See notes to consolidated financial statements.

TAUBMAN CENTERS, INC.

CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except share data)

See notes to consolidated financial statements.

TAUBMAN CENTERS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (DEFICIT)

(in thousands, except share data)

See notes to consolidated financial statements.

TAUBMAN CENTERS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (DEFICIT)

(in thousands, except share data)

See notes to consolidated financial statements.

TAUBMAN CENTERS, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

See notes to consolidated financial statements.

Note 1 - 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 70% general partnership interest in The Taubman Realty Group Limited Partnership (TRG), which owns direct or indirect interests in all of our real estate properties. In this report, the terms “we", "us", and "our'" refer to TCO, TRG, and/or TRG's subsidiaries as the context may require. We own, manage, lease, acquire, dispose of, develop, and expand retail shopping centers and interests therein. Our owned portfolio as of June 30, 20192020 included 24 urban and suburban shopping centers operating in 11 U.S. states, Puerto Rico, South Korea, and China. The Taubman Company LLC (the Manager) provides certain management and administrative services for us and for our U.S. properties.

The Consolidated Businesses consist of shopping centers and entities that are controlled, bythrough 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 bybut over which we have significant influence (Unconsolidated Joint Ventures or UJVs)(UJVs) are accounted for under the equity method.

The unaudited interim financial statements should be read in conjunction with the audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018.2019. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial statements for the interim periods have been made. The results of interim periods are not necessarily indicative of the results for a full year.

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

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 theour 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 theour 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.

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

In addition to common stock, we had three classes of preferred stock outstanding (Series B, J, and K) as of June 30, 2019.2020. Dividends on the 6.5% Series J Cumulative Redeemable Preferred Stock (Series J Preferred Stock) and the 6.25% Series K Cumulative Redeemable Preferred Stock (Series K Preferred Stock) are cumulative and are paid on the last business day of each calendar quarter. We own corresponding Series J and Series K Preferred Equity interests in TRG that entitle us to income and distributions (in the form of guaranteed payments) in amounts equal to the dividends payable on TCO'sour Series J and Series K Preferred Stock. If the Merger Agreement referenced above is consummated per the terms of the agreement, immediately prior to the effective time of the merger of TCO with and into a subsidiary of Simon (REIT Merger Effective Time), TCO will issue a redemption notice and cause funds to be set aside to pay the redemption price for each share of Series J Preferred Stock and each share of Series K Preferred Stock, at their respective liquidation preference of $25.00 plus all accumulated and unpaid dividends up to, but not including, the redemption date of such share.

We are also obligated to issue to the noncontrolling partners of TRG, upon subscription, one share of Series B Non-Participating Convertible Preferred Stock (Series B Preferred Share) per each unit of limited partnership in TRG (TRG Unit). Each Series B Preferred Share entitles the holder to one vote 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 June 30, 20192020 consisted of 26,413,11726,079,064 shares of Series B Preferred Stock and 61,208,58061,615,362 shares of common stock.

TRG

At June 30, 2019,2020, TRG’s equity included two classes of preferred equity (Series J and K) and the net equity of the TRG unitholders. Net income and distributions of TRG are allocable first to the preferred equity interests, and the remaining amounts to the general and limited partners in TRG in accordance with their percentage ownership. The Series J and Series K Preferred Equity are owned by TCO and are eliminated in consolidation.

TCO's ownership in TRG at June 30, 20192020 consisted of a 70% managing general partnership interest, as well as the Series J and Series K Preferred Equity interests. Our average ownership percentage in TRG for both the six months ended June 30, 20192020 and 20182019 was 70% and 71%, respectively.. At June 30, 2019,2020, TRG had 87,639,29687,712,025 TRG Units outstanding, of which we owned 61,208,58061,615,362 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).

Revenue Recognition

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 fromwith customers that considers economic differences between revenue types. The following table summarizes our disaggregation of consolidated revenues for this purpose.

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 June 30, 2019,2020, we had an inconsequential amount of contract assets and liabilities.

The aggregate amount of the transaction price allocated to our performance obligations that were unsatisfied, or partially unsatisfied, as of June 30, 20192020 were inconsequential.

Restructuring ChargeCharges

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 andcycle. We did not incur any expense related to our restructuring efforts during the current near-term challenges facingthree months ended June 30, 2020. During the U.S. retail industry.six months ended June 30, 2020, we incurred $0.4 million of expense related to our restructuring efforts. During the three and six months ended June 30, 2019, we incurred $0.1 million and $0.7 million, respectively, of expense related to our restructuring efforts. During the three and six months ended June 30, 2018, we recorded a change in estimate to previously recognized restructuring charges resulting in a reversal of expense of $0.1 million and $0.4 million, respectively. These expenses and changes in estimates thereto have been separately classified as Restructuring ChargeCharges on theour Consolidated Statement of Operations and Comprehensive Income (Loss). As of June 30, 2019, an inconsequential amount of the restructuring costs recognized during 2018 and 2019 were unpaid and remained accrued.    

Costs Associated with Shareholder Activism

During the three and six months ended June 30, 2019, we incurred $12.0 million and $16.0 million respectively, of expense associated with activities related to shareholder activism, largely legal and advisory services. Expenses for the three and six months ended June 30, 2019 include a $5.0 million expense pursuant to an agreement with Land & Buildings Investment Management, LLC (Land & Buildings) for a reimbursement of a portion of the billed fees and expenses incurred by Land & Buildings and its affiliated funds in connection with Land & Buildings' activist involvement with TCO and the service on our Board of Directors of its founder and Chief Investment Officer, Jonathan Litt, which reimbursement representsrepresented a related party transaction. We received written certification from Land and Buildings that the actual billed fees and expenses as of the payment date exceeded $5.0 million. During the three and six months ended June 30, 2018, expenses associated with activities related to shareholder activism were $5.0 million and $8.5 million, respectively.

Also included in the activism costs iswas a retention program for certain employees.employees, which fully vested in December 2019. Given the uncertainties associated with shareholder activism and to ensure the retention of top talent in key positions within TCO, certain key employees were provided certain incentive benefits in the form of cash and/or equity retention awards. We and our Board of Directors believebelieved these benefits arewere 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 beenwere separately classified as Costs Associated with Shareholder Activism on our Consolidated Statement of Operations and Comprehensive Income (Loss). Unvested incentive benefits underNo expenses associated with activities related to shareholder activism were incurred during the retention awards as ofthree or six months ended June 30, 2019 were $0.1 million, which will be recognized as service is rendered through December 31, 2019.2020.

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

In connection with the adoption of ASC Topic 842, "Leases", on January 1, 2019, we now reviewbegan reviewing the collectibility of both billed and accrued charges under our tenant leases each quarter taking into considerationon a tenant by tenant basis considering the tenant’s historical payment status, credit profile,history, credit-worthiness, aging of the receivable, the tenant's operating performance and known issues related to tenant operations.other factors. 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.UJVs. This resulted in a cumulative effect adjustment increasing Dividends in Excess of Net Income by $3.2 million and Non-redeemable Noncontrolling Interest by $1.8 million on our Consolidated Balance Sheet with offsetting increases in Accounts and Notes Receivable, Investment in Unconsolidated Joint Ventures,UJVs, and Distributions in Excess of Investments In and Net Income of Unconsolidated Joint VenturesUJVs balances on our Consolidated Balance Sheet.

Note 2 - Acquisition,Disposition, Partial DispositionDispositions of Ownership Interests, Redevelopment,Acquisition, Redevelopments, and Development

In AprilMay 2018, we entered into a redevelopment agreement for Taubman Prestige Outlets Chesterfield, and all operations at the center, as well as the building and improvements, were transferred to The Staenberg Group (TSG). TSG leases the land from us through a long-term, participating ground lease. In December 2019, we acquired a 48.5% interestdetermined that construction on the redevelopment was probable of commencing within the year, which would nullify our right to terminate the ground lease that was contingent on TSG commencing construction on the redevelopment within five years. Accordingly, the center was classified as held for sale as of December 31, 2019 and an impairment charge of $72.2 million was recognized in The Gardens Mall in Palm Beach Gardens, Florida, in exchange for 1.5 million newly issued TRG Units (Note 13). We also assumed our $94.6 million sharethe fourth quarter of 2019, which reduced the book value of the existing debt atbuildings, improvements, and equipment that were transferred to 0. During the center. Our ownership interestthree months ended March 31, 2020, TSG began construction on the redevelopment and therefore our termination right was nullified, resulting in the center is accounted for as an Unconsolidated Joint Venture undersale of the equity method.center.

Partial DispositionDispositions 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). FollowingThe interests sold were valued at $480 million which, after transaction costs, taxes and the transactions, which are subjectallocation to customary closing conditions and are expectedBlackstone of its share of third party debt, resulted in net cash proceeds of about $330 million that were used 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.pay down our revolving lines of credit. We will remain the partner responsible for the joint management of the three shopping centers, with Blackstone paying a property service fee. fee recorded within Other revenue on our Consolidated Statement of Operations and Comprehensive Income (Loss).

The sales of 50% of our interests to be soldin Starfield Hanam and CityOn.Zhengzhou were valued at $480completed in September 2019 and December 2019, respectively. In March 2020, we received an additional $0.5 million as of cash proceeds from the sale agreement date, with netof 50% of our interest in CityOn.Zhengzhou. As a result, we recorded adjustments to the previously recognized gains resulting in an additional $0.5 million gain on disposition and an additional $0.5 million gain on remeasurement during the six months ended June 30, 2020.

In February 2020, we completed the sale of 50% of our interest in CityOn.Xi'an. Net cash proceeds expected to be about $315from the sale were $48.0 million, after transaction costs andfollowing the allocation to Blackstone of its share of third-party debt. Also,third party debt, taxes, and transaction costs. A gain of $10.6 million was recognized as a result of the partial disposition of our interest, which represented the excess of the net consideration from the sale over our investment in the UJV. In addition, upon completion of the sale, we may receive upremeasured our remaining 25% interest in the shopping center to fair value, resulting in the recognition of a $13.2 million gain on remeasurement. In June 2020, we received an additional $50$0.4 million of consideration basedcash proceeds from the sale of 50% of our interest in CityOn.Xi'an. As a result, we recorded adjustments to the previously recognized gains resulting in an additional $0.4 million gain on disposition and an additional $0.4 million gain on remeasurement during the three months ended June 30, 2020.