, 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 5 regarding guarantees and 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 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 $1.3 million and $8.9 million for the three and nine months ended September 30, 2015, respectively. During the three and nine months ended September 30, 2015, a reversal of $2.7 million and $2.0 million, respectively, of prior period share-based compensation expense was recognized upon the announcement of an executive management transition as a reduction of General and Administrative expense on the Company’s Consolidated Statement of Operations and Comprehensive Income. The compensation cost charged to income for the Company’s share-based compensation plans was $3.9 million and $11.2 million for the three and nine months ended September 30, 2014, respectively. Compensation cost capitalized as part of properties and deferred leasing costs was $0.2 million and $1.6 million for the three and nine months ended September 30, 2015, respectively, and $0.4 million and $1.5 million for the three and nine months ended September 30, 2014, 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, 2015 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, 2015
521,293

 
$
39.20

 
1.6
 
$
26.56

-
$
51.15

Exercised
(228,750
)
 
29.72

 
 
 
 
 
 
Outstanding at September 30, 2015
292,543

 
$
46.60

 
1.7
 
$
35.50

-
$
51.15

 
 
 
 
 
 
 
 
 
 
Fully vested options at September 30, 2015
292,543

 
$
46.60

 
1.7
 
 

 
 


No options were granted during the nine months ended September 30, 2015.

The aggregate intrinsic value (the difference between the period end stock price and the option exercise price) of in-the-money options outstanding was $6.6 million as of September 30, 2015.

The total intrinsic value of options exercised during the nine months ended September 30, 2015 and 2014 was $10.0 million and $1.4 million, respectively. Cash received from option exercises for the nine months ended September 30, 2015 and 2014 was $6.8 million and $1.8 million, respectively.

As of September 30, 2015, 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 March 2015, 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, plus a cash payment equal to the aggregate cash dividends that would have been paid on such shares of common stock from the date of grant of the award to the vesting date. The units vest in March 2018 if continuous service has been provided, or upon retirement or certain other events (such as death or disability) if earlier.

The Company estimated the value of these PSU granted using a Monte Carlo simulation, considering the Company’s common stock price at the grant date, historical returns of the Company and the peer group of companies, a risk-free interest rate of 1.12% and a measurement period of approximately three years. The resulting weighted average grant-date fair value was $112.30 per PSU.

A summary of PSU activity for the nine months ended September 30, 2015 is presented below:
 
Number of Performance Share Units
 
Weighted Average Grant Date Fair Value
Outstanding at January 1, 2015
254,651

 
$
132.86

Vested
(43,575
)
(1) 
97.44

Granted
50,256

 
112.30

Forfeited
(5,854
)
 
174.95

Outstanding at September 30, 2015
255,478

 
$
134.52



(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, 2015 was zero.

None of the PSU outstanding at September 30, 2015 were vested. As of September 30, 2015, there was $10.5 million of total unrecognized compensation cost related to nonvested PSU outstanding. This cost is expected to be recognized over an average period of 1.7 years.

Restricted Share Units

In March 2015, 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, plus a cash payment equal to the aggregate cash dividends that would have been paid on such shares of common stock from the date of grant of the award to the vesting date. The units vest in March 2018, if continuous service has been provided, or upon retirement or certain other events (such as death or disability) if earlier. The Company estimated the values of these RSU using the Company’s common stock price at the grant date. The Company’s valuation was a grant-date fair value of $74.36 per RSU.

A summary of RSU activity for the nine months ended September 30, 2015 is presented below:
 
Number of Restricted Share Units
 
Weighted Average Grant Date Fair Value
Outstanding at January 1, 2015
293,651

 
$
67.00

Vested
(94,835
)
 
65.56

Granted
100,682

 
74.36

Forfeited
(13,884
)
 
69.90

Outstanding at September 30, 2015
285,614

 
$
69.92



None of the RSU outstanding at September 30, 2015 were vested. As of September 30, 2015, there was $7.9 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 (as later amended and restated, the Cash Tender Agreement) with A. Alfred Taubman, as trustee of the A. Alfred Taubman Restated Revocable Trust (the Revocable Trust) and TRA Partners (now Taubman Ventures Group LLC or TVG), each of whom owned an interest in the Operating Partnership, whereby each of the revocable trust and TVG has the 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. Control of TVG is shared by the Revocable Trust and entities affiliated with the children of A. Alfred Taubman (Robert S. Taubman, William S. Taubman, and Gayle Taubman Kalisman). At the election of the person making a tender, partnership units in the Operating Partnership held by members of A. Alfred Taubman’s family and partnership units held by entities in which his family members hold interests may be included in such a tender. Upon the death of A. Alfred Taubman in April 2015, the successor trustees of the trust (Robert S. Taubman, William S. Taubman and Gayle Taubman Kalisman) act on behalf of the trust.

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 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, 2015 of $69.08 per share for the Company's common stock, the aggregate value of interests in the Operating Partnership that may be tendered under the Cash Tender Agreement was $1.7 billion. The purchase of these interests at September 30, 2015 would have resulted in the Company owning an additional 28% interest in the Operating Partnership.

Continuing Offer

The Company has made a continuing, irrevocable offer to all present holders (other than certain excluded holders, currently TVG and the Revocable Trust), 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

The Company carries liability insurance to mitigate its exposure to certain losses, including those relating to personal injury claims. We believe the Company's insurance policy terms and conditions and limits are appropriate and adequate given the relative risk of loss and industry practice. However, there are certain types of losses, such as punitive damage awards, that may not be covered by insurance, and not all potential losses are insured against.

Other

See Note 5 for the Operating Partnership's guarantees of certain notes payable, including guarantees relating to Unconsolidated Joint Ventures, 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
 
2015

2014
 
2015
 
2014
Net income attributable to Taubman Centers, Inc. common shareowners (Numerator):
 

 
 
 
 
 
 
Basic
$
30,422

 
$
33,682

 
$
83,274

 
$
424,151

Impact of additional ownership of TRG
109

 
121

 
305

 
4,151

Diluted
$
30,531

 
$
33,803

 
$
83,579

 
$
428,302

 
 
 
 
 
 
 
 
Shares (Denominator) – basic
60,713,379

 
63,317,680

 
61,778,051

 
63,249,400

Effect of dilutive securities
712,736

 
770,062

 
795,906

 
1,626,651

Shares (Denominator) – diluted
61,426,115

 
64,087,742

 
62,573,957

 
64,876,051

 
 
 
 
 
 
 
 
Earnings per common share - basic
$
0.50

 
$
0.53

 
$
1.35

 
$
6.71

Earnings per common share – diluted
$
0.50

 
$
0.53

 
$
1.34

 
$
6.60



The calculation of diluted earnings per share in certain periods 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
 
2015

2014
 
2015
 
2014
Weighted average noncontrolling partnership units outstanding
3,983,268

 
4,369,590

 
4,058,747

 
4,352,233

Unissued partnership units under unit option deferral elections
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.

Other

The Company's valuation of an insurance deposit utilizes unadjusted quoted prices determined by active markets for the specific securities the Company has invested in, and therefore falls 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, 2015 Using
 
Fair Value Measurements as of
December 31, 2014 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)
Insurance deposit
 
$
14,359

 
 

 
$
13,059

 
 

Total assets
 
$
14,359


$

 
$
13,059

 
$

 
 
 
 
 
 
 
 
 
Derivative interest rate contracts (Note 8)
 
 

 
$
(11,439
)
 
 

 
$
(4,044
)
Total liabilities
 
 

 
$
(11,439
)
 
 

 
$
(4,044
)


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.

Financial Instruments Carried at Other Than Fair Values

Simon Property Group Limited Partnership Units

As of September 30, 2015, the Company owned 590,124 partnership units in Simon Property Group Limited Partnership (Note 2). The fair value of the partnership units, which is derived from SPG's common stock price and therefore falls into level 2 of the fair value hierarchy, was $108.4 million at September 30, 2015 and $105.2 million at December 31, 2014. The partnership units were classified as Deferred Charges and Other Assets on the Consolidated Balance Sheet and had a book value of $77.7 million at both September 30, 2015 and December 31, 2014.

Notes Payable

The fair value of notes payable is estimated using cash flows discounted at current market rates and therefore falls 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, 2015 and December 31, 2014, the Company employed the credit spreads at which the debt was originally issued. For debt refinanced prior to 2010, excluding debt assumed from acquisitions, an additional 0.75% credit spread was added to the discount rate at both September 30, 2015 and December 31, 2014 to attempt 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 September 30, 2015 or December 31, 2014. 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, 2015 and December 31, 2014 were as follows:
 
2015
 
2014
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Notes payable
$
2,594,073

 
$
2,587,905

 
$
2,025,505

 
$
2,056,474




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, 2015 by $111.4 million or 4.3%.

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 is estimated using cash flows discounted at current market rates and therefore falls into Level 2 of the fair value hierarchy.

See Note 8 regarding additional information on derivatives.
Accumulated Other Comprehensive Income
Comprehensive Income (Loss) Note [Text Block]
Accumulated Other Comprehensive Income

Changes in the balance of each component of AOCI for the nine months ended September 30, 2015 are 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, 2015
$
(101
)
 
$
(14,967
)
 
$
(15,068
)
 
$
(41
)
 
$
5,879

 
$
5,838

Other comprehensive income (loss) before reclassifications
(10,917
)
 
(12,953
)
 
(23,870
)
 
(4,541
)
 
(5,388
)
 
(9,929
)
Amounts reclassified from AOCI

 
6,299

 
6,299

 


 
2,620

 
2,620

Net current period other comprehensive income (loss)
$
(10,917
)
 
$
(6,654
)
 
$
(17,571
)
 
$
(4,541
)
 
$
(2,768
)
 
$
(7,309
)
Adjustments due to changes in ownership
1

 
(199
)
 
(198
)
 
(1
)
 
199

 
198

September 30, 2015
$
(11,017
)
 
$
(21,820
)
 
$
(32,837
)
 
$
(4,583
)
 
$
3,310

 
$
(1,273
)


Changes in the balance of each component of AOCI for the nine months ended September 30, 2014 are 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, 2014
$
5,040

 
$
(13,954
)
 
$
(8,914
)
 
$
2,011


$
6,141

 
$
8,152

Other comprehensive income (loss) before reclassifications
(1,741
)
 
(8,478
)
 
(10,219
)
 
(691
)

(3,516
)
 
(4,207
)
Amounts reclassified from AOCI

 
9,846

 
9,846

 



4,227

 
4,227

Net current period other comprehensive income (loss)
$
(1,741
)
 
$
1,368

 
$
(373
)
 
$
(691
)
 
$
711

 
$
20

Adjustments due to changes in ownership
7

 
22

 
29

 
(7
)

(22
)
 
(29
)
September 30, 2014
$
3,306

 
$
(12,564
)
 
$
(9,258
)
 
$
1,313

 
$
6,830

 
$
8,143



The following table presents reclassifications out of AOCI for the nine months ended September 30, 2015:
Details about AOCI Components
 
Amounts reclassified from AOCI
 
Affected line item in Consolidated Statement of Operations
Losses on interest rate instruments and other:
 
 
 
 
Realized loss on interest rate contracts - consolidated subsidiaries
 
$
5,412

 
Interest Expense
Realized loss on interest rate contracts - UJVs
 
3,376

 
Equity in Income of UJVs
Realized loss on cross-currency interest rate contract - UJV
 
131

 
Equity in Income of UJVs
Total reclassifications for the period
 
$
8,919

 
 


The following table presents reclassifications out of AOCI for the nine months ended September 30, 2014:
Details about AOCI Components
 
Amounts reclassified from AOCI
 
Affected line item in Consolidated Statement of Operations
Losses on interest rate instruments and other:
 
 
 
 
Discontinuation of hedge accounting - consolidated subsidiary
 
$
4,880

 
Nonoperating Income (Expense)
Realized loss on interest rate contracts - consolidated subsidiaries
 
6,853

 
Interest Expense
Realized loss on interest rate contracts - UJVs
 
2,340

 
Equity in Income of UJVs
Total reclassifications for the period
 
$
14,073

 
 
Cash Flow Disclosures and Non-Cash Investing and Financing Activities
Cash Flow, Supplemental Disclosures [Text Block]
Cash Flow Disclosures and Non-Cash Investing and Financing Activities

Interest paid for the nine months ended September 30, 2015 and 2014, net of amounts capitalized of $24.6 million and $18.8 million, respectively, was $43.7 million and $70.5 million, respectively. Income taxes paid for the nine months ended September 30, 2015 and 2014 were $2.1 million and $9.9 million, respectively. The following non-cash investing and financing activities occurred during the nine months ended September 30, 2015 and September 30, 2014.
 
Nine Months Ended September 30
 
2015
 
2014
Recapitalization of The Mall of San Juan joint venture (Note 2)
$
9,296

 
 
Receipt of Simon Property Group Limited Partnership units in connection with the sale of Arizona Mills (Note 2)
 
 
$
77,711

Issuance of TRG partnership units in connection with the purchase of the U.S. headquarters building (Note 2)

 
91

Assumption of debt in connection with the purchase of the U.S. headquarters building (Note 2)

 
18,215

Other non-cash additions to properties
75,880

 
53,018



Other non-cash additions to properties primarily represent accrued construction and tenant allowance costs. Various assets and liabilities were also adjusted upon the disposition of interests in International Plaza and the deconsolidation of the Company's remaining interest (Note 2).
New Accounting Pronouncements