|Interim Financial Statements
||Interim Financial Statements
Taubman Centers, Inc. (TCO) is a Michigan corporation that operates as a self-administered and self-managed real estate investment trust (REIT). TCO's sole asset is an approximate 70% general partnership interest in The Taubman Realty Group Limited Partnership (TRG), which owns direct or indirect interests in all of our real estate properties. In this report, the terms “we", "us", and "our'" refer to TCO, TRG, and/or TRG's subsidiaries as the context may require. We own, manage, lease, acquire, dispose of, develop, and expand retail shopping centers and interests therein. Our owned portfolio as of March 31, 2020 included 24 urban and suburban shopping centers operating in 11 U.S. states, Puerto Rico, South Korea, and China. The Taubman Company LLC (the Manager) provides certain management and administrative services for us and for our U.S. properties.
The Consolidated Businesses consist of shopping centers and entities that are controlled, through ownership or contractual agreements, by TRG, the Manager, or Taubman Properties Asia LLC and its subsidiaries and affiliates (Taubman Asia). Shopping centers owned through joint ventures that are not controlled by us but over which we have significant influence (UJVs) are accounted for under the equity method.
The unaudited interim financial statements should be read in conjunction with the audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2019. 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 per share data or as otherwise noted.
Risks and Uncertainties Related to COVID -19
The operations of both our U.S. and Asia shopping centers have been and could continue to be significantly adversely impacted by the COVID-19 pandemic. The impact of the COVID-19 pandemic could have material and adverse effects on our business, financial condition, results of operations, and liquidity including, but not limited to, the following:
reduced global economic activity severely impacts our tenants' businesses, financial condition, and liquidity and may cause tenants to be unable to fully meet their obligations to us or to otherwise seek modifications of such obligations, resulting in increases in uncollectible receivables and reductions in rental revenues;
the negative financial impact could affect our future compliance with financial covenants of our $1.1 billion primary unsecured revolving line of credit, unsecured term loans, or other debt agreements and our ability to fund debt service; and
weaker economic conditions could result in lower fair values of assets and cause us to recognize impairment charges for our consolidated centers or other than temporary impairment of our Investments in UJVs.
In response to the COVID-19 pandemic, we temporarily closed all but two of our U.S. shopping centers on March 19. The other two centers closed soon thereafter. The closures of our U.S. shopping centers did not significantly affect our financial results for the three months ended March 31, 2020. In Asia, the operations and results of our three centers were significantly adversely impacted, though our share of the impact was limited due to our partial ownership interests in the centers (Note 2).
The extent to which the COVID-19 pandemic materially and adversely impacts our operations, financial condition, results of operations, and liquidity in the future, and those of our tenants and anchors, will depend on future actions and outcomes, which are highly uncertain and cannot be predicted, including (1) the severity and duration of the pandemic, (2) the actions taken to contain the pandemic or mitigate its impact, and (3) the direct and indirect economic and financial market effects of the pandemic and containment measures, among others.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.
We are not presently aware of any events or circumstances arising from the COVID-19 pandemic that would require us to update our current estimates, assumptions, or the reported amounts of assets, liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Our estimates may change, however, as new events occur and additional information is obtained, any such changes will be recognized in the consolidated financial statements. Actual results could differ from those estimates.
On February 9, 2020, we entered into an Agreement and Plan of Merger (the Merger Agreement) for Simon Property Group, Inc. (Simon) to acquire a 100% ownership interest in TCO and an 80% ownership interest in TRG. Simon, through its operating partnership, Simon Property Group, L.P. (the Simon Operating Partnership), will acquire all of TCO’s common stock (other than certain shares of excluded common stock) for $52.50 per share in cash (the Common Stock Merger Consideration) and certain members of the Taubman Family (including Robert S. Taubman, William S. Taubman, Gayle Taubman Kalisman, and the Estate of A. Alfred Taubman) will retain certain of their TRG interests so that they remain a 20% partner in TRG and will sell their remaining ownership interest in TRG for $52.50 per share in cash. The transaction is subject to customary closing conditions. We anticipate completing the transaction in the second or third quarter of 2020. During the three months ended March 31, 2020, we incurred costs of $6.4 million related to the transaction, which have been separately classified as Simon Property Group, Inc. Transaction Costs on our Consolidated Statement of Operations and Comprehensive Income (Loss). For additional information regarding the Merger Agreement, see our other filings with the Securities and Exchange Commission (SEC), which are available on the SEC’s website at www.sec.gov; provided, that the content of such website is not incorporated herein by reference.
The consolidated financial statements of TCO include all accounts of TCO, TRG, and our consolidated businesses, including the Manager and Taubman Asia. All intercompany transactions have been eliminated. The entities included in these consolidated financial statements are separate legal entities and maintain records and books of account separate from any other entity. However, inclusion of these separate entities in our consolidated financial statements does not mean that the assets and credit of each of these legal entities are available to satisfy the debts or other obligations of any other such legal entity included in our consolidated financial statements.
In determining the method of accounting for partially owned joint ventures, we evaluate the characteristics of associated entities and determine whether an entity is a variable interest entity (VIE), and, if so, determine whether we are the primary beneficiary by analyzing whether we have both the power to direct the entity's significant economic activities and the obligation to absorb potentially significant losses or receive potentially significant benefits. Significant judgments and assumptions inherent in this analysis include the nature of the entity's operations, the entity's financing and capital structure, and contractual relationship and terms, including consideration of governance and decision making rights. We consolidate a VIE when we have determined that we are the primary beneficiary. All of our consolidated joint ventures, including TRG, meet the definition and criteria as VIEs, as either we or an affiliate of ours is the primary beneficiary of each VIE.
TCO's sole asset is an approximate 70% general partnership interest in TRG and, consequently, substantially all of TCO's consolidated assets and liabilities are assets and liabilities of TRG. All of TCO's debt (Note 5) is a direct obligation of TRG or one of our other consolidated subsidiaries. Note 5 also provides disclosure of guarantees provided by TRG to certain consolidated joint ventures and UJVs. Note 6 provides additional disclosures of the carrying balance of the noncontrolling interests in our consolidated joint ventures and other information, including a description of certain rights of the noncontrolling owners.
Investments in UJVs are accounted for under the equity method. We have evaluated our investments in UJVs under guidance for determining whether an entity is a VIE and have concluded that the ventures are not VIEs. Accordingly, we account for our 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). Our partners or other owners in these UJVs 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 we have concluded that the equity method of accounting is appropriate for these interests. Specifically, our 79% and 50.1% investments in Westfarms and International Plaza, respectively, are through general partnerships in which the other general partners have participating rights over annual operating budgets, capital spending, refinancing, or sale of the property. We provide our beneficial interest in certain financial information of our UJVs (Notes 4 and 5). This beneficial information is derived as our ownership interest in the investee multiplied by the specific financial statement item being presented. Investors are cautioned that deriving our beneficial interest in this manner may not accurately depict the legal and economic implications of holding a noncontrolling interest in the investee.
In addition to common stock, we had three classes of preferred stock outstanding (Series B, J, and K) as of March 31, 2020. Dividends on the 6.5% Series J Cumulative Redeemable Preferred Stock (Series J Preferred Stock) and the 6.25% Series K Cumulative Redeemable Preferred Stock (Series K Preferred Stock) are cumulative and are paid on the last business day of each calendar quarter. We own corresponding Series J and Series K Preferred Equity interests in TRG that entitle us to income and distributions (in the form of guaranteed payments) in amounts equal to the dividends payable on our Series J and Series K Preferred Stock. Immediately prior to the effective time of the merger of TCO with and into a subsidiary of Simon (REIT Merger Effective Time) as referenced above, TCO will issue a redemption notice and cause funds to be set aside to pay the redemption price for each share of Series J Preferred Stock and each share of Series K Preferred Stock, at their respective liquidation preference of $25.00 plus all accumulated and unpaid dividends up to, but not including, the redemption date of such share.
We are also obligated to issue to the noncontrolling partners of TRG, upon subscription, one share of Series B Non-Participating Convertible Preferred Stock (Series B Preferred Share) per each unit of limited partnership in TRG (TRG Unit). Each Series B Preferred Share entitles the holder to one vote on all matters submitted to our shareholders. The holders of Series B Preferred Shares, voting as a class, have the right to designate up to four nominees for election as directors of TCO. On all other matters on which the holders of common stock are entitled to vote, including the election of directors, the holders of Series B Preferred Shares will vote with the holders of common stock. The holders of Series B Preferred Shares are not entitled to dividends or earnings of TCO. The Series B Preferred Shares are convertible into common stock at a ratio of 14,000 shares of Series B Preferred Stock for one share of common stock.
Outstanding voting securities of TCO at March 31, 2020 consisted of 26,311,117 shares of Series B Preferred Stock and 61,375,291 shares of common stock.
At March 31, 2020, TRG’s equity included two classes of preferred equity (Series J and K) and the net equity of the TRG unitholders. Net income and distributions of TRG are allocable first to the preferred equity interests, and the remaining amounts to the general and limited partners in TRG in accordance with their percentage ownership. The Series J and Series K Preferred Equity are owned by TCO and are eliminated in consolidation.
TCO's ownership in TRG at March 31, 2020 consisted of a 70% managing general partnership interest, as well as the Series J and Series K Preferred Equity interests. Our average ownership percentage in TRG for the three months ended March 31, 2020 and 2019 was 70% and 71%, respectively. At March 31, 2020, TRG had 87,704,007 TRG Units outstanding, of which we owned 61,375,291 TRG Units. Disclosures about TRG Units outstanding exclude TRG Profits Units granted or other share-based grants for which TRG Units may eventually be issued (Note 8).
The remaining approximate 30% of TRG Units are owned by TRG's partners other than TCO, including the Taubman Family.
Shopping center space is leased to tenants and certain anchors pursuant to lease agreements. Future rental revenues under operating leases in effect at March 31, 2020 for operating centers, assuming no new or renegotiated leases or option extensions on anchor agreements, is summarized as follows:
Disaggregation of Revenue
The nature, amount, timing, and uncertainty of individual types of revenues may be affected differently by economic factors. Under Accounting Standards Codification (ASC) Topic 606, "Revenue from Contracts with Customers", we are required to disclose a disaggregation of our revenues derived from contracts with customers that considers economic differences between revenue types. The following table summarizes our disaggregation of consolidated revenues for this purpose.
Three Months Ended March 31
Shopping center and other operational revenues
Management, leasing, and development services
Total revenue from contracts with customers
Information about Contract Balances and Unsatisfied Performance Obligations
Contract assets exist when we have a right to payment for services rendered that remains conditional on factors other than the passage of time. Similarly, contract liabilities are incurred when customers prepay for services to be rendered. Certain revenue streams within shopping center and other operational revenues may give rise to contract assets and liabilities. However, these revenue streams are generally short-term in nature and the difference between revenue recognition and cash collection, although variable, does not differ significantly from period to period. As of March 31, 2020, we had an inconsequential amount of contract assets and liabilities.
The aggregate amount of the transaction price allocated to our performance obligations that were unsatisfied, or partially unsatisfied, as of March 31, 2020 were inconsequential.
We have been undergoing a restructuring to reduce our workforce and reorganize various areas of the organization in response to the completion of another major development cycle. During the three months ended March 31, 2020 and 2019, we incurred $0.4 million and $0.6 million, respectively, of expense related to our restructuring efforts. These expenses have been separately classified as Restructuring Charges on our Consolidated Statement of Operations and Comprehensive Income (Loss).
Costs Associated with Shareholder Activism
During the three months ended March 31, 2019, we incurred $4.0 million of expense associated with activities related to shareholder activism, largely legal and advisory services. Also included in the activism costs was a retention program for certain employees, which fully vested in December 2019. Given the uncertainties associated with shareholder activism and to ensure the retention of top talent in key positions within TCO, certain key employees were provided certain incentive benefits in the form of cash and/or equity retention awards. We and our Board of Directors believed these benefits were instrumental in ensuring the continued success of TCO during the retention period. Due to the unusual and infrequent nature of these expenses in our history, they were separately classified as Costs Associated with Shareholder Activism on our Consolidated Statement of Operations and Comprehensive Income (Loss). No expenses associated with activities related to shareholder activism were incurred during the three months ended March 31, 2020.
Management’s Responsibility to Evaluate Our Ability to Continue as a Going Concern
When preparing financial statements for each annual and interim reporting period, management has the responsibility to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued. No such conditions or events were identified as of the issuance date of the financial statements contained in this Quarterly Report on Form 10-Q.
Change in Accounting Policies
Accounts Receivable and Uncollectible Tenant Revenues
In connection with the adoption of ASC Topic 842, "Leases", on January 1, 2019, we began reviewing the collectibility of both billed and accrued charges under our tenant leases each quarter taking into consideration the tenant’s historical payment status, credit profile, and known issues related to tenant operations. For any tenant receivable balances thought to be uncollectible, we record an offset for uncollectible tenant revenues directly to Rental Revenues on our Consolidated Statement of Operations and Comprehensive Income (Loss).
As a result of the above change in evaluation in uncollectible tenant revenues, the allowance for doubtful accounts was written off and an entry was recorded as of January 1, 2019 to adjust the receivables and equity balances of our Consolidated Businesses and UJVs. This resulted in a cumulative effect adjustment increasing Dividends in Excess of Net Income by $3.2 million and Non-redeemable Noncontrolling Interest by $1.8 million on our Consolidated Balance Sheet with offsetting increases in Accounts and Notes Receivable, Investment in UJVs, and Distributions in Excess of Investments In and Net Income of UJVs balances on our Consolidated Balance Sheet.