TAUBMAN CENTERS INC, 10-Q filed on 5/1/2019
Quarterly Report
v3.19.1
Document and Entity Information Document - shares
3 Months Ended
Mar. 31, 2019
Apr. 30, 2019
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, 2019  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q1  
Amendment Flag false  
Entity Common Stock, Shares Outstanding   61,166,581
Entity Current Reporting Status Yes  
Entity Small Business false  
Entity Emerging Growth Company false  
v3.19.1
CONSOLIDATED BALANCE SHEET - USD ($)
Mar. 31, 2019
Dec. 31, 2018
Assets:    
Properties $ 4,732,683,000 $ 4,717,569,000
Accumulated depreciation and amortization (1,445,644,000) (1,404,692,000)
Real Estate Investment Property, Net 3,287,039,000 3,312,877,000
Investment in Unconsolidated Joint Ventures (Notes 1, 2, and 4) 691,221,000 673,616,000
Cash and cash equivalents (Note 13) 38,151,000 48,372,000
Restricted cash (Note 13) 97,294,000 94,557,000
Accounts and notes receivable (Note 1) 80,246,000 77,730,000
Accounts receivable from related parties 733,000 1,818,000
Operating lease right-of-use assets (Note 1) 167,287,000  
Deferred charges and other assets 89,423,000 135,136,000
Total Assets 4,451,394,000 4,344,106,000
Liabilities:    
Notes payable, net (Note 5) 3,846,501,000 3,830,195,000
Accounts payable and accrued liabilities 220,701,000 336,208,000
Operating lease liabilities (Note 1) 232,702,000  
Distributions in excess of investments in and net income of Unconsolidated Joint Ventures (Notes 1 and 4) 483,343,000 477,800,000
Total Liabilities 4,783,247,000 4,644,203,000
Commitments and contingencies (Notes 1, 5, 6, 7, 8, and 9)
Redeemable Noncontrolling Interest, Equity, Carrying Amount [Abstract]    
Redeemable noncontrolling interests (Note 6) 7,800,000 7,800,000
Equity (Deficit):    
Series B Non-Participating Convertible Preferred Stock, $0.001 par and liquidation value, 40,000,000 shares authorized, 24,855,694 and 24,862,994 shares issued and outstanding at March 31, 2019 and December 31, 2018 25,000 25,000
Common Stock, $0.01 par value, 250,000,000 shares authorized, 61,161,539 and 61,069,108 shares issued and outstanding at March 31, 2019 and December 31, 2018 612,000 611,000
Additional paid-in capital 677,755,000 676,097,000
Accumulated other comprehensive income (loss) (Note 12) (27,501,000) (25,376,000)
Dividends in excess of net income (Notes 1 and 7) (767,622,000) (744,230,000)
Stockholders' Equity Attributable to Parent (116,731,000) (92,873,000)
Noncontrolling interests (Notes 1 and 6) (222,922,000) (215,024,000)
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest (339,653,000) (307,897,000)
Total Liabilities and Equity $ 4,451,394,000 $ 4,344,106,000
v3.19.1
CONSOLIDATED BALANCE SHEET (Parenthetical) - USD ($)
Mar. 31, 2019
Dec. 31, 2018
Common stock, par value $ 0.01 $ 0.01
Common stock, shares authorized 250,000,000 250,000,000
Common stock, shares issued 61,161,539 61,069,108
Common stock, shares outstanding 61,161,539 61,069,108
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 24,855,694 24,862,994
Preferred Stock, shares outstanding 24,855,694 24,862,994
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
v3.19.1
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Revenues:    
Rental revenues (Note 1) $ 144,289  
Minimum rents (Note 1) $ 86,825
Overage rents 3,141 2,625
Recovery of Direct Costs 51,528
Management, leasing, and development services 1,216 794
Other (Note 1) 11,562 19,720
Total Revenues 160,208 161,492
Expenses:    
Maintenance, taxes, utilities, and promotion 38,538 37,637
Other operating (Note 1) 19,225 23,866
Management, leasing, and development services 531 302
General and administrative 8,576 8,493
Restructuring charge (Note 1) 625 (346)
Costs associated with shareholder activism (Note 1) 4,000 3,500
Interest expense 36,885 30,823
Depreciation and amortization 44,956 35,022
Operating Expenses 153,336 139,297
Nonoperating income (expense) (Notes 9 and 11) 8,733 (7,143)
Income before income tax expense and equity in income of Unconsolidated Joint Ventures 15,605 15,052
Income tax expense (Note 3) (539) (184)
Equity in income of Unconsolidated Joint Ventures (Note 4) 14,672 19,728
Net income 29,738 34,596
Net income attributable to noncontrolling interests (Note 6) (8,230) (9,623)
Net income attributable to Taubman Centers, Inc. 21,508 24,973
Distributions to participating securities of TRG (Note 8) (627) (599)
Preferred stock dividends (5,784) (5,784)
Net income attributable to Taubman Centers, Inc. common shareholders 15,097 18,590
Other comprehensive income (Note 12):    
Unrealized gain (loss) on interest rate instruments (4,888) 6,419
Cumulative translation adjustment 3,318 3,721
Reclassification adjustment for amounts recognized in net income (1,423) 774
Other comprehensive income (loss) (2,993) 10,914
Comprehensive income 26,745 45,510
Comprehensive income attributable to noncontrolling interests (7,364) (12,793)
Comprehensive income attributable to Taubman Centers, Inc. $ 19,381 $ 32,717
Basic earnings per common share (Note 10) $ 0.25 $ 0.31
Diluted earnings per common share (Note 10) $ 0.25 $ 0.30
Weighted average number of common shares outstanding – basic 61,124,016 60,917,235
v3.19.1
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]
Former Taubman Asia Redeemable Noncontrolling Interest [Member]
Series J Preferred Stock [Member]
Series K Preferred Stock [Member]
Balance at Dec. 31, 2017 $ (150,028,000) $ 25,000 $ 608,000 $ 675,333,000 $ (6,919,000) $ (646,807,000) $ (172,268,000)      
Balance (in shares) at Dec. 31, 2017   39,438,114 60,832,918              
Increase (Decrease) in Stockholders' Equity [Roll Forward]                    
Issuance of stock pursuant to Continuing Offer (Notes 8 and 9) 0              
Issuance of stock pursuant to Continuing Offer (Notes 8 and 9), shares   (893) 3,353              
Share-based compensation under employee and director benefit plans (Note 8) (1,533,000)   $ 2,000 (1,535,000)            
Share-based compensation under employee and director benefit plans (Note 8), shares     154,843              
Adjustments of noncontrolling interests (Note 6) (52,000)     (71,000) 9,000   10,000      
Dividends and distributions (63,418,000)         (46,331,000)        
Adjustments of equity pursuant to adoption of ASC 842 (Note 1)         (677,000)          
Distributions to noncontrolling interests             (17,087,000)      
Other (392,000)     (677,000) 563,000 (278,000)      
Net income (excludes net loss attributable to redeemable noncontrolling interest) (Note 6) 34,648,000         24,973,000 9,675,000      
Net Income (Loss) Attributable to Redeemable Noncontrolling Interest (52,000)             $ (52,000)    
Unrealized gain (loss) on interest rate instruments and other 6,419,000       4,553,000   1,866,000      
Cumulative translation adjustment 3,721,000       2,641,000   1,080,000      
Reclassification adjustment for amounts recognized in net income 774,000       550,000   224,000      
Balance at Mar. 31, 2018 (169,861,000) $ 25,000 $ 610,000 673,727,000 157,000 (667,602,000) (176,778,000)      
Balance (in shares) at Mar. 31, 2018   39,437,221 60,991,114              
Increase (Decrease) in Stockholders' Equity [Roll Forward]                    
Common Stock, Dividends, Per Share, Declared     $ 0.655              
Preferred Stock, Dividends Per Share, Declared                 $ 0.40625 $ 0.390625
Balance at Dec. 31, 2018 (307,897,000) $ 25,000 $ 611,000 676,097,000 (25,376,000) (744,230,000) (215,024,000)      
Balance (in shares) at Dec. 31, 2018   39,362,994 61,069,108              
Increase (Decrease) in Stockholders' Equity [Roll Forward]                    
Issuance of stock pursuant to Continuing Offer (Notes 8 and 9) 0              
Issuance of stock pursuant to Continuing Offer (Notes 8 and 9), shares   (7,300) 7,300              
Share-based compensation under employee and director benefit plans (Note 8) 1,830,000   $ 1,000 1,829,000            
Share-based compensation under employee and director benefit plans (Note 8), shares     85,131              
Adjustments of noncontrolling interests (Note 6) (93,000)     (171,000) 2,000   76,000      
Dividends and distributions (64,888,000)         (47,694,000)        
Adjustments of equity pursuant to adoption of ASC 842 (Note 1) 4,919,000         3,156,000 1,763,000      
Distributions to noncontrolling interests             (17,194,000)      
Other (362,000)     (362,000)      
Net income (excludes net loss attributable to redeemable noncontrolling interest) (Note 6) 29,831,000         21,508,000 8,323,000      
Net Income (Loss) Attributable to Redeemable Noncontrolling Interest (93,000)             $ (93,000)    
Unrealized gain (loss) on interest rate instruments and other (4,888,000)       (3,475,000)   (1,413,000)      
Cumulative translation adjustment 3,318,000       2,359,000   959,000      
Reclassification adjustment for amounts recognized in net income (1,423,000)       (1,011,000)   (412,000)      
Balance at Mar. 31, 2019 $ (339,653,000) $ 25,000 $ 612,000 $ 677,755,000 $ (27,501,000) $ (767,622,000) $ (222,922,000)      
Balance (in shares) at Mar. 31, 2019   39,355,694 61,161,539              
Increase (Decrease) in Stockholders' Equity [Roll Forward]                    
Common Stock, Dividends, Per Share, Declared     $ 0.675              
Preferred Stock, Dividends Per Share, Declared                 $ 0.40625 $ 0.390625
v3.19.1
CONSOLIDATED STATEMENT OF CASH FLOWS - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Cash Flows From Operating Activities:    
Net income $ 29,738 $ 34,596
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 44,956 35,022
Provision for bad debts 3,913
Fluctuation in fair value of equity securities (Note 11) 3,346 (10,262)
Loss from Unconsolidated Joint Ventures in excess of distributions (1,684) (1,206)
Non-cash operating lease expense 509
Other 3,499 4,103
Increase (decrease) in cash attributable to changes in assets and liabilities:    
Receivables, deferred charges, and other assets (3,084) (1,193)
Accounts payable and accrued liabilities (27,420) (35,310)
Net Cash Provided By Operating Activities 43,168 50,187
Cash Flows From Investing Activities:    
Additions to properties (47,006) (58,676)
Proceeds from sale of equity securities (Note 11) 52,077
Insurance proceeds for capital items at The Mall of San Juan (Note 9) 4,787
Contributions to Unconsolidated Joint Ventures (Note 2) (16,900) (1,253)
Distributions from Unconsolidated Joint Ventures in excess of income 8,418 777
Other 23 22
Net Cash Used In Investing Activities (3,388) (54,343)
Cash Flows From Financing Activities:    
Proceeds from revolving lines of credit, net 18,475 13,295
Debt proceeds 550,000
Debt payments (2,871) (476,654)
Debt issuance costs (2,925)
Issuance of common stock and/or TRG Units in connection with incentive plans (581) (2,293)
Distributions to noncontrolling interests (17,194) (17,087)
Distributions to participating securities of TRG (627) (599)
Cash dividends to preferred shareholders (5,784) (5,784)
Cash dividends to common shareholders (41,283) (39,948)
Net Cash Provided By (Used In) Financing Activities (49,865) 18,005
Effect of exchange rate fluctuations on cash, cash equivalents, and restricted cash (Note 13) 2,601 2,621
Net Increase (Decrease) In Cash, Cash Equivalents, and Restricted Cash (7,484) 16,470
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period (Note 13) 142,929 164,404
Cash, Cash Equivalents, and Restricted Cash at End of Period (Note 13) $ 135,445 $ 180,874
v3.19.1
Interim Financial Statements
3 Months Ended
Mar. 31, 2019
Notes to Financial Statements [Abstract]  
Interim Financial Statements
Interim Financial Statements

General

Taubman Centers, Inc. (TCO) is a Michigan corporation that operates as a self-administered and self-managed real estate investment trust (REIT). TCO's sole asset is an approximate 71% general partnership interest in The Taubman Realty Group Limited Partnership (TRG), which owns direct or indirect interests in all of our real estate properties. In this report, the terms “we", "us", and "our'" refer to TCO, TRG, and/or TRG's subsidiaries as the context may require. We own, manage, lease, acquire, dispose of, develop, and expand shopping centers and interests therein. Our owned portfolio as of March 31, 2019 included 23 urban and suburban shopping centers operating in 11 U.S. states, Puerto Rico, South Korea, and China. The Taubman Company LLC (the Manager) provides certain management and administrative services for us and for our U.S. properties.

The Consolidated Businesses consist of shopping centers and entities that are controlled, by ownership or contractual agreements, by TRG, the Manager, or Taubman Properties Asia LLC and its subsidiaries and affiliates (Taubman Asia). Shopping centers owned through joint ventures that are not controlled by us by over which we have significant influence (Unconsolidated Joint Ventures or UJVs) are accounted for under the equity method.

In May 2018, we entered into a redevelopment agreement for Taubman Prestige Outlets Chesterfield. As of May 1, 2018, all operations at the center, as well as the building and improvements, were transferred to The Staenberg Group (TSG), and TSG leases the land from us through a long-term, participating ground lease. Both we and TSG have the ability to terminate the ground lease in the event that a redevelopment has not begun within five years, with the buildings and improvements reverting to us upon such a termination. We will defer recognition of a sale of the building and improvements and maintain the property on our Consolidated Balance Sheet until the foregoing termination right is no longer available to the parties, with this right ceasing upon TSG commencing a redevelopment. The shopping center has been excluded from our owned shopping center portfolio disclosure above.

The unaudited interim financial statements should be read in conjunction with the audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018. 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 TCO include all accounts of TCO, TRG, and our consolidated businesses, including the Manager and Taubman Asia. All intercompany transactions have been eliminated. The entities included in these consolidated financial statements are separate legal entities and maintain records and books of account separate from any other entity. However, inclusion of these separate entities in 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, we evaluate the characteristics of associated entities and determine whether an entity is a variable interest entity (VIE), and, if so, determine whether we are the primary beneficiary by analyzing whether we have both the power to direct the entity's significant economic activities and the obligation to absorb potentially significant losses or receive potentially significant benefits. Significant judgments and assumptions inherent in this analysis include the nature of the entity's operations, the entity's financing and capital structure, and contractual relationship and terms, including consideration of governance and decision making rights. We consolidate a VIE when we have determined that we are the primary beneficiary. All of our consolidated joint ventures, including TRG, meet the definition and criteria as VIEs, as either we or an affiliate of ours is the primary beneficiary of each VIE.






TCO's sole asset is an approximate 71% general partnership interest in TRG and, consequently, substantially all of TCO's consolidated assets and liabilities are assets and liabilities of TRG. All of TCO's debt (Note 5) is an obligation of TRG or our consolidated subsidiaries. Note 5 also provides disclosure of guarantees provided by TRG to certain consolidated joint ventures and UJVs. Note 6 provides additional disclosures of the carrying balance of the noncontrolling interests in our consolidated joint ventures and other information, including a description of certain rights of the noncontrolling owners.

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

Ownership

In addition to common stock, we had three classes of preferred stock outstanding (Series B, J, and K) as of March 31, 2019. Dividends on the 6.5% Series J Cumulative Redeemable Preferred Stock (Series J Preferred Stock) and the 6.25% Series K Cumulative Redeemable Preferred Stock (Series K Preferred Stock) are cumulative and are paid on the last business day of each calendar quarter. We own corresponding Series J and Series K Preferred Equity interests in TRG that entitle us to income and distributions (in the form of guaranteed payments) in amounts equal to the dividends payable on TCO's Series J and Series K Preferred Stock.

We are also obligated to issue to the noncontrolling partners of TRG, upon subscription, one share of Series B Non-Participating Convertible Preferred Stock (Series B Preferred Share) per each unit of limited partnership in TRG (TRG Unit). Each Series B Preferred Share entitles the holder to one vote per share on all matters submitted to our shareholders. The holders of Series B Preferred Shares, voting as a class, have the right to designate up to four nominees for election as directors of TCO. On all other matters on which the holders of common stock are entitled to vote, including the election of directors, the holders of Series B Preferred Shares will vote with the holders of common stock. The holders of Series B Preferred Shares are not entitled to dividends or earnings of TCO. The Series B Preferred Shares are convertible into common stock at a ratio of 14,000 shares of Series B Preferred Stock for one share of common stock.

Outstanding voting securities of TCO at March 31, 2019 consisted of 24,855,694 shares of Series B Preferred Stock and 61,161,539 shares of common stock.

TRG

At March 31, 2019, TRG’s equity included two classes of preferred equity (Series J and K) and the net equity of the TRG unitholders. Net income and distributions of TRG are allocable first to the preferred equity interests, and the remaining amounts to the general and limited partners in TRG in accordance with their percentage ownership. The Series J and Series K Preferred Equity are owned by TCO and are eliminated in consolidation.

TCO's ownership in TRG at March 31, 2019 consisted of a 71% managing general partnership interest, as well as the Series J and Series K Preferred Equity interests. Our average ownership percentage in TRG for both the three months ended March 31, 2019 and 2018 was 71%. At March 31, 2019, TRG had 86,031,993 TRG Units outstanding, of which we owned 61,161,539 TRG Units. Disclosures about TRG Units outstanding exclude TRG Profits Units granted or other share-based grants for which TRG Units may eventually be issued (Note 8).

The remaining approximate 29% of TRG Units are owned by TRG's partners other than TCO, including Robert S. Taubman, William S. Taubman, Gayle Taubman Kalisman, and the A. Alfred Taubman Restated Revocable Trust (the Revocable Trust).
Revenue Recognition

Disaggregation of Revenue

The nature, amount, timing, and uncertainty of individual types of revenues may be affected differently by economic factors. Under Accounting Standards Codification (ASC) Topic 606, "Revenue from Contracts with Customers", we are required to disclose a disaggregation of our revenues derived from contracts from customers that considers economic differences between revenue types. The following table summarizes our disaggregation of consolidated revenues for this purpose.
        
 
 
Three Months Ended March 31
 
 
2019
 
2018
Expense recoveries (1)
 

 
$
51,528

Shopping center and other operational revenues (2)
 
$
11,562

 
10,820

Management, leasing, and development services
 
1,216

 
794

Total revenue from contracts with customers
 
$
12,778


$
63,142


(1)
Pursuant to our adoption of ASC Topic 842, "Leases", beginning January 1, 2019, expense recoveries has been combined with minimum rent on the Consolidated Statement of Operations and Comprehensive Income (Loss) into Rental Revenues and is no longer required to be disaggregated.
(2)
Represents consolidated Other revenue reported on the Consolidated Statement of Operations and Comprehensive Income (Loss) excluding lease cancellation income for the three months ended March 31, 2018. Pursuant to the adoption of ASC Topic 842, "Leases", beginning January 1, 2019, lease cancellation income is now presented in Rental Revenues on the Consolidated Statement of Operations and Comprehensive Income (Loss).

Information about Contract Balances and Unsatisfied Performance Obligations

Contract assets exist when we have a right to payment for services rendered that remains conditional on factors other than the passage of time. Similarly, contract liabilities are incurred when customers prepay for services to be rendered. Certain revenue streams within shopping center and other operational revenues may give rise to contract assets and liabilities. However, these revenue streams are generally short-term in nature and the difference between revenue recognition and cash collection, although variable, does not differ significantly from period to period. As of March 31, 2019, we had an inconsequential amount of contract assets and liabilities.

The aggregate amount of the transaction price allocated to our performance obligations that were unsatisfied, or partially unsatisfied, as of March 31, 2019 were inconsequential.

Restructuring Charge

We have been undergoing a restructuring to reduce our workforce and reorganize various areas of the organization in response to the completion of another major development cycle and the current near-term challenges facing the U.S. retail industry. During the three months ended March 31, 2019, we incurred $0.6 million of expense related to our restructuring efforts. During the three months ended March 31, 2018, we recorded a change in estimate to previously recognized restructuring charges resulting in a reversal of expense of $0.3 million. These expenses and changes in estimates thereto have been separately classified as Restructuring Charge on the Consolidated Statement of Operations and Comprehensive Income (Loss). As of March 31, 2019, $0.2 million of the restructuring costs recognized during 2018 and 2019 were unpaid and remained accrued.    

Costs Associated with Shareholder Activism

During the three months ended March 31, 2019 and 2018, we incurred $4.0 million and $3.5 million, respectively, of expense associated with activities related to shareholder activism, largely legal and advisory services. Also included in the activism costs is a retention program for certain employees. Given the uncertainties associated with shareholder activism and to ensure the retention of top talent in key positions within TCO, certain key employees were provided certain incentive benefits in the form of cash and/or equity retention awards. We and our Board of Directors believe these benefits are instrumental in ensuring the continued success of TCO during the retention period. Due to the unusual and infrequent nature of these expenses in our history, they have been separately classified as Costs Associated with Shareholder Activism on our Consolidated Statement of Operations and Comprehensive Income (Loss). Unvested incentive benefits under the retention awards as of March 31, 2019 were $0.6 million, which will be recognized as service is rendered through December 31, 2019.


Management’s Responsibility to Evaluate Our Ability to Continue as a Going Concern

When preparing financial statements for each annual and interim reporting period, management has the responsibility to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued. No such conditions or events were identified as of the issuance date of the financial statements contained in this Quarterly Report on Form 10-Q.

Adoption of ASC Topic 842 ("Leases")

On January 1, 2019, we adopted ASC Topic 842, "Leases". ASC Topic 842 addresses off-balance sheet financing related to operating leases and introduces a new lessee model that bring substantially all leases onto the balance sheet. We adopted ASC Topic 842, recognizing operating lease liabilities and related right-of-use assets for ground and office leases under which we are the lessee on our Consolidated Balance Sheet, as of the date of adoption. These lease liabilities and related right-of-use assets will amortize over the remaining life of the respective leases. We also began expensing certain indirect leasing costs, which were capitalizable under the previous lease accounting standard. For the three months ended March 31, 2019, we expensed $1.4 million of leasing costs under ASC Topic 842 that would have been capitalized under the previous accounting standard.
We implemented ASC Topic 842 using certain practical expedients. As a result of these elections, we did not reassess whether any existing contracts contained a lease, the lease classification of existing leases, or the initial direct costs of existing leases. In addition, in instances where we are the lessor, we elected to not separate non-lease components, most significantly certain common area maintenance recoveries, from the associated lease components. Due to this election, minimum rents and expense recoveries were combined into a single revenue line item, Rental Revenues, on our Consolidated Statement of Operations and Comprehensive Income (Loss). We also elected the optional transition method to apply the provisions of ASC Topic 842 as of the adoption date, rather than the earliest period presented. As such, the requirements of ASC Topic 842 were not applied in the comparative periods presented in our consolidated financial statements.
In connection with the adoption of ASC Topic 842, lease cancellation payments from our tenants are now included in Rental Revenues on our Consolidated Statement of Operations and Comprehensive Income (Loss) and recognized on a straight-line basis over the remaining lease term, if any. Lease cancellation income is now presented in Rental Revenues on our Consolidated Statement of Operations and Comprehensive Income (Loss). Lease cancellation income was previously accounted for under ASC Topic 606 and presented in Other revenue on our Consolidated Statement of Operations and Comprehensive Income (Loss).

Shopping center space is leased to tenants and certain anchors pursuant to lease agreements. Future rental revenues under operating leases in effect at March 31, 2019 for operating centers, assuming no new or renegotiated leases or option extensions on anchor agreements, is summarized as follows:
2019
$
337,575

2020
438,542

2021
393,565

2022
346,388

2023
309,854

Thereafter
953,455



Certain shopping centers, as lessees, have ground and office leases expiring at various dates through the year 2105. As of March 31, 2019, these leases had an average remaining lease term of approximately 51 years. One center has an option to extend the term for three, 10-year periods and another center has the option to extend the lease term for one additional 10-year period. As of March 31, 2019, these extension options were not considered reasonably assured of being exercised and therefore were excluded from the respective lease terms for these centers. We also lease certain of our office facilities and certain equipment. Office facility and equipment leases expire at various dates through the year 2022.
In order to determine the operating lease liabilities and related right-of-use assets for ground and office leases under which we are the lessee, we utilized a synthetic corporate yield curve to determine an incremental borrowing rate for each of our leases. Significant judgment was required to develop the yield curve, which utilized certain peer and market observations. As of March 31, 2019, the weighted average discount rate for operating leases reported on our Consolidated Balance Sheet was 6.2%. In instances where variable consideration not dependent upon an index or rate existed, such future payments were excluded from the determination of the related operating lease liability and right-of-use asset.
For leases existing as of the adoption date of ASC Topic 842, rent expense is recognized on a straight-line basis. Rental expense under operating leases was $4.2 million for both the three months ended March 31, 2019 and 2018. There was no contingent rent expense under operating leases for the three months ended March 31, 2019 and 2018. Payables representing straight-line rent adjustments under lease agreements were $64.8 million as of December 31, 2018. These amounts are now presented within Operating Lease Liabilities on our Consolidated Balance Sheet upon adoption of ASC Topic 842.

The following is a schedule of future minimum rental payments required under operating leases:
2019
$
10,949

2020
13,643

2021
12,584

2022
13,982

2023
14,142

Thereafter
723,068



We own the retail space subject to a long-term participating lease at City Creek Center, a mixed-use property in Salt Lake City, Utah. City Creek Reserve, Inc. (CCRI), an affiliate of the LDS Church is the participating lessor. We own 100% of the leasehold interest in the retail buildings and property. CCRI has an option to purchase our interest at fair value at various points in time over the term of the lease. In addition to the minimum rent included in the table above, we may pay contingent rent based on the performance of the center.
International Market Place, a shopping center located in Waikiki, Honolulu, Hawaii, is subject to a long-term participating ground lease. In addition to minimum rent included in the table above, we may pay contingent rent based on the performance of the center.

Accounts Receivable and Uncollectible Tenant Revenues

In connection with the adoption of ASC Topic 842, we now review the collectibility of both billed and accrued charges under our tenant leases each quarter taking into consideration the tenant’s historical payment status, credit profile, and known issues related to tenant operations. For any tenant receivable balances thought to be uncollectible, we now record an offset for uncollectible tenant revenues directly to Rental Revenues on the Consolidated Statement of Operations and Comprehensive Income (Loss). Uncollectible tenant revenues were previously reported as bad debt expense in Other Operating expense on our Consolidated Statement of Operations and Comprehensive Income (Loss). Our allowance for doubtful accounts as of December 31, 2018 was $10.4 million.

As a result of the above change in evaluation in uncollectible tenant revenues, the allowance for doubtful accounts was written off and an entry was recorded as of January 1, 2019 to adjust the receivables and equity balances of our Consolidated Businesses and Unconsolidated Joint Ventures. This resulted in a cumulative effect adjustment increasing Dividends in Excess of Net Income by $3.2 million and Non-redeemable Noncontrolling Interest by $1.8 million on our Consolidated Balance Sheet with offsetting increases in Accounts and Notes Receivable, Investment in Unconsolidated Joint Ventures, and Distributions in Excess of Investments In and Net Income of Unconsolidated Joint Ventures balances on our Consolidated Balance Sheet.
v3.19.1
Disposition, Redevelopments, and Developments
3 Months Ended
Mar. 31, 2019
Acquisition, Redevelopments, and Developments [Abstract]  
Disposition, Redevelopments, and Developments [Text Block]
Partial Disposition of Ownership Interests, Redevelopment, and Development

Partial Disposition of Ownership Interests

In February 2019, we announced agreements to sell 50% of our interests in Starfield Hanam, CityOn.Xi’an, and CityOn.Zhengzhou to funds managed by The Blackstone Group L.P. (Blackstone). Following the transactions, which are subject to customary closing conditions and are expected to close throughout 2019, we will retain a 17.15% ownership interest in Starfield Hanam, a 25% ownership interest in CityOn.Xi'an, and a 24.5% ownership interest in CityOn.Zhengzhou. We will remain the partner responsible for the joint management of the three shopping centers, with Blackstone paying a property service fee. The interests to be sold were valued at $480 million as of the sale agreement date, with net cash proceeds expected to be about $315 million, after transaction costs and the allocation to Blackstone of its share of third-party debt. Also, we may receive up to an additional $50 million of consideration based on the 2019 performance of the three assets.

Redevelopment

We have an ongoing redevelopment project at The Mall at Green Hills, which is expected to be completed in June 2019. This redevelopment project is expected to cost approximately $200 million. As of March 31, 2019, our total capitalized costs related to this redevelopment project was $149.9 million.

Asia Development

Starfield Anseong

We have partnered with Shinsegae Group, our partner in Starfield Hanam, to build, lease, and manage Starfield Anseong, an approximately 1.1 million square foot shopping center in Anseong, Gyeonggi Province, South Korea. We own a 49% interest in the project and no longer expect to admit an additional capital partner during the development period. The shopping center is scheduled to open in late 2020. As of March 31, 2019, we have invested $110.3 million in the project, after cumulative currency translation adjustments. This investment is classified within Investment in Unconsolidated Joint Ventures on the Consolidated Balance Sheet.
v3.19.1
Income Taxes
3 Months Ended
Mar. 31, 2019
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes

Income Tax Expense

Our income tax expense (benefit) for the three months ended March 31, 2019 and 2018 consisted of the following:

 
Three Months Ended March 31
 
2019
 
2018
Federal deferred
$
193

 
$
(87
)
Foreign current
120

 
172

Foreign deferred
115

 
138

State current
19

 
3

State deferred
92

 
(42
)
Total income tax expense
$
539

 
$
184



Deferred Taxes

Deferred tax assets and liabilities as of March 31, 2019 and December 31, 2018 were as follows:

 
2019
 
2018
Deferred tax assets:
 
 
 
Federal
$
5,470

 
$
5,662

Foreign
1,600

 
1,655

State
1,024

 
807

Total deferred tax assets
$
8,094

 
$
8,124

Valuation allowances
(1,815
)
 
(1,744
)
Net deferred tax assets
$
6,279

 
$
6,380

Deferred tax liabilities:
 
 
 

Foreign
$
1,851

 
$
2,454

Total deferred tax liabilities
$
1,851

 
$
2,454



We believe 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.

v3.19.1
Investments in Unconsolidated Joint Ventures
3 Months Ended
Mar. 31, 2019
Equity Method Investments and Joint Ventures [Abstract]  
Investments in Unconsolidated Joint Ventures
Investments in Unconsolidated Joint Ventures

General Information

We own beneficial interests in joint ventures that own shopping centers. TRG is the sole direct or indirect managing general partner or managing member of Fair Oaks Mall, International Plaza, Stamford Town Center, Sunvalley, The Mall at University Town Center, and Westfarms; however, these joint ventures are accounted for under the equity method due to the substantive participation rights of the outside partners. TRG also provides certain management, leasing, and/or development services to the other shopping centers noted below.
Shopping Center
 
Ownership as of
March 31, 2019 and
December 31, 2018
CityOn.Xi'an (1)
 
50%
CityOn.Zhengzhou (1)
 
49
Country Club Plaza
 
50
Fair Oaks Mall
 
50
International Plaza
 
50.1
The Mall at Millenia
 
50
Stamford Town Center
 
50
Starfield Anseong (under development)
 
Note 2
Starfield Hanam (1)
 
34.3
Sunvalley
 
50
The Mall at University Town Center
 
50
Waterside Shops
 
50
Westfarms
 
79


(1)
We entered into agreements to sell 50% of our ownership interests in CityOn.Xi'an, CityOn.Zhengzhou, and Starfield Hanam in February 2019, which are subject to customary closing conditions and are expected to close throughout 2019 (Note 2).

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

On our Consolidated Balance Sheet, we separately report our 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 shopping centers.
Combined Financial Information

Combined balance sheet and results of operations information is presented in the following table for our Unconsolidated Joint Ventures, followed by TRG's beneficial interest in the combined operations information. The combined financial information of the Unconsolidated Joint Ventures as of March 31, 2019 and December 31, 2018 excludes the balances of Starfield Anseong, which is currently under development (Note 2). Beneficial interest is calculated based on TRG's ownership interest in each of the Unconsolidated Joint Ventures.

 
March 31,
2019
 
December 31,
2018
Assets:
 
 
 
Properties
$
3,729,197

 
$
3,728,846

Accumulated depreciation and amortization
(880,591
)
 
(869,375
)
 
$
2,848,606

 
$
2,859,471

Cash and cash equivalents
193,326

 
161,311

Accounts and notes receivable (1)
133,234

 
131,767

Operating lease right-of-use assets (1)
11,517

 
 
Deferred charges and other assets
133,459

 
140,444

 
$
3,320,142

 
$
3,292,993

 
 
 
 
Liabilities and accumulated equity (deficiency) in assets:
 

 
 

Notes payable, net 
$
2,856,140

 
$
2,815,617

Accounts payable and other liabilities
413,169

 
426,358

Operating lease liabilities (1)
13,271

 
 
TRG's accumulated deficiency in assets (1)
(61,537
)
 
(49,465
)
Unconsolidated Joint Venture Partners' accumulated equity in assets (1)
99,099

 
100,483

 
$
3,320,142

 
$
3,292,993

 
 
 
 
TRG's accumulated deficiency in assets (above)
$
(61,537
)
 
$
(49,465
)
TRG's investment in Starfield Anseong (Note 2) plus advances to CityOn.Zhengzhou and Starfield Hanam
165,523

 
140,743

TRG basis adjustments, including elimination of intercompany profit
57,201

 
57,360

TCO's additional basis
46,691

 
47,178

Net investment in Unconsolidated Joint Ventures
$
207,878

 
$
195,816

Distributions in excess of investments in and net income of Unconsolidated Joint Ventures
483,343

 
477,800

Investment in Unconsolidated Joint Ventures
$
691,221

 
$
673,616


(1) Upon adoption of ASC Topic 842, "Leases" on January 1, 2019, we valued our operating lease obligations and recorded operating lease liabilities and related right-of-use assets. These lease liabilities and related right-of-use assets will amortize over the remaining life of the respective leases.
 
Three Months Ended March 31
 
2019
 
2018
Revenues (1)
$
142,641

 
$
155,288

Maintenance, taxes, utilities, promotion, and other operating expenses (1)
$
47,875

 
$
52,790

Interest expense
32,498

 
32,467

Depreciation and amortization
32,971

 
32,784

Total operating costs
$
113,344

 
$
118,041

Nonoperating income, net
401

 
347

Income tax expense
(1,679
)
 
(1,416
)
Net income
$
28,019

 
$
36,178

 
 
 
 
Net income attributable to TRG
$
14,293

 
$
18,706

Realized intercompany profit, net of depreciation on TRG’s basis adjustments
866

 
1,509

Depreciation of TCO's additional basis
(487
)
 
(487
)
Equity in income of Unconsolidated Joint Ventures
$
14,672

 
$
19,728

 
 
 
 
Beneficial interest in Unconsolidated Joint Ventures’ operations:
 

 
 

Revenues less maintenance, taxes, utilities, promotion, and other operating expenses
$
49,417

 
$
54,244

Interest expense
(16,776
)
 
(16,751
)
Depreciation and amortization
(17,192
)
 
(17,055
)
Income tax expense
(777
)
 
(710
)
Equity in income of Unconsolidated Joint Ventures
$
14,672

 
$
19,728



(1) Upon adoption of ASC Topic 842, "Leases", uncollectible tenant revenues are now being recorded in Rental Revenues (Note 1).

Related Party

We have a note receivable outstanding with CityOn.Zhengzhou, which was originally issued for the purpose of funding development costs. The balance of the note receivable was $44.8 million and $43.6 million as of March 31, 2019 and December 31, 2018, respectively, and was classified within Investment in Unconsolidated Joint Ventures on the Consolidated Balance Sheet. We also have a related party receivable from Starfield Hanam of $10.3 million as of March 31, 2019, which was classified within Investment in Unconsolidated Joint Ventures on the Consolidated Balance Sheet. This receivable is related to normal distributions payable by the joint venture to the joint venture partners.
v3.19.1
Beneficial Interest in Debt and Interest Expense
3 Months Ended
Mar. 31, 2019
Debt Disclosure [Abstract]  
Beneficial interest in Debt and Interest Expense
Beneficial Interest in Debt and Interest Expense

TRG's beneficial interest in the debt, capitalized interest, and interest expense of our consolidated subsidiaries and our Unconsolidated Joint Ventures is summarized in the following table. TRG's beneficial interest in the consolidated subsidiaries excludes debt and interest related to the noncontrolling interest in Cherry Creek Shopping Center (50%) and International Market Place (6.5%).
 
At 100%
 
At Beneficial Interest
 
 
Consolidated Subsidiaries
 
Unconsolidated Joint Ventures
 
Consolidated Subsidiaries
 
Unconsolidated Joint Ventures
 
Debt as of:
 
 
 
 
 
 
 
 
March 31, 2019
$
3,846,501

 
$
2,856,140

 
$
3,555,870

 
$
1,457,611

 
December 31, 2018
3,830,195

 
2,815,617

 
3,539,588

 
1,437,445

 
 
 
 
 
 
 
 
 
 
Capitalized interest:
 

 
 

 
 

 
 

 
Three Months Ended March 31, 2019
$
2,057

(1) 
$
33

 
$
2,053

(1) 
$
18

 
Three Months Ended March 31, 2018
3,293

 

 
3,285

 

 
 
 
 
 
 
 
 
 
 
Interest expense:
 

 
 

 
 

 
 

 
Three Months Ended March 31, 2019
$
36,885

 
$
32,498

 
$
33,860

 
$
16,776

 
Three Months Ended March 31, 2018
30,823

 
32,467

 
27,818

 
16,751

 


(1)
We capitalize interest costs incurred in funding our equity contributions to development projects accounted for as Unconsolidated Joint Ventures. The capitalized interest cost is included in our basis in our investment in Unconsolidated Joint Ventures. Such capitalized interest reduces interest expense on the Consolidated Statement of Operations and Comprehensive Income (Loss) and in the table above is included within Consolidated Subsidiaries.

Upcoming Maturity

The $150 million loan for The Mall at Green Hills matures in December 2019. We expect to exercise the second and final one-year extension option upon maturity.

Debt Covenants and Guarantees

Certain loan agreements contain various restrictive covenants, including the following corporate covenants on our primary unsecured revolving line of credit, as well as the $300 million and $250 million unsecured term loans and the loan 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, our primary unsecured revolving line of credit and unsecured term loans have unencumbered pool covenants, which currently apply to Beverly Center, Dolphin Mall, and The Gardens on El Paseo 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, 2019, the corporate total leverage ratio was the most restrictive covenant. We were in compliance with all of our covenants and loan obligations as of March 31, 2019. 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 our tax status, pay preferred distributions, and for distributions related to the sale of certain assets.

In connection with the August 2018 financing at International Market Place, TRG provided an unconditional guarantee of the loan principal balance and all accrued but unpaid interest during the term of the loan. The $250 million loan is interest only during the initial three-year term with principal amortization required during the extension periods, if exercised. Accrued but unpaid interest as of March 31, 2019 was $1.0 million. We believe the likelihood of a repayment under the guarantee to be remote.

In connection with the $175 million additional financing at International Plaza, which is owned by an Unconsolidated Joint Venture, TRG 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, 2019, the interest rate swap was an asset and in a receivable position for unpaid interest. We believe the likelihood of a payment under the guarantee to be remote.
v3.19.1
Noncontrolling Interests
3 Months Ended
Mar. 31, 2019
Noncontrolling Interest [Abstract]  
Noncontrolling Interests
Noncontrolling Interests

Redeemable Noncontrolling Interests

Taubman Asia President

In September 2016, we 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 was employed by us in another capacity through September 30, 2017.

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 TRG for Taubman Asia's operating and investment activities subsequent to the Former Asia President obtaining his ownership interest. TRG 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 TRG'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 Taubman Asia's properties reaching certain specified milestones. The redemption price for the ownership interest is the fair value of the ownership interest less the amount required to return TRG's preferred interest. We have determined that the Former Asia President's ownership interest in Taubman Asia qualifies as an equity award, considering its specific redemption provisions, and account for it as a contingently redeemable noncontrolling interest. We present 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. As of both March 31, 2019 and December 31, 2018, the carrying amount of this redeemable equity was $7.8 million. Adjustments to the redemption value are recorded through equity.

In April 2016, we 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 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 TRG for Taubman Asia's operating and investment activities subsequent to the Successor Asia President obtaining his ownership interest. TRG 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 TRG'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 TRG's preferred interest. We have determined that the Successor Asia President's ownership interest in Taubman Asia qualifies as an equity award, considering its specific redemption provisions, and account for it as a contingently redeemable noncontrolling interest. As of both March 31, 2019 and December 31, 2018, the carrying amount of this redeemable equity was zero. Any adjustments to the redemption value are recorded through equity.








International Market Place

We own a 93.5% controlling interest in a joint venture that owns International Market Place in Waikiki, Honolulu, Hawaii. The 6.5% joint venture partner has no obligation and no right to contribute capital. We are entitled to a preferential return on our capital contributions. We have the right to purchase the joint venture partner's interest and the joint venture partner has the right to require us 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, we account for the joint venture partner's interest as a contingently redeemable noncontrolling interest with a carrying value of zero at both March 31, 2019 and December 31, 2018. Any adjustments to the redemption value are recorded through equity.

Reconciliation of Redeemable Noncontrolling Interest
 
Three Months Ended March 31
 
2019
 
2018
Balance, January 1
$
7,800

 
$
7,500

Allocation of net loss
(93
)
 
(52
)
Adjustments of redeemable noncontrolling interest
93

 
52

Balance, March 31
$
7,800

 
$
7,500



Equity Balances of Non-redeemable Noncontrolling Interests

The net equity balance of the non-redeemable noncontrolling interests as of March 31, 2019 and December 31, 2018 included the following:
 
2019
 
2018
Non-redeemable noncontrolling interests:
 
 
 
Noncontrolling interests in consolidated joint ventures
$
(155,120
)
 
$
(156,470
)
Noncontrolling interests in partnership equity of TRG
(67,802
)
 
(58,554
)
 
$
(222,922
)
 
$
(215,024
)


Net Income (Loss) Attributable to Noncontrolling Interests

Net income (loss) attributable to the noncontrolling interests for the three months ended March 31, 2019 and 2018 included the following:
 
Three Months Ended March 31
 
2019
 
2018
Net income (loss) attributable to noncontrolling interests:
 
 
 
Non-redeemable noncontrolling interests:
 
 
 
Noncontrolling share of income of consolidated joint ventures
$
1,522

 
$
1,396

Noncontrolling share of income of TRG
6,801

 
8,279

 
$
8,323

 
$
9,675

Redeemable noncontrolling interest:
(93
)
 
(52
)
 
$
8,230

 
$
9,623




Equity Transactions

The following table presents the effects of changes in TCO’s ownership interest in consolidated subsidiaries on TCO’s equity for the three months ended March 31, 2019 and 2018:
 
Three Months Ended March 31
 
2019
 
2018
Net income attributable to TCO common shareholders
$
15,097

 
$
18,590

Transfers (to) from the noncontrolling interest:
 

 
 

(Decrease) increase in TCO’s paid-in capital for adjustments of noncontrolling interest (1)
(171
)
 
(71
)
Net transfers (to) from noncontrolling interests
(171
)
 
(71
)
Change from net income attributable to TCO and transfers (to) from noncontrolling interests
$
14,926

 
$
18,519


(1)
In 2019 and 2018, adjustments of the noncontrolling interest were made as a result of changes in our ownership of TRG in connection with our share-based compensation under employee and director benefit plans (Note 8), issuances of common stock pursuant to the Continuing Offer (Note 9), and in connection with the accounting for the Former Asia President's redeemable ownership interest.

Finite Life Entities

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, 2019, we 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 $370 million at March 31, 2019, compared to a book value of $(155.1) million that is classified in Noncontrolling Interests on our Consolidated Balance Sheet. The fair value of the noncontrolling interest was calculated as the noncontrolling interest's effective ownership share 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.
v3.19.1
Derivative and Hedging Activities
3 Months Ended
Mar. 31, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative and Hedging Activities
Derivative and Hedging Activities

Risk Management Objective and Strategies for Using Derivatives

We use 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. We may also enter into forward starting swaps or treasury lock agreements to set the effective interest rate on a planned fixed-rate financing. Our interest rate swaps involve the receipt of variable-rate amounts from a counterparty in exchange for us 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 we cash settle in anticipation of a fixed rate financing or refinancing, we 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.

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

As of March 31, 2019, we 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
%
 
100,000

 
2.14
%
 
1.60
%
(1) 
3.74
%
(1) 
February 2022
Receive variable (LIBOR) /pay-fixed swap (1)
 
100
%
 
100,000

 
2.14
%
 
1.60
%
(1) 
3.74
%
(1) 
February 2022
Receive variable (LIBOR) /pay-fixed swap (1)
 
100
%
 
50,000

 
2.14
%
 
1.60
%
(1) 
3.74
%
(1) 
February 2022
Receive variable (LIBOR) /pay-fixed swap (1)
 
100
%
 
50,000

 
2.14
%
 
1.60
%
(1) 
3.74
%
(1) 
February 2022
Receive variable (LIBOR) /pay-fixed swap (2)
 
100
%
 
125,000

 
3.02
%
(2) 
1.60
%
(2) 
4.62
%
(2) 
March 2023
Receive variable (LIBOR) /pay-fixed swap (2)
 
100
%
 
75,000

 
3.02
%
(2) 
1.60
%
(2) 
4.62
%
(2) 
March 2023
Receive variable (LIBOR) /pay-fixed swap (2)
 
100
%
 
50,000

 
3.02
%
(2) 
1.60
%
(2) 
4.62
%
(2) 
March 2023
Receive variable (LIBOR) /pay-fixed swap (3)
 
100
%
 
12,000

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

 


 

 
 

 
 

 
 

 
 
Receive variable (LIBOR) /pay-fixed swap (4)
 
50.1
%
 
161,306

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

 
1.52
%
 
1.60
%
 
3.12
%
 
September 2020

(1)
The hedged forecasted transaction for each of these swaps is the first previously unhedged one-month LIBOR-indexed interest payment 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. We are currently using these swaps to manage interest rate risk on the $300 million unsecured term loan. The credit spread on this loan can vary within a range of 1.25% to 1.90%, depending on our 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.
(2)
The hedged forecasted transaction for each of these swaps is the first previously unhedged one-month LIBOR-indexed interest payment 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 March 2019 effective date of these swaps. As of March 31, 2019, we are using these swaps to manage interest rate risk on the $250 million unsecured term loan. The credit spread on this loan can vary within a range of 1.25% to 1.90%, depending on our total leverage ratio at the measurement date, resulting in an effective rate in the range of 4.27% to 4.92% 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 this swap is equal to the outstanding principal balance of the floating rate loan on International Plaza.
(5)
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

We recognize all changes in fair value for hedging instruments designated and qualifying for cash flow hedge accounting treatment as a component of Other Comprehensive Income (OCI).

Amounts reported in Accumulated Other Comprehensive Income (AOCI) related to currently outstanding interest rate derivatives are recognized as an adjustment to income as interest payments are made on our 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.

We expect that approximately $0.1 million of AOCI of TCO and the noncontrolling interests will be reclassified from AOCI and recognized as an increase of income in the following 12 months.

The following tables present the effect of derivative instruments on the Consolidated Statement of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2019 and 2018. 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.
 
Amount of Gain or (Loss) Recognized in OCI on Derivative
 
Location of Gain or (Loss) Reclassified from AOCI into Income
 
Amount of Gain or (Loss) Reclassified from AOCI into Income
 
Three Months Ended March 31
 
 
 
Three Months Ended March 31
 
2019
 
2018
 
 
 
2019
 
2018
Derivatives in cash flow hedging relationships:
 
 
 
 

 
 
 
 
Interest rate contracts – consolidated subsidiaries
$
(5,716
)
 
$
5,872

 
Interest Expense
 
$
838

 
$
(463
)
Interest rate contracts – UJVs
(625
)
 
1,372

 
Equity in Income of UJVs
 
137

 
(306
)
Cross-currency interest rate contract – UJV
30

 
(51
)
 
Equity in Income of UJVs
 
448

 
(5
)
Total derivatives in cash flow hedging relationships
$
(6,311
)
 
$
7,193

 
 
 
$
1,423

 
$
(774
)


We record all derivative instruments at fair value on the Consolidated Balance Sheet. The following table presents the location and fair value of our derivative financial instruments as reported on the Consolidated Balance Sheet as of March 31, 2019 and December 31, 2018.
 
 
 
Fair Value
 
Consolidated Balance Sheet Location
 
March 31,
2019
 
December 31,
2018
Derivatives designated as hedging instruments:
 
 
 
 
 
Asset derivatives:
 
 
 
 
 
Interest rate contracts – consolidated subsidiaries
Deferred Charges and Other Assets
 
$
346

 
$
3,530

Interest rate contract - UJV
Investment in UJVs
 
720

 
1,345

Total assets designated as hedging instruments
 
 
$
1,066

 
$
4,875

 
 
 
 
 
 
Liability derivatives:
 
 
 

 
 
Interest rate contracts – consolidated subsidiary
Accounts Payable and Accrued Liabilities
 
$
(8,242
)
 
$
(5,710
)
Cross-currency interest rate contract – UJV
Investment in UJVs
 
(519
)
 
(963
)
Total liabilities designated as hedging instruments
 
 
$
(8,761
)
 
$
(6,673
)


Contingent Features

Our 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 TRG's indebtedness. As of March 31, 2019, we are not in default on any indebtedness that would trigger a credit-risk-related default on our current outstanding derivatives.
As of March 31, 2019 and December 31, 2018, the fair value of derivative instruments with credit-risk-related contingent features that were in a liability position was $8.8 million and $6.7 million, respectively. As of March 31, 2019 and December 31, 2018, we were not required to post any collateral related to these agreements. If we breached any of these provisions we would be required to settle our obligations under the agreements at their fair value. See Note 5 regarding guarantees and Note 11 for fair value information on derivatives.
v3.19.1
Share-Based Compensation
3 Months Ended
Mar. 31, 2019
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Share-Based Compensation
Share-Based Compensation

General

In May 2018, our shareholders approved The Taubman Company LLC 2018 Omnibus Long-Term Incentive Plan (2018 Omnibus Plan). The 2018 Omnibus Plan provides for the award of restricted shares, restricted share units, restricted profits units of TRG (TRG Profits Units), options to purchase common shares, unrestricted shares, and dividend equivalent rights, in each case with or without performance conditions, to acquire up to an aggregate of 2.8 million common shares or TRG Profits Units to directors, officers, employees, and other service providers of TCO and our affiliates. Every share or TRG Profits Unit subject to awards under the 2018 Omnibus Plan shall be counted against this limit as one share or TRG Profits Unit for every one share or TRG Profits Unit granted. The amount of shares or TRG Profits Units available for future grants is adjusted when the number of contingently issuable common shares or units are settled. If an award issued under the 2018 Omnibus Plan is forfeited, expires without being exercised, or is used to pay tax withholding on such award, the shares or TRG Profits Units become available for issuance under new awards. TRG Profits Units 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. The 2018 Omnibus Plan allows us to permit or require the deferral of all or a part of an award payment into a deferred compensation arrangement. Prior to the adoption of the 2018 Omnibus Plan, we provided share-based compensation through The Taubman Company LLC 2008 Omnibus Long-Term Incentive Plan (2008 Omnibus Plan), as amended, which expired in May 2018. Awards that were issued under the 2008 Omnibus Plan are still outstanding and will be paid out of the 2008 Omnibus Plan upon vesting.

TRG Profits Units

The following types of TRG Profits Units awards were granted to certain senior management employees in prior years: (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 vested if absolute TSR is not positive over a three-year period. 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 2019 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 either TRG Units or common shares being issued at vesting under the TRG Profits Units program and the Performance Share Unit program, respectively.

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 TRG Profits Unit entitles the holder to only one-tenth of the distributions otherwise payable by TRG on a TRG Unit. Therefore, we account for these TRG Profits Units as participating securities in TRG. A portion of the TRG 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 TRG Profits Units realized under each award to reflect TRG's actual cash distributions during the vesting period.

All currently unvested TRG Profits Units will vest by March 2021, if continuous service has been provided, or upon retirement or certain other events (such as death or disability) if earlier. Each holder of a TRG Profits Unit will be treated as a limited partner in TRG from the date of grant. To the extent the vested TRG Profits Units have not achieved the applicable criteria for conversion to TRG Units, vesting and economic equivalence to a TRG Unit prior to the tenth anniversary of the date of grant, the awards will be forfeited pursuant to the terms of the award agreement.

2019 Awards - Other Management Employee Grants

During 2019, other types of awards granted to management employees include those described below. These vest in March 2022, 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 common stock ranging from 0-300% of the TSR PSU based on our market performance relative to that of a peer group. The TSR PSU grants include a cash payment upon vesting equal to the aggregate cash dividends that would have been paid on such shares of common stock during the vesting period.

NOI - Based Performance Share Units (NOI PSU) - Each NOI PSU represents the right to receive, upon vesting, shares of common stock ranging from 0-300% of the NOI PSU based on our 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 during the vesting period. These awards also provide for a cap on the maximum number of units vested if absolute TSR is not positive over a three-year period.

Restricted Share Units (RSU) - Each RSU represents the right to receive upon vesting one share of 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 during the vesting period.

Expensed and Capitalized Costs

The compensation cost charged to income for our share-based compensation plans was $2.3 million and $2.4 million for the three months ended March 31, 2019 and 2018, respectively. Compensation cost capitalized as part of properties and deferred leasing costs was $0.1 million and $0.2 million for the three months ended March 31, 2019 and 2018, respectively.

Valuation Methodologies

We 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 our 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. We assume no forfeitures for failure to meet the service requirement of Performance Share Units (PSU) or TRG Profits Units, due to the small number of participants and low turnover rate.

The valuations of all grants utilized our 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. We estimated the value of grants dependent on TSR performance using a Monte Carlo simulation and considering historical returns of TCO and the peer group.

For awards dependent on NOI performance, we consider the NOI measure a performance condition under applicable accounting standards, and as such, have 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 TRG Profits Units consider the possibility that sufficient share price appreciation will not be realized, such that the conversion to TRG Units will not occur and the awards will be forfeited.

Summaries of Activity for the Three Months Ended March 31, 2019

Restricted TRG Profits Units
 
Number of Restricted TRG Profits Units
 
Weighted Average Grant-Date Fair Value
Outstanding at January 1, 2019
69,285

 
$
57.93

Units recovered and cancelled (1)
(368
)
 
59.49

Outstanding at March 31, 2019
68,917

 
$
57.92

 
 
 
 
Fully vested at March 31, 2019
46,506

(2) 
$
59.45



(1)
This reflects the recovery and cancellation of previously granted Restricted TRG Profits Units, which vested on March 1, 2019, as a result of the actual cash distributions made during the vesting period.
(2)
These Restricted TRG Profits Units will not convert to TRG Units until certain tax-driven requirements are satisfied. In the event that vested Restricted TRG Profits Units have not achieved the criteria for conversion on the 10th anniversary of the date of grant, the awards will be forfeited pursuant to the terms of the agreement.


As of March 31, 2019, there was $0.5 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 1.4 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, 2019
148,078

 
$
25.17

Units recovered and cancelled (1)
(76,489
)
 
26.42

Outstanding at March 31, 2019
71,589

 
$
23.84

 
 
 
 
Fully vested at March 31, 2019
21,169

(2) 
$
26.30



(1)
This reflects the recovery and cancellation of previously granted (300% of target grant amount) Relative TSR Performance-based TRG Profits Units, which vested on March 1, 2019, as a result of the performance payout ratio of 22% and the actual cash distributions made during the vesting period. That is, despite the completion of applicable employee service requirements, the number of Relative TSR Performance-based TRG Profits Units ultimately considered earned is determined by the extent to which the TSR market performance measure was achieved during the performance period.
(2)
These Relative TSR Performance-based TRG Profits Units will not convert to TRG Units until certain tax-driven requirements are satisfied. In the event that vested Relative TSR Performance-based TRG Profits Units have not achieved the criteria for conversion on the 10th anniversary of the date of grant, the awards will be forfeited pursuant to the terms of the agreement.

As of March 31, 2019, there was $0.5 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 1.5 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, 2019
149,949

 
$
19.29

Units recovered and cancelled (1)
(68,730
)
 
17.47

Outstanding at March 31, 2019
81,219

 
$
18.51

 
 
 
 
Fully vested at March 31, 2019
30,800

(2) 
$
18.86


(1)
This reflects the recovery and cancellation of previously granted (300% of target grant amount) NOI Performance-based TRG Profits Units, which vested on March 1, 2019, as a result of the performance payout ratio of 30% and the actual cash distributions made during the vesting period. That is, despite the completions of applicable employee service requirements, the number of NOI Performance-based TRG Profits Units ultimately considered earned is determined by the extent to which the NOI performance measure was achieved during the performance period.
(2)
These NOI Performance-based TRG Profits Units will not convert to TRG Units until certain tax-driven requirements are satisfied. In the event that vested NOI Performance-based TRG Profits Units have not achieved the criteria for conversion on the 10th anniversary of the date of grant, the awards will be forfeited pursuant to the terms of the agreement.
    
As of March 31, 2019, there was $0.4 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 1.4 years.

TSR - Based Performance Share Units
 
Number of TSR PSU
 
Weighted Average Grant-Date Fair Value
Outstanding at January 1, 2019
14,197

 
$
79.13

Granted
20,936

 
85.44

Outstanding at March 31, 2019
35,133

 
$
82.89

    
As of March 31, 2019, there was $2.4 million of total unrecognized compensation cost related to nonvested TSR PSU outstanding. This cost is expected to be recognized over an average period of 2.5 years.

NOI - Based Performance Share Units
 
Number of NOI PSU
 
Weighted Average Grant-Date Fair Value
Outstanding at January 1, 2019
14,197

 
$
60.59

Granted
20,936

 
52.41

Outstanding at March 31, 2019
35,133

 
$
55.71



As of March 31, 2019, there was $1.5 million of total unrecognized compensation cost related to nonvested NOI PSU outstanding. This cost is expected to be recognized over an average period of 2.4 years.














Restricted Share Units
 
Number of RSU
 
Weighted Average Grant-Date Fair Value
Outstanding at January 1, 2019
184,673

 
$
63.44

Vested
(51,958
)
 
69.73

Granted
87,720

 
52.41

Forfeited
(3,309
)
 
58.13

Outstanding at March 31, 2019
217,126

 
$
57.56



As of March 31, 2019, there was $7.8 million of total unrecognized compensation cost related to nonvested RSU outstanding. This cost is expected to be recognized over an average period of 2.2 years.

Unit Option Deferral Election

Under a prior option plan, the 2008 Omnibus Plan, and the 2018 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, our chief executive officer, exercised options for 3.0 million units by tendering 2.1 million mature units and deferring receipt of 0.9 million units under the unit option deferral election. As TRG 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 options units will be issued as TRG Units in five annual installments. The deferred option units are accounted for as participating securities of TRG.
v3.19.1
Commitments and Contingencies
3 Months Ended
Mar. 31, 2019
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies
Commitments and Contingencies

Cash Tender

At the time of our initial public offering and acquisition of our partnership interest in TRG in 1992, we entered into an agreement (the Cash Tender Agreement) with 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 us 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 us to purchase the tendered interests at a purchase price based on a market valuation of TCO 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.

We will have the option to pay for these interests from available cash, borrowed funds, or from the proceeds of an offering of common stock. Generally, we expect to finance these purchases through the sale of new shares of our common 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 our sole benefit. We account for the Cash Tender Agreement as a freestanding written put option. As the option put price is defined by the current market price of our 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, 2019 of $52.88 per share for our common stock, the aggregate value of TRG Units that may be tendered under the Cash Tender Agreement was $1.3 billion. The purchase of these interests at March 31, 2019 would have resulted in us owning an additional 28% interest in TRG.

Continuing Offer

We have made a continuing, irrevocable offer (the Continuing Offer) to all present holders of TRG Units (other than a certain excluded holder, currently TVG), permitted assignees of all present holders of TRG Units, those future holders of TRG Units as we may, in our sole discretion, agree to include in the Continuing Offer, all future optionees under the 2018 Omnibus Plan to exchange shares of common stock for TRG Units. Under the Continuing Offer agreement, one TRG Unit is exchangeable for one share of common stock. Upon a tender of TRG Units, the corresponding shares of Series B Preferred Stock, if any, will automatically be converted into common stock at a ratio of 14,000 shares of Series B Preferred Stock for one share of common stock.

Insurance

We carry liability insurance to mitigate our exposure to certain losses, including those relating to personal injury claims. We believe our 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.

Hurricane Maria and The Mall of San Juan

The Mall of San Juan incurred significant damage from Hurricane Maria in 2017. We have substantial insurance to cover hurricane and flood damage, as well as business and service interruption. The business interruption coverage commences at time of loss and continues for one year after the damage is fully repaired. Our hurricane coverage includes a single deductible of $2 million, which was recognized as depreciation expense in 2017, and policy limits of $900 million, all subject to various terms and conditions. However, insurance proceeds have been lagging and were not received in the same period the losses were incurred.
During the three months ended March 31, 2019, we recognized $4.0 million of insurance proceeds related to our business interruption claim. We are still in discussions with our insurer and expect to recognize additional business interruption proceeds in future periods, however the amount to be received and timing of payment is uncertain. During the three months ended March 31, 2019 and 2018, we recorded an inconsequential amount and $0.7 million, respectively, of insurance recoveries related to reimbursement of expensed costs within Nonoperating Income (Expense) on the Consolidated Statement of Operations and Comprehensive Income (Loss). Additionally, during the three months ended March 31, 2018, we recognized a reduction of $3.9 million of depreciation expense relating to insurance proceeds received for property damage for which we took write-offs in 2017. During the three months ended March 31, 2019, we did not recognize any such reduction of depreciation expense.
On October 17, 2017, Plaza Internacional Puerto Rico LLC (Plaza Internacional), the owner of The Mall of San Juan (the Mall), filed a civil action in the Commonwealth of Puerto Rico Court of First Instance, San Juan Judicial Center, Superior Court, Civil No. SJ2017CV02094 (503), against Saks Fifth Avenue Puerto Rico, Inc. (Saks PR), and Saks Incorporated (Saks Inc.). The lawsuit asks the court to compel Saks PR and Saks Inc. to immediately remediate and repair the Saks Fifth Avenue store (the Store) that was damaged by Hurricane Maria on September 20, 2017, to reopen the Store on the completion of the reconstruction, and to operate the Store in accordance with the Operating Covenant contained in the Construction, Operation and Reciprocal Easement Agreement among Plaza Internacional, Saks PR, and Nordstrom Puerto Rico LLC (Nordstrom PR) made as of April 23, 2013 (the REA). In response, Saks PR and Saks Inc. filed a Counterclaim, alleging that they have no obligation to repair, remediate, reconstruct, or reopen the Store, asserting various alleged breaches of the REA and other operating agreements. Plaza Internacional filed a motion for a preliminary injunction directing Saks PR to repair, reopen, and operate the Store, but, on March 28, 2018, the Court of First Instance denied Plaza Internacional’s motion, and, on September 12, 2018, the Court of Appeals of Puerto Rico affirmed that ruling, each without prejudging the merits of the substantive claims. Should Saks PR prevail in the action, Nordstrom PR and other Mall tenants may then have the right to terminate their own operating covenants or leases. Plaza Internacional is vigorously prosecuting its claims and defending the Counterclaim. The outcome of the action cannot be predicted, and, at this time, we are unable to estimate the amount of loss that could result from an unfavorable outcome. An unfavorable outcome may have a material and adverse effect on our business and our results of operations.
Other

See Note 5 for TRG'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.
v3.19.1
Earnings Per Share
3 Months Ended
Mar. 31, 2019
Earnings Per Share [Abstract]  
Earnings Per Share
Earnings Per Common Share

Basic earnings per common share amounts are based on the weighted average of common shares outstanding for the respective periods. Diluted earnings per common 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 TRG Units exchangeable for common shares under the Continuing Offer (Note 9), TSR PSU, NOI PSU, Restricted and Performance-based TRG Profits Units, RSU, deferred shares under the Non-Employee Directors’ Deferred Compensation Plan, and unissued TRG Units under a unit option deferral election (Note 8). In computing the potentially dilutive effect of potential common stock, TRG 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 TRG 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 earnings per common share 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
 
2019
 
2018
Net income attributable to TCO common shareholders (Numerator):
 
 
 
Basic
$
15,097

 
$
18,590

Impact of additional ownership of TRG
21

 
28

Diluted
$
15,118

 
$
18,618

 
 
 
 
Shares (Denominator) – basic
61,124,016

 
60,917,235

Effect of dilutive securities
275,092

 
289,142

Shares (Denominator) – diluted
61,399,108

 
61,206,377

 
 
 
 
Earnings per common share – basic
$
0.25

 
$
0.31

Earnings per common share – diluted
$
0.25

 
$
0.30



The calculation of diluted earnings per common share in certain periods excluded certain potential common stock including outstanding TRG Units and unissued TRG Units under a unit option deferral election, both of which may be exchanged for common shares of TCO under the Continuing Offer. The table below presents the potential common stock excluded from the calculation of diluted earnings per common share as they were anti-dilutive in the period presented.
 
Three Months Ended March 31
 
2019

2018
Weighted average noncontrolling TRG Units outstanding
4,149,066

 
4,145,247

Unissued TRG Units under unit option deferral elections
871,262

 
871,262

v3.19.1
Fair Value Disclosures
3 Months Ended
Mar. 31, 2019
Fair Value Disclosures [Abstract]  
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 we would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the reporting date. The valuations of our 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 our own nonperformance risk and the respective counterparty's nonperformance risk.

Other

The valuations of both our investments in an insurance deposit and in SPG common shares utilize unadjusted quoted prices determined by active markets for the specific securities we have invested in, and therefore fall into Level 1 of the fair value hierarchy. We measured our investment in SPG common shares at fair value with changes in value recorded through net income. We owned zero and 290,124 SPG common shares as of March 31, 2019 and December 31, 2018, respectively. In January 2019, we sold our remaining investment in 290,124 SPG common shares at an average price of $179.52 per share. Proceeds from the sale were used to pay down our revolving lines of credit.

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, 2019 Using
 
Fair Value Measurements as of
December 31, 2018 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
 


 
 
 
$
48,738

 
 
Insurance deposit
 
$
9,973

 
 

 
10,121

 
 

Derivative interest rate contracts (Note 7)
 
 
 
$
346

 
 
 
$
3,530

Total assets
 
$
9,973


$
346

 
$
58,859

 
$
3,530

 
 
 
 
 
 
 
 
 
Derivative interest rate contracts (Note 7)
 
 

 
$
(8,242
)