TAUBMAN CENTERS INC, 10-Q filed on 7/29/2011
Quarterly Report
Document and Entity Information Document (USD $)
6 Months Ended
Jun. 30, 2011
Jul. 28, 2011
Jun. 30, 2010
Entity Information [Line Items]
 
 
 
Entity Registration Name
TAUBMAN CENTERS INC. 
 
 
Entity Central Index Key
0000890319 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Document Type
10-Q 
 
 
Document Period End Date
Jun. 30, 2011 
 
 
Document Fiscal Year Focus
2011 
 
 
Document Fiscal Period Focus
Q2 
 
 
Amendment Flag
FALSE 
 
 
Entity Common Stock, Shares Outstanding
 
57,889,825 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Public Float
 
 
$ 2,000,000,000 
CONSOLIDATED BALANCE SHEET (USD $)
In Thousands
6 Months Ended
Jun. 30, 2011
12 Months Ended
Dec. 31, 2010
Assets:
 
 
Properties
$ 3,536,103 
$ 3,528,297 
Accumulated depreciation and amortization
(1,240,028)
(1,199,247)
Properties, net
2,296,075 
2,329,050 
Investment in Unconsolidated Joint Ventures (Note 3)
73,920 
77,122 
Cash and cash equivalents
16,763 
19,291 
Accounts and notes receivable, less allowance for doubtful accounts of $10,501 and $7,966 in 2011 and 2010
41,313 
49,906 
Accounts receivable from related parties
1,311 
1,414 
Deferred charges and other assets
65,998 
70,090 
Total Assets
2,495,380 
2,546,873 
Liabilities:
 
 
Notes payable (Note 4)
2,504,342 
2,656,560 
Accounts payable and accrued liabilities
244,777 
247,895 
Distributions in excess of investments in and net income of Unconsolidated Joint Ventures (Note 3)
173,093 
170,329 
Liabilities
2,922,212 
3,074,784 
Commitments and Contingencies (Notes 4, 5, 6, 7, and 8)
 
 
Equity:
 
 
Preferred Stock, Non-Participating, Convertible, Par Value
25 
26 
Common Stock, $0.01 par value, 250,000,000 shares authorized, 57,889,530 and 54,696,054 shares issued and outstanding at June 30, 2011 and December 31, 2010
579 
547 
Additional paid-in capital
664,398 
589,881 
Accumulated other comprehensive income (loss)
(14,223)
(14,925)
Dividends in excess of net income
(969,217)
(939,290)
Total Shareowners
(318,438)
(363,761)
Noncontrolling interests (Note 5)
(108,394)
(164,150)
Stockholders' Equity, including Portion Attributable to Noncontrolling Interest
(426,832)
(527,911)
Total Liabilities and Equity
$ 2,495,380 
$ 2,546,873 
Balance Sheet Parenthetical Parentheticals (USD $)
Jun. 30, 2011
Dec. 31, 2010
Allowance for doubtful accounts
$ 10,501,000 
$ 7,966,000 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
250,000,000 
250,000,000 
Common stock, shares issued
57,889,530 
54,696,054 
Common stock, shares outstanding
57,889,530 
54,696,054 
Series B [Member]
 
 
Preferred Stock, Non-Participating, Convertible, Par Value, Per Share
$ 0.001 
$ 0.001 
Preferred Stock, Non-Participating, Convertible, Liquidation Value
$ 0.001 
$ 0.001 
Preferred Stock, Non-Participating, Convertible, Shares Authorized
40,000,000 
40,000,000 
Preferred Stock, Non-Participating, Convertible, Shares Issued
25,140,436 
26,233,126 
Preferred Stock, Non-Participating, Convertible, Shares Outstanding
25,140,436 
26,233,126 
Series G Preferred Stock [Member]
 
 
Auction Market Preferred Securities, Stock Series, Liquidation Value
100,000,000 
100,000,000 
Preferred Stock, Shares Authorized
4,000,000 
4,000,000 
Preferred Stock, Shares Issued
4,000,000 
4,000,000 
Preferred Stock, Shares Outstanding
4,000,000 
4,000,000 
Preferred Stock, Par or Stated Value Per Share
$ 0 
$ 0 
Series H Preferred Stock [Member]
 
 
Auction Market Preferred Securities, Stock Series, Liquidation Value
$ 87,000,000 
$ 87,000,000 
Preferred Stock, Shares Authorized
3,480,000 
3,480,000 
Preferred Stock, Shares Issued
3,480,000 
3,480,000 
Preferred Stock, Shares Outstanding
3,480,000 
3,480,000 
Preferred Stock, Par or Stated Value Per Share
$ 0 
$ 0 
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (USD $)
In Thousands, except Share data
3 Months Ended
Jun. 30,
6 Months Ended
Jun. 30,
2011
2010
2011
2010
Revenues:
 
 
 
 
Minimum rents
$ 86,855 
$ 84,081 
$ 172,840 
$ 167,435 
Percentage rents
1,560 
1,061 
4,952 
3,135 
Expense recoveries
57,032 
56,334 
111,075 
109,255 
Management, leasing, and development services
4,480 
4,007 
10,340 
7,063 
Other Income
5,435 
8,599 
11,674 
18,683 
Total Revenue
155,362 
154,082 
310,881 
305,571 
Expenses:
 
 
 
 
Maintenance, taxes, utilities, and promotion
47,478 
48,312 
91,415 
93,237 
Other operating
17,042 
14,765 
35,876 
30,721 
Management, leasing, and development services
2,323 
2,185 
4,603 
3,778 
General and administrative
8,005 
7,036 
15,289 
14,425 
Interest expense
35,470 
37,923 
70,485 
75,340 
Depreciation and amortization
36,329 
35,918 
70,118 
73,002 
Total Expenses
146,647 
146,139 
287,786 
290,503 
Nonoperating income
684 
1,150 
812 
1,299 
Income before income tax expense and equity in income of Unconsolidated Joint Ventures
9,399 
9,093 
23,907 
16,367 
Income tax (expense) benefit (Note 2)
(114)
(205)
(310)
Equity in income of Unconsolidated Joint Ventures (Note 3)
10,886 
9,505 
21,032 
19,240 
Net income
20,290 
18,484 
44,734 
35,297 
Net income attributable to noncontrolling interests (Note 5)
(7,906)
(7,011)
(17,595)
(13,521)
Net income (loss) attributable to Taubman Centers, Inc.
12,384 
11,473 
27,139 
21,776 
Distributions to participating securities of TRG (Note 7)
(381)
(361)
(762)
(723)
Preferred stock dividends
(3,659)
(3,659)
(7,317)
(7,317)
Net income attributable to Taubman Centers, Inc. common shareowners
8,344 
7,453 
19,060 
13,736 
Net income
20,290 
18,484 
44,734 
35,297 
Other Comprehensive Income (Loss), Net of Tax [Abstract]
 
 
 
 
Unrealized gain (loss) on interest rate instruments and other
(2,972)
3,466 
(337)
5,899 
Reclassification adjustment for amounts recognized in net income
410 
316 
725 
631 
Comprehensive income
17,728 
22,266 
45,122 
41,827 
Comprehensive income attributable to noncontrolling interests
(7,019)
(9,206)
(17,771)
(17,296)
Comprehensive income attributable to Taubman Centers, Inc.
$ 10,709 
$ 13,060 
$ 27,351 
$ 24,531 
Basic earnings per common share (Note 9)
$ 0.15 
$ 0.14 
$ 0.34 
$ 0.25 
Diluted earnings per common share (Note 9)
$ 0.15 
$ 0.14 
$ 0.34 
$ 0.25 
Cash dividends declared per common share (in dollars per share)
$ 0.4375 
$ 0.415 
$ 0.875 
$ 0.83 
Weighted average number of common shares outstanding - basic
56,186,216 
54,550,964 
55,875,329 
54,454,579 
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (USD $)
In Thousands, except Share data
Total
Preferred Stock [Member]
Common Stock [Member]
Additional Paid-in Capital [Member]
Accumulated Other Comprehensive Income [Member]
Accumulated Distributions in Excess of Net Income [Member]
Noncontrolling Interest [Member]
Balance at Dec. 31, 2009
$ (474,747)
$ 26 
$ 543 
$ 579,983 
$ (24,443)
$ (884,666)
$ (146,190)
Balance, shares (in shares) at Dec. 31, 2009
 
33,839,235 
54,321,586 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
Issuance of stock pursuant to Continuing Offer (Notes 5, 7, and 8)
 
 
(1)
 
 
 
Issuance of stock pursuant to Continuing Offer, shares (in shares)
 
(126,109)
126,116 
 
 
 
 
Share based compensation under employee and director benefit plans (Note 7)
6,312 
 
6,309 
 
 
 
Share Based Compensation Under Employee And Director Benefit Plans Shares
 
 
231,843 
 
 
 
 
Adjustments of noncontrolling interest (Note 5)
(623)
 
 
(623)
34 
 
589 
Purchase of additional interest in subsidiary
623 
 
 
 
 
 
 
Dividend equivalents (Note 7)
(94)
 
 
 
 
(94)
 
Dividends and distributions
(83,757)
 
 
 
 
(53,344)
(30,413)
Net income
35,297 
 
 
 
 
21,776 
13,521 
Unrealized gain (loss) on interest rate instruments and other
5,899 
 
 
 
2,330 
 
3,569 
Reclassification adjustment for amounts recognized in net income
631 
 
 
 
425 
 
206 
Balance at Jun. 30, 2010
(510,459)
26 
547 
585,668 
(21,654)
(916,328)
(158,718)
Balance, shares (in shares) at Jun. 30, 2010
 
33,713,126 
54,679,545 
 
 
 
 
Balance at Dec. 31, 2010
(527,911)
26 
547 
589,881 
(14,925)
(939,290)
(164,150)
Balance, shares (in shares) at Dec. 31, 2010
 
33,713,126 
54,696,054 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
Stock Issued During Period, Value, New Issues
111,926 
 
20 
111,906 
 
 
 
Stock Issued During Period, Shares, New Issues
2,012,500 
 
2,012,500 
 
 
 
 
Issuance of stock pursuant to Continuing Offer (Notes 5, 7, and 8)
 
(1)
11 
(10)
 
 
 
Issuance of stock pursuant to Continuing Offer, shares (in shares)
 
(1,092,690)
1,092,766 
 
 
 
 
Share based compensation under employee and director benefit plans (Note 7)
3,384 
 
3,383 
 
 
 
Share Based Compensation Under Employee And Director Benefit Plans Shares
 
 
88,210 
 
 
 
 
Adjustments of noncontrolling interest (Note 5)
(40,762)
 
 
(40,762)
490 
 
40,272 
Purchase of additional interest in subsidiary
40,762 
 
 
 
 
 
 
Contributions from Noncontrolling Interests (excludes $62 contribution from redeemable noncontrolling interests) (Note 5)
31,417 
 
 
 
 
 
31,417 
Dividend equivalents (Note 7)
(53)
 
 
 
 
(53)
 
Dividends and distributions
(91,009)
 
 
 
 
(57,013)
(33,996)
Net income
44,734 
 
 
 
 
 
 
Net income (excludes $292 of net loss attributable to redeemable noncontrolling interests) (Note 5)
45,026 
 
 
 
 
27,139 
17,887 
Unrealized gain (loss) on interest rate instruments and other
(337)
 
 
 
(291)
 
(46)
Reclassification adjustment for amounts recognized in net income
725 
 
 
 
503 
 
222 
Balance at Jun. 30, 2011
$ (426,832)
$ 25 
$ 579 
$ 664,398 
$ (14,223)
$ (969,217)
$ (108,394)
Balance, shares (in shares) at Jun. 30, 2011
 
32,620,436 
57,889,530 
 
 
 
 
CONSOLIDATED STATEMENT OF CASH FLOWS (USD $)
In Thousands
6 Months Ended
Jun. 30,
2011
2010
Cash Flows From Operating Activities:
 
 
Net income
$ 44,734 
$ 35,297 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
Depreciation and amortization
70,118 
73,002 
Provision for bad debts
4,147 
2,204 
Gain on sale of land
(519)
(1,040)
Other
6,749 
5,528 
Increase (decrease) in cash attributable to changes in assets and liabilities:
 
 
Receivables, deferred charges, and other assets
1,251 
(8,150)
Accounts payable and other liabilities
(1,831)
2,050 
Net Cash Provided By Operating Activities
124,649 
108,891 
Cash Flows From Investing Activities:
 
 
Additions to properties
(37,037)
(32,153)
Proceeds from sale of land
3,728 
1,557 
Repayments of notes receivable
848 
719 
Issuances of notes receivable
 
(2,948)
Contributions to Unconsolidated Joint Ventures
(440)
(6,820)
Distributions from Unconsolidated Joint Ventures in excess of income
7,638 
7,524 
Net Cash Used In Investing Activities
(25,263)
(32,121)
Cash Flows From Financing Activities:
 
 
Debt proceeds
 
82,500 
Debt payments
(150,312)
(83,444)
Debt issuance costs
(2,161)
(869)
Issuance of common stock (Note 1)
111,926 
 
Issuance of common stock and/or partnership units in connection with incentive plans
(2,032)
1,928 
Distributions to noncontrolling interests
(33,996)
(30,413)
Distributions to participating securities of TRG
(762)
(723)
Contributions from noncontrolling interests
31,709 
 
Cash dividends to preferred shareowners
(7,317)
(7,317)
Cash dividends to common shareowners
(48,892)
(45,237)
Other
(77)
(144)
Net Cash Used In Financing Activities
(101,914)
(83,719)
Net Decrease In Cash and Cash Equivalents
(2,528)
(6,949)
Cash and Cash Equivalents at Beginning of Period
19,291 
16,176 
Cash and Cash Equivalents at End of Period
$ 16,763 
$ 9,227 
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 June 30, 2011 included 23 urban and suburban shopping centers in ten states.


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


The unaudited interim financial statements should be read in conjunction with the audited financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial statements for the interim periods have been made. The results of interim periods are not necessarily indicative of the results for a full year.


Dollar amounts presented in tables within the notes to the financial statements are stated in thousands, except share data or as otherwise noted. Certain reclassifications have been made to prior year amounts to conform with current year classifications. Expenses for promotion and advertising of shopping centers that were previously classified in Other Operating are now included in Maintenance, Taxes, Utilities and Promotion expense. Amounts for 2010 have been reclassified to conform to the 2011 classification.


Consolidation


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


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


Ownership


In addition to the Company’s common stock, there are three classes of preferred stock (Series B, G, and H) outstanding as of June 30, 2011. Dividends on the 8% Series G and 7.625% Series H Preferred Stock are cumulative and are paid on the last day of each calendar quarter. The Company owns corresponding Series G and Series H Preferred Equity interests in the Operating Partnership that entitle the Company to income and distributions (in the form of guaranteed payments) in amounts equal to the dividends payable on the Company’s Series G and Series H Preferred Stock.


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


In June 2011, the Company sold 2,012,500 of its common shares. The proceeds were used by the Company to acquire an equal number of Operating Partnership units. The Operating Partnership paid all offering costs. The Operating Partnership used the net proceeds, after offering costs, of $111.9 million to reduce outstanding borrowings under its lines of credit. See Note 5 "Noncontrolling Interests - Equity Transactions".
Outstanding voting securities of the Company at June 30, 2011 consisted of 25,140,436 shares of Series B Preferred Stock and 57,889,530 shares of Common Stock.
The Operating Partnership


At June 30, 2011, the Operating Partnership’s equity included three classes of preferred equity (Series F, G, and H) and the net equity of the partnership unitholders. Net income and distributions of the Operating Partnership are allocable first to the preferred equity interests, and the remaining amounts to the general and limited partners in the Operating Partnership in accordance with their percentage ownership. The Series G and Series H Preferred Equity are owned by the Company and are eliminated in consolidation. The Series F Preferred Equity is owned by an institutional investor and accounted for as a noncontrolling interest of the Company.


The Company's ownership in the Operating Partnership at June 30, 2011 consisted of a 70% managing general partnership interest, as well as the Series G and H Preferred Equity interests. The Company's average ownership percentage in the Operating Partnership for the six months ended June 30, 2011 and 2010 was 69% and 67%, respectively. At June 30, 2011, the Operating Partnership had 83,048,416 partnership units outstanding, of which the Company owned 57,889,530 units.
Income Taxes
Income Taxes
Income Taxes


In May 2011, the State of Michigan replaced the Michigan Business Tax with a Corporate Income Tax that will be effective on January 1, 2012. Due to the repeal of the Michigan Business Tax, the Company wrote off net deferred tax assets and deferred tax liabilities of approximately $3.7 million and $3.9 million, respectively, during the three months ended on June 30, 2011. Under the new law, the Company does not expect to pay any Corporate Income Tax based on estimates of taxable income of the Company's unitary filing group for Michigan tax purposes.


Income Tax Expense


The Company’s income tax expense for the three and six months ended June 30, 2011 and 2010 is as follows:


 
Three Months Ended

June 30
 
Six Months Ended

June 30
 
2011
 
2010
 
2011
 
2010
State current
$
186


 
$
219


 
$
428


 
$
495


State deferred
(197
)
 
(105
)
 
(246
)
 
(185
)
Federal current
18


 
 
 
35


 
 
Federal deferred
(12
)
 
 
 
(12
)
 
 
Total income tax expense (benefit)
$
(5
)
 
$
114


 
$
205


 
$
310






The Company expects to have less than $0.1 million of federal alternative minimum tax payable in 2011. The Company had no other federal or foreign income tax expense during these periods as a result of net operating losses incurred by the Company’s Taxable REIT Subsidiaries.


Deferred Taxes


Deferred tax assets and liabilities as of June 30, 2011 and December 31, 2010 are as follows:


 
2011
 
2010
Deferred tax assets:
 
 
 
Federal
$
8,082


 
$
8,589


Foreign
2,160


 
2,361


State
413


 
6,786


Total deferred tax assets
$
10,655


 
$
17,736


Valuation allowances
(6,782
)
 
(10,199
)
Net deferred tax assets
$
3,873


 
$
7,537


Deferred tax liabilities:
 


 
 


Federal
$
618


 
$
607


State
239


 
4,171


Total deferred tax liabilities
$
857


 
$
4,778






The Company believes that it is more likely than not the results of future operations will generate sufficient taxable income to recognize the net deferred tax assets. These future operations are primarily dependent upon the Manager’s profitability, the timing and amounts of gains on land sales, the profitability of the Company’s Asia-Pacific 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 direct or indirect managing general partner or managing member of these Unconsolidated Joint Ventures, except for the ventures that own Arizona Mills, The Mall at Millenia, and Waterside Shops.


Shopping Center
Ownership as of
June 30, 2011 and
December 31, 2010
Arizona Mills
50%
Fair Oaks
50
The Mall at Millenia
50
Stamford Town Center
50
Sunvalley
50
Waterside Shops
25
Westfarms
79




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


In its Consolidated Balance Sheet, the Company separately reports its investment in Unconsolidated Joint Ventures for which accumulated distributions have exceeded investments in and net income of the Unconsolidated Joint Ventures. The net equity of certain joint ventures is less than zero because distributions are usually greater than net income, as net income includes non-cash charges for depreciation and amortization. In addition, distributions related to refinancing of the centers will 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. Beneficial interest is calculated based on the Operating Partnership's ownership interest in each of the Unconsolidated Joint Ventures.




 
June 30 2011
 
December 31

2010
Assets:
 
 
 
Properties
$
1,097,724


 
$
1,092,916


Accumulated depreciation and amortization
(432,423
)
 
(417,712
)
 
$
665,301


 
$
675,204


Cash and cash equivalents
20,408


 
21,339


Accounts and notes receivable, less allowance for doubtful accounts of $1,443 and $1,471 in 2011 and 2010
18,813


 
26,288


Deferred charges and other assets
17,965


 
18,891


 
$
722,487


 
$
741,722


 
 
 
 
Liabilities and accumulated deficiency in assets:
 


 
 


Notes payable
$
1,119,746


 
$
1,125,618


Accounts payable and other liabilities
33,641


 
37,292


TRG's accumulated deficiency in assets
(228,961
)
 
(224,636
)
Unconsolidated Joint Venture Partners' accumulated deficiency in assets
(201,939
)
 
(196,552
)
 
$
722,487


 
$
741,722


 
 
 
 
TRG's accumulated deficiency in assets (above)
$
(228,961
)
 
$
(224,636
)
TRG basis adjustments, including elimination of intercompany profit
68,013


 
68,682


TCO's additional basis
61,775


 
62,747


Net Investment in Unconsolidated Joint Ventures
$
(99,173
)
 
$
(93,207
)
Distributions in excess of investments in and net income of Unconsolidated Joint Ventures
173,093


 
170,329


Investment in Unconsolidated Joint Ventures
$
73,920


 
$
77,122




 
Three Months Ended June 30
 
Six Months Ended June 30
 
2011
 
2010
 
2011
 
2010
Revenues
$
62,918


 
$
63,722


 
$
126,277


 
$
127,062


Maintenance, taxes, utilities, promotion, and other operating expenses
$
20,769


 
$
22,845


 
$
41,006


 
$
43,675


Interest expense
13,949


 
15,916


 
29,545


 
31,734


Depreciation and amortization
8,952


 
8,880


 
18,137


 
18,172


Total operating costs
$
43,670


 
$
47,641


 
$
88,688


 
$
93,581


Nonoperating income
5


 
(11
)
 
10


 
1


Net income
$
19,253


 
$
16,070


 
$
37,599


 
$
33,482


 
 
 
 
 
 
 
 
Net income attributable to TRG
$
10,825


 
$
9,345


 
$
21,294


 
$
19,238


Realized intercompany profit, net of depreciation on TRG’s basis adjustments
546


 
646


 
710


 
975


Depreciation of TCO's additional basis
(485
)
 
(486
)
 
(972
)
 
(973
)
Equity in income of Unconsolidated Joint Ventures
$
10,886


 
$
9,505


 
$
21,032


 
$
19,240


 
 
 
 
 
 
 
 
Beneficial interest in Unconsolidated Joint Ventures’ operations:
 


 
 


 
 


 
 


Revenues less maintenance, taxes, utilities, promotion, and other operating expenses
$
23,511


 
$
23,076


 
$
47,220


 
$
46,491


Interest expense
(7,247
)
 
(8,248
)
 
(15,324
)
 
(16,450
)
Depreciation and amortization
(5,378
)
 
(5,323
)
 
(10,864
)
 
(10,801
)
Equity in income of Unconsolidated Joint Ventures
$
10,886


 
$
9,505


 
$
21,032


 
$
19,240






The estimated fair value of the Unconsolidated Joint Ventures’ notes payable was $1.2 billion at June 30, 2011 and December 31, 2010.
Beneficial Interest in Debt and Interest Expense
Beneficial interest in Debt and Interest Expense
Beneficial Interest in Debt and Interest Expense


The Operating Partnership's beneficial interest in the debt, capitalized interest, and interest expense of its consolidated subsidiaries and its Unconsolidated Joint Ventures is summarized in the following table. The Operating Partnership's beneficial interest in the consolidated subsidiaries excludes debt and interest related to the noncontrolling interests in Cherry Creek Shopping Center (50%), International Plaza (49.9%), The Pier Shops at Caesars (The Pier Shops) (see Notes 1 and 2 below), The Mall at Wellington Green (10%), and MacArthur Center (MacArthur) (5%).


 
At 100%
 
At Beneficial Interest
 
Consolidated Subsidiaries
 
Unconsolidated Joint Ventures
 
Consolidated Subsidiaries
 
 
Unconsolidated Joint Ventures
Debt as of:
 
 
 
 
 
 
 
 
June 30, 2011
$
2,504,342


 
$
1,119,746


 
$
2,171,491


(1) 
 
$
571,600


December 31, 2010
2,656,560


 
1,125,618


 
2,297,460


(1) 
 
575,103


 
 
 
 
 
 
 
 
 
Capitalized interest:
 


 
 


 
 


 
 
 


Six Months Ended June 30, 2011
373


 
 


 
373


 
 
 


Six Months Ended June 30, 2010
59


 
 


 
59


 
 
 


 
 
 
 
 
 
 
 
 
Interest expense:
 


 
 


 
 


 
 
 


Six Months Ended June 30, 2011
70,485


 
29,545


 
64,843


(2) 
 
15,324


Six Months Ended June 30, 2010
75,340


 
31,734


 
64,827


(1) 
 
16,450






(1)
The Pier Shops is included at beneficial interest of 77.5%.
(2)
The Pier Shops is included at 100%. See “MD&A – Results of Operations – The Pier Shops and Regency Square Reconciliations of Net Operating Income to Net Income,” regarding a change in the presentation of beneficial interest in The Pier Shops’ operations in 2011.
 
Debt Covenants and Guarantees


Certain loan agreements contain various restrictive covenants, including a minimum net worth requirement, a maximum payout ratio on distributions, a minimum debt yield ratio, a maximum leverage ratio, minimum interest coverage ratios, and a minimum fixed charges coverage ratio, the latter being the most restrictive. This covenant requires that the Company maintain a minimum fixed charges coverage ratio of more than 1.5 over a trailing 12-month period. As of June 30, 2011, the Company’s trailing 12-month fixed charges coverage ratio was 2.2. Other than The Pier Shops’ and Regency Square loans, which are in default, the Company is in compliance with all of its covenants and loan obligations as of June 30, 2011. The default on these loans did not trigger any cross defaults on our other indebtedness. The maximum payout ratio on distributions covenant limits the payment of distributions generally to 95% of funds from operations, as defined in the loan agreements, except as required to maintain our tax status, pay preferred distributions, and for distributions related to the sale of certain assets.


Payments of principal and interest on the loans in the following table are guaranteed by the Operating Partnership as of June 30, 2011.


Center
 
Loan Balance

as of 6/30/11
 
TRG's Beneficial Interest in Loan Balance

as of 6/30/11
 
Amount of Loan Balance Guaranteed by TRG

as of 6/30/11
 
% of Loan Balance Guaranteed by TRG
 
% of Interest Guaranteed by TRG
 
 
(in millions)
 
 
 
 
Dolphin Mall
 
 


 


 
100
%
 
100
%
Fairlane Town Center
 
$
20.0


 
$
20.0


 
$
20.0


 
100


 
100


Twelve Oaks Mall
 
 


 


 
100


 
100






The Company is required to escrow cash balances for specific uses stipulated by certain of its lenders. As of June 30, 2011 and December 31, 2010, the Company’s cash balances restricted for these uses were $6.9 million and $7.6 million, respectively. Such amounts are included within Deferred Charges and Other Assets in the Company’s Consolidated Balance Sheet.


2011 Financings


In April 2011, the maturity date on the $250 million loan on Fair Oaks, a 50% owned unconsolidated joint venture, was extended to April 2012. The rate on the loan had been fixed at 4.22% due to an interest rate swap that also matured in April 2011. The loan then reverted to a floating rate at LIBOR plus 1.40%. See "Note 11 - Subsequent Events" for information related to the refinancing of Fair Oaks in July 2011.


In February 2011, the maturity date on the Company’s $550 million primary line of credit was extended to February 2012. In March 2011, the maturity date on the Company’s secondary line of credit was extended through April 2012. In addition, the maximum amount available under this facility was increased to $65 million from the prior $40 million maximum for the $25 million letter of credit required by the lessor of the City Creek Center project. The availability under the line will revert to $40 million when the obligation under the letter of credit is extinguished. See "Note 11 - Subsequent Events" for information related to the refinancing of the Company's primary line of credit in July 2011.


In January 2011, the International Plaza loan was extended to a maturity of January 2012. The principal balance on the loan was required to be paid down by $52.6 million. The Company funded its $26.4 million beneficial share of the paydown using its revolving line of credit. The principal on the loan is now $272.4 million at 100%, and $136.5 million at the Company’s beneficial share. The rate on the loan had been fixed at 5.01% due to an interest rate swap that also matured in January 2011. The loan has now reverted to a floating rate at LIBOR plus 1.15%. The extended loan is prepayable at any time and has an additional one-year extension option.


Regency Square and The Pier Shops Loan Defaults


In June 2011, the $72.2 million non-recourse loan encumbering Regency Square went into default. Under the terms of the loan agreement, interest accrues at the original stated rate of 6.75% plus a 4% default rate. The book value of the investment in Regency Square as of June 30, 2011 was approximately $29 million.


The $135 million non-recourse loan encumbering The Pier Shops is also in default. Under the terms of the loan agreement, interest accrues at the original stated rate of 6.01% plus a 4% default rate. The book value of the investment in The Pier Shops as of June 30, 2011 was approximately $41 million. See Note 8 for more information on related litigation.


Regarding both Regency Square and The Pier Shops, a non-cash accounting gain will be recognized for each center when its loan obligation is extinguished upon transfer of title of the respective center. The gain will represent the difference between the book value of the debt, interest payable and other obligations extinguished over the net book value of the property and any other assets transferred. The administration of the loans has been turned over to the special servicers. The transition processes are not in the Company’s control and the timing of transfer of title for each of the centers is uncertain. The Company will continue to record the operations of the centers and interest on the loans in its results until ownership of the centers has been transferred.


Noncontrolling Interests
Noncontrolling Interests
Noncontrolling Interests


Redeemable Noncontrolling Interests


In 2010, the Company's president of Taubman Asia (the Asia President) obtained 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. Taubman Asia has the ability to call, and the Asia President has the ability to put, the Asia President’s ownership interest, subject to certain conditions including the termination of the Asia President’s employment and the expiration of certain required holding periods. 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. At June 30, 2011, the interest had an immaterial redemption value. Adjustments to the redemption value are recorded through equity.


Also in 2010, the Company formed a joint venture that is focusing on developing and owning outlet shopping centers. The Company owns a 90% controlling interest and consolidates the venture, while the joint venture partner owns a 10% interest. At any time after June 2012, the Company will have the right to purchase the joint venture partner's entire interest and the joint venture partner will have the right to require the Company to purchase the joint venture partner's entire interest. Additionally, the parties each have a one-time put and/or call on the joint venture partner’s interest in any stabilized centers, while still maintaining the ongoing joint venture relationship. Considering the redemption provisions, the Company accounts for the joint venture partner’s interest as a contingently redeemable noncontrolling interest. At June 30, 2011, the interest had an immaterial redemption value. Adjustments to the redemption value are recorded through equity.


Reconciliation of redeemable noncontrolling interests:
2011
Balance January 1, 2011
$


Contributions
292


Allocation of net loss
(292
)
Balance June 30, 2011
$






Equity Balances and Income Allocable to Noncontrolling Interests


The net equity balance of the noncontrolling interests as of June 30, 2011 and December 31, 2010 includes the following:


 
2011
 
2010
Non-redeemable noncontrolling interests:
 
 
 
Noncontrolling interests in consolidated joint ventures
$
(73,174
)
 
$
(100,355
)
Noncontrolling interests in partnership equity of TRG
(64,437
)
 
(93,012
)
Preferred equity of TRG
29,217


 
29,217


 
$
(108,394
)
 
$
(164,150
)




Net income attributable to the noncontrolling interests for the three months ended June 30, 2011 and June 30, 2010 includes the following:


 
2011
 
2010
Net income attributable to noncontrolling interests:
 
 
 
Non-redeemable noncontrolling interests:
 
 
 
Noncontrolling share of income of consolidated joint ventures
$
3,015


 
$
1,968


Noncontrolling share of income of TRG
4,506


 
4,428


TRG Series F preferred distributions
615


 
615


 
$
8,136


 
$
7,011


Redeemable noncontrolling interests
(230
)
 




 
$
7,906


 
$
7,011






Net income attributable to the noncontrolling interests for the six months ended June 30, 2011 and June 30, 2010 includes the following:


 
2011
 
2010
Net income attributable to noncontrolling interests:
 
 
 
Non-redeemable noncontrolling interests:
 
 
 
Noncontrolling share of income of consolidated joint ventures
$
6,462


 
$
3,981


Noncontrolling share of income of TRG
10,195


 
8,310


TRG Series F preferred distributions
1,230


 
1,230


 
17,887


 
13,521


Redeemable noncontrolling interests
(292
)
 




 
$
17,595


 
$
13,521






Equity Transactions


The following schedule presents the effects of changes in Taubman Centers, Inc.’s ownership interest in consolidated subsidiaries on Taubman Centers, Inc.’s equity for the six months ended June 30, 2011 and June 30, 2010:


 
2011
 
2010
Net income attributable to Taubman Centers, Inc. common shareowners
$
19,060


 
$
13,736


Transfers (to) from the noncontrolling interest –
 


 
 


Decrease in Taubman Centers, Inc.’s paid-in capital for the adjustments of noncontrolling interest (1)
(40,762
)
 
(623
)
Net transfers (to) from noncontrolling interests
(40,762
)
 
(623
)
Change from net income attributable to Taubman Centers, Inc. and transfers (to) from noncontrolling interests
$
(21,702
)
 
$
13,113






(1)
In 2011 and 2010, 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 issuance of common stock (Note 1), share-based compensation under employee and director benefit plans (Note 7), and issuances of stock pursuant to the Continuing Offer (Note 8).


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 June 30, 2011, the Company held controlling interests in consolidated entities with specified termination dates in 2081 and 2083. The noncontrolling owners’ interests in these entities are to be settled upon termination by distribution or transfer of either cash or specific assets of the underlying entity. The estimated fair value of these noncontrolling interests was approximately $208 million at June 30, 2011, compared to a book value of $(71.5) million that is classified in Noncontrolling Interests in the Company’s Consolidated Balance Sheet.


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, except for two immaterial out-of-the-money interest rate caps, which mature in January 2012 and April 2012.


As of June 30, 2011, the Company had the following outstanding interest rate derivatives that were designated and are expected to be effective as cash flow hedges of the interest payments on the associated debt.


Instrument Type
 
Ownership
 
Notional Amount
 
Swap Rate
 
Credit Spread on Loan
 
Total Swapped Rate on Loan
 
Maturity Date
Consolidated Subsidiaries:
 
 
 
 
 
 
 
 
 
 
 
 
Receive variable (LIBOR) /pay-fixed swap (1)
 
95
%
 
$
131,000


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


 
 


 
 


 
 


 
 


 
 
Receive variable (LIBOR) /pay-fixed swap
 
50


 
30,000


 
5.05


 
0.90


 
5.95


 
November 2012




(1)
The notional amount of the swap is equal to the outstanding principal balance on the loan, which begins amortizing in September 2012.


Cash Flow Hedges of Interest Rate Risk


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


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


The Company expects that approximately $4.7 million of the AOCI of Taubman Centers, Inc. and the noncontrolling interests will be reclassified from AOCI and recognized as a reduction of income in the following 12 months.


As of June 30, 2011, the Company had $1.9 million of net realized losses included in AOCI resulting from settled derivative instruments, which were designated as cash flow hedges that are being recognized as a reduction of income over the term of the hedged debt.


The following tables present the effect of derivative instruments on the Company’s Consolidated Statement of Operations and Comprehensive Income for the three and six months ended June 30, 2011 and June 30, 2010. The tables include the location and amount of unrealized gains and losses on outstanding derivative instruments in cash flow hedging relationships and the location and amount of realized losses reclassified from AOCI into income resulting from settled derivative instruments associated with hedged debt.


During the three months ended June 30, 2011 and June 30, 2010, the Company did not have any hedge ineffectiveness or amounts that were excluded from the assessment of hedge effectiveness recorded in earnings.


 
Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
 
Location of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
 
Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
 
Three Months Ended June 30
 
 
 
Three Months Ended June 30
 
2011
 
2010
 
 
 
2011
 
2010
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
Interest rate contracts – consolidated subsidiaries
$
(3,180
)
 
$
2,868


 
Interest Expense
 
$
(802
)
 
$
(2,932
)
Interest rate contracts – UJVs
101


 
694


 
Equity in Income of UJVs
 
(180
)
 
(979
)
Total derivatives in cash flow hedging relationships
$
(3,079
)
 
$
3,562


 
 
 
$
(982
)
 
$
(3,911
)
 
 
 
 
 
 
 
 
 
 
Realized losses on settled cash flow hedges:
 


 
 


 
 
 
 


 
 


Interest rate contracts – consolidated subsidiaries
 


 
 


 
Interest Expense
 
$
(315
)
 
$
(222
)
Interest rate contract – UJVs
 


 
 


 
Equity in Income of UJVs
 
(94
)
 
(94
)
Total realized losses on settled cash flow hedges
 


 
 


 
 
 
$
(409
)
 
$
(316
)


During the six months ended June 30, 2011 and June 30, 2010, the Company did not have any hedge ineffectiveness or amounts that were excluded from the assessment of hedge effectiveness recorded in earnings.


 
Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
 
Location of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
 
Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
 
Six Months Ended
June 30
 
 
 
Six Months Ended
June 30
 
2011
 
2010
 
 
 
2011
 
2010
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
Interest rate contracts – consolidated subsidiaries
$
(1,553
)
 
$
4,900


 
Interest Expense
 
$
(1,872
)
 
$
(5,880
)
Interest rate contracts – UJVs
1,044


 
934


 
Equity in Income of UJVs
 
(1,158
)
 
(1,968
)
Total derivatives in cash flow hedging relationships
$
(509
)
 
$
5,834


 
 
 
$
(3,030
)
 
$
(7,848
)
 
 
 
 
 
 
 
 
 
 
Realized losses on settled cash flow hedges:
 


 
 


 
 
 
 


 
 


Interest rate contracts – consolidated subsidiaries
 


 
 


 
Interest Expense
 
$
(536
)
 
$
(443
)
Interest rate contract – UJVs
 


 
 


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


 
 


 
 
 
$
(724
)
 
$
(631
)




The Company records all derivative instruments at fair value in the Consolidated Balance Sheet. The following table presents the location and fair value of the Company’s derivative financial instruments as reported in the Consolidated Balance Sheet as of June 30, 2011 and December 31, 2010.


 
 
 
Fair Value
 
Consolidated Balance Sheet Location
 
June 30 2011
 
December 31 2010
Derivatives designated as hedging instruments:
 
 
 
 
 
Asset derivatives-
 
 
 
 
 
Interest rate contract – consolidated subsidiaries
Deferred Charges and Other Assets
 
$
3,012


 
$
4,856


Liability derivatives:
 
 
 


 
 


Interest rate contract – consolidated subsidiaries
Accounts Payable and Accrued Liabilities
 
 


 
$
(291
)
Interest rate contracts – UJVs
Investment in UJVs
 
$
(920
)
 
(1,964
)
Total liabilities designated as hedging instruments
 
 
$
(920
)
 
$
(2,255
)




Contingent Features


Certain of the Company's outstanding derivatives contain provisions that state if the hedged entity defaults on any of its indebtedness in excess of $1 million, then the derivative obligation could also be declared in default. As of June 30, 2011, the Company is not in default on any debt obligations that would trigger a credit risk related default on its current outstanding derivatives.


As of June 30, 2011 and December 31, 2010, the fair value of derivative instruments with credit-risk-related contingent features that are in a liability position was $0.9 million and $2.3 million, respectively. As of June 30, 2011 and December 31, 2010, the Company was not required to post any collateral related to these agreements. If the Company breached any of these provisions it would be required to settle its obligations under the agreements at their fair value. See Note 10 for fair value information on derivatives.


Share-Based Compensation
Share-Based Compensation
Share-Based Compensation


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


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


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


The compensation cost charged to income for the Company’s share-based compensation plans was $2.2 million and $4.6 million for the three and six months ended June 30, 2011, respectively. The compensation cost charged to income for the Company’s share-based compensation plans was $2.4 million and $3.9 million for the three and six months ended June 30, 2010, respectively. Compensation cost capitalized as part of properties and deferred leasing costs was approximately $0.1 million and $0.2 million for the three months and six months ended June 30, 2011, respectively, and approximately $0.1 million and $0.2 million for the three months and six months ended June 30, 2010, respectively.


The Company currently recognizes no tax benefits from the recognition of compensation cost or tax deductions incurred upon the exercise or vesting of share-based awards. Allocations of compensation cost or deduction to the Company’s corporate taxable REIT subsidiaries from the Company's Manager, which is treated as a partnership for federal income tax purposes, have not resulted in the recognition of tax benefits due to the Company’s current income tax position (Note 2).


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 six months ended June 30, 2011 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, 2011
1,452,781


 
$
37.00


 
5.7


 
$
13.83


-
$
55.90


Outstanding at June 30, 2011
1,452,781


 
$
37.00


 
5.2


 
$
13.83


-
$
55.90


 
 
 
 
 
 
 
 
 
 
Fully vested options at June 30, 2011
1,244,452


 
$
38.00


 
5.4


 
 


 
 




There were 0.1 million options that vested during the six months ended June 30, 2011.


The aggregate intrinsic value (the difference between the period end stock price and the option exercise price) of in-the-money options outstanding and in-the-money fully vested options as of June 30, 2011 was $32.2 million and $26.4 million, respectively.


No options were exercised during the six months ended June 30, 2011. The total intrinsic value of options exercised during the six months ended June 30, 2010 was $3.9 million. Cash received from option exercises for the six months ended June 30, 2010 was $3.1 million.


As of June 30, 2011, there were 0.2 million nonvested options outstanding, and $0.1 million of total unrecognized compensation cost related to nonvested options. The remaining cost is expected to be recognized within one year.


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 2011, the Company granted Performance Share Units (PSU) under the 2008 Omnibus Plan. Each PSU represents the right to receive, upon vesting, shares of the Company’s common stock ranging from 0-300% of the PSU based on the Company’s market performance relative to that of a peer group. The vesting date is three years from the grant date, if continuous service has been provided, or upon retirement or certain other events if earlier. No dividends accumulate during the vesting period.


The Company estimated the value of the PSU granted in March 2011 using a Monte Carlo simulation, considering the Company’s common stock price at the grant date less the present value of the expected dividends during the vesting period, historical returns of the Company and the peer group of companies, a risk-free interest rate of 1.18%, and a measurement period of 3 years. The resulting weighted average grant-date fair value was $85.40 per PSU.


A summary of PSU activity for the six months ended June 30, 2011 is presented below:


 
Number of Performance Stock Units
 
Weighted Average Grant Date Fair Value
Outstanding at January 1, 2011
272,356


 
$
28.88


Granted
53,795


 
$
85.40


Outstanding at June 30, 2011
326,151


 
$
38.20






None of the PSU outstanding at June 30, 2011 were vested. As of June 30, 2011, there was $7.4 million of total unrecognized compensation cost related to nonvested PSU outstanding. This cost is expected to be recognized over an average period of 2.1 years.


Restricted Share Units


In March 2011 and June 2011, restricted share units (RSU) were issued under the 2008 Omnibus Plan and represent the right to receive upon vesting one share of the Company’s common stock. The units vest in March 2014, if continuous service has been provided through that period, or upon retirement or certain other events if earlier. No dividends accumulate during the vesting period.


The Company estimated the value of the RSU grants in March 2011 and June 2011 using the Company’s common stock at the grant date deducting the present value of expected dividends during the vesting period using risk-free rates of 1.18% and 0.78%, respectively. The result of the Company’s valuation was a weighted average grant-date fair value of $47.98 per RSU granted in March 2011, and $53.65 per RSU granted in June 2011.


A summary of Restricted Share Units (RSU) activity for the six months ended June 30, 2011 is presented below:


 
Number of Restricted Stock Units
 
Weighted Average Grant Date Fair Value
Outstanding at January 1, 2011
617,884


 
$
22.72


Redeemed
(113,684
)
 
50.21


Granted March 2011
105,391


 
47.98


Granted June 2011
1,972


 
53.65


Forfeited
(1,484
)
 
18.76


Outstanding at June 30, 2011
610,079


 
$
22.07






All of the RSU outstanding at June 30, 2011 were nonvested. As of June 30, 2011, there was $7.4 million of total unrecognized compensation cost related to nonvested RSU outstanding. This cost is expected to be recognized over an average period of 2.1 years.
Commitments and Contingencies
Commitments and Contingencies
Commitments and Contingencies


Cash Tender


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


Based on a market value at June 30, 2011 of $59.20 per common share, the aggregate value of interests in the Operating Partnership that may be tendered under the Cash Tender Agreement was approximately $1.4 billion. The purchase of these interests at June 30, 2011 would have resulted in the Company owning an additional 29% interest in the Operating Partnership.


Continuing Offer


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


Litigation


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


In April 2010, the holder of the loan on The Pier Shops filed a mortgage foreclosure complaint in the United States District Court for the District of New Jersey (Case No. CV01755) against APA. The plaintiff seeks to establish the amounts due under The Pier Shops’ mortgage loan agreement, foreclose all right, title, and lien which APA has in The Pier Shops’ leasehold interest, obtain possession of the property, and order a foreclosure sale of the property to satisfy the amounts due under the loan. In March 2011, a consent judgment of foreclosure was entered by the Court. The completion of the foreclosure process is not in the Company’s control and the timing of transfer of title is uncertain. Upon completion of the foreclosure sale, the ownership of The Pier Shops will be transferred in satisfaction of the obligations under the debt.




See Note 4 for the Operating Partnership's guarantees of certain notes payable, Note 5 for contingent features relating to certain joint venture agreements, Note 6 for contingent features relating to derivative instruments, and Note 7 for obligations under existing share-based compensation plans.
Earnings Per Share
Earnings Per Share
rnings Per Share


Basic earnings per share amounts are based on the weighted average of common shares outstanding for the respective periods. Diluted earnings per share amounts are based on the weighted average of common shares outstanding plus the dilutive effect of potential common stock. Potential common stock includes outstanding partnership units exchangeable for common shares under the Continuing Offer (Note 8), outstanding options for partnership units, PSU, RSU, deferred shares under the Non-Employee Directors’ Deferred Compensation Plan, and unissued partnership units under a unit option deferral election (Note 7). In computing the potentially dilutive effect of potential common stock, partnership units are assumed to be exchanged for common shares under the Continuing Offer, increasing the weighted average number of shares outstanding. The potentially dilutive effects of partnership units outstanding and/or issuable under the unit option deferral elections are calculated using the if-converted method, while the effects of other potential common stock are calculated using the treasury method. Contingently issuable shares are included in diluted EPS based on the number of shares, if any, that would be issuable if the end of the reporting period were the end of the contingency period.
 
As of June 30, 2011, there were 7.4 million partnership units outstanding and 0.9 million unissued partnership units under unit option deferral elections that may be exchanged for common shares of the Company under the Continuing Offer. These outstanding partnership units and unissued units were excluded from the computation of diluted earnings per share as they were anti-dilutive in all periods presented. Also, there were out-of-the-money options for 15 thousand and 0.2 million shares for the three and six months ended June 30, 2011, respectively, and 0.5 million and 0.6 million shares for the three and six months ended June 30, 2010, respectively, that were excluded from the computation of diluted EPS because they were anti-dilutive.


 
Three Months Ended
 
Six Months Ended
 
June 30
 
June 30
 
2011
 
2010
 
2011
 
2010
Net income attributable to Taubman Centers, Inc. common shareowners (Numerator):
 
 
 
 
 
 
 
Basic
$
8,344


 
$
7,453


 
$
19,060


 
$
13,736


Impact of additional ownership of TRG
86


 
57


 
184


 
104


Diluted
$
8,430


 
$
7,510


 
$
19,244


 
$
13,840


 
 
 
 
 
 
 
 
Shares (Denominator) – basic
56,186,216


 
54,550,964


 
55,875,329


 
54,454,579


Effect of dilutive securities
1,583,249


 
1,060,923


 
1,501,547


 
1,036,356


Shares (Denominator) – diluted
57,769,465


 
55,611,887


 
57,376,876


 
55,490,935


 
 
 
 
 
 
 
 
Earnings per common share – basic
$
0.15


 
$
0.14


 
$
0.34


 
$
0.25


Earnings per common share – diluted
$
0.15


 
$
0.14


 
$
0.34


 
$
0.25




Fair Value Disclosures
Fair Value Disclosures
Fair Value Disclosures


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


Recurring Valuations


Derivative Instruments


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


Marketable Securities


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


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


 
 
Fair Value Measurements as of

June 30, 2011 Using
 
Fair Value Measurements as of

December 31, 2010 Using
Description
 
Quoted Prices in Active Markets for Identical Assets

(Level 1)
 
Significant Other Observable Inputs

(Level 2)
 
Quoted Prices in Active Markets for Identical Assets

(Level 1)
 
Significant Other Observable Inputs

(Level 2)
Available-for-sale securities
 
$
2,233


 
 
 
$
2,061


 
 
Derivative interest rate contract
 
 


 
$
3,012


 
 


 
$
4,856


Insurance deposit
 
10,900


 
 


 
10,135


 
 


Total assets
 
$
13,133


 
$
3,012


 
$
12,196


 
$
4,856


 
 
 
 
 
 
 
 
 
Derivative interest rate contract
 
 


 
 


 
 


 
$
(291
)
Total liabilities
 
 


 
 


 
 


 
$
(291
)




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


The available-for-sale securities shown above consist of marketable securities that represent shares in a Vanguard REIT fund that were purchased to facilitate a tax efficient structure for the 2005 disposition of Woodland mall and is classified within Deferred Charges and Other Assets.


Financial Instruments Carried at Other Than Fair Values


Community Development District Obligation


The owner of one shopping center pays annual special assessment levies of a Community Development District (CDD), which provided certain infrastructure assets and improvements. As the amount and period of the special assessments were determinable, the Company capitalized the infrastructure assets and improvements and recognized an obligation for the future special assessments to be levied. At June 30, 2011 and December 31, 2010, the book value of the infrastructure assets and improvements, net of depreciation, was $42.6 million and $43.6 million, respectively. The related obligation is classified within Accounts Payable and Accrued Liabilities and had a balance of $62.6 million at June 30, 2011 and December 31, 2010. The fair value of this obligation, derived from quoted market prices, was $57.1 million at June 30, 2011 and $56.8 million at December 31, 2010.


Notes Payable


The fair value of notes payable is estimated based on quoted market prices, if available. If no quoted market prices are available, the fair value of notes payable are estimated using cash flows discounted at current market rates. When selecting discount rates for purposes of estimating the fair value of notes payable at June 30, 2011 and December 31, 2010, the Company employed the credit spreads at which the debt was originally issued. Excluding 2010 refinancings, an additional 1.25% credit spread was added to the discount rate at June 30, 2011 and 1.50% credit spread at December 31, 2010, 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 June 30, 2011 or December 31, 2010. To further assist financial statement users, the Company has included with its fair value disclosures an analysis of interest rate sensitivity. The fair values of the loans on The Pier Shops and Regency Square, at June 30, 2011 and December 31, 2010, have been estimated at the fair value of the centers, which are collateral for the loans (Note 4).


The estimated fair values of notes payable at June 30, 2011 and December 31, 2010 are as follows:


 
2011
 
2010
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Notes payable
$
2,504,342


 
$
2,501,310


 
$
2,656,560


 
$
2,616,986






The fair values of the notes payable are dependent on the interest rates used in estimating the values. An overall 1% increase in rates employed in making these estimates would have decreased the fair values of the debt shown above at June 30, 2011 by $71.2 million or 2.8%.


See Note 3 regarding the fair value of the Unconsolidated Joint Ventures’ notes payable, and Note 6 regarding additional information on derivatives.
Subsequent Events
Schedule of Subsequent Events [Text Block]
Subsequent Events


In July 2011, the Company refinanced its primary line of credit. The new line of credit increased the borrowing capacity to $650 million, and matures in January 2015 with a 1-year extension option. The borrowing rate on the facility is LIBOR plus 1.75%, up from LIBOR plus 0.7%.


In July 2011, a $275 million non-recourse refinancing was completed on Fair Oaks, which bears interest at one-month LIBOR plus 1.70% and matures in July 2018. The rate on the loan has been swapped to an all-in fixed rate of 4.27% through April 2018. The loan is interest only until August 2014, and then the loan payments are based on amortizing principal over 25 years. The existing $250 million floating rate loan was paid off and the Company's $11.1 million beneficial share of excess proceeds was used to pay down its lines of credit.
Income Taxes (Tables)


 
Three Months Ended

June 30
 
Six Months Ended

June 30
 
2011
 
2010
 
2011
 
2010
State current
$
186


 
$
219


 
$
428


 
$
495


State deferred
(197
)
 
(105
)
 
(246
)
 
(185
)
Federal current
18


 
 
 
35


 
 
Federal deferred
(12
)
 
 
 
(12
)
 
 
Total income tax expense (benefit)
$
(5
)
 
$
114


 
$
205


 
$
310




 
2011
 
2010
Deferred tax assets:
 
 
 
Federal
$
8,082


 
$
8,589


Foreign
2,160


 
2,361


State
413


 
6,786


Total deferred tax assets
$
10,655


 
$
17,736


Valuation allowances
(6,782
)
 
(10,199
)
Net deferred tax assets
$
3,873


 
$
7,537


Deferred tax liabilities:
 


 
 


Federal
$
618


 
$
607


State
239


 
4,171


Total deferred tax liabilities
$
857


 
$
4,778


Investments in Unconsolidated Joint Ventures (Tables)
Shopping Center
Ownership as of
June 30, 2011 and
December 31, 2010
Arizona Mills
50%
Fair Oaks
50
The Mall at Millenia
50
Stamford Town Center
50
Sunvalley
50
Waterside Shops
25
Westfarms
79
 
June 30 2011
 
December 31

2010
Assets:
 
 
 
Properties
$
1,097,724


 
$
1,092,916


Accumulated depreciation and amortization
(432,423
)
 
(417,712
)
 
$
665,301


 
$
675,204


Cash and cash equivalents
20,408


 
21,339


Accounts and notes receivable, less allowance for doubtful accounts of $1,443 and $1,471 in 2011 and 2010
18,813


 
26,288


Deferred charges and other assets
17,965


 
18,891


 
$
722,487


 
$
741,722


 
 
 
 
Liabilities and accumulated deficiency in assets:
 


 
 


Notes payable
$
1,119,746


 
$
1,125,618


Accounts payable and other liabilities
33,641


 
37,292


TRG's accumulated deficiency in assets
(228,961
)
 
(224,636
)
Unconsolidated Joint Venture Partners' accumulated deficiency in assets
(201,939
)
 
(196,552
)
 
$
722,487


 
$
741,722


 
 
 
 
TRG's accumulated deficiency in assets (above)
$
(228,961
)
 
$
(224,636
)
TRG basis adjustments, including elimination of intercompany profit
68,013


 
68,682


TCO's additional basis
61,775


 
62,747


Net Investment in Unconsolidated Joint Ventures
$
(99,173
)
 
$
(93,207
)
Distributions in excess of investments in and net income of Unconsolidated Joint Ventures
173,093


 
170,329


Investment in Unconsolidated Joint Ventures
$
73,920


 
$
77,122




 
Three Months Ended June 30
 
Six Months Ended June 30
 
2011
 
2010
 
2011
 
2010
Revenues
$
62,918


 
$
63,722


 
$
126,277


 
$
127,062


Maintenance, taxes, utilities, promotion, and other operating expenses
$
20,769


 
$
22,845


 
$
41,006


 
$
43,675


Interest expense
13,949


 
15,916


 
29,545


 
31,734


Depreciation and amortization
8,952


 
8,880


 
18,137


 
18,172


Total operating costs
$
43,670


 
$
47,641


 
$
88,688


 
$
93,581


Nonoperating income
5


 
(11
)
 
10


 
1


Net income
$
19,253


 
$
16,070


 
$
37,599


 
$
33,482


 
 
 
 
 
 
 
 
Net income attributable to TRG
$
10,825


 
$
9,345


 
$
21,294


 
$
19,238


Realized intercompany profit, net of depreciation on TRG’s basis adjustments
546


 
646


 
710


 
975


Depreciation of TCO's additional basis
(485
)
 
(486
)
 
(972
)
 
(973
)
Equity in income of Unconsolidated Joint Ventures
$
10,886


 
$
9,505


 
$
21,032


 
$
19,240


 
 
 
 
 
 
 
 
Beneficial interest in Unconsolidated Joint Ventures’ operations:
 


 
 


 
 


 
 


Revenues less maintenance, taxes, utilities, promotion, and other operating expenses
$
23,511


 
$
23,076


 
$
47,220


 
$
46,491


Interest expense
(7,247
)
 
(8,248
)
 
(15,324
)
 
(16,450
)
Depreciation and amortization
(5,378