Derivative and Hedging Activities

Risk Management Objective and Strategies for Using Derivatives

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

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

As of September 30, 2018, the Company had the following outstanding derivatives that were designated and are expected to be effective as cash flow hedges of the interest payments and/or the currency exchange rate on the associated debt.



Instrument Type	Ownership		Notional Amount		Swap Rate		Credit Spread on Loan			Total Swapped Rate on Loan			Maturity Date
Consolidated Subsidiaries:
Receive variable (LIBOR) /pay-fixed swap ⁽¹⁾	100	%	$	200,000	1.64	%	1.90	%	⁽¹⁾	3.54	%	⁽¹⁾	February 2019
Receive variable (LIBOR) /pay-fixed swap ⁽¹⁾	100	%	175,000		1.65	%	1.70	%	⁽¹⁾	3.35	%	⁽¹⁾	February 2019
Receive variable (LIBOR) /pay-fixed swap ⁽¹⁾	100	%	100,000		1.64	%	1.90% / 1.70%		⁽¹⁾	3.54% / 3.34%		⁽¹⁾	February 2019
Receive variable (LIBOR) /pay-fixed swap ⁽²⁾	100	%	100,000		2.14	%	1.90	%	⁽²⁾	4.04	%	⁽²⁾	February 2022
Receive variable (LIBOR) /pay-fixed swap ⁽²⁾	100	%	100,000		2.14	%	1.90	%	⁽²⁾	4.04	%	⁽²⁾	February 2022
Receive variable (LIBOR) /pay-fixed swap ⁽²⁾	100	%	50,000		2.14	%	1.90	%	⁽²⁾	4.04	%	⁽²⁾	February 2022
Receive variable (LIBOR) /pay-fixed swap ⁽²⁾	100	%	50,000		2.14	%	1.90	%	⁽²⁾	4.04	%	⁽²⁾	February 2022
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	%	163,072		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 payments accrued and made each month on a debt principal amount equal to the swap notional amount, regardless of the specific debt agreement from which they may flow. The Company is currently using these swaps to manage interest rate risk on the $250 million unsecured term loan and $225 million on the $1.1 billion primary unsecured revolving line of credit. The credit spreads on these loans can vary within a range of 1.25% to 1.90% on the $250 million unsecured term loan and 1.15% to 1.70% on the primary unsecured revolving line of credit, depending on the Company's total leverage ratio at the measurement date, resulting in an effective rate in the range of 2.89% to 3.54% on the $250 million unsecured term loan and 2.80% to 3.35% on $225 million of the $1.1 billion primary unsecured revolving line of credit during the remaining swap period. In October 2018, the Company entered into forward starting swaps on the $250 million unsecured term loan (see "Note 5 - Beneficial Interest in Debt and Interest Expense - 2018 Financings").

(2)


(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

On January 1, 2018, the Company early adopted ASU No. 2017-12, "Targeted Improvements to Accounting for Hedging Activities", which provided changes in hedge accounting recognition and presentation requirements. The Company now recognizes 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), as opposed to previously recognizing the ineffective portion, if any, directly in earnings. Upon adoption, the Company applied the modified-retrospective approach and recorded a one-time cumulative-effect adjusting entry to reclassify an inconsequential amount of previous hedge ineffectiveness for cash flow hedges from Dividends in Excess of Net Income to AOCI on the Company's Consolidated Balance Sheet.

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the unrealized gain or loss on the derivative is reported as a component of OCI. Prior to the adoption of ASU No. 2017-12 on January 1, 2018, the ineffective portion of the change in fair value, if any, was recognized directly in earnings. Beginning January 1, 2018, all unrealized gains or losses on the derivatives are reported as components of OCI. Net realized gains or losses resulting from derivatives that were settled in conjunction with planned fixed-rate financings or refinancings continue to be included in AOCI during the term of the hedged debt transaction.

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

The Company expects that approximately $3.8 million of the AOCI of Taubman Centers, Inc. and the noncontrolling interests will be reclassified from AOCI and recognized as an increase to income in the following 12 months.

The following tables present the effect of derivative instruments on the Consolidated Statement of Operations and Comprehensive Income for the three and nine months ended September 30, 2018 and 2017. 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 (Effective Portion)					Location of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
	Three Months Ended September 30						Three Months Ended September 30
	2018		2017				2018			2017
Derivatives in cash flow hedging relationships:
Interest rate contracts – consolidated subsidiaries	$	756	$	472		Interest Expense	$	506		$	(533	)
Interest rate contracts – UJVs	235		454			Equity in Income of UJVs	(1		)	(523		)
Cross-currency interest rate contract – UJV	92		(13		)	Equity in Income of UJVs	(36		)	22
Total derivatives in cash flow hedging relationships	$	1,083	$	913			$	469		$	(1,034	)



	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)						Location of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
	Nine Months Ended September 30							Nine Months Ended September 30
	2018			2017				2018			2017
Derivatives in cash flow hedging relationships:
Interest rate contracts – consolidated subsidiaries	$	8,674		$	(257	)	Interest Expense	$	205		$	(2,409	)
Interest rate contracts – UJVs	2,101			1,693			Equity in Income of UJVs	(287		)	(1,920		)
Cross-currency interest rate contract – UJV	(90		)	(32		)	Equity in Income of UJVs	781			(982		)
Total derivatives in cash flow hedging relationships	$	10,685		$	1,404			$	699		$	(5,311	)

The Company records all derivative instruments at fair value on the Consolidated Balance Sheet. The following table presents the location and fair value of the Company’s derivative financial instruments as reported on the Consolidated Balance Sheet as of September 30, 2018 and December 31, 2017.



		Fair Value
	Consolidated Balance Sheet Location	September 30, 2018			December 31, 2017
Derivatives designated as hedging instruments:
Asset derivatives:
Interest rate contracts – consolidated subsidiaries	Deferred Charges and Other Assets	$	9,128		$	939
Interest rate contract - UJV	Investment in UJVs	2,504			760
Total assets designated as hedging instruments		$	11,632		$	1,699

Liability derivatives:
Interest rate contracts – consolidated subsidiary	Accounts Payable and Accrued Liabilities				$	(484	)
Interest rate contracts – UJV	Investment in UJVs				(357		)
Cross-currency interest rate contract – UJV	Investment in UJVs	$	(940	)	(1,630		)
Total liabilities designated as hedging instruments		$	(940	)	$	(2,471	)

Contingent Features

All of the Company's outstanding derivatives contain provisions that state if the hedged entity defaults on its indebtedness above a certain threshold, then the derivative obligation could also be declared in default. The cross default thresholds vary for each agreement, ranging from $0.1 million of any indebtedness to $50 million of indebtedness on the Operating Partnership's indebtedness. As of September 30, 2018, the Company is not in default on any indebtedness that would trigger a credit-risk-related default on its current outstanding derivatives.

As of September 30, 2018 and December 31, 2017, the fair value of derivative instruments with credit-risk-related contingent features that were in a liability position was $0.9 million and $2.5 million, respectively. As of September 30, 2018 and December 31, 2017, the Company was not required to post any collateral related to these agreements. If the Company breached any of these provisions it would be required to settle its obligations under the agreements at their fair value. See Note 5 regarding guarantees and Note 11 for fair value information on derivatives.