The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent our expectations or beliefs concerning future events, including the following: statements regarding future developments and joint ventures, rents, returns, and earnings; statements regarding the continuation of trends; and any statements regarding the sufficiency of our cash balances and cash generated from operating, investing, and financing activities for our future liquidity and capital resource needs. We caution that although forward-looking statements reflect our good faith beliefs and reasonable judgment based upon current information, these statements are qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements, because of risks, uncertainties, and factors including, but not limited to, the continuing impacts of the U.S. recession and global credit environment, other changes in general economic and real estate conditions, changes in the interest rate environment and the availability of financing, and adverse changes in the retail industry. Except as required by law, we assume no obligation to update these forward-looking statements, even if new information becomes available in the future. Other risks and uncertainties are detailed from time to time in reports filed with the SEC, and in particular those set forth under "Risk Factors" in our most recent Annual Report on Form 10-K. The following discussion should be read in conjunction with the accompanying consolidated financial statements of Taubman Centers, Inc. and the notes thereto.
General Background and Performance Measurement Taubman Centers, Inc. (TCO) is a Michigan corporation that operates as a self-administered and self-managed real estate investment trust (REIT). The Taubman Realty Group Limited Partnership (the Operating Partnership or TRG) is a majority-owned partnership subsidiary of TCO, 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, the Operating Partnership, and/or the Operating Partnership's subsidiaries as the context may require. We own, lease, develop, acquire, dispose of, and operate regional and super-regional shopping centers. The Consolidated Businesses consist of shopping centers and entities that are controlled by ownership or contractual agreements, The Taubman Company LLC (Manager), and Taubman Properties Asia LLC and its subsidiaries (Taubman Asia). Shopping centers owned through joint ventures that are not controlled by us but over which we have significant influence (Unconsolidated Joint Ventures) are accounted for under the equity method.
References in this discussion to "beneficial interest" refer to our ownership or pro-rata share of the item being discussed. Also, the operations of the shopping centers are often best understood by measuring their performance as a whole, without regard to our ownership interest. Consequently, in addition to the discussion of the operations of the Consolidated Businesses, the operations of the Unconsolidated Joint Ventures are presented and discussed as a whole. Current Operating Trends
The real estate industry continues to face difficult times due to the impacts of the recession and tough capital market and retail environment. Although there have been some positive signs, unemployment continues to be very high and there is considerable uncertainty as to how long the impacts of the recession may continue. We have seen the negative effect on our business in 2009, and we expect that the economy will continue to strain the resources of our tenants and their customers. A number of regional and national retailers have announced store closings or filed for bankruptcy. During the nine months ended September 30, 2009, 3.1% of our tenants sought the protection of the bankruptcy laws, compared to 1.5% in the comparable period in 2008. It is difficult to predict when the environment will stabilize.

We have also seen the impact of the recession on our tenants' sales, which continued to decrease during the quarter, although there has been some moderation in the sales decline in the third quarter. In fact, the sales trend improved in both July and August and in September, the decline was only 2.9% compared to the prior year. We expect that sales may be flat to slightly up in the fourth quarter, given the severity of the downturn that began in September 2008. Our mall tenants reported an 8.0% decrease in sales per square foot in the third quarter of 2009 from the same period in 2008, while year to date sales per square foot decreased 10.9%. For the twelve month period ended September 30, 2009, mall tenant sales per square foot decreased by 11.8% to $497 per square foot. Tenant sales and sales per square foot information are operating statistics used in measuring the productivity of the portfolio and are based on reports of sales furnished by mall tenants. Over the long term, the level of mall tenant sales is the single most important determinant of revenues of the shopping centers because mall tenants provide approximately 90% of these revenues and because mall tenant sales determine the amount of rent, percentage rent, and recoverable expenses (together, total occupancy costs) that mall tenants can afford to pay. However, levels of mall tenant sales can be considerably more volatile in the short run than total occupancy costs, and may be impacted significantly, either positively or negatively, by the success or lack of success of a small number of tenants or even a single tenant.
Sales directly impact the amount of percentage rents certain tenants and anchors pay. The effects of increases or declines in sales on our operations are moderated by the relatively minor share of total rents that percentage rents represent of total rents. However, due to the sales declines this year and depending on actual sales in the fourth quarter, we do expect a significant decrease in this income in 2009.
While sales are critical over the long term, the high quality regional mall business has historically been a very stable business model with its diversity of income from thousands of tenants, its staggered lease maturities, and high proportion of fixed rent. However, a sustained trend in sales does impact, either negatively or positively, our ability to lease vacancies and negotiate rents at advantageous rates. While weakness in the U.S. economy continues to impact retailers, nevertheless, leasing continues to be active with retailers planning openings for 2010 and 2011 when they expect conditions to improve.
In the third quarter of 2009, ending occupancy was 88.5% compared to 90.5% in the third quarter of 2008. This decline is largely due to five big box anchor store locations that closed late in 2008 and in 2009 at our value centers. We expect year end occupancy will be up modestly from the third quarter's 88.5%, but to be down approximately 1.0% compared to year end 2008. However, the impact on income will be somewhat offset by a higher level of temporary tenant leasing in 2009. Temporary tenants, defined as those with lease terms less than 12 months, are not included in occupancy or leased space statistics. As of September 30, 2009, approximately 3.1% of mall tenant space was occupied by temporary tenants, compared to 2.2% in the third quarter of 2008. We expect temporary tenant space to be as much as 4% by year end, which helps mitigate the rent loss from permanent tenants. See "Seasonality" for occupancy and leased space statistics.
Leased space was 91.0% at September 30, 2009, down 1.4% from September 30, 2008. The difference between leased space and occupancy is that leased space includes spaces where leases have been signed but the tenants are not yet open. Neither statistic includes temporary tenants. We view occupancy as the more important of the two as it represents those spaces upon which we are collecting rent from permanent tenants. Finally, the spread between leased space and occupied space, at 2.5% this quarter, is consistent with our history of 2% to 3% in the third quarter.
As leases have expired in the centers, we have generally been able to rent the available space, either to the existing tenant or a new tenant, at rental rates that are higher than those of the expired leases. Generally, center revenues have increased as older leases rolled over or were terminated early and replaced with new leases negotiated at current rental rates that were usually higher than the average rates for existing leases. In periods of increasing sales, rents on new leases will generally tend to rise. In periods of slower growth or declining sales, as we are experiencing now, rents on new leases will grow more slowly or will decline for the opposite reason, as tenants' expectations of future growth become less optimistic. Rent per square foot information for our Consolidated Businesses and Unconsolidated Joint Ventures follows:

                                             Three Months                 Nine Months
                                          Ended September 30          Ended September 30
                                           2009          2008         2009          2008
   Average rent per square foot:
   Consolidated Businesses              $    42.36     $  44.04     $   43.47     $   44.04
   Unconsolidated Joint Ventures             44.56        44.52         44.59         44.72
   Opening base rent per square foot:
   Consolidated Businesses              $    36.66     $  56.96     $   42.12     $   54.18
   Unconsolidated Joint Ventures             33.04        50.41         45.82         55.94
   Square feet of GLA opened:
   Consolidated Businesses                 123,166       97,466       672,089       576,344
   Unconsolidated Joint Ventures            27,020       91,345       221,085       336,210
   Closing base rent per square foot:
   Consolidated Businesses              $    40.36     $  71.95     $   39.40     $   47.54
   Unconsolidated Joint Ventures             54.17        50.77         44.87         46.26
   Square feet of GLA closed:
   Consolidated Businesses                 115,023       70,882       834,917       646,606
   Unconsolidated Joint Ventures            29,240       71,622       264,801       378,951
   Releasing spread per square foot:
   Consolidated Businesses              $    (3.70 )   $ (14.99 )   $    2.72     $    6.64
   Unconsolidated Joint Ventures            (21.13 )      (0.36 )        0.95          9.68

Rent per square foot across our portfolio, including both consolidated and unconsolidated properties, was down 2.5% for the quarter. We expect total average rent per square foot for the year to be down about 1.5% compared to the prior year. This is the result of concerted efforts to keep tenants open in this difficult environment. In addition, the difficult sales environment has put downward pressure on opening rents in 2009, which will likely continue into 2010. The spread between opening and closing rents may not be indicative of future periods, as this statistic is not computed on comparable tenant spaces, and can vary significantly from period to period depending on the total amount, location, and average size of tenant space opening and closing in the period. In the third quarter of 2009, the releasing spread per square foot of the Consolidated Businesses was negatively affected by the openings of large tenants at certain centers. Also in the third quarter of 2009, the releasing spread per square foot of the Unconsolidated Joint Ventures was impacted by the low number of openings and closings and the fact that most of the openings of tenants were not in the same center as the closing, and therefore not in the same space. In addition, the releasing spread per square foot of the Unconsolidated Joint Ventures was impacted by store size, as the average size of the stores opening was greater than the average size of the stores closing. Generally, smaller stores command a greater rent per square foot. In the third quarter of 2008, the releasing spread per square foot of the Consolidated Businesses was also negatively impacted by store size.
Seasonality
The regional shopping center industry is seasonal in nature, with mall tenant sales highest in the fourth quarter due to the Christmas season, and with lesser, though still significant, sales fluctuations associated with the Easter holiday and back-to-school period. While minimum rents and recoveries are generally not subject to seasonal factors, most leases are scheduled to expire in the first quarter, and the majority of new stores open in the second half of the year in anticipation of the Christmas selling season. Additionally, most percentage rents are recorded in the fourth quarter. Accordingly, revenues and occupancy levels are generally highest in the fourth quarter. Gains on sales of peripheral land and lease cancellation income may vary significantly from quarter to quarter.

                                    3rd              2nd                  1st                                                           4th                   3rd              2nd              1st
                                  Quarter          Quarter              Quarter                        Total                          Quarter               Quarter          Quarter          Quarter
                                    2009             2009                2009                          2008                            2008                   2008             2008             2008
                                                                           (in thousands of dollars, except occupancy and leased space data)
Mall tenant sales (1)              1,020,834          994,811                 941,469                       4,654,885                       1,342,748        1,112,502        1,116,027        1,083,608
Revenues and gains on land
sales and other nonoperating
income:
Consolidated Businesses              163,447          159,137                 157,925                         676,067                         190,855          164,124          161,868          159,220
Unconsolidated Joint Ventures         67,317           63,657                  66,144                         272,496                          77,277           67,169           63,657           64,393
Occupancy and leased space:
Ending occupancy                        88.5 %           88.6 %                  88.6 %                          90.3 %                          90.3 %           90.5 %           90.1 %           89.9 %
Average occupancy                       88.4             88.7                    88.8                            90.3                            90.7             90.4             90.0             90.0
Leased space                            91.0             91.1                    90.5                            91.8                            91.8             92.4             92.7             93.1

(1) Based on reports of sales furnished by mall tenants.

Because the seasonality of sales contrasts with the generally fixed nature of minimum rents and recoveries, mall tenant occupancy costs (the sum of minimum rents, percentage rents, and expense recoveries) as a percentage of sales are considerably higher in the first three quarters than they are in the fourth quarter.

                       3rd           2nd           1st                         4th           3rd           2nd           1st
                     Quarter       Quarter       Quarter        Total        Quarter       Quarter       Quarter       Quarter
                       2009          2009          2009          2008          2008          2008          2008          2008

Consolidated
Businesses:
Minimum rents          10.4 %        10.8 %        12.1 %         9.6 %         8.8 %         9.9 %         9.9 %        10.2 %
Percentage rents        0.2           0.1           0.3           0.4           0.6           0.3           0.2           0.3
Expense
recoveries              5.2           5.8           6.0           5.4           5.4           5.4           5.3           5.3

Mall tenant
occupancy costs        15.8 %        16.7 %        18.4 %        15.4 %        14.8 %        15.6 %        15.4 %        15.8 %

Unconsolidated
Joint Ventures:
Minimum rents          10.3 %        10.6 %        10.9 %         8.9 %         7.9 %         9.5 %         9.3 %         9.2 %
Percentage rents        0.3           0.0           0.3           0.4           0.6           0.4           0.0           0.4
Expense
recoveries              5.0           5.1           4.9           4.6           4.9           4.8           4.4           4.2

Mall tenant
occupancy costs        15.6 %        15.7 %        16.1 %        13.9 %        13.4 %        14.7 %        13.7 %        13.8 %

Center Operations
As a result of the current recession, which has negatively impacted our operating statistics as discussed in the previous sections, we expect that net operating income of our centers, excluding lease cancellation income, could decrease by approximately 4% in 2009. Lower tenant sales for our weaker tenants have resulted in increased early terminations, rent relief, and bankruptcies, in addition to reduced percentage rent income. Bankruptcies for the quarter were 1.1%, which were 1.0% higher than last year. Year to date bankruptcies were 3.1%, compared to 1.5% for the comparable period in 2008.
We expect the annualization of rent relief to have a further negative impact in 2010. In addition, we expect lower recoveries from CAM capital expenditures in 2010 as we plan to reduce CAM capital spending. Results of Operations
In addition to the trends in our operations disclosed in the preceding sections, the following sections discuss certain transactions that affected operations in the three and nine month periods ended September 30, 2009 and 2008, or are expected to impact operations in the future. Impairment Charges
In the third quarter of 2009, we concluded that the book values of the investments in The Pier Shops at Caesars (The Pier Shops) and Regency Square were impaired, which resulted in a non-cash charge of $166.7 million (or $160.8 million at our share).
The Pier Shops at Caesars
Cash flows generated from The Pier Shops, although positive, are insufficient to cover debt service on the $135 million non-recourse mortgage loan. Given long term prospects for the property, our Board of Directors concluded that it is in our best interest to discontinue financial support of the center. As a result, the book value of The Pier Shops was written down by $107.7 million (our share of which is $101.8 million) to a fair value of approximately $52 million. The loan has now been turned over to the special servicer, although, we expect the transition process will take some time. We continue to record the operations of the center in our results.
Regency Square
We concluded that the book value of the investment in Regency Square is also impaired based on current estimates of future cash flows for the property, which will be negatively impacted by necessary capital expenditures and declining net operating income. As a result, the book value of the property was written down by $59.0 million to a fair value of approximately $29 million. At the current level of cash flows, Regency Square intends to continue to service its $74.5 million non-recourse mortgage loan.
These properties generate less than two percent of our net operating income. See "Note 3 - Impairment Charges" for additional information.

Restructuring
In the first half of 2009, in response to the decreased level of active projects due to the downturn in the economy, we reduced our workforce by about 40 positions, primarily in areas that directly or indirectly affect our development initiatives in the U.S. and Asia. The restructuring charge was $2.6 million, and primarily represents the cost of terminations of personnel. Taubman Asia
In 2008, Taubman Asia entered into agreements to acquire a 25% interest in The Mall at Studio City, the retail component of Macao Studio City, a major mixed-use project on the Cotai Strip in Macao, China. In August 2009, our Macao agreements terminated and our $54 million initial cash payment was returned to us because the financing for the project was not completed. See "Note 4 - Acquisition and Development."
In 2007, we entered into an agreement to provide development services for a 1.1 million square foot retail and entertainment complex in Songdo International Business District (Songdo), Incheon, South Korea. We also finalized an agreement to provide management and leasing services for Riverstone, the retail component, and we continue to provide services as the regional mall progresses. The shopping center will be anchored by Lotte Department Store, Tesco Homeplus, and a nine-screen MegaBox multiplex. Construction has been completed on the mall infrastructure and parking, including the subway station that will connect the mall to Seoul. However, the project financing of Riverstone remains unresolved due to market conditions and the overall complexity and scale of the broader Songdo financings. Once financing is complete, full construction will begin and we will make a determination about an investment in this center. Oyster Bay
On January 27, 2009, the Appellate Division of the Supreme Court of the State of New York, Second Department, reversed the Supreme Court's order directing the Town Board of the Town of Oyster Bay to issue a special use permit for the construction of The Mall at Oyster Bay. The court also held that the Town Board's request for a supplemental environmental impact statement was proper. In June 2009, the Court of Appeals of the State of New York denied our motion for leave to appeal the January 2009 decision of the Appellate Division of the Supreme Court of the State of New York. We are expensing costs relating to Oyster Bay until it is probable that we will be able to successfully move forward with a project. We began expensing carrying costs as incurred in the fourth quarter of 2008.
Impairment Loss on Marketable Securities In the second quarter of 2009, we recognized an impairment loss of $1.7 million on our investment in marketable securities. The marketable securities represent shares in a Vanguard REIT fund that were purchased to facilitate a tax efficient structure for the 2005 disposition of Woodland mall. We concluded that the decrease in value was other than temporary, and therefore recognized an impairment loss.

Presentation of Operating Results
Income Allocation
The following table contains the operating results of our Consolidated Businesses and the Unconsolidated Joint Ventures. On January 1, 2009, we adopted the new requirements of ASC Topic 810 "Consolidation" as it relates to noncontrolling interests (formerly Statement of Financial Accounting Standards (SFAS) No. 160 "Noncontrolling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin (ARB) No. 51.") The new requirements of ASC 810 amend prior accounting and reporting standards for the noncontrolling interest (previously referred to as a minority interest) in a subsidiary. Consequently, the noncontrolling interests in the Operating Partnership and certain consolidated joint ventures no longer need to be carried at zero balances in our balance sheet. As a result, the income allocated to these noncontrolling interests is no longer required to be equal, at a minimum, to their share of distributions, which results in a material increase to our net income. Prior to 2009, under the previous accounting for noncontrolling interests, the income allocated to the Operating Partnership noncontrolling unitholders was equal to their share of distributions as long as the net equity of the Operating Partnership was less than zero. Similarly, the income allocated to the noncontrolling partners in consolidated joint ventures with net equity balances less than zero was equal to their share of operating distributions. The net equity balances of the Operating Partnership and certain of the consolidated joint ventures were less than zero because of accumulated distributions in excess of net income and not as a result of operating losses. Distributions to partners were usually greater than net income because net income includes non-cash charges for depreciation and amortization. Our average ownership percentage of the Operating Partnership was 67% during the three and nine months ended September 30, 2009 and 2008.
Upon our adoption of the new accounting for noncontrolling interests, net income was reclassified to include the amounts attributable to the noncontrolling interests. However, as the new accounting is applicable beginning with the January 1, 2009 adoption date, the interests of these noncontrolling interests for prior periods have not been remeasured. Use of Non-GAAP Measures
We use Net Operating Income (NOI) as an alternative measure to evaluate the operating performance of centers, both on individual and stabilized portfolio bases. We define NOI as property-level operating revenues (includes rental income excluding straightline adjustments of minimum rent) less maintenance, taxes, utilities, ground rent, and other property operating expenses. Since NOI excludes general and administrative expenses, pre-development charges, interest income and expense, depreciation and amortization, impairment charges, restructuring charges, and gains from land and property dispositions, it provides a performance measure that, when compared period over period, reflects the revenues and expenses most directly associated with owning and operating rental properties, as well as the impact on their operations from trends in tenant sales, occupancy and rental rates, and operating costs.
The operating results in the following tables include the supplemental earnings measures of Beneficial Interest in EBITDA and Funds from Operations (FFO). Beneficial Interest in EBITDA represents our share of the earnings before interest, income taxes, and depreciation and amortization of our consolidated and unconsolidated businesses. We believe Beneficial Interest in EBITDA provides a useful indicator of operating performance, as it is customary in the real estate and shopping center business to evaluate the performance of properties on a basis unaffected by capital structure.
The National Association of Real Estate Investment Trusts (NAREIT) defines FFO as net income (loss) (computed in accordance with Generally Accepted Accounting Principles (GAAP)), excluding gains (or losses) from extraordinary items and sales of properties, plus real estate related depreciation and after adjustments for unconsolidated partnerships and joint ventures. We believe that FFO is a useful supplemental measure of operating performance for REITs. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, we and most industry investors and analysts have considered presentations of operating results that exclude historical cost depreciation to be useful in evaluating the operating performance of REITs. We primarily use FFO in measuring performance . . .