TAUBMAN CENTERS INC, 10-Q filed on 4/28/2017
Quarterly Report
Document and Entity Information Document
3 Months Ended
Mar. 31, 2017
Apr. 27, 2017
Entity Information [Line Items]
 
 
Entity Registrant Name
TAUBMAN CENTERS INC. 
 
Entity Central Index Key
0000890319 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Document Type
10-Q 
 
Document Period End Date
Mar. 31, 2017 
 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q1 
 
Amendment Flag
false 
 
Entity Common Stock, Shares Outstanding
 
60,693,184 
Entity Well-known Seasoned Issuer
Yes 
 
Entity Voluntary Filers
No 
 
Entity Current Reporting Status
Yes 
 
CONSOLIDATED BALANCE SHEET (USD $)
Mar. 31, 2017
Dec. 31, 2016
Assets:
 
 
Properties
$ 4,231,943,000 
$ 4,173,954,000 
Accumulated depreciation and amortization
(1,179,741,000)
(1,147,390,000)
Real Estate Investment Property, Net
3,052,202,000 
3,026,564,000 
Investment in Unconsolidated Joint Ventures (Notes 2 and 4)
572,982,000 
604,808,000 
Cash and cash equivalents
51,129,000 
40,603,000 
Restricted cash (Note 5)
12,410,000 
932,000 
Accounts and notes receivable, less allowance for doubtful accounts of $6,671 and $4,311 in 2017 and 2016
62,137,000 
60,174,000 
Accounts receivable from related parties
2,748,000 
2,103,000 
Deferred charges and other assets
291,249,000 
275,728,000 
Total Assets
4,044,857,000 
4,010,912,000 
Liabilities:
 
 
Notes payable, net (Note 5)
3,287,968,000 
3,255,512,000 
Accounts payable and accrued liabilities
327,384,000 
336,536,000 
Distributions in excess of investments in and net income of Unconsolidated Joint Ventures (Note 4)
504,903,000 
480,863,000 
Total Liabilities
4,120,255,000 
4,072,911,000 
Commitments and contingencies (Notes 5, 6, 7, 8, and 9)
 
   
Redeemable Noncontrolling Interest, Equity, Carrying Amount [Abstract]
 
 
Redeemable noncontrolling interest (Note 6)
8,970,000 
8,704,000 
Equity (Deficit):
 
 
Series B Non-Participating Convertible Preferred Stock, $0.001 par and liquidation value, 40,000,000 shares authorized, 24,954,059 and 25,029,059 shares issued and outstanding at March 31, 2017 and December 31, 2016
25,000 
25,000 
Common Stock, $0.01 par value, 250,000,000 shares authorized, 60,685,420 and 60,430,613 shares issued and outstanding at March 31, 2017 and December 31, 2016
607,000 
604,000 
Additional paid-in capital
662,506,000 
657,281,000 
Accumulated other comprehensive income (loss) (Note 12)
(28,930,000)
(35,916,000)
Dividends in excess of net income
(570,535,000)
(549,914,000)
Stockholders' Equity Attributable to Parent
63,673,000 
72,080,000 
Noncontrolling interests (Note 6)
(148,041,000)
(142,783,000)
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest
(84,368,000)
(70,703,000)
Total Liabilities and Equity
$ 4,044,857,000 
$ 4,010,912,000 
CONSOLIDATED BALANCE SHEET (Parenthetical) (USD $)
Mar. 31, 2017
Dec. 31, 2016
Allowance for doubtful accounts
$ 6,671,000 
$ 4,311,000 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
250,000,000 
250,000,000 
Common stock, shares issued
60,685,420 
60,430,613 
Common stock, shares outstanding
60,685,420 
60,430,613 
Series B Preferred Stock [Member]
 
 
Preferred Stock, par value
$ 0.001 
$ 0.001 
Preferred Stock, liquidation preference per share
$ 0.001 
$ 0.001 
Preferred Stock, shares authorized
40,000,000 
40,000,000 
Preferred Stock, shares issued
24,954,059 
25,029,059 
Preferred Stock, shares outstanding
24,954,059 
25,029,059 
Series J Preferred Stock [Member]
 
 
Preferred Stock, par value
$ 0 
$ 0 
Preferred Stock, liquidation preference
192,500,000 
192,500,000 
Preferred Stock, shares authorized
7,700,000 
7,700,000 
Preferred Stock, shares issued
7,700,000 
7,700,000 
Preferred Stock, shares outstanding
7,700,000 
7,700,000 
Series K Preferred Stock [Member]
 
 
Preferred Stock, par value
$ 0 
$ 0 
Preferred Stock, liquidation preference
$ 170,000,000 
$ 170,000,000 
Preferred Stock, shares authorized
6,800,000 
6,800,000 
Preferred Stock, shares issued
6,800,000 
6,800,000 
Preferred Stock, shares outstanding
6,800,000 
6,800,000 
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (USD $)
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Revenues:
 
 
Minimum rents
$ 84,303,000 
$ 81,977,000 
Percentage rents
2,575,000 
2,772,000 
Expense recoveries
53,012,000 
47,760,000 
Management, leasing, and development services
917,000 
1,728,000 
Other
8,276,000 
5,218,000 
Total Revenues
149,083,000 
139,455,000 
Expenses:
 
 
Maintenance, taxes, utilities, and promotion
39,711,000 
34,938,000 
Other operating
19,319,000 
18,708,000 
Management, leasing, and development services
579,000 
872,000 
General and administrative
10,751,000 
11,380,000 
Restructuring charge (Note 1)
1,900,000 
 
Costs associated with shareowner activism (Note 1)
3,500,000 
 
Interest expense
25,546,000 
19,128,000 
Depreciation and amortization
37,711,000 
29,746,000 
Operating Expenses
139,013,000 
114,772,000 
Nonoperating income, net
2,779,000 
1,470,000 
Income before income tax expense and equity in income of Unconsolidated Joint Ventures
12,849,000 
26,153,000 
Income tax expense (Note 3)
(208,000)
(302,000)
Equity in income of Unconsolidated Joint Ventures (Note 4)
20,118,000 
18,478,000 
Net income
32,759,000 
44,329,000 
Net income attributable to noncontrolling interests (Note 6)
(9,234,000)
(13,420,000)
Net income attributable to Taubman Centers, Inc.
23,525,000 
30,909,000 
Distributions to participating securities of TRG (Note 8)
(571,000)
(512,000)
Preferred stock dividends
(5,784,000)
(5,784,000)
Net income attributable to Taubman Centers, Inc. common shareowners
17,170,000 
24,613,000 
Other comprehensive income (Note 12):
 
 
Unrealized loss on interest rate instruments
(1,393,000)
(11,860,000)
Fair value adjustment for marketable equity securities
(1,410,000)
 
Cumulative translation adjustment
9,449,000 
5,942,000 
Reclassification adjustment for amounts recognized in net income
3,235,000 
3,037,000 
Other comprehensive income (loss)
9,881,000 
(2,881,000)
Comprehensive income
42,640,000 
41,448,000 
Comprehensive income attributable to noncontrolling interests
(12,115,000)
(12,575,000)
Comprehensive income attributable to Taubman Centers, Inc.
$ 30,525,000 
$ 28,873,000 
Basic earnings per common share (Note 10)
$ 0.28 
$ 0.41 
Diluted earnings per common share (Note 10)
$ 0.28 
$ 0.41 
Cash dividends declared per common share
$ 0.6250 
$ 0.5950 
Weighted average number of common shares outstanding – basic
60,555,466 
60,275,004 
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (USD $)
Total
Preferred Stock [Member]
Common Stock [Member]
Additional Paid-in Capital [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Accumulated Distributions in Excess of Net Income [Member]
Noncontrolling Interest [Member]
Balance at Dec. 31, 2015
$ 120,811,000 
$ 25,000 
$ 602,000 
$ 652,146,000 
$ (27,220,000)
$ (512,746,000)
$ 8,004,000 
Balance (in shares) at Dec. 31, 2015
 
39,544,939 
60,233,561 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
Share-based compensation under employee and director benefit plans (Note 8)
3,994,000 
 
1,000 
3,993,000 
 
 
 
Share-based compensation under employee and director benefit plans (Note 8), shares
 
 
109,353 
 
 
 
 
Former Taubman Asia President redeemable equity adjustment (Note 6)
(13,041,000)
 
 
(13,041,000)
 
 
 
Adjustments of noncontrolling interests excluding redeemable noncontrolling interest (Note 6)
 
 
 
3,865,000 
1,000 
 
(3,866,000)
Adjustments of noncontrolling interests including redeemable noncontrolling interest (Note 6)
 
 
 
 
 
 
Dividends and distributions
(57,602,000)
 
 
 
 
(42,214,000)
 
Distributions to noncontrolling interests
 
 
 
 
 
 
(15,388,000)
Other
(188,000)
 
 
1,000 
 
(189,000)
   
Net Income, Including Portion Attributable to Noncontrolling Interest
44,329,000 
 
 
 
 
30,909,000 
13,420,000 
Unrealized loss on interest rate instruments and other
(11,860,000)
 
 
 
(8,380,000)
 
(3,480,000)
Cumulative translation adjustment
5,942,000 
 
 
 
4,198,000 
 
1,744,000 
Reclassification adjustment for amounts recognized in net income
3,037,000 
 
 
 
2,146,000 
 
891,000 
Balance at Mar. 31, 2016
95,422,000 
25,000 
603,000 
646,964,000 
(29,255,000)
(524,240,000)
1,325,000 
Balance (in shares) at Mar. 31, 2016
 
39,544,939 
60,342,914 
 
 
 
 
Balance at Dec. 31, 2016
(70,703,000)
25,000 
604,000 
657,281,000 
(35,916,000)
(549,914,000)
(142,783,000)
Balance (in shares) at Dec. 31, 2016
 
39,529,059 
60,430,613 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
Issuance of stock pursuant to Continuing Offer (Notes 8 and 9)
 
1,000 
(1,000)
 
 
 
Issuance of stock pursuant to Continuing Offer (Notes 8 and 9), shares
 
(75,000)
75,005 
 
 
 
 
Share-based compensation under employee and director benefit plans (Note 8)
5,509,000 
 
2,000 
5,507,000 
 
 
 
Share-based compensation under employee and director benefit plans (Note 8), shares
 
 
179,802 
 
 
 
 
Former Taubman Asia President redeemable equity adjustment (Note 6)
(266,000)
 
 
(266,000)
 
 
 
Adjustments of noncontrolling interests excluding redeemable noncontrolling interest (Note 6)
 
 
 
(19,000)
(14,000)
 
(159,000)
Adjustments of noncontrolling interests including redeemable noncontrolling interest (Note 6)
(192,000)
 
 
 
 
 
 
Dividends and distributions
(61,689,000)
 
 
 
 
(44,283,000)
 
Distributions to noncontrolling interests
 
 
 
 
 
 
(17,406,000)
Other
141,000 
 
 
4,000 
 
137,000 
   
Net Income, Including Portion Attributable to Noncontrolling Interest
32,759,000 
 
 
 
 
 
 
Net income (excludes net loss attributable to redeemable noncontrolling interest) (Note 6)
32,951,000 
 
 
 
 
23,525,000 
9,426,000 
Net Income (Loss) Attributable to Redeemable Noncontrolling Interest
(192,000)
 
 
 
 
 
 
Unrealized loss on interest rate instruments and other
(1,393,000)
 
 
 
(986,000)
 
(407,000)
Fair value adjustment for marketable equity securities
(1,410,000)
 
 
 
(999,000)
 
(411,000)
Cumulative translation adjustment
9,449,000 
 
 
 
6,694,000 
 
2,755,000 
Reclassification adjustment for amounts recognized in net income
3,235,000 
 
 
 
2,291,000 
 
944,000 
Balance at Mar. 31, 2017
$ (84,368,000)
$ 25,000 
$ 607,000 
$ 662,506,000 
$ (28,930,000)
$ (570,535,000)
$ (148,041,000)
Balance (in shares) at Mar. 31, 2017
 
39,454,059 
60,685,420 
 
 
 
 
CONSOLIDATED STATEMENT OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Cash Flows From Operating Activities:
 
 
Net income
$ 32,759 
$ 44,329 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
37,711 
29,746 
Provision for bad debts
2,890 
2,243 
Gain on sale of peripheral land
   
(403)
Other
5,866 
4,488 
Increase (decrease) in cash attributable to changes in assets and liabilities:
 
 
Receivables, restricted cash, deferred charges, and other assets
(6,224)
(4,803)
Accounts payable and accrued liabilities
5,792 
(12,220)
Net Cash Provided By Operating Activities
78,794 
63,380 
Cash Flows From Investing Activities:
 
 
Additions to properties
(79,436)
(95,185)
Proceeds from sale of peripheral land
   
5,415 
Cash provided to escrow or deposits related to center construction projects
(11,477)
(4,097)
Funding of development project (Note 2)
(10,998)
 
Contributions to Unconsolidated Joint Ventures
(1,628)
(9,479)
Contribution for acquisition of Country Club Plaza (Note 2)
   
(314,245)
Distributions from Unconsolidated Joint Ventures in excess of income (Note 2)
68,632 
168,260 
Other
21 
20 
Net Cash Used In Investing Activities
(34,886)
(249,311)
Cash Flows From Financing Activities:
 
 
Proceeds from revolving lines of credit, net
35,300 
142,460 
Debt proceeds
301,589 
74,727 
Debt payments
(303,951)
(1,505)
Debt issuance costs
(6,595)
   
Deposit in connection with anticipated refinancing
   
5,500 
Issuance of common stock and/or partnership units in connection with incentive plans
1,964 
(316)
Distributions to noncontrolling interests (Note 5)
(17,406)
(15,388)
Distributions to participating securities of TRG
(571)
(512)
Cash dividends to preferred shareowners
(5,784)
(5,784)
Cash dividends to common shareowners
(37,928)
(35,918)
Proceeds from (Payments for) Other Financing Activities
   
(50)
Net Cash (Used In) Provided By Financing Activities
(33,382)
152,214 
Net Increase (Decrease) In Cash and Cash Equivalents
10,526 
(33,717)
Cash and Cash Equivalents at Beginning of Period
40,603 
206,635 
Cash and Cash Equivalents at End of Period
$ 51,129 
$ 172,918 
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 March 31, 2017 included 24 urban and suburban shopping centers operating in 11 U.S. states, Puerto Rico, South Korea, and China.

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

The unaudited interim financial statements should be read in conjunction with the audited financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial statements for the interim periods have been made. The results of interim periods are not necessarily indicative of the results for a full year.

Dollar amounts presented in tables within the notes to the financial statements are stated in thousands, except share data or as otherwise noted.

Consolidation

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

In determining the method of accounting for partially owned joint ventures, the Company evaluates the characteristics of associated entities and determines whether an entity is a variable interest entity (VIE), and, if so, determines whether the Company is the primary beneficiary by analyzing whether the Company has 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. The Company consolidates a VIE when it has determined that it is the primary beneficiary. All of the Company’s consolidated joint ventures, including the Operating Partnership, meet the definition and criteria as VIEs, as either the Company or an affiliate of the Company is the primary beneficiary of each VIE.

The Company’s sole significant asset is its investment in the Operating Partnership and, consequently, substantially all of the Company’s consolidated assets and liabilities are assets and liabilities of the Operating Partnership. All of the Company’s debt (Note 5) is an obligation of the Operating Partnership or its consolidated subsidiaries. Note 5 also provides disclosure of guarantees provided by the Operating Partnership to certain consolidated joint ventures. Note 6 provides additional disclosures of the carrying balance of the noncontrolling interests in its consolidated joint ventures and other information, including a description of certain rights of the noncontrolling owners.








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 VIE and has concluded that the ventures are not VIEs. Accordingly, the Company accounts for its interests in these entities under general accounting standards for investments in real estate ventures (including guidance for determining effective control of a limited partnership or similar entity). The Company’s partners or other owners in these Unconsolidated Joint Ventures have substantive participating rights including approval rights over annual operating budgets, capital spending, financing, admission of new partners/members, or sale of the properties and the Company has concluded that the equity method of accounting is appropriate for these interests. Specifically, the Company’s 79% and 50.1% investments in Westfarms and International Plaza, respectively, are through general partnerships in which the other general partners have participating rights over annual operating budgets, capital spending, refinancing, or sale of the property. The Company provides its beneficial interest in certain financial information of its Unconsolidated Joint Ventures (Notes 4 and 5). This beneficial information is derived as the Company's ownership interest in the investee multiplied by the specific financial statement item being presented. Investors are cautioned that deriving the Company's beneficial interest in this manner may not accurately depict the legal and economic implications of holding a noncontrolling interest in the investee.

Ownership

In addition to the Company’s common stock, there were three classes of preferred stock outstanding (Series B, J, and K) as of March 31, 2017. 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. The Company owns corresponding Series J and Series K Preferred Equity interests in the Operating Partnership that entitle the Company to income and distributions (in the form of guaranteed payments) in amounts equal to the dividends payable on the Company’s Series J and Series K Preferred Stock.

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

Outstanding voting securities of the Company at March 31, 2017 consisted of 24,954,059 shares of Series B Preferred Stock and 60,685,420 shares of common stock.

The Operating Partnership

At March 31, 2017, the Operating Partnership’s equity included two classes of preferred equity (Series J and K) and the net equity of the partnership unitholders. Net income and distributions of the Operating Partnership are allocable first to the preferred equity interests, and the remaining amounts to the general and limited partners in the Operating Partnership in accordance with their percentage ownership. The Series J and Series K Preferred Equity are owned by the Company and are eliminated in consolidation.

The Company's ownership in the Operating Partnership at March 31, 2017 consisted of a 71% managing general partnership interest, as well as the Series J and Series K Preferred Equity interests. The Company's average ownership percentage in the Operating Partnership for both the three months ended March 31, 2017 and 2016 was 71%. At March 31, 2017, the Operating Partnership had 85,656,699 partnership units outstanding, of which the Company owned 60,685,420 units. Disclosures about partnership units outstanding exclude Profits Units granted or other share-based grants for which partnership units may eventually be issued (Note 8).

Restructuring Charge

During 2017, the Company underwent a restructuring plan to reduce its workforce across various areas of the organization in response to the completion of another major development cycle. During the three months ended March 31, 2017, the Company incurred $1.9 million of expenses related to the reduction in the workforce. These expenses have been separately classified as Restructuring Charge on the Consolidated Statement of Operations and Comprehensive Income. As of March 31, 2017, substantially all of the restructuring costs recognized in the first quarter of 2017 were paid.
 

Costs Associated with Shareowner Activism

During the three months ended March 31, 2017, the Company incurred $3.5 million of expense associated with activities related to a shareowner activist campaign, largely legal and advisory services. Due to the unusual and infrequent nature of these expenses in the Company's history, they have been separately classified as Costs Associated with Shareowner Activism in the Company's Consolidated Statement of Operations and Comprehensive Income.

Management’s Responsibility to Evaluate the Company’s 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 the Company's 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.
Acquisition, Redevelopments, and Developments
Acquisition, Redevelopments, and Developments [Text Block]
Acquisition, Redevelopments, and Development

Acquisition

Country Club Plaza

In March 2016, a joint venture that the Company formed with The Macerich Company acquired Country Club Plaza, a mixed-use retail and office property in Kansas City, Missouri, from Highwood Properties for $660 million ($330 million at TRG's share) in cash, excluding transaction costs. The Company has a 50% ownership interest in the center, which is jointly managed by both companies. The Company's ownership interest in the center is accounted for as an Unconsolidated Joint Venture under the equity method. The joint venture determined the fair value of assets acquired and liabilities assumed upon acquisition. Also, in March 2016, a 10-year, $320 million ($160 million at TRG's share) non-recourse financing was completed for this center. The proceeds from the financing were distributed to the joint venture partners based on the partnership agreement ownership percentages. In March 2017, the joint venture sold the Valencia Place office tower for $75.2 million ($37.6 million at TRG's share), which was a component of the mixed-use property acquired.

U.S. Redevelopments

Redevelopments

The Company has ongoing redevelopment projects at Beverly Center and The Mall at Green Hills, which are expected to be completed in 2018 and 2019, respectively. In total, these two redevelopment projects are expected to cost approximately $700 million. As of March 31, 2017, the Company's total capitalized costs related to these redevelopment projects were $219.6 million.

U.S. Development

International Market Place

The International Market Place shopping center, located in Waikiki, Honolulu, Hawaii, opened in August 2016.

Asia Developments

Operating Centers

The Company recently opened three shopping centers in Asia: CityOn.Xi’an, located in Xi’an, China; Starfield Hanam, located in Hanam, South Korea; and CityOn.Zhengzhou, located in Zhengzhou, China. The centers opened in April 2016, September 2016, and March 2017, respectively (Note 4). These investments are classified within Investment in Unconsolidated Joint Ventures on the Consolidated Balance Sheet.






South Korea Project

Taubman Asia is exploring a second development opportunity in South Korea with Shinsegae Group, the Company's partner in Starfield Hanam. In March 2017, the Company made an initial refundable deposit of $11 million relating to a potential development site. The Company is continuing its due diligence and preliminary planning. The potential return of the deposit, including a 5% return, is secured by a letter of credit from Shinsegae Group. The Company's $11 million deposit is classified within Deferred Charges and Other Assets on the Consolidated Balance Sheet.
Income Taxes
Income Taxes
Income Taxes

Income Tax Expense

The Company’s income tax expense (benefit) for the three months ended March 31, 2017 and 2016 consisted of the following:

 
Three Months Ended March 31
 
2017

2016
Federal current


 
$
1,115

Federal deferred
$
152

 
(761
)
Foreign current
88

 
134

Foreign deferred
(121
)
 
(210
)
State current
86

 
127

State deferred
3

 
(103
)
Total income tax expense
$
208


$
302



Deferred Taxes

Deferred tax assets and liabilities as of March 31, 2017 and December 31, 2016 were as follows:
 
2017
 
2016
Deferred tax assets:
 
 
 
Federal
$
1,983

 
$
3,230

Foreign
1,946

 
1,673

State
851

 
935

Total deferred tax assets
$
4,780

 
$
5,838

Valuation allowances
(1,765
)
 
(1,812
)
Net deferred tax assets
$
3,015

 
$
4,026

Deferred tax liabilities:
 
 
 

Foreign
$
1,102

 
$
1,124

Total deferred tax liabilities
$
1,102

 
$
1,124



The Company believes that it is more likely than not that the results of future operations will generate sufficient taxable income to recognize the net deferred tax assets. These future operations are primarily dependent upon the Manager’s profitability, the timing and amounts of gains on peripheral land sales, the profitability of Taubman Asia's operations, and other factors affecting the results of operations of the taxable REIT subsidiaries. The valuation allowances relate to net operating loss carryforwards and tax basis differences where there is uncertainty regarding their realizability.


Investments in Unconsolidated Joint Ventures
Investments in Unconsolidated Joint Ventures
Investments in Unconsolidated Joint Ventures

General Information

The Company owns beneficial interests in joint ventures that own shopping centers. The Operating Partnership is the sole direct or indirect managing general partner or managing member of Fair Oaks, International Plaza, Stamford Town Center, Sunvalley, The Mall at University Town Center, and Westfarms. The Operating Partnership also provides certain management, leasing, and/or development services to the other shopping centers noted below.
Shopping Center
 
Ownership as of
March 31, 2017 and
December 31, 2016
CityOn.Xi'an
 
50%
CityOn.Zhengzhou
 
49
Country Club Plaza
 
50
Fair Oaks
 
50
International Plaza
 
50.1
The Mall at Millenia
 
50
Stamford Town Center
 
50
Starfield Hanam
 
34.3
Sunvalley
 
50
The Mall at University Town Center
 
50
Waterside Shops
 
50
Westfarms
 
79



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

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

Combined balance sheet and results of operations information is presented in the following table for the Unconsolidated Joint Ventures, followed by the Operating Partnership's beneficial interest in the combined operations information. The combined information of the Unconsolidated Joint Ventures as of March 31, 2017 and December 31, 2016 excludes the balances of CityOn.Zhengzhou, which opened in March 2017. Beneficial interest is calculated based on the Operating Partnership's ownership interest in each of the Unconsolidated Joint Ventures.

 
March 31,
2017
 
December 31,
2016
Assets:
 
 
 
Properties
$
3,356,646

 
$
3,371,216

Accumulated depreciation and amortization
(680,435
)
 
(661,611
)
 
$
2,676,211

 
$
2,709,605

Cash and cash equivalents
75,178

 
83,882

Accounts and notes receivable, less allowance for doubtful accounts of $3,301 and $1,965 in 2017 and 2016
109,788

 
87,612

Deferred charges and other assets
54,225

 
67,167

 
$
2,915,402

 
$
2,948,266

 
 
 
 
Liabilities and accumulated equity (deficiency) in assets:
 

 
 

Notes payable, net (1)
$
2,772,089

 
$
2,706,628

Accounts payable and other liabilities
362,092

 
359,814

TRG's accumulated deficiency in assets
(220,404
)
 
(166,226
)
Unconsolidated Joint Venture Partners' accumulated equity in assets
1,625

 
48,050

 
$
2,915,402

 
$
2,948,266

 
 
 
 
TRG's accumulated deficiency in assets (above)
$
(220,404
)
 
$
(166,226
)
TRG's investment in CityOn.Zhengzhou
112,163

 
112,861

TRG basis adjustments, including elimination of intercompany profit
125,736

 
126,240

TCO's additional basis
50,584

 
51,070

Net investment in Unconsolidated Joint Ventures
$
68,079

 
$
123,945

Distributions in excess of investments in and net income of Unconsolidated Joint Ventures
504,903

 
480,863

Investment in Unconsolidated Joint Ventures
$
572,982

 
$
604,808


(1)
The Notes Payable, Net amounts exclude the construction financing outstanding for CityOn.Zhengzhou of $71.2 million ($34.9 million at TRG's share) and $70.5 million ($34.5 million at TRG's share) as of March 31, 2017 and December 31, 2016, respectively.
 
Three Months Ended March 31
 
2017
 
2016
Revenues
$
140,600

 
$
96,763

Maintenance, taxes, utilities, promotion, and other operating expenses
$
48,380

 
$
28,322

Interest expense
30,369

 
21,596

Depreciation and amortization
29,767

 
15,299

Total operating costs
$
108,516

 
$
65,217

Nonoperating income, net
1,851

 
246

Income tax expense
(2,943
)
 
 
Gain on disposition, net of tax (1)
3,713

 
 
Net income
$
34,705

 
$
31,792

 
 
 
 
Net income attributable to TRG
$
18,422

 
$
17,459

Realized intercompany profit, net of depreciation on TRG’s basis adjustments
2,183

 
1,506

Depreciation of TCO's additional basis
(487
)
 
(487
)
Equity in income of Unconsolidated Joint Ventures
$
20,118

 
$
18,478

 
 
 
 
Beneficial interest in Unconsolidated Joint Ventures’ operations:
 

 
 

Revenues less maintenance, taxes, utilities, promotion, and other operating expenses
$
51,101

 
$
39,341

Interest expense
(15,781
)
 
(11,528
)
Depreciation and amortization
(15,652
)
 
(9,335
)
Income tax expense
(1,633
)
 
 
Gain on disposition, net of tax (1)
2,083

 
 
Equity in income of Unconsolidated Joint Ventures
$
20,118

 
$
18,478



(1)Amount represents the gain related to the sale of the Valencia Place office tower at Country Club Plaza in March 2017.


Related Party

In 2016, the Company issued a note receivable to one of its Unconsolidated Joint Ventures for purposes of funding development costs. The balance of the note receivable was $43.5 million and $43.2 million as of March 31, 2017 and December 31, 2016, respectively, and was classified within Investments in Unconsolidated Joint Ventures on the Consolidated Balance Sheet.
Beneficial Interest in Debt and Interest Expense
Beneficial interest in Debt and Interest Expense
Beneficial Interest in Debt and Interest Expense

The Operating Partnership's beneficial interest in the debt, capitalized interest, and interest expense of its consolidated subsidiaries and its Unconsolidated Joint Ventures is summarized in the following table. The Operating Partnership's beneficial interest in the consolidated subsidiaries excludes debt and interest related to the noncontrolling interest in Cherry Creek Shopping Center (50%), International Market Place (6.5%), and The Mall of San Juan (5%).
 
At 100%
 
At Beneficial Interest
 
 
Consolidated Subsidiaries
 
Unconsolidated Joint Ventures
 
Consolidated Subsidiaries
 
Unconsolidated Joint Ventures
 
Debt as of:
 
 
 
 
 
 
 
 
March 31, 2017
$
3,287,968

 
$
2,843,331

 
$
2,996,892

 
$
1,454,852

 
December 31, 2016
3,255,512

 
2,777,162

 
2,949,440

 
1,425,511

 
 
 
 
 
 
 
 
 
 
Capitalized interest:
 

 
 

 
 

 
 

 
Three Months Ended March 31, 2017
$
4,081

(1) 
$
551

(2) 
$
4,039

(1) 
$
551

(2) 
Three Months Ended March 31, 2016
6,502

(1) 
655

(2) 
6,486

(1) 
655

(2) 
 
 
 
 
 
 
 
 
 
Interest expense:
 

 
 

 
 

 
 

 
Three Months Ended March 31, 2017
$
25,546

 
$
30,369

 
$
22,571

 
$
15,781

 
Three Months Ended March 31, 2016
19,128

 
21,596

 
17,176

 
11,528

 


(1)
The Company capitalizes interest costs incurred in funding its equity contributions to development projects accounted for as Unconsolidated Joint Ventures. The capitalized interest cost is included in the Company's basis in its investment in Unconsolidated Joint Ventures. Such capitalized interest reduces interest expense on the Company's Consolidated Statement of Operations and Comprehensive Income and in the table above is included within Consolidated Subsidiaries.
(2)
Capitalized interest on the Asia Unconsolidated Joint Venture construction financings is presented at the Company's beneficial interest in both the Unconsolidated Joint Ventures (at 100%) and Unconsolidated Joint Ventures (at Beneficial Interest) columns.

2017 Financings and Upcoming Maturities

In April 2017, the Company expects to extend the $65.0 million secondary secured revolving line of credit for one year upon maturity. All significant terms of the credit facility remain unchanged as a result of the extension.

In March 2017, the Company repaid the outstanding balance of $302.4 million on the construction facility for The Mall of San Juan, which was scheduled to mature in April 2017. The Company funded the repayment using its revolving lines of credit.

In February 2017, the Company completed a $300 million unsecured term loan that matures in February 2022. TRG is the borrower under the loan and the loan bears interest at a range of LIBOR plus 1.25% to LIBOR plus 1.90% based on the Company's total leverage ratio. In March 2017, the Company entered into forward starting swaps to fix the LIBOR rate on the $300 million unsecured term loan from January 2018 through the term of the loan (Note 7). Also in February 2017, the Company amended its $1.1 billion primary unsecured revolving line of credit. The amended agreement extends the maturity date to February 2021, with two six-month extension options. The facilities include an accordion feature which would increase the Company's maximum aggregate total commitment to $2.0 billion between the two facilities if fully exercised, subject to obtaining additional lender commitments, customary closing conditions, and covenant compliance for the unencumbered asset pool.












Debt Covenants and Guarantees

Certain loan agreements contain various restrictive covenants, including the following corporate covenants on the Company’s primary unsecured revolving line of credit, $475 million and $300 million unsecured term loans, and the construction facility on International Market Place: a minimum net worth requirement, a maximum total leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a maximum recourse secured debt ratio, and a maximum payout ratio. In addition, the Company’s primary unsecured revolving line of credit and unsecured term loans have unencumbered pool covenants, which currently apply to Beverly Center, Dolphin Mall, The Gardens on El Paseo, and Twelve Oaks Mall on a combined basis. These covenants include a minimum number and minimum value of eligible unencumbered assets, a maximum unencumbered leverage ratio, a minimum unencumbered interest coverage ratio, and a minimum unencumbered asset occupancy ratio. As of March 31, 2017, the corporate total leverage ratio was the most restrictive covenant. The Company was in compliance with all of its covenants and loan obligations as of March 31, 2017. The maximum payout ratio covenant limits the payment of distributions generally to 95% of funds from operations, as defined in the loan agreements, except as required to maintain the Company’s tax status, pay preferred distributions, and for distributions related to the sale of certain assets.

In connection with the financing of the construction facility at International Market Place, the Operating Partnership has provided an unconditional guarantee of the construction loan principal balance and all accrued but unpaid interest during the term of the loan. The Operating Partnership has also provided a guarantee as to the completion of construction of the center. The maximum amount of the construction facility is $330.9 million. The outstanding balance of the International Market Place construction financing facility as of March 31, 2017 was $258.6 million. Accrued but unpaid interest as of March 31, 2017 was $0.6 million. The Company believes the likelihood of a payment under the guarantees to be remote.

In connection with the $175 million additional financing at International Plaza, which is owned by an Unconsolidated Joint Venture, the Operating Partnership provided an unconditional and several guarantee of 50.1% of all obligations and liabilities related to an interest rate swap that was required on the debt for the term of the loan. As of March 31, 2017, the interest rate swap was in an asset position of $0.3 million and had unpaid interest of $0.2 million. The Company believes the likelihood of a payment under the guarantee to be remote.

Other

The Company is required to escrow cash balances for specific uses stipulated by certain of its lenders and other various agreements. As of March 31, 2017 and December 31, 2016, the Company’s cash balances restricted for these uses were $12.4 million and $0.9 million, respectively.
Noncontrolling Interests
Noncontrolling Interests
Noncontrolling Interests

Redeemable Noncontrolling Interests

Taubman Asia President

In September 2016, the Company announced the appointment of Peter Sharp (Successor Asia President) as president of Taubman Asia, a consolidated subsidiary, succeeding René Tremblay (Former Asia President) effective January 1, 2017. The Former Asia President continues to be employed by the Company in another capacity.

The Former Asia President has an ownership interest in Taubman Asia. This interest entitles the Former Asia President to 5% of Taubman Asia's dividends, with 85% of his dividends relating to investment activities undergone prior to the Successor Asia President obtaining an ownership interest (see below) being withheld as contributions to capital. These withholdings will continue until he contributes and maintains his capital consistent with his percentage ownership interest, including all capital funded by the Operating Partnership for Taubman Asia's operating and investment activities subsequent to the Former Asia President obtaining his ownership interest. The Operating Partnership has a preferred investment in Taubman Asia to the extent the Former Asia President has not yet contributed capital commensurate with his ownership interest. This preferred investment accrues an annual preferential return equal to the Operating Partnership's average borrowing rate (with the preferred investment and accrued return together being referred to herein as the preferred interest). In addition, Taubman Asia has the ability to call, and the Former Asia President has the ability to put, the Former Asia President’s ownership interest upon specified terminations of the Former Asia President’s employment, although such put or call right may not be exercised for specified time periods after certain termination events. The redemption price for the ownership interest is 50% (increasing to 100% as early as June 2017) of the fair value of the ownership interest less the amount required to return the Operating Partnership's preferred interest. The Company has determined that the Former 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. The Company presents as temporary equity at each balance sheet date an estimate of the redemption value of the ownership interest, therefore falling into level 3 of the fair value hierarchy, taking into account the proportion of the Former Asia President's services rendered before he is fully vested. As of March 31, 2017 and December 31, 2016, the carrying amount of this redeemable equity was $9.0 million and $8.7 million, respectively. Any adjustments to the redemption value are recorded through equity.

In April 2016, the Company reacquired half of the Former Asia President’s previous 10% ownership interest in Taubman Asia for $7.2 million. The Former Asia President contributed $2 million to Taubman Asia, which may be returned, in part or in whole, upon satisfaction of the re-evaluation of the full liquidation value of Taubman Asia as of April 2016; such re-evaluation will be performed at the Former Asia President's election on or after the third anniversary of the opening of specified Asia projects. The Former Asia President’s current 5% interest is puttable beginning in 2019 at the earliest, upon reaching certain specified milestones, and was classified as Redeemable Noncontrolling Interest on the Consolidated Balance Sheet.

The Successor Asia President also has an ownership interest in Taubman Asia. This interest entitles the Successor Asia President to 3% of Taubman Asia's dividends for investment activities undergone by Taubman Asia subsequent to him obtaining his ownership interest, with all of his dividends being withheld as contributions to capital. These withholdings will continue until he contributes and maintains his capital consistent with his percentage ownership interest, including all capital funded by the Operating Partnership for Taubman Asia's operating and investment activities subsequent to the Successor Asia President obtaining his ownership interest. The Operating Partnership has a preferred investment in Taubman Asia to the extent the Successor Asia President has not yet contributed capital commensurate with his ownership interest. This preferred investment accrues an annual preferential return equal to the Operating Partnership's average borrowing rate (with the preferred investment and accrued return together being referred to herein as the preferred interest). In addition, Taubman Asia has the ability to call, and the Successor Asia President has the ability to put, the Successor Asia President’s ownership interest upon specified terminations of the Successor Asia President’s employment, although such put or call right may not be exercised for specified time periods after certain termination events. The redemption price for the ownership interest is 50% (increasing to 100% as early as January 2022) of the fair value of the ownership interest less the amount required to return the Operating Partnership's preferred interest. The Company has determined that the Successor 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. As of March 31, 2017, the carrying amount of this redeemable equity was zero. Any adjustments to the redemption value are recorded through equity.





International Market Place

The Company owns a 93.5% controlling interest in a joint venture that owns International Market Place in Waikiki, Honolulu, Hawaii, which opened in August 2016. The 6.5% joint venture partner has no obligation nor the right to contribute capital. The Company is entitled to a preferential return on its capital contributions. The Company has the right to purchase the joint venture partner's interest and the joint venture partner has the right to require the Company to purchase the joint venture partner's interest after the third anniversary of the opening of the center, and annually thereafter. The purchase price of the joint venture partner's interest will be based on fair value. Considering the redemption provisions, the Company accounts for the joint venture partner's interest as a contingently redeemable noncontrolling interest with a carrying value of zero at both March 31, 2017 and December 31, 2016. Any adjustments to the redemption value are recorded through equity.

Reconciliation of Redeemable Noncontrolling Interest
 
Three Months Ended March 31
 
2017
 
2016
Balance, January 1
$
8,704

 
 
Former Taubman Asia President vested redeemable equity
266

 
$
13,041

Allocation of net loss
(192
)
 
 
Adjustments of redeemable noncontrolling interest
192

 
 
Balance, March 31
$
8,970

 
$
13,041



Equity Balances of Non-redeemable Noncontrolling Interests

The net equity balance of the non-redeemable noncontrolling interests as of March 31, 2017 and December 31, 2016 included the following:
 
2017
 
2016
Non-redeemable noncontrolling interests:
 
 
 
Noncontrolling interests in consolidated joint ventures
$
(155,960
)
 
$
(155,919
)
Noncontrolling interests in partnership equity of TRG
7,919

 
13,136

 
$
(148,041
)
 
$
(142,783
)


Net Income (Loss) Attributable to Noncontrolling Interests

Net income (loss) attributable to the noncontrolling interests for the three months ended March 31, 2017 and 2016 included the following:
 
Three Months Ended March 31
 
2017
 
2016
Net income (loss) attributable to noncontrolling interests:
 
 
 
Non-redeemable noncontrolling interests:
 
 
 
Noncontrolling share of income of consolidated joint ventures
$
1,636

 
$
2,521

Noncontrolling share of income of TRG
7,790

 
10,899

 
$
9,426

 
$
13,420

Redeemable noncontrolling interest:
(192
)
 
 
 
$
9,234

 
$
13,420










Equity Transactions

The following table presents the effects of changes in Taubman Centers, Inc.’s ownership interest in consolidated subsidiaries on Taubman Centers, Inc.’s equity for the three months ended March 31, 2017 and 2016:
 
Three Months Ended March 31
 
2017
 
2016
Net income attributable to Taubman Centers, Inc. common shareowners
$
17,170

 
$
24,613

Transfers (to) from the noncontrolling interest:
 

 
 

(Decrease) increase in Taubman Centers, Inc.’s paid-in capital for adjustments of noncontrolling interest (1)
(19
)
 
3,865

Net transfers (to) from noncontrolling interests
(19
)
 
3,865

Change from net income attributable to Taubman Centers, Inc. and transfers (to) from noncontrolling interests
$
17,151

 
$
28,478


(1)
In 2017 and 2016, adjustments of the noncontrolling interest were made as a result of changes in the Company's ownership of the Operating Partnership in connection with the Company's share-based compensation under employee and director benefit plans (Note 8) and issuances of stock pursuant to the Continuing Offer (Note 9). In 2017 and 2016, adjustments of the noncontrolling interest were also made in connection with the accounting for the Former Asia President's redeemable ownership interest.

Finite Life Entities

Accounting Standards Codification (ASC) 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 March 31, 2017, the Company held a controlling interest in a consolidated entity with a specified termination date in 2083. The noncontrolling owners' interest in this entity is to be settled upon termination by distribution or transfer of either cash or specific assets of the underlying entity. The estimated fair value of this noncontrolling interest was approximately $360 million at March 31, 2017, compared to a book value of $(156.0) million that is classified in Noncontrolling Interests on the Company’s Consolidated Balance Sheet. The fair value of the noncontrolling interest was calculated as the noncontrolling interest's ownership shares of the underlying property's fair value. The property's fair value was estimated by considering its in-place net operating income, current market capitalization rate, and mortgage debt outstanding.
Derivative and Hedging Activities
Derivative and Hedging Activities
Derivative and Hedging Activities

Risk Management Objective and Strategies for Using Derivatives

The Company uses derivative instruments, such as interest rate swaps and interest rate caps, primarily to manage exposure to interest rate risks inherent in variable rate debt and refinancings. The Company may also enter into forward starting swaps or treasury lock agreements to set the effective interest rate on a planned fixed-rate financing. The Company’s interest rate swaps involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. In a forward starting swap or treasury lock agreement that the Company cash settles in anticipation of a fixed rate financing or refinancing, the Company will receive or pay an amount equal to the present value of future cash flow payments based on the difference between the contract rate and market rate on the settlement date.

The Company does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedging instruments under the accounting requirements for derivatives and hedging.










As of March 31, 2017, the Company had the following outstanding derivatives that were designated and are expected to be effective as cash flow hedges of the interest payments and/or the currency exchange rate on the associated debt.
Instrument Type

Ownership

Notional Amount

Swap Rate

Credit Spread on Loan

Total Swapped Rate on Loan

Maturity Date
Consolidated Subsidiaries:

 

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

100
%

$
200,000

 
1.64
%
 
1.45
%
(1) 
3.09
%
(1) 
February 2019
Receive variable (LIBOR) /pay-fixed swap (1)

100
%

175,000

 
1.65
%
 
1.45
%
(1) 
3.10
%
(1) 
February 2019
Receive variable (LIBOR) /pay-fixed swap (1)

100
%

100,000

 
1.64
%
 
1.45
%
(1) 
3.09
%
(1) 
February 2019
Receive variable (LIBOR) /pay-fixed swap (2)
 
100
%
 
100,000

 


(2) 


(2) 


(2) 
February 2022
Receive variable (LIBOR) /pay-fixed swap (2)
 
100
%
 
100,000

 


(2) 


(2) 


(2) 
February 2022
Receive variable (LIBOR) /pay-fixed swap (2)
 
100
%
 
50,000

 


(2) 


(2) 


(2) 
February 2022
Receive variable (LIBOR) /pay-fixed swap (2)
 
100
%
 
50,000

 


(2) 


(2) 


(2) 
February 2022
Receive variable (LIBOR) /pay-fixed swap (3)
 
100
%
 
12,000

 
2.09
%
(3) 
1.40
%
(3) 
3.49
%
(3) 
March 2024
Unconsolidated Joint Ventures:

 


 

 
 

 
 

 
 

 
 
Receive variable (LIBOR) /pay-fixed swap (4)

50
%

131,967

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

50
%

131,967

 
2.40
%
 
1.70
%
 
4.10
%
 
April 2018
Receive variable (LIBOR) /pay-fixed swap (5)
 
50.1
%
 
168,164

 
1.83
%
 
1.75
%
 
3.58
%
 
December 2021
Receive variable (LIBOR) USD/pay-fixed Korean Won (KRW) cross-currency interest rate swap (6)
 
34.3
%
 
52,065 USD / 60,500,000 KRW

 
1.52
%
 
1.60
%
 
3.12
%
 
September 2020

(1)
The hedged forecasted transaction for each of these swaps is the first previously unhedged one-month LIBOR-indexed interest payments accrued and made each month on a debt principal amount equal to the swap notional amount, regardless of the specific debt agreement from which they may flow. The Company is currently using these swaps to manage interest rate risk on the $475 million unsecured term loan. The credit spread on this loan can also vary within a range of 1.35% to 1.90%, depending on the Company's total leverage ratio at the measurement date, resulting in an effective rate in the range of 2.99% to 3.55% during the swap period.
(2)
The hedged forecasted transaction for each of these swaps is the first previously unhedged one-month LIBOR-indexed interest payments accrued and made each month on a debt principal amount equal to the swap notional amount, regardless of the specific debt agreement from which they may flow, beginning with the January 2018 effective date of the swaps. The Company anticipates using these forward starting swaps to manage interest rate risk on the $300 million unsecured term loan beginning with the January 2018 effective date. Beginning in January 2018, the LIBOR rate will be swapped to a fixed rate of 2.14%. The credit spread on this loan can vary within a range of 1.25% to 1.90%, depending on the Company's total leverage ratio at the measurement date, resulting in an effective rate in the range of 3.39% to 4.04% during the swap period.
(3)
The notional amount on this swap is equal to the outstanding principal balance of the floating rate loan on the U.S. headquarters building.
(4)
The notional amount on each of these swaps is equal to 50% of the outstanding principal balance of the loan on Fair Oaks.
(5)
The notional amount on this swap is equal to the outstanding principal balance of the floating rate loan on International Plaza.
(6)
The notional amount on this swap is equal to the outstanding principal balance of the U.S. dollar construction loan for Starfield Hanam. There is a cross-currency interest rate swap to fix the interest rate on the loan and swap the related principal and interest payments from U.S. dollars to KRW in order to reduce the impact of fluctuations in interest rates and exchange rates on the cash flows of the joint venture. The currency swap exchange rate is 1,162.0.


Cash Flow Hedges

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

Amounts reported in AOCI related to currently outstanding interest rate derivatives are recognized as an adjustment to income as interest payments are made on the Company’s variable-rate debt. Realized gains or losses on settled derivative instruments included in AOCI are recognized as an adjustment to income over the term of the hedged debt transaction. Amounts reported in AOCI related to the cross-currency interest rate swap are recognized as an adjustment to income as transaction gains or losses arising from the remeasurement of foreign currency denominated loans are recognized and as actual interest and principal obligations are repaid.

The Company expects that approximately $4.6 million of the AOCI of Taubman Centers, Inc. and the noncontrolling interests will be reclassified from AOCI and recognized as a reduction of income in the following 12 months.

The following tables present the effect of derivative instruments on the Company’s Consolidated Statement of Operations and Comprehensive Income for the three months ended March 31, 2017 and 2016. The tables include the amount of gains or losses on outstanding derivative instruments recognized in OCI in cash flow hedging relationships and the location and amount of gains or losses reclassified from AOCI into income resulting from outstanding derivative instruments.

During the three months ended March 31, 2017 and March 31, 2016, the Company recognized an inconsequential amount and $0.4 million, respectively, of hedge ineffectiveness expense related to the swaps used to hedge the $475 million unsecured term loan. The hedge ineffectiveness for both periods was recorded in Nonoperating Income, Net on the Consolidated Statement of Operations and Comprehensive Income.
 
Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
 
Location of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
 
Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
 
Three Months Ended March 31
 
 
 
Three Months Ended March 31
 
2017
 
2016
 
 
 
2017
 
2016
Derivatives in cash flow hedging relationships:
 
 
 
 

 
 
 
 
Interest rate contracts – consolidated subsidiaries
$
764

 
$
(5,742
)
 
Interest Expense
 
$
(1,074
)
 
$
(1,517
)
Interest rate contracts – UJVs
1,042

 
(2,791
)
 
Equity in Income of UJVs
 
(759
)
 
(974
)
Cross-currency interest rate contract – UJV
36

 
(290
)
 
Equity in Income of UJVs
 
(1,402
)
 
(546
)
Total derivatives in cash flow hedging relationships
$
1,842

 
$
(8,823
)
 
 
 
$
(3,235
)
 
$
(3,037
)














The Company records all derivative instruments at fair value on the Consolidated Balance Sheet. The following table presents the location and fair value of the Company’s derivative financial instruments as reported on the Consolidated Balance Sheet as of March 31, 2017 and December 31, 2016.
 
 
 
Fair Value
 
Consolidated Balance Sheet Location
 
March 31,
2017
 
December 31,
2016
Derivatives designated as hedging instruments:
 
 
 
 
 
Asset derivative:
 
 
 
 
 
Interest rate contracts – consolidated subsidiary
Deferred Charges and Other Assets
 
$
22

 


Interest rate contracts - UJVs
Investment in UJVs
 
160

 
 
Cross-currency interest rate swap - UJV
Investment in UJVs
 


 
$
381

Total assets designated as hedging instruments
 
 
$
182

 
$
381

 
 
 
 
 
 
Liability derivatives:
 
 
 

 
 
Interest rate contracts – consolidated subsidiaries
Accounts Payable and Accrued Liabilities
 
$
(2,824
)
 
$
(3,548
)
Interest rate contracts – UJVs
Investment in UJVs
 
(1,614
)
 
(2,496
)
Cross-currency interest rate swap – UJV
Investment in UJVs
 
(933
)
 


Total liabilities designated as hedging instruments
 
 
$
(5,371
)
 
$
(6,044
)


Contingent Features

All of the Company's outstanding derivatives contain provisions that state if the hedged entity defaults on its indebtedness above a certain threshold, then the derivative obligation could also be declared in default. The cross default thresholds vary for each agreement, ranging from $0.1 million of any indebtedness to $50 million of indebtedness on the Operating Partnership's indebtedness. As of March 31, 2017, the Company is not in default on any indebtedness that would trigger a credit-risk-related default on its current outstanding derivatives.
As of March 31, 2017 and December 31, 2016, the fair value of derivative instruments with credit-risk-related contingent features that were in a liability position was $5.4 million and $6.0 million, respectively. As of March 31, 2017 and December 31, 2016, the Company was not required to post any collateral related to these agreements. If the Company breached any of these provisions it would be required to settle its obligations under the agreements at their fair value. See Note 5 regarding guarantees and Note 11 for fair value information on derivatives.
Share-Based Compensation
Share-Based Compensation
Share-Based Compensation

General

The Taubman Company LLC 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 share units, restricted units of limited partnership in TRG (TRG Units), restricted TRG Unit units, options to purchase shares or TRG units, share appreciation rights, performance share units, unrestricted shares or TRG Units, and other awards to acquire up to an aggregate of 8.5 million Company common shares or TRG Units. TRG Units to be awarded also include "Profits Units", which are intended to constitute "profits interests" within the meaning of Treasury authority under the Internal Revenue Code of 1986, as amended. In addition, non-employee directors have the option to defer their compensation under a deferred compensation plan.

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

2017 Awards - Profits Units

During 2017, the following types of Profits Units awards have been granted to certain senior management individuals: (1) a time-based award with a three-year cliff vesting period (Restricted TRG Profits Units); (2) a performance-based award that is based on the achievement of relative total shareholder return (TSR) over a three-year period (Relative TSR Performance-based TRG Profits Units); and (3) a performance-based award that is based on the achievement of net operating income (NOI) over a three-year period (NOI Performance-based TRG Profits Units). The maximum number of Relative TSR and NOI Performance-based TRG Profits Units are issued at grant, eventually subject to a recovery and cancellation of previously granted amounts depending on actual performance against TSR and NOI measures over the three-year performance measurement period. NOI Performance-based TRG Profits Units provide for a cap on the maximum number of units if a specified absolute TSR level is not achieved. Relative TSR and NOI Performance-based TRG Profits Units are generally subject to the same performance measures as the TSR-Based and NOI-Based Performance Share Units (see 2017 Awards - Other Management Employee Grants below). Despite the difference in scaling of the grant programs, the final outcome of the TSR and NOI performance measures will result in similar numbers of TRG Units being issued at vesting under both the TRG Profits Units and the Performance Share Unit programs.

Each such award represents a contingent right to receive a TRG Unit upon vesting and the satisfaction of certain tax-driven requirements and, as to the TSR and NOI Performance-based TRG Profits Units the satisfaction of certain performance-based requirements. Until vested, a Profits Unit entitles the holder to only one-tenth of the distributions otherwise payable by TRG on a TRG Unit. Therefore, the Company accounts for these Profits Units as participating securities in the Operating Partnership. A portion of the Profits Units award represents estimated cash distributions that otherwise would have been payable during the vesting period and, upon vesting, there will be an adjustment in actual number of Profits Units realized under each award to reflect the Operating Partnership's actual cash distributions during the vesting period.

All Profits Units issued in 2017 vest in March 2020, if continuous service has been provided, or upon retirement or certain other events (such as death or disability) if earlier. Each holder of a Profits Unit will be treated as a limited partner in TRG from the date of grant. To the extent the vested Profits Units have not achieved the applicable criteria for conversion to TRG Units, vesting and economic equivalence to a partnership unit prior to the tenth anniversary of the date of grant, the awards will be forfeited pursuant to the terms of the award agreement.

2017 Awards - Other Management Employee Grants

During 2017, other types of awards granted to management employees include those described in the following. These vest in March 2020, if continuous service has been provided, or upon retirement or certain other events (such as death or disability) if earlier.

TSR - Based Performance Share Units (TSR PSU) - Each TSR PSU represents the right to receive, upon vesting, shares of the Company's common stock ranging from 0-300% of the TSR PSU based on the Company's market performance relative to that of a peer group. The 2017 TSR PSU grant includes a cash payment upon vesting equal to the aggregate cash dividends that would have been paid on such shares of common stock from the award's grant date to the vesting date.
NOI - Based Performance Share Units (NOI PSU) - Each NOI PSU represents the right to receive, upon vesting, shares of the Company's common stock ranging from 0-300% of the NOI PSU based on the Company's NOI performance, as well as a cash payment upon vesting equal to the aggregate cash dividends that would have been paid on such shares of common stock from the award's grant date to the vesting date. These awards also provide for a cap on the maximum number of units if a specified absolute TSR level is not achieved.

Restricted Share Units (RSU) - Each RSU represents the right to receive upon vesting one share of the Company's common stock, as well as a cash payment upon vesting equal to the aggregate cash dividends that would have been paid on such shares of common stock from the award's grant date to the vesting date.

Expensed and Capitalized Costs

The compensation cost charged to income for the Company’s share-based compensation plans was $3.1 million and $3.4 million for the three months ended March 31, 2017 and 2016, respectively. Compensation cost capitalized as part of properties and deferred leasing costs was $0.3 million and $0.8 million for the three months ended March 31, 2017 and 2016, respectively.

Valuation Methodologies

The Company estimated the grant-date fair values of share-based grants using the methods as follows. 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 grant date. The Company assumes no forfeitures for failure to meet the service requirement of Performance Share Units (PSU) or Profits Units, due to the small number of participants and low turnover rate.

The valuations of all grants utilized the Company's common stock price at the grant date. Common stock prices when used in valuing TRG Profits Units are further adjusted by the present value of expected differences in dividends payable on the common stock versus the distributions payable on the TRG Profits Units over the vesting period. The Company estimated the value of grants dependent on TSR performance using a Monte Carlo simulation and considering historical returns of the Company and the peer group.

For awards dependent on NOI performance, the Company considers the NOI measure a performance condition under applicable accounting standards, and as such, has estimated a grant-date fair value for each of its possible outcomes. The compensation cost ultimately will be recognized equal to the grant-date fair value of the award that coincides with the actual outcome of the NOI performance. The weighted average grant-date fair value shown for NOI-dependent awards corresponds with management's current expectation of the probable outcome of the NOI performance measure. The product of the NOI-dependent awards outstanding and the grant-date fair value represents the compensation cost being recognized over the service periods.

The valuations of Profits Units consider the possibility that sufficient share price appreciation will not be realized, such that the conversion to partnership units will not occur and the awards will be forfeited.

Summaries of Activity for the Three Months Ended March 31, 2017

Restricted TRG Profits Units
 
Number of Restricted TRG Profits Units
 
Weighted Average Grant-Date Fair Value
Outstanding at January 1, 2017
45,940

 
$
59.49

Granted
46,076

 
57.84

Outstanding at March 31, 2017
92,016

 
$
58.66



As of March 31, 2017, there was $4.5 million of total unrecognized compensation cost related to nonvested Restricted TRG Profits Units outstanding. This cost is expected to be recognized over an average period of 2.4 years.





Relative TSR Performance-based TRG Profits Units
 
Number of relative TSR Performance-based TRG Profits Units
 
Weighted Average Grant-Date Fair Value
Outstanding at January 1, 2017
103,369

 
$
26.42

Granted
103,666

 
23.14

Outstanding at March 31, 2017
207,035

 
$
24.78



As of March 31, 2017, there was $4.2 million of total unrecognized compensation cost related to nonvested Relative TSR Performance-based TRG Profits Units outstanding. This cost is expected to be recognized over an average period of 2.4 years.

NOI Performance-based TRG Profits Units
 
Number of NOI Performance-based TRG Profits Units
 
Weighted Average Grant-Date Fair Value
Outstanding at January 1, 2017
103,369

 
$
41.87

Granted
103,666

 
19.35

Outstanding at March 31, 2017
207,035

 
$
30.59

    
As of March 31, 2017, there was $5.0 million of total unrecognized compensation cost related to nonvested NOI Performance-based TRG Profits Units outstanding. This cost is expected to be recognized over an average period of 2.4 years.

TSR - Based Performance Share Units
 
Number of TSR PSU
 
Weighted Average Grant-Date Fair Value
Outstanding at January 1, 2017
166,027

 
$
138.93

Vested - 2015 three-year grant
(2,885
)
(1) 
112.30

Vested - 2014 three-year grant
(43,803
)
(1) 
88.10

Vested - 2012 and 2013 special grants
(79,764
)
(1) 
181.99

Granted
5,046

 
80.71

Outstanding at March 31, 2017
44,621

 
$
108.73


(1)
Based on the Company's market performance relative to that of a peer group, the actual number of shares of common stock issued upon vesting during the three months ended March 31, 2017 was 2,193 shares (0.76x), 27,166 shares (0.62x), and zero shares for the 2015 TSR PSU three-year grant, 2014 TSR PSU three-year grant, and the 2012 and 2013 TSR PSU special grants, respectively. That is, despite the completion of the applicable employee service requirements, the number of shares ultimately considered earned is determined by the extent to which the TSR market performance measure was achieved during the performance period. These 2015 TSR PSU three-year grants vested due to a retirement.

As of March 31, 2017, there was $1.6 million of total unrecognized compensation cost related to nonvested TSR PSU outstanding. This cost is expected to be recognized over an average period of 1.1 years.

NOI - Based Performance Share Units
 
Number of NOI PSU
 
Weighted Average Grant-Date Fair Value
Outstanding at January 1, 2017
 
 
 
Granted
5,046

 
$
67.50

Outstanding at March 31, 2017 (1)
5,046

 
$
67.50



As of March 31, 2017, there was $0.3 million of total unrecognized compensation cost related to nonvested NOI PSU outstanding. This cost is expected to be recognized over an average period of 2.9 years.


Restricted Share Units
 
Number of Restricted Share Units
 
Weighted Average Grant-Date Fair Value
Outstanding at January 1, 2017
231,903

 
$
70.40

Vested
(108,491
)
 
66.13

Granted
69,775

 
67.50

Forfeited
(1,539
)
 
70.36

Outstanding at March 31, 2017
191,648

 
$
71.63



As of March 31, 2017, there was $8.1 million of total unrecognized compensation cost related to nonvested RSU outstanding. This cost is expected to be recognized over an average period of 1.9 years.

Options

As of March 31, 2017, the Company has 107,997 options outstanding at an exercise price of $45.90 and a remaining contractual term of 0.9 years. All options outstanding are fully vested and there is no unrecognized compensation cost related to options. No options were granted during the three months ended March 31, 2017. Cash received from option exercises for the three months ended March 31, 2017 and 2016 was $4.8 million and $1.7 million, respectively.

Unit Option Deferral Election

Under both a 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 TRG 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 and subsequent deferral elections (the latest being made in September 2016), beginning in December 2022 (unless Mr. Taubman retires earlier), the deferred partnership units will be issued in five annual installments. The deferred units are accounted for as participating securities of the Operating Partnership.
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 TRG in 1992, the Company entered into an agreement (the Cash Tender Agreement) with the A. Alfred Taubman Restated Revocable Trust (the Revocable Trust) and TRA Partners (now Taubman Ventures Group LLC or TVG), each of whom owned an interest in TRG, whereby each of the Revocable Trust and TVG (and/or any assignee of the Revocable Trust or TVG) has the right to tender to the Company TRG Units (provided that if the tendering party is tendering less than all of its TRG Units, 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 (except as otherwise provided below). TVG is controlled by a majority-in-interest among the Revocable Trust and entities affiliated with the children of A. Alfred Taubman (Robert S. Taubman, William S. Taubman, and Gayle Taubman Kalisman). At the election of the tendering party, TRG Units held by members of A. Alfred Taubman’s family and TRG Units held by entities in which his family members hold interests may be included in such a tender.

The Company will have the option to pay for these interests from available cash, borrowed funds, or from the proceeds of an offering of the Company's common stock. Generally, the Company expects to finance these purchases through the sale of new shares of its stock. The tendering partner will bear all market risk if the market price at closing is less than the purchase price and will bear the costs of sale. Any proceeds of the offering in excess of the purchase price will be for the sole benefit of the Company. The Company accounts for the Cash Tender Agreement as a freestanding written put option. As the option put price is defined by the current market price of the Company's stock at the time of tender, the fair value of the written option defined by the Cash Tender Agreement is considered to be zero.

Based on a market value at March 31, 2017 of $66.02 per share for the Company's common stock, the aggregate value of TRG Units that may be tendered under the Cash Tender Agreement was $1.6 billion. The purchase of these interests at March 31, 2017 would have resulted in the Company owning an additional 28% interest in the TRG.

Continuing Offer

The Company has made a continuing, irrevocable offer (the Continuing Offer) to all present holders (other than a certain excluded holder, currently TVG), permitted assignees of all present holders, those future holders of partnership interests in TRG 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. Under the Continuing Offer agreement, one unit of the Operating Partnership interest is exchangeable for one share of the Company's common stock. Upon a tender of Operating Partnership units, the corresponding shares of Series B Preferred Stock, if any, will automatically be converted into the Company’s common stock at a ratio of 14,000 shares of Series B Preferred Stock for one share of common stock.

Insurance

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

Other

See Note 5 for the Operating Partnership's guarantees of certain notes payable, including guarantees relating to Unconsolidated Joint Ventures, Note 6 for contingent features relating to certain joint venture agreements, Note 7 for contingent features relating to derivative instruments, and Note 8 for obligations under existing share-based compensation plans.
Earnings Per Share
Earnings Per Share
Earnings Per Share

Basic earnings per share amounts are based on the weighted average of common shares outstanding for the respective periods. Diluted earnings per share amounts are based on the weighted average of common shares outstanding plus the dilutive effect of potential common stock. Potential common stock includes outstanding partnership units exchangeable for common shares under the Continuing Offer (Note 9), outstanding options for partnership units, PSU, Restricted and Performance-based TRG Profits Units, RSU, deferred shares under the Non-Employee Directors’ Deferred Compensation Plan, and unissued partnership units under a unit option deferral election (Note 8). 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, which would be issuable if the end of the reporting period were the end of the contingency period. 
 
Three Months Ended March 31
 
2017

2016
Net income attributable to Taubman Centers, Inc. common shareowners (Numerator):
 

 
 
Basic
$
17,170

 
$
24,613

Impact of additional ownership of TRG
45

 
66

Diluted
$
17,215

 
$
24,679

 
 
 
 
Shares (Denominator) – basic
60,555,466

 
60,275,004

Effect of dilutive securities
498,290

 
515,997

Shares (Denominator) – diluted
61,053,756

 
60,791,001

 
 
 
 
Earnings per common share – basic
$
0.28

 
$
0.41

Earnings per common share – diluted
$
0.28

 
$
0.41



The calculation of diluted earnings per share in certain periods excluded certain potential common stock including outstanding partnership units and unissued partnership units under a unit option deferral election, both of which may be exchanged for common shares of the Company under the Continuing Offer. The table below presents the potential common stock excluded from the calculation of diluted earnings per share as they were anti-dilutive in the period presented.
 
Three Months Ended March 31
 
2017

2016
Weighted average noncontrolling partnership units outstanding
4,018,981

 
4,003,975

Unissued partnership units under unit option deferral elections
871,262

 
871,262

Fair Value Disclosures
Fair Value Disclosures
Fair Value Disclosures

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

Recurring Valuations

Derivative Instruments

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

Other

The Company's valuations of both its investments in an insurance deposit and Simon Property Group (SPG) common shares utilize unadjusted quoted prices determined by active markets for the specific securities the Company has invested in, and therefore falls into Level 1 of the fair value hierarchy.

For assets and liabilities measured at fair value on a recurring basis, quantitative disclosure of the fair value for each major category of assets and liabilities is presented below:
 
 
Fair Value Measurements as of March 31, 2017 Using
 
Fair Value Measurements as of
December 31, 2016 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)
SPG common shares
 
$
43,008

 
 
 
$
44,418

 
 
Insurance deposit
 
15,430

 
 

 
15,440

 
 

Derivative interest rate contracts (Note 7)
 
 
 
$
22

 
 
 


Total assets
 
$
58,438


$
22

 
$
59,858

 
$

 
 
 
 
 
 
 
 
 
Derivative interest rate contracts (Note 7)
 
 

 
$
(2,824
)
 
 

 
$
(3,548
)
Total liabilities
 
 

 
$
(2,824
)
 
 

 
$
(3,548
)


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

Financial Instruments Carried at Other Than Fair Values

Simon Property Group Limited Partnership Units

At both March 31, 2017 and December 31, 2016, the Company owned 340,124 partnership units in Simon Property Group Limited Partnership. The fair value of the partnership units, which is derived from SPG's common stock price and therefore falls into Level 2 of the fair value hierarchy, was $58.5 million at March 31, 2017 and $60.4 million at December 31, 2016. The partnership units were classified as Deferred Charges and Other Assets on the Consolidated Balance Sheet and had a book value of $44.8 million at both March 31, 2017 and December 31, 2016.

Notes Payable

The fair value of notes payable is estimated using cash flows discounted at current market rates and therefore falls into Level 2 of the fair value hierarchy. When selecting discount rates for purposes of estimating the fair value of notes payable at March 31, 2017 and December 31, 2016, the Company primarily employed the credit spreads at which the debt was originally issued. 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 March 31, 2017 or December 31, 2016. To further assist financial statement users, the Company has included with its fair value disclosures an analysis of interest rate sensitivity.

The estimated fair values of notes payable at March 31, 2017 and December 31, 2016 were as follows:
 
2017
 
2016
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Notes payable, net
$
3,287,968

 
$
3,232,923

 
$
3,255,512

 
$
3,184,036




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 March 31, 2017 by $139.0 million or 4.3%.

Cash Equivalents and Notes Receivable

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

See Note 7 regarding additional information on derivatives.
Accumulated Other Comprehensive Income
Comprehensive Income (Loss) Note [Text Block]
Accumulated Other Comprehensive Income

Changes in the balance of each component of AOCI for the three months ended March 31, 2017 were as follows:
 
Taubman Centers, Inc. AOCI
 
Noncontrolling Interests AOCI
 
Cumulative translation adjustment
 
Unrealized gains (losses) on interest rate instruments
 
Fair value adjustment for marketable equity securities
 
Total
 
Cumulative translation adjustment
 
Unrealized gains (losses) on interest rate instruments
 
Fair value adjustment for marketable equity securities
 
Total
January 1, 2017
$
(23,147
)
 
$
(12,467
)
 
$
(302
)
 
$
(35,916
)
 
$
(9,613
)
 
$
7,191

 
$
(126
)
 
$
(2,548
)
Other comprehensive income (loss) before reclassifications
6,694

 
(986
)
 
(999
)
 
4,709

 
2,755

 
(407
)
 
(411
)
 
1,937

Amounts reclassified from AOCI
 
 
2,291

 
 
 
2,291

 
 
 
944

 
 
 
944

Net current period other comprehensive income (loss)
$
6,694

 
$
1,305

 
$
(999
)
 
$
7,000

 
$
2,755

 
$
537

 
$
(411
)
 
$
2,881

Adjustments due to changes in ownership
(61
)
 
47

 
 
 
(14
)
 
61

 
(47
)
 
 
 
14

March 31, 2017
$
(16,514
)
 
$
(11,115
)
 
$
(1,301
)
 
$
(28,930
)
 
$
(6,797
)
 
$
7,681

 
$
(537
)
 
$
347



Changes in the balance of each component of AOCI for the three months ended March 31, 2016 were as follows:

 
Taubman Centers, Inc. AOCI
 
Noncontrolling Interests AOCI
 
Cumulative translation adjustment
 
Unrealized gains (losses) on interest rate instruments and other
 
Total
 
Cumulative translation adjustment
 
Unrealized gains (losses) on interest rate instruments and other
 
Total
January 1, 2016
$
(10,890
)
 
$
(16,330
)
 
$
(27,220
)
 
$
(4,531
)
 
$
5,595

 
$
1,064

Other comprehensive income (loss) before reclassifications
4,198

 
(8,380
)
 
(4,182
)
 
1,744

 
(3,480
)
 
(1,736
)
Amounts reclassified from AOCI

 
2,146

 
2,146

 


 
891

 
891

Net current period other comprehensive income (loss)
$
4,198

 
$
(6,234
)
 
$
(2,036
)
 
$
1,744

 
$
(2,589
)
 
$
(845
)
Adjustments due to changes in ownership
(6
)
 
7

 
1

 
6

 
(7
)
 
(1
)
March 31, 2016
$
(6,698
)
 
$
(22,557
)
 
$
(29,255
)
 
$
(2,781
)
 
$
2,999

 
$
218



The following table presents reclassifications out of AOCI for the three months ended March 31, 2017:
Details about AOCI Components
 
Amounts reclassified from AOCI
 
Affected line item in Consolidated Statement of Operations and Comprehensive Income
Losses on interest rate instruments and other:
 
 
 
 
Realized loss on interest rate contracts - consolidated subsidiaries
 
$
1,074

 
Interest Expense
Realized loss on interest rate contracts - UJVs
 
759

 
Equity in Income of UJVs
Realized loss on cross-currency interest rate contract - UJV
 
1,402

 
Equity in Income of UJVs
Total reclassifications for the period
 
$
3,235

 
 


The following table presents reclassifications out of AOCI for the three months ended March 31, 2016:
Details about AOCI Components
 
Amounts reclassified from AOCI
 
Affected line item in Consolidated Statement of Operations and Comprehensive Income
Losses on interest rate instruments and other:
 
 
 
 
Realized loss on interest rate contracts - consolidated subsidiaries
 
$
1,517

 
Interest Expense
Realized loss on interest rate contracts - UJVs
 
974

 
Equity in Income of UJVs
Realized loss on cross-currency interest rate contract - UJV
 
546

 
Equity in Income of UJVs
Total reclassifications for the period
 
$
3,037

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

Interest paid for the three months ended March 31, 2017 and 2016, net of amounts capitalized of $4.1 million and $6.5 million, respectively, was $23.4 million and $17.3 million, respectively. Income taxes paid for the three months ended March 31, 2017 and 2016 were $1.1 million and $0.5 million, respectively. Other non-cash additions to properties during the three months ended March 31, 2017 and 2016 were $95.4 million and $87.0 million, respectively, and primarily represent accrued construction and tenant allowance costs.
New Accounting Pronouncements
New Accounting Pronouncements, Policy [Policy Text Block]
New Accounting Pronouncements

In February 2017, the Financial Accounting Standards Board (FASB) issued ASU No. 2017-05, "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets", which provides guidance for recognizing gains and losses from the transfer of nonfinancial assets and for partial sales of nonfinancial assets. ASU No. 2017-05 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2017. Early adoption of this ASU is permitted, including adoption in an interim period. The Company currently accounts for the derecognition of nonfinancial assets according to industry-specific guidance as the Company's nonfinancial assets are considered in-substance real estate. The Company is currently evaluating the application of this ASU, although the most likely outcome is that in the event the Company sells a controlling interest in a shopping center, but retains a noncontrolling ownership interest, the Company would measure the retained interest at fair value. This would result in full gain/loss recognition upon such a sale of the controlling interest, a change from current practice.

In January 2017, the FASB issued ASU No. 2017-01, "Clarifying the Definition of a Business", which provides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or dispositions) of assets or businesses. ASU No. 2017-01 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2017. Early adoption of this ASU is permitted for transactions occurring before the amendment date if the transaction has not been reported in previous filings. The Company previously generally accounted for acquisitions of shopping centers as acquisitions of businesses under ASC Topic 805, "Business Combinations". In January 2017, the Company early adopted ASU No. 2017-01, and expects to account for potential future acquisitions of shopping centers as asset acquisitions. This will impact the Consolidated Statement of Operations and Comprehensive Income as transaction costs associated with asset acquisitions will now be capitalized.

In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows - Restricted Cash", which provides guidance for the presentation of restricted cash and changes in restricted cash. ASU No. 2016-18 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2017. Early adoption of this ASU is permitted, including adoption in an interim period. This ASU will require restricted cash to be presented in combination with cash and cash equivalents on the Consolidated Statement of Cash Flows. The Company is currently evaluating the application of this ASU, however the Company does not expect the effect on the Company's Consolidated Statement of Cash Flows to be material as the Company generally holds a small amount of restricted cash.

In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments", which provides guidance for the presentation of certain cash receipts and payments, including the classification of distributions received from equity method investees. ASU No. 2016-15 provides companies with two alternatives of presentation; the nature of the distribution approach or the cumulative earnings approach. ASU No. 2016-15 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2017. Early adoption of this ASU is permitted, including adoption in an interim period. The Company expects to adopt the new standard on its effective date. The Company expects to use the cumulative earnings approach to calculate and present distributions received from equity method investees, and does not believe there will be a material impact to the Consolidated Statement of Cash Flows.


In February 2016, the FASB issued ASU No. 2016-02, "Leases", which provides for significant changes to the current lease accounting standard. The primary objectives of this ASU is to address off-balance-sheet financing related to operating leases and to introduce a new lessee model that brings substantially all leases onto the balance sheet. ASU No. 2016-02 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2018. The Company expects to adopt the new standard on its effective date. The Company is currently evaluating the application of this ASU and its effect on the Company’s financial position and results of operations. From initial implementation efforts, the Company preliminarily expects the most significant impacts of adoption to include (1) the potential need to expense certain internal leasing costs currently being capitalized, including costs associated with the Company's leasing department, (2) the bifurcation of certain lease revenues between rental and reimbursement (non-rental) components, and (3) the potential recognition of lease obligations and right-of-use assets for ground and office leases under which the Company or its ventures are the lessee. Under the new ASU, common area maintenance recoveries must be accounted for as a non-lease component. The Company will be evaluating whether bifurcating of common area maintenance will affect the timing or recognition of such revenues.

In January 2016, the FASB issued ASU No. 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities", which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Amongst its changes, ASU No. 2016-01 requires an entity to measure equity investments at fair value through net income, except for those that result in consolidation or are accounted for under the equity method of accounting. ASU No. 2016-01 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2017. As of March 31, 2017, the Company owned 340,124 Simon Property Group Limited Partnership units that are currently being accounted for as a cost method investment and 250,000 SPG common shares that are currently being recorded at fair value (Note 11). Upon the Company's adoption of ASU No. 2016-01 any outstanding Simon Property Group Limited Partnership units will be remeasured at fair value and an offsetting cumulative effect adjustment will be recorded in equity. After the Company's adoption of ASU No. 2016-01, changes in the fair value of any outstanding Simon Property Group Limited Partnership units and SPG common shares will be recorded in net income. Both the Simon Property Group Limited Partnership units and SPG common shares are recorded in Deferred Charges and Other Assets on the Consolidated Balance Sheet.
 
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers". This standard provides a single comprehensive model to use in accounting for revenue arising from contracts with customers and gains and losses arising from transfers of non-financial assets including sales of property, plant and equipment, real estate, and intangible assets. ASU No. 2014-09 supersedes most current revenue recognition guidance, including industry-specific guidance. In August 2015, the FASB issued ASU No. 2015-14, which deferred the effective date of ASU No. 2014-09 one year to annual reporting periods beginning after December 15, 2017 for public entities. ASU No. 2015-14 permits public entities to adopt ASU No. 2014-09 early, but not before the original effective date of annual periods beginning after December 15, 2016. ASU No. 2014-09 may be applied either retrospectively or as a cumulative effect adjustment as of the date of adoption. The Company is currently evaluating the application of this ASU and its effect on the Company's financial position and results of operations. The Company has preliminarily determined the revenue streams that could be most significantly impacted by this ASU relate to the Company's management, leasing and development services, certain recoveries from tenants, and other miscellaneous income. The Company expects that the revenue recognition from management services and other miscellaneous income will be generally consistent with current recognition methods. In the first quarter of 2017, these revenues were less than 10% of consolidated revenue. The Company expects to adopt the standard using the modified retrospective approach, which requires cumulative adjustment as of the date of the adoption. The Company will adopt the standard on its effective date beginning with the first quarter of 2018.
Income Taxes (Tables)
The Company’s income tax expense (benefit) for the three months ended March 31, 2017 and 2016 consisted of the following:

 
Three Months Ended March 31
 
2017

2016
Federal current


 
$
1,115

Federal deferred
$
152

 
(761
)
Foreign current
88

 
134

Foreign deferred
(121
)
 
(210
)
State current
86

 
127

State deferred
3

 
(103
)
Total income tax expense
$
208


$
302



Deferred tax assets and liabilities as of March 31, 2017 and December 31, 2016 were as follows:
 
2017
 
2016
Deferred tax assets:
 
 
 
Federal
$
1,983

 
$
3,230

Foreign
1,946

 
1,673

State
851

 
935

Total deferred tax assets
$
4,780

 
$
5,838

Valuation allowances
(1,765
)
 
(1,812
)
Net deferred tax assets
$
3,015

 
$
4,026

Deferred tax liabilities:
 
 
 

Foreign
$
1,102

 
$
1,124

Total deferred tax liabilities
$
1,102

 
$
1,124

Investments in Unconsolidated Joint Ventures (Tables)
The Company owns beneficial interests in joint ventures that own shopping centers. The Operating Partnership is the sole direct or indirect managing general partner or managing member of Fair Oaks, International Plaza, Stamford Town Center, Sunvalley, The Mall at University Town Center, and Westfarms. The Operating Partnership also provides certain management, leasing, and/or development services to the other shopping centers noted below.
Shopping Center
 
Ownership as of
March 31, 2017 and
December 31, 2016
CityOn.Xi'an
 
50%
CityOn.Zhengzhou
 
49
Country Club Plaza
 
50
Fair Oaks
 
50
International Plaza
 
50.1
The Mall at Millenia
 
50
Stamford Town Center
 
50
Starfield Hanam
 
34.3
Sunvalley
 
50
The Mall at University Town Center
 
50
Waterside Shops
 
50
Westfarms
 
79



Combined Financial Information

Combined balance sheet and results of operations information is presented in the following table for the Unconsolidated Joint Ventures, followed by the Operating Partnership's beneficial interest in the combined operations information. The combined information of the Unconsolidated Joint Ventures as of March 31, 2017 and December 31, 2016 excludes the balances of CityOn.Zhengzhou, which opened in March 2017. Beneficial interest is calculated based on the Operating Partnership's ownership interest in each of the Unconsolidated Joint Ventures.

 
March 31,
2017
 
December 31,
2016
Assets:
 
 
 
Properties
$
3,356,646

 
$
3,371,216

Accumulated depreciation and amortization