Taubman Centers Issues Solid Third Quarter Results

September 30, 2014

Three Months Ended

September 30, 2013

Three Months Ended

September 30, 2014

Nine Months Ended

September 30, 2013

Nine Months Ended

Net income allocable to common shareholders (EPS) per diluted share

$0.53

$0.38

$6.60

$1.09

Funds from Operations (FFO) per diluted share

$0.87

$0.89

$2.57

$2.53

Growth rate

1.6%

Adjusted Funds from Operations (Adjusted FFO) per diluted share⁽¹⁾

$0.91

$0.89

$2.67

$2.53

Growth rate

2.2%

5.5%

(1)   Adjusted FFO for the three and nine months ended September 30, 2014 excludes charges related to the sale of seven centers to Starwood.

TAUBMAN CENTERS, INC.

Table 1 - Summary of Results

For the Periods Ended September 30, 2014 and 2013

(in thousands of dollars, except as indicated)

Three Months Ended 

Year to Date

2014

2013

2014

2013

Net income

56,637

43,243

621,848

123,202

Noncontrolling share of income of consolidated joint ventures

(2,643)

(2,198)

(8,013)

(6,752)

Noncontrolling share of income of TRG 

(14,057)

(10,338)

(170,922)

(29,915)

Preferred stock dividends 

(5,784)

(5,784)

(17,353)

(15,148)

Distributions to participating securities of TRG

(471)

(435)

(1,409)

(1,313)

Net income attributable to Taubman Centers, Inc. common shareowners

33,682

24,488

424,151

70,074

Net income per common share - basic 

0.53

0.38

6.71

1.10

Net income per common share - diluted

0.53

0.38

6.60

1.09

Beneficial interest in EBITDA - Combined (1)

116,972

128,320

838,015

371,430

Adjusted Beneficial interest in EBITDA- Combined (1)

120,354

128,320

360,613

371,430

Funds from Operations(1)

78,450

80,500

231,537

230,222

Funds from Operations attributable to TCO (1)

56,045

57,737

165,418

164,692

Funds from Operations per common share - basic(1)

0.89

0.91

2.62

2.59

Funds from Operations per common share - diluted (1)

0.87

0.89

2.57

2.53

Adjusted Funds from Operations (1)

81,832

80,500

240,755

230,222

Adjusted Funds from Operations attributable to TCO (1)

58,466

57,737

172,015

164,692

Adjusted Funds from Operations per common share- basic(1)

0.92

0.91

2.72

2.59

Adjusted Funds from Operations per common share- diluted (1)

0.91

0.89

2.67

2.53

Weighted average number of common shares outstanding - basic

63,317,680

63,753,748

63,249,400

63,653,155

Weighted average number of common shares outstanding - diluted

64,087,742

64,690,909

64,876,051

64,702,648

Common shares outstanding at end of period

63,319,539

63,524,788

Weighted average units - Operating Partnership - basic

88,453,782

88,933,226

88,392,327

88,903,234

Weighted average units - Operating Partnership - diluted

90,095,106

90,741,649

90,018,978

90,823,989

Units outstanding at end of period - Operating Partnership

88,454,989

88,702,310

Ownership percentage of the Operating Partnership at end of period

71.6%

71.6%

Number of owned shopping centers at end of period (2)

24

25

24

25

Operating Statistics:

Net Operating Income excluding lease cancellation income - growth % (1)(3)

2.5%

3.2%

3.0%

4.0%

Ending occupancy - all centers

89.0%

90.9%

89.0%

90.9%

Ending occupancy - comparable(3)

89.6%

91.0%

89.6%

91.0%

Average occupancy - all centers 

89.2%

90.8%

89.7%

90.7%

Average occupancy - comparable (3)

89.7%

90.8%

90.3%

90.6%

Leased space - all centers

91.2%

92.6%

91.2%

92.6%

Leased space - comparable(3)

91.6%

92.8%

91.6%

92.8%

Average rent per square foot - Consolidated Businesses (3)

48.58

48.13

48.11

48.04

Average rent per square foot - Unconsolidated Joint Ventures (3)

58.20

52.79

58.02

52.19

Average rent per square foot - Combined (3)

51.54

49.31

51.07

49.09

Operating Statistics Excluding Centers Sold to Starwood Capital Group in October 2014 (5):

Net Operating Income excluding lease cancellation income - growth % (1)

2.8%

3.1%

Ending occupancy - comparable(3)

91.4%

92.9%

91.4%

92.9%

Ending occupancy - comparable with TILs(3)

94.1%

95.6%

94.1%

95.6%

Leased space - comparable(3)

93.4%

94.7%

93.4%

94.7%

Average rent per square foot - Combined

58.06

53.08

56.99

51.93

All centers (4):

Mall tenant occupancy costs as a percentage of tenant sales - Consolidated Businesses

15.0%

14.4%

14.8%

13.9%

Mall tenant occupancy costs as a percentage of tenant sales - Unconsolidated Joint Ventures

14.5%

14.1%

14.1%

13.2%

Mall tenant occupancy costs as a percentage of tenant sales - Combined

14.8%

14.3%

14.5%

13.7%

Comparable centers (3)(4):

Mall tenant occupancy costs as a percentage of tenant sales - Consolidated Businesses 

15.1%

14.5%

14.9%

14.0%

Mall tenant occupancy costs as a percentage of tenant sales - Unconsolidated Joint Ventures 

14.5%

13.9%

14.1%

13.0%

Mall tenant occupancy costs as a percentage of tenant sales - Combined 

14.9%

14.3%

14.5%

13.6%

Mall tenant sales - all centers (4)

1,121,619

1,177,657

3,368,300

3,578,702

Mall tenant sales - comparable (3)(4)

1,111,848

1,126,993

3,344,320

3,447,116

(1)

Beneficial Interest in EBITDA represents the Operating Partnership's share of the earnings before interest, income taxes, and depreciation and amortization of its consolidated and unconsolidated businesses. The Company believes Beneficial Interest in EBITDA provides a useful indicator of operating performance, as it is customary in the real estate and shopping center business to evaluate the performance of properties on a basis unaffected by capital structure.

The Company uses Net Operating Income (NOI) as an alternative measure to evaluate the operating performance of centers, both on individual and stabilized portfolio bases. The Company defines NOI as property-level operating revenues (includes rental income excluding straight-line adjustments of minimum rent) less maintenance, taxes, utilities, promotion, ground rent (including straight-line adjustments), and other property operating expenses. Since NOI excludes general and administrative expenses, pre-development charges, interest income and expense, depreciation and amortization, impairment charges, restructuring charges, and gains from peripheral land and property dispositions, it provides a performance measure that, when compared period over period, reflects the revenues and expenses most directly associated with owning and operating rental properties, as well as the impact on their operations from trends in tenant sales, occupancy and rental rates, and operating costs. The Company also uses NOI excluding lease cancellation income as an alternative measure because this income may vary significantly from period to period, which can affect comparability and trend analysis. The Company generally provides separate projections for expected comparable center NOI growth and lease cancellation income. Comparable centers are generally defined as centers that were owned and open for the entire current and preceding period presented.

The National Association of Real Estate Investment Trusts (NAREIT) defines Funds from Operations (FFO) as net income (computed in accordance with Generally Accepted Accounting Principles (GAAP)), excluding gains (or losses) from extraordinary items and sales of properties and impairment write-downs of depreciable real estate, plus real estate related depreciation and after adjustments for unconsolidated partnerships and joint ventures. The Company believes that FFO is a useful supplemental measure of operating performance for REITs. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, the Company and most industry investors and analysts have considered presentations of operating results that exclude historical cost depreciation to be useful in evaluating the operating performance of REITs. The Company primarily uses FFO in measuring performance and in formulating corporate goals and compensation. 

The Company may also present adjusted versions of NOI, Beneficial Interest in EBITDA, and FFO when used by management to evaluate operating performance when certain significant items have impacted results that affect comparability with prior or future periods due to the nature or amounts of these items.  The Company believes the disclosure of the adjusted items is similarly useful to investors and others to understand management's view on comparability of such measures between periods.  For the three and nine month periods ended September 30, 2014, FFO and EBITDA were adjusted for expenses related to the sale of seven centers to an affiliate of Starwood Capital Group (Starwood) completed in October 2014. Specifically, these measures were adjusted for charges related to the discontinuation of hedge accounting on the interest rate swap previously designated to hedge the MacArthur Center (MacArthur) note payable, a restructuring charge and disposition costs incurred related to the sale.  In addition, for the nine month period ended September 30, 2014, EBITDA was adjusted for the gain on dispositions of interests in International Plaza, Arizona Mills, and land in Syosset, New York related to the former Oyster Bay project.  

These non-GAAP measures as presented by the Company are not necessarily comparable to similarly titled measures used by other REITs due to the fact that not all REITs use the same definitions. These measures should not be considered alternatives to net income or as an indicator of the Company's operating performance. Additionally, these measures do not represent cash flows from operating, investing, or financing activities as defined by GAAP.

(2)

In October 2014, the Company completed the sale of seven centers to affiliates of Starwood Capital Group.

(3)

Statistics exclude non-comparable centers. In 2014 and 2013, non-comparable centers are Taubman Prestige Outlets Chesterfield and Arizona Mills. 

(4)

Based on reports of sales furnished by mall tenants. 

(5)

Statistics have been adjusted to exclude the portfolio of seven centers included in the sale to Starwood Capital Group in October 2014.

 TAUBMAN CENTERS, INC. 

 Table 2 - Income Statement 

 For the Three Months Ended September 30, 2014 and 2013 

 (in thousands of dollars) 

2014

2013

CONSOLIDATED BUSINESSES

 UNCONSOLIDATED JOINT

VENTURES (1) 

CONSOLIDATED BUSINESSES

 UNCONSOLIDATED JOINT

VENTURES (1) 

REVENUES:

Minimum rents

96,691

48,226

103,501

42,532

Percentage rents

5,263

2,270

7,021

2,137

Expense recoveries

63,527

28,517

67,943

25,738

Management, leasing, and development services

3,135

8,753

Other

7,428

1,658

6,720

1,452

Total revenues

176,044

80,671

193,938

71,859

EXPENSES:

Maintenance, taxes, utilities, and promotion

52,184

20,457

55,375

18,807

Other operating

18,036

3,611

19,295

3,372

Management, leasing, and development services

1,539

1,027

General and administrative

11,369

11,812

Restructuring charge

3,031

Interest expense

23,382

18,255

32,515

17,048

Depreciation and amortization 

24,553

11,939

40,982

10,068

Total expenses

134,094

54,262

161,006

49,295

Nonoperating income (expense) 

891

(22)

(456)

(1)

42,841

26,387

32,476

22,563

Income tax expense 

(683)

(1,453)

Equity in income of Unconsolidated Joint Ventures

14,479

12,220

Net income 

56,637

43,243

Net income attributable to noncontrolling interests:

Noncontrolling share of income of consolidated joint ventures 

(2,643)

(2,198)

Noncontrolling share of income of TRG

(14,057)

(10,338)

Distributions to participating securities of TRG

(471)

(435)

Preferred stock dividends 

(5,784)

(5,784)

Net income attributable to Taubman Centers, Inc. common shareowners 

33,682

24,488

SUPPLEMENTAL INFORMATION:

EBITDA - 100% 

90,776

56,581

105,973

49,679

EBITDA - outside partners' share 

(5,566)

(24,819)

(5,653)

(21,679)

Beneficial interest in EBITDA

85,210

31,762

100,320

28,000

Beneficial interest expense

(21,273)

(10,006)

(30,352)

(9,415)

Beneficial income tax expense - TRG and TCO

(683)

(1,453)

Beneficial income tax expense - TCO

112

(29)

Non-real estate depreciation

(888)

(787)

Preferred dividends and distributions 

(5,784)

(5,784)

Funds from Operations contribution 

56,694

21,756

61,915

18,585

STRAIGHTLINE AND PURCHASE ACCOUNTING ADJUSTMENTS:

Net straight-line adjustments to rental revenue, recoveries,

and ground rent expense at TRG % 

405

304

1,081

226

Green Hills purchase accounting adjustments - minimum rents increase

229

186

Green Hills, El Paseo Village, and Gardens on El Paseo purchase accounting 

adjustments - interest expense reduction

306

858

Waterside Shops purchase accounting adjustments - interest expense reduction

263

263

Taubman BHO headquarters purchase accounting adjustment - 

interest expense reduction

183

(1)

With the exception of the Supplemental Information, amounts include 100% of the Unconsolidated Joint Ventures. Amounts are net of intercompany transactions. The Unconsolidated Joint Ventures are presented at 100% in order to allow for measurement of their performance as a whole, without regard to the Company's ownership interest. In its consolidated financial statements, the Company accounts for its investments in the Unconsolidated Joint Ventures under the equity method. International Plaza's operations were consolidated through the disposition date. Subsequent to the disposition, the Company's remaining 50.1% interest is accounted for under the equity method of accounting within Unconsolidated Joint Ventures. In addition, Arizona Mills' operations were accounted for under equity method accounting through the disposition in January 2014.

 TAUBMAN CENTERS, INC. 

 Table 3 - Income Statement 

 For the Nine Months Ended September 30, 2014 and 2013 

 (in thousands of dollars) 

2014

2013

CONSOLIDATED BUSINESSES

 UNCONSOLIDATED JOINT

VENTURES (1) 

CONSOLIDATED BUSINESSES

 UNCONSOLIDATED JOINT

VENTURES (1) 

REVENUES:

Minimum rents

291,113

143,098

309,043

124,679

Percentage rents

11,019

5,427

13,732

5,763

Expense recoveries

187,439

83,144

197,549

73,922

Management, leasing, and development services

8,605

13,954

Other

22,631

6,521

21,104

4,820

Total revenues

520,807

238,190

555,382

209,184

EXPENSES:

Maintenance, taxes, utilities, and promotion

148,955

60,449

154,694

53,993

Other operating

49,582

13,035

53,950

11,643

Management, leasing, and development services

4,520

4,172

General and administrative

34,493

36,676

Restructuring charge 

3,031

Interest expense 

74,946

54,284

99,589

50,976

Depreciation and amortization 

96,521

34,731

116,262

29,326

Total expenses

412,048

162,499

465,343

145,938

Nonoperating income (expense) (2)

(3,327)

(25)

1,831

(1)

105,432

75,666

91,870

63,245

Income tax expense 

(1,693)

(2,715)

Equity in income of Unconsolidated Joint Ventures 

41,222

34,047

144,961

123,202

Gain on dispositions of International Plaza, Arizona Mills, and Oyster Bay, net of tax  (3)

476,887

Net income

621,848

123,202

Net income attributable to noncontrolling interests:

Noncontrolling share of income of consolidated joint ventures 

(8,013)

(6,752)

Noncontrolling share of income of TRG

(170,922)

(29,915)

Distributions to participating securities of TRG

(1,409)

(1,313)

Preferred stock dividends 

(17,353)

(15,148)

Net income attributable to Taubman Centers, Inc. common shareowners  

424,151

70,074

SUPPLEMENTAL INFORMATION:

EBITDA - 100% (4)

763,519

164,681

307,721

143,547

EBITDA - outside partners' share 

(17,840)

(72,345)

(17,068)

(62,770)

Beneficial interest in EBITDA

745,679

92,336

290,653

80,777

Gain on dispositions of International Plaza, Arizona Mills, and Oyster Bay

(486,620)

Beneficial interest expense 

(68,687)

(29,805)

(93,049)

(28,192)

Beneficial income tax expense - TRG and TCO

(1,693)

(2,715)

Beneficial income tax expense - TCO

258

132

Non-real estate depreciation

(2,578)

(2,236)

Preferred dividends and distributions

(17,353)

(15,148)

Funds from Operations contribution  

169,006

62,531

177,637

52,585

STRAIGHTLINE AND PURCHASE ACCOUNTING ADJUSTMENTS:

Net straight-line adjustments to rental revenue, recoveries,

and ground rent expense at TRG % 

1,229

843

2,881

451

Green Hills purchase accounting adjustments - minimum rents increase

620

590

Green Hills, El Paseo Village, and Gardens on El Paseo purchase accounting 

adjustments - interest expense reduction

917

2,573

Waterside Shops purchase accounting adjustments - interest expense reduction

788

788

Taubman BHO headquarters purchase accounting adjustment - 

interest expense reduction

425

(1)

With the exception of the Supplemental Information, amounts include 100% of the Unconsolidated Joint Ventures. Amounts are net of intercompany transactions. The Unconsolidated Joint Ventures are presented at 100% in order to allow for measurement of their performance as a whole, without regard to the Company's ownership interest. In its consolidated financial statements, the Company accounts for its investments in the Unconsolidated Joint Ventures under the equity method.  International Plaza's operations were consolidated through the disposition date. Subsequent to the disposition, the Company's remaining 50.1% interest is accounted for under the equity method of accounting within Unconsolidated Joint Ventures. In addition, Arizona Mills' operations were accounted for under equity method accounting through the disposition in January 2014.

(2)

Nonoperating expense for the nine months ended September 30, 2014 includes $5.5 million in connection with the discontinuation of hedge accounting related to the MacArthur interest rate swap and $1 million of disposition costs related to the sale of seven centers to Starwood Capital Group.

(3)

During the nine months ended September 30, 2014, the gain on dispositions of interests in International Plaza, Arizona Mills and land in Syosset, New York related to the former Oyster Bay project is net of income tax expense of $9.7 million.

(4)

For the nine months ended September 30, 2014, EBITDA includes the Company's $486.6 million (before tax) gain from the dispositions of interests in International Plaza, Arizona Mills, and Land in Syosset, New York related to the former Oyster Bay project.

TAUBMAN CENTERS, INC.

Table 4 - Reconciliation of Net Income Attributable to Taubman Centers, Inc. Common Shareowners to Funds from Operations

   and Adjusted Funds from Operations

For the Three Months Ended September 30, 2014 and 2013

(in thousands of dollars except as noted; may not add or recalculate due to rounding)

2014

2013

Shares 

Per Share

Shares 

Per Share 

Dollars

/Units

/Unit

Dollars

/Units

/Unit

Net income attributable to TCO common shareowners - Basic

33,682

63,317,680

0.53

24,488

63,753,748

0.38

Add impact of share-based compensation

121

770,062

107

937,161

Net income attributable to TCO common shareowners - Diluted

33,803

64,087,742

0.53

24,595

64,690,909

0.38

Add depreciation of TCO's additional basis

1,617

0.03

1,720

0.03

Add (less) TCO's additional income tax expense (benefit)

112

0.00

(29)

(0.00)

Net income attributable to TCO common shareowners,

excluding step-up depreciation and additional income tax expense (benefit)

35,532

64,087,742

0.55

26,286

64,690,909

0.41

Add:

Noncontrolling share of income of TRG 

14,057

25,136,102

10,338

25,179,478

Distributions to participating securities of TRG

471

871,262

435

871,262

Net income attributable to partnership unitholders 

and participating securities

50,060

90,095,106

0.56

37,059

90,741,649

0.41

Add (less) depreciation and amortization:

Consolidated businesses at 100%

24,553

0.27

40,982

0.45

Depreciation of TCO's additional basis

(1,617)

(0.02)

(1,720)

(0.02)

Noncontrolling partners in consolidated joint ventures

(814)

(0.01)

(1,292)

(0.01)

Share of Unconsolidated Joint Ventures

7,277

0.08

6,365

0.07

Non-real estate depreciation

(888)

(0.01)

(787)

(0.01)

Less impact of share-based compensation

(121)

0.00

(107)

(0.00)

Funds from Operations

78,450

90,095,106

0.87

80,500

90,741,649

0.89

TCO's average ownership percentage of TRG

71.6%

71.7%

Funds from Operations attributable to TCO,

excluding additional income tax benefit (expense)

56,157

0.87

57,708

0.89

Add (less) TCO's additional income tax benefit (expense)

(112)

(0.00)

29

0.00

Funds from Operations attributable to TCO 

56,045

0.87

57,737

0.89

Funds from Operations

78,450

90,095,106

0.87

80,500

90,741,649

0.89

Disposition costs related to the Starwood sale

513

0.01

Restructuring charge

3,031

0.03

Discontinuation of hedge accounting - MacArthur

(162)

(0.00)

Adjusted Funds from Operations

81,832

90,095,106

0.91

80,500

90,741,649

0.89

TCO's average ownership percentage of TRG

71.6%

71.7%

Adjusted Funds from Operations attributable to TCO,

excluding additional income tax benefit (expense)

58,578

0.91

57,708

0.89

Add (less) TCO's additional income tax benefit (expense)

(112)

(0.00)

29

0.00

Adjusted Funds from Operations attributable to TCO 

58,466

0.91

57,737

0.89

TAUBMAN CENTERS, INC.

Table 5 - Reconciliation of Net Income Attributable to Taubman Centers, Inc. Common Shareowners to Funds from Operations

   and Adjusted Funds from Operations

(in thousands of dollars except as noted; may not add or recalculate due to rounding)

2014

2013

Shares 

Per Share

Shares 

Per Share 

Dollars

/Units

/Unit

Dollars

/Units 

/Unit

Net income attributable to TCO common shareowners - Basic

424,151

63,249,400

6.71

70,074

63,653,155

1.10

Add distributions to participating securities of TRG

1,409

871,262

Add impact of share-based compensation

2,742

755,389

352

1,049,493

Net income attributable to TCO common shareowners - Diluted

428,302

64,876,051

6.60

70,426

64,702,648

1.09

Add depreciation of TCO's additional basis

5,057

0.08

5,160

0.08

Add TCO's additional income tax expense 

258

0.00

132

0.00

Net income attributable to TCO common shareowners,

excluding step-up depreciation and additional income tax expense

433,617

64,876,051

6.68

75,718

64,702,648

1.17

Add: