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Taubman Centers, Inc. (NYSE:TCO)

Q4 2012 Earnings Call

February 14, 2013, 11:00 am ET

Executives

Robert Taubman - Chairman, President & CEO

Lisa Payne - Vice Chairman & CFO

Barbara Baker - VP, Investor Relations

Analysts

Paul Morgan - Morgan Stanley

Quentin Velleley - Citigroup

Tayo Okusanya – Jefferies

Michael Mueller - JPMorgan

Alex Goldfarb - Sandler O’Neill

Vincent Chow - Deutsche Bank

Cedrik Lachance - Green Street Advisor

Ben Yang - Evercore Partners

Michael Bilerman - Citigroup

Operator

Thank you for holding and welcome to the Taubman Centers Fourth Quarter 2012 Earnings Conference Call. The call will begin with prepared remarks and then we will open the line to questions. On the call today will be Robert Taubman, Taubman Centers’ Chairman, President and Chief Executive Officer; Lisa Payne, Vice Chairman and Chief Financial Officer and Barbara Baker, Vice President of Investor Relations.

Now I will turn the call over to Barbara for opening remarks.

Barbara Baker

Thank you, operator, and welcome to our fourth quarter conference call. Yesterday, we released our fourth quarter and year end results and our supplemental information package. Both are available on our website www.taubman.com.

As you know, during this conference call, we’ll be making forward-looking statements within the meaning of the Federal Securities Laws. These statements reflect our current views with respect to future events and financial performance although actual results may differ materially. Please see our SEC filings including our latest Form 10-K and subsequent reports for a discussion of the various risks and uncertainties underlying our forward-looking statements.

During this call, we’ll also discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release and in our supplemental information.

In addition, a replay of the call is provided through a link on the Investor Relations section of the website. When we get to questions, we ask that you limit them to two and then if you have more, queue up again. That way, everyone has the opportunity to ask a question.

And now let me turn the call over to Bobby.

Robert Taubman

Thanks, Barbara, and good morning, everyone. 2012 was a very productive year for our company. We celebrated our 20th anniversary of becoming a publicly traded REIT. We made significant progress in Asia. We announced a number of exciting development projects in the US and it’s the second year in a row we ended the year with over $0.5 billion of acquisitions.

On top of it all, our core produced tremendous results. Adjusted FFO, up 17.6%, NOI comp, up 7.2%, the highest growth rate we’ve seen in 10 years; sales per square foot, $688, up 7.3%, another record for the company and the publicly held U.S. regional mall industry. Occupancy, lease space, rents, all our key operating statistics were up solidly.

For the quarter, sales per square foot were up 3.5%. As we expected, sales have moderated through the year and have now reached a more normalize level. Over the 10-year period ending December 31, 2012, the compounded annual growth rate of our 10 sales per square foot has been 5.1%. This compares to the core Consumer Price Index compounded annual growth of 1.9% over the same period. It's clear that on average, our centers have gained significant market share.

Historically, with all our businesses healthy if overtime we are exceeding inflation by 100 to 200 basis points. At 320 basis points, it's been a phenomenal run. There were many success stories in the quarter. Luxury was strong with Gucci, FENDI, Burberry, Cartier and BVLGARI all up double-digits. Louis Vuitton and Christian Dior had excellent quarters as well.

As household formations and housing starts have improved, we're seeing strong sales results in home furnishings. Z Gallerie and Pottery Barn delivered very solid increases. Restoration Hardware has been off the charts. Electronics; Yes, Apple and Junior Apparel hurt the quarter. For the year, Apple was modestly positive.

Occupancy for all centers at year end was 91.8%, up 1.1% from last year. Temporary tenants comprised additional 4.8% for the fourth quarter. This brings the total to 96.6%, the highest complying occupancy number we have ever had.

Lease space in comp centers was 93.2%, up 0.9% from last year; another reflection of the positive retailer settlement in our centers. We saw solid rent growth per square foot in 2012. We concluded the year up 3.3% in line with our original guidance of 3% for the year.

Turning to our development projects, I will start in the U.S. In Sarasota, construction at University Town Center is moving along nicely. We’ve started footings and steel will be going up soon. Our opening remains as scheduled in October 2014.

In Puerto Rico at The Mall of San Juan construction is also moving forward and we expect to start footings next month. We have now determined we will be opening the shopping center spring 2015. The specific date will be announced shortly. Retailers are enthusiastic about these two centers and while it’s still early merchandising and leasing are going very well.

At Chesterfield, our Outlet Center in suburban St. Louis construction is proceeding as planned and we continue to be on-track for our August 2nd opening. We encourage you to visit www.taubmanpresteigeoutletschesterfield.com to see photos of our progress. As you all know, this is a very competitive situation. We have said for sometime if two centers were built, it would fragment the market, both for retailers and customers. This is clearly the situation. Nonetheless, St. Louis is the 19th largest metropolitan area with nearly 3 million people and the only top 20 market without an Outlet Center.

Our project combined with Simon’s will total roughly 650,000 square feet. No other top 20 market has less. Two markets in the top 20 have between 800,000 and 900,000 square feet and the third smallest outlet supply in the top 20 markets is 1.6 million square feet. We believe this underserved market coupled with our outstanding location will allow us to create good project overtime. We have said stabilized returns would be reduced if both centers were built and they will be. The range for income for 2013 is in our guidance. Given how contentious this situation is, we are not in a position to comment any further.

Moving on, in Salt Lake City we are very proud to say this City Creek Center was just named Best Retail Development for 2012 at the Esteemed International Property Awards in London. The Center One for the entire Americas region which includes the U.S., Canada, Central and South America and the Caribbean. The Center also plays a second as the world’s best retail development. We are delighted and honored to receive such a prestigious award.

In Asia, we are pleased to have just announced our second project in China and our third in Asia. We are once again partnering with Wangfujing Department Store and a local developer on a 1 million square foot shopping center in Zhengzhou. Like Xi’an, Zhengzhou is a second-tier city in Central China with nearly 9 million people and growing very quickly.

There are over 1 million residents in a three mile radius of the project with the total trade area population less than a 5 mile radius expected to reach 2.8 million people by 2015. Zhengzhou is home to a number of major industries, automobile, infrastructure, food production, coal, electricity, aluminum, textiles, data, and it is well known for Foxconn’s headquarters, the manufacturer of many of Apples products.

The center will be built adjacent to two key arterial roads, near to subway and strategically located in the heart of the Zhengdong New District. It’s an area of significant importance to the municipal, provincial and central governments.

We are building a six level shopping center with five levels above ground and one underground. Upon opening, we expect approximately 200 stores with Wangfujing Department Store being the key anchor. The stores are expected to be a mix of international and local, middle-to-high end brands.

The center will also include a supermarket, Movie Theater and a significant group of restaurants. Over 1 million square foot center has begun construction and is scheduled to open in 2015. Our role is to lead the design, leasing, tenant coordination and marketing efforts.

Wangfujing will have the primary role for the construction of the shopping center. Our share of the investment will be somewhat over $100 million or a 32% equity interest in the project. Like our first announced project in Xi’an, we are expecting a 6% to 6.5% unlevered after tax return at stabilization.

Sales growth rates are expected to be in excess of 10% and combined with shorter lease terms in the US, returns on our investment are forecasted to equal those earned in the US by the seventh or eighth year. We expect they will continue to grow at a rapid pace beyond that.

Now, I would like to turn the call over to Lisa. Then I'll return at the end of the call for some closing comments.

Lisa Payne

Thanks, Bobby. As we prepare to fund our development pipeline over the next few years, we remain committed to maintaining our strong balance sheet. At December 31, 2012; our debt-to-market capitalization stood at 33.6% down nearly 5% compared to the same period last year.

Last month, we completed the refinancing of Great Lakes Crossing Outlets in Auburn Hills, Michigan. The new $225 million non-recourse loan matures in 10 years and bears interest at an all in fixed rate of 3.63%. This represents a 165 basis point reduction in the stated rate from the previous loan.

Excess proceeds of about $100 million were used to pay down our revolving lines of credit. In addition, we are finalizing an increase to our primary line of credit to $1.1 billion, up from $650 million. This will provide us additional financial flexibility to fund our operations and development pipeline. The facility will include an accordion feature that would increase the borrowing capacity to as much as $1.5 billion if fully exercised.

The new line will be unsecured with a four-year term and a one-year extension option. Pricing will be based on the debt levels of the company and at today’s leverage; pricing would be LIBOR plus 1.5% with a 25 basis points facility fee.

Looking ahead, we plan to obtain financing on City Creek Center later this year. We expect financing proceeds to be in excess of our cost for the center. Also in 2013, we expect to pay off the loan at the mall at Green Hills in Nashville using our revolving line of credit. This will allow financial flexibility as we continue to explore expansion opportunities at the center.

Now moving to FFO, as you can see on page 10 of our supplemental, we had a number of adjustments this quarter. Excluding these items, our adjusted FFO was a $1 up 7.5% compared to $0.93 last year. Let’s look at the year-over-year variances for the quarter. First, minimum rent up $0.07 from the prior year due to higher occupancy and rents per square foot.

Next, percentage rents up $0.03 from increased sales. Net recoveries unfavorable by $0.02, a result of increased fund spending during the quarter and a property tax refund received in the prior year.

Net revenue from management, leasing and development services unfavorable by $0.85, that’s largely a result of the timing of the leasing success fees of our IFC Center in Seoul which occurred in the fourth quarter of 2011 and the third quarter in 2012.

Also impacting this quarter was the third-party business of Taubman TCBL which incurred a loss before we sold it. Lease cancellation income, favorable by $0.02. Redevelopment cost and interest expense were both favorable by $0.015 primarily due to capitalization of the US and Asia development projects that we announced earlier this year.

General and administrative expense was unfavorable by $0.035 from increased compensation and professional fees. Next, non-comparable centers favorable by $0.055 due to the mall at Green Hills and El Paseo which we acquired in December of last year and the strong performance of City Creek Center which opened in March. Operations of the Pier Shops and Regency Square favorable by $0.03 because we no longer own them. These centers were disposed in the fourth quarter of 2011 and this is the last time we will have this variant.

Finally, deletion from the company’s recent common equity offering, net of interest expense reduction impacted our results unfavorably by $0.02.

Now, turning to guidance. As we said in the release, for the full year 2013 we are introducing FFO guidance in the range of 357 to 370. At the midpoint, this represents an increase of nearly 9% over 2012 adjusted FFO. Here are some of the assumptions behind these numbers.

Comp center NOI excluding lease cancellation income is expected to be at least 3% for the year. We are estimating that our recovery ratio will roughly be even with 2012, year end occupancy is expected to be up modestly, average rent per square foot is expected to be up 4% to 5%. We are estimating that lease cancellation income which is always difficult to predict will be similar to this year and in the range of $3 million to $4 million.

Net third-party revenues are expected to be about $6 million to $9 million for the year. This includes the final success fee related to the opening of IFC Mall in Seoul, and the impact of Woodfield Mall in Schaumburg, Illinois.

As you know at year end, we start providing management and leasing services at the center. Beginning in 2013, we will now classify certain Asia cost in G&A as opposed to predevelopment expense. We are moving from mainly a deal pursued and third-party business to one that is primarily executing investments in new projects. This is consistent with the presentation of our US business.

As a result, our quarterly G&A run rate is now expected to be about $13 million. This expense also includes the ramp up in the US to handle all of our increased activities. Predevelopment expense including both the US and Asia is expected to be between $13 million and $14 million versus $18.5 million in 2012.

And finally, we closed our land sale in early 2013 for gain of about a penny and do not expect any additional land sales this year.

With that, I'll turn the call back to Bobby for closing remarks.

Robert Taubman

Thanks, Lisa. In summary, we had another fantastic year that combined with a great quarter. During 2012, our shareholders enjoyed a total shareholder return of newly 30%. In fact for the period ended December 31, 2012; our total shareholder return has been nearly 22% compounded over the last decade. The best in the publicly held US regional mall industry and fourth of the 85 US REITs operating during that period. Over the same 10-year period, compounded annual growth of our adjusted FFO per share has been approximately 6%.

As I mentioned it’s now been 20 years since we became a public company. We had a remarkable record during that span. Along the way, the company has more than quintupled our equity market cap and our shareholders have enjoyed a return of about 17% since our IPO in November 1992. As we look out on to the horizon, we are well positioned for the next 5 to 10 years. Our core is as strong as ever, thanks to the wonderful sales we've enjoyed over the last few years we have significant embedded growth opportunities and we've established a development pipeline that will fuel the growth for years to come.

Once again, I would like to thank our employees, Board and our shareholders for your continued support. We are now ready to open the call up for questions. As Barbara said please limit your questions to two. Lindsey are you there?

Question-and-Answer Session

Operator

(Operator Instructions) your first question comes from the line of Paul Morgan from Morgan Stanley.

Paul Morgan - Morgan Stanley

On the same store NOI growth outlook of 3%, can you just talk about maybe some of the drivers there that they are taking you from 7% to 3%. I mean you ramped up occupancy over the course of the year, I would think that would kind of filter into NOI and growth in ’13. I'd assume your spreads are, given where the occupancy costs are, that your spreads are going to be at least the strong and the recovery rate is flat. What are the things that are going to take you down relative to where you were this year?

Lisa Payne

Well, I would say probably the biggest surprise in 2012 was clearly our percentage rent line, because we've had such strong sales growth, and typically as we did at the beginning of 2012 we don't project that kind of percentage rent growth, so a lot of the performance came from that. This coming year we are expecting a modest increase in percentage rents, but not that significant. The other thing I would say in 2012, we really did an excellent job. We continue to push this but we did an amazing job in managing our expenses in CAM and again we are going to continue to do that. But you can take that to some level and then you can push it as greatly, but we are continuing to look for efficiencies in CAM but are not projecting to have that kind of positive variance. As we said, we are expecting net recoveries to be flat for the year. Rents of course we just said is actually going to be up even stronger in 2013, and so we are seeing rents per square foot as a solid growth and we are just expecting occupancy to be up modestly.

Paul Morgan - Morgan Stanley

And my other question is just on the US portfolio, a lot of your peers are pretty heavily focused on resurgence and redevelopment and expansions of their existing better assets, and given the strength of your sales and where your occupancies are for your US portfolio, you mentioned Green Hills being one but are there other things that are percolating in terms of redevelopment spends in the US?

Robert Taubman

Paul, we are always focused on redevelopment, and I would argue that our reinvestment in almost every asset is, we're continuously reinvesting in them. If you looked at the last 5 or 10 years, the number of assets that we've either substantially renovated and/or expanded in some way. It's a very high percentage of the overall assets in the portfolio. We did mention Nashville. When we bought Green Hills we said that there are ways that we felt we could actually when we bought both we felt there were ways we could expand both. We were very focused on Green Hills and we continue to be, and hopefully we're going to be able to find some way to do it.

We do have a few other situations that we're working on, that I don’t intend to name until they are ready to, but they are longer-term. Our primary focus has been on development for external growth and we have been able to buy assets at the end of this year, at the end of last year, that we think are very strategic and that will add to our portfolio.

Operator

Your next question comes from the line of Craig Schmidt from Bank of America. Your line is open.

Unidentified Analyst

Actually this is [Jeff Spectrum] here with Craig. We have two questions. I will just ask the first. I guess a follow up Lisa on the percentage rent. Just thinking about the math quickly, I understand if you are not forecasting sales to increase at such a high growth rate in ‘13 over ’12, but given that you can’t convert the leases quick enough from that percentage rent to fixed rent, wouldn’t you assume at least an equal amount of percentage rent in ‘13 compared to ‘12?

Lisa Payne

Yes Jeff may be I didn’t say my answer to question wasn’t as clear. New York is actually expecting a modest increase in percentage rents in 2013 over ’12. So we are going to get the same level and some more. But I think what the question was is why isn’t our growth we are at a 7.5 growth in ’12, why are we only up 3 in ‘13. So the growth in percentage rent isn’t going to be a great in ‘13 as it was in ’12, but we are going to get at least what we got plus some. But it’s going to be up a smaller amount. Also I mentioned about percentage rent, it is very tenant specific and very hard to predict. So we do think, as I said, we are going to be up because we do assume sales are going to grow and we will have a modest increase in percentage rent.

Unidentified Analyst

Okay, thanks for clarifying that. And our second question is then just thinking about the low end of the range; does that assume the consumer pulls back let’s say your tenant sale start to decline that you are walking into negotiations and the retailers are now pushing back that they are actually seeing decline in sales or it’s not that conservative.

Robert Taubman

Jeff let me answer. First of all our retailer stem is very strong right now. It’s a very fragile recovery that we are sitting, in the fourth quarter trend which we have talked about for several years that we would get back to normalization. The fourth quarter was impacted by things like Sandy what was going on in the election, the market volatility right up leading to the election. So we are very comfortable and I will say that a 9% midpoint guidance increase is pretty strong and maybe the strongest we’ve ever had, so we are very comfortable with the kind of guidance that we are giving out there.

Lisa Payne

Yeah, and I’ll just add that, I would say the lower end of the range really isn't as much about NOI growth it’s really about other issues potentially competitive pressures in Chesterfield, development spending, there is a lot and we are way early in the year. We are early in the year for even knowing what sales are going to do, but I think Bobby is right, given our occupancy cost we feel very good about the quarter.

Operator

Your next question comes from the line of Quentin Velleley from Citigroup. Your line is open.

Quentin Velleley - Citigroup

Given the competitiveness in St. Louis, how are you thinking about your outlets strategy now particularly with (inaudible) partnering in three key US markets so far and righteous restrictions really limiting your ability to develop. Have you sort of changed the outlet strategy and reduced the number that you wanted to build or are you still sort of targeting something similar?

Robert Taubman

Quen, we are still targeting right over this decade, we hope to build a handful of these things. That’s what we talked about along. We think it is an absolute natural extension of our capabilities. We think its very synergistic with the retailers and the leasing excess that we talk to all the time. Retailers are encouraging us to do it, it diversifies our product type, it augments our organic growth. At every level it makes sense for us to be involved in it. It is a very competitive environment, and you mentioned Simon to other people out there trying to do this as well. But we are hopeful that we will find locations that will be less competitive overtime than this one has proved to be.

Quentin Velleley - Citigroup

And then just secondly in terms of Asia, you sort of got either $500 million of spend coming in, I don't know you can find that for debt construction lines and you already have partners. But is there an opportunity to bring another partner in for part of that $500 million cost or would your preference be to sort of why derisk the projects and try and get a better valuation down the road?

Lisa Payne

Yeah, I think its going to be case by case. We have said that in Korea we do, we are looking at and working on a potential partnership on that project. I think its fair to say that we think that project is terrific and so we want to make sure that we are going to get a deal that we think merits the quality of the project; we are very optimistic that we are going to be able to do that. But if not, we are very comfortable taking that project to the end and then either bringing a partner at that point or doing something else. So I do think it will be case by case.

On the China project, they are pretty small already. I mean we are already only a third and our investment is just in the 100-ish range. We likely are going to do construction financing on those projects. So we are not looking at bringing a partner there, because we mitigated our risk there by picking already a good partner in Wangfujing. It’s a fully entitled site; its going forward, so we are kind of thinking that project as frankly derisk to the point where we want to take it to fruition and then we will decide how we want to handle our capital at that point.

Operator

Your next question comes from the line of Tayo Okusanya from Jefferies. Your line is open.

Tayo Okusanya - Jefferies

Just a couple of questions, first of all in regards to Woodfield, since you managed that asset already, just curious why you decided not to partner up there, the same way Simon did and rather let Simon kind of did the deal that they did?

Robert Taubman

Well, obviously we have a long and wonderful history with Woodfield. It is a great shopping center. We built it 40 years ago. We were partners with CalPERS initially for over 20 years on the asset and then we exchanged our interest in the asset to the General Motors Pension Trust and together they owned it and we managed it for many years. So it was a great history with a great asset for a long time.

Obviously, we considered the opportunity of continue to actual renewed ownership in the asset and we came to determination that it was unlikely that we were going to be able to find a significant growth that we already haven't found in developing and managing that asset for many years. Obviously, it’s a great asset.

I think that in the Simon and you will have to talk to Simon, obviously about their reasons for getting involved, but I think that they found it interesting to not only own a part of a great asset, but also to exchange interest in another asset of theirs in Southern California and that was of great interest to CalPERS. So it’s a great asset, I am sure that CalPERS and Simon will continue to enjoy the benefits of it and we felt that we've added an enormous amount of value over a long period of time.

Tayo Okusanya - Jefferies

I know you are not making another comment about St. Louis, but we heard about you guys find Polo out there which kind of seemed to be a pretty big deal. Just kind of curious whether kind of changed the competitive landscape at all, with Polo coming over to you guys instead?

Robert Taubman

Well, I really can’t comment on individual tenants, but we're very happy with the group of retailers that we're bringing to there and as we said, you know, the market will be fragmented nonetheless with the two projects.

Tayo Okusanya - Jefferies

Got it. That’s helpful and just one last question for the road in Puerto Rico, we're also hearing that the luxury releasing is going very well. I am just kind of curious where a lot of these stores are coming from. It looks luxury retailers are shutting out some of the other stores in areas such as Condado; are these actual brand new stores on the island and they are actually increasing their store count?

Robert Taubman

You are absolutely right. Leasing is going extremely well on that project. Luxury is extremely exciting. All the luxury merchants are extremely excited. There was a recent conference last week, the Caribbean ICSC and you know, all of the tenants in that existing market were there. People are very excited about this asset. We do expect that luxury will have significant stores called flagship stores and we do believe that over 60% of the tenants in that center will be new to the market as are the two anchor Nordstrom and Saks that are the first stores anywhere in the Caribbean. So we really think we have amazing opportunity in San Juan and I think retailers are viewing this as a great new venue especially at the high end where they can have the opportunity of San Juan and its tourism and existing population.

Tayo Okusanya - Jefferies

But for people who are currently on the island already like Louis Vuitton and Cartier and some of these other guys, are they planning new stores there, or they are going to just move their old store from another location to your center?

Robert Taubman

There is only a handful of existing luxury retailers on the island. All of the retailers on the island today, as well as others have been searching for venue for a long time that they could be comfortable in. And what we are providing them, it’s a very underserved market at the high end, and what we are doing is dividing for them that new venue that they are now comfortable with and that’s why the handful that are there will be interested in larger stores and that’s why the ones that aren’t there are going want to be there.

Operator

Your next question comes from the line of Michael Mueller from JP Morgan. Your line is open.

Michael Mueller - JPMorgan

Great thanks. A couple of questions, first, Lisa, I was wondering if you can give us the timing and the size of the success fee that you referenced in your comments?

Lisa Payne

We aren’t going to get specific on that, but it will be at the end of the year; fourth quarter. But it is in that management and leasing guidance that we gave you.

Michael Mueller - JPMorgan

Okay, great. And then can you talk a little bit about what’s in ‘13 guidance for funding for the development pipeline specifically in equity component and just how you are sizing it up over the next few years as well?

Lisa Payne

We are planning and feel very good having spoken to our bank group of arranging construction loans on both San Juan and Sarasota; we are going to really start with Sarasota, plus with the increased revolving line of credit, we feel very capable of managing through, by the way most of these loans and most of the development cost will really start this year, but the biggest year is really next year. So at this point, we feel that we have it all under control on that side.

Having said that, as we look out over the next three to five years depending on additional opportunities that may come in, obviously we have a commitment to maintaining our balance sheet conservatively. We do feel we did a good amount of equity and preferred this past year, and we would look to potentially most likely on the preferred side given the attractiveness of that capital as something we might do in the future if we need to add to our capital structure other than through construction loans or additional borrowings.

Michael Mueller - JPMorgan

Okay. So no common equity and no common equity is expected for this year then correct?

Lisa Payne

I’ll just say, like I said, without knowing what other opportunities, I think we are finding ourselves like we bought the assets at the end of the year. So borrowing anything like that, I would say nothing is contemplated, but that can change in a moments notice depending on what opportunities we can see in market conditions. But I would say, let's say this, there is nothing in the guidance that we’ve given you, that would say we thought we are going to have an equity offering.

Robert Taubman

And I think Lisa already said in the comments, we are committed to maintaining the kind of capital structure that we have at the company, so as opportunities present themselves, external growth opportunities show up, we are going to always think in that context.

Operator

Your next question comes from the line of Alex Goldfarb from Sandler O’Neill. Your line is open.

Alex Goldfarb - Sandler O’Neill

Bobby, over your time there, you guys have been involved in, I mean, it seems like a lot of retail development are always pretty tough battles between competing sites, obviously, you guys went through the willow bend, experienced almost a decade ago, what makes this more contentious than any of the other developments that you've been engaged with, is it, basically, is it that the competitor ended up going through so you have two projects going up at the same time or is it something else?

Robert Taubman

I think its pretty self-evident Alex. I mean its very competitive market. There's a limited number of retailers or key retailers and you want to try to attract as many as you can, but as I said you are in a marketplace that has no outlet supply today and our view is that over time these assets will gestate into the market and they will both be successful.

There's no question that one individual project would have been very successful. It would have been one of the best outlet malls in the United States. Now it’s going to have to share that market. So if you have to share it’s never as good as having it alone. So it’s a very contentious situation and I think it does highlight that people are trying to manage their territory as best as they possibly can and I would say a natural occurrence in some respects. But it is very competitive. It was competitive 10 years ago.

We built a lot of projects in the last decade and that was probably the most competitive but all of the projects that we built at that time all had their own competition and we have competition today in San Juan, in Sarasota, elsewhere. So we feel comfortable with where we are. Obviously, we would prefer if we had been alone in St. Louis, that's not the situation.

Lisa Payne

And I would add, I think what maybe a way to also add is what the price does here. What that given the strength of our site and where we were in our process that somebody would actually build on what we saw as very, very inferior site with very bad access. So when we look back and say what could we do differently? I guess, we underestimated our competitor but we also didn't think that they are going to do something that was building bad real estate and shame on us may be but in fairness, we really did analyze the situation and did not think that anyone would build on that site.

Alex Goldfarb - Sandler O’Neill

And just to expand on Quinton’s earlier thing, I mean one of the beauties of your platform is the small portfolio size, the productivity, the cash flow, the properties and if you guys can do San Juan and Sarasota’s obviously, it’d be great to get Oyster Bay at some point despite the returns but if you guys can do malls like that or City Creeks, why go head-to-head in the outlet? Why not just say we do a really good job on the mall development side, I mean IP has been a huge success along with the others from that class. So why not just state, why not do that and use the beauty of the small platform that individual deals do make a difference rather than tackling the outlets?

Robert Taubman

Well, first of all, remind you that Dolphin Mall in Miami and Great Lakes Crossing in Detroit are fabulous outlet venues, incredible, two of the best in the United States. So we're in the business and when we see opportunities, we're going to pursue them. And as I said earlier in answer to an earlier question, it’s a natural extension of our capabilities and it augments our organic growth. So we're going to pursue where it makes sense and we think that overtime, we will be able to own a group of these and they will be part of our core business.

Operator

Your next question comes from the line of Vincent Chow from Deutsche Bank. Your line is open.

Vincent Chow - Deutsche Bank

Just a question on same-store NOI, it's a little bit, it’s somewhat backward but on a 2012 same-store NOI growth it was about 7.2%. I think that compared to guidance of 6%. Can you just talk about really what the delta was versus your expectation? Was it just the [camp] recoveries that coming in better than you thought? I know it's down year-on-year but was that better than what you thought it would be?

Lisa Payne

Yes, our recovery ratio did end up being better than we expected and that was big piece of it and the second big part was more of percentage rent, which as we said, is always very difficult to pin down to the penny. So those two components helped us exceed our expectations.

Vincent Chow - Deutsche Bank

Okay, and then the camp timing step made the same-store NOI on a quarterly basis pretty choppy in 2012. Did you expect it to be more normalized in 2013 or should we be aware of any sort of unusual quarterly variances?

Lisa Payne

I wouldn't say unusual but I think it typically is more positive variances in the beginning half and more and potentially flat to maybe even it’s so early but definitely moderates in the second half of the year.

Vincent Chow - Deutsche Bank

Okay, but not as ….

Lisa Payne

Probably not let’s say, our expectation is not as chunky as this year but when I report my results I may be wrong because quarterly guidance is very difficult for us.

Vincent Chow - Deutsche Bank

Right, okay.

Lisa Payne

So right now, we expect it to be more positive in the first half less in the second not as chunky as this year.

Vincent Chow - Deutsche Bank

Okay and then just going to occupancy costs, I think 12.7% for the year for 2012, just wondering if you had the numbers as far as the lease roles over the next few years what the occupancy cost? Is it similar to that 12.7 level for what’s coming due in the next year or two?

Lisa Payne

We do show in our 10-K, a lease expiration schedule that we will be updating for this K and I think that’s probably the best place for you to see what rents are, it shows rents for the next few years.

Vincent Chow - Deutsche Bank

Okay and then may be…

Robert Taubman

Obviously, it’s highly dependent on the growth and trend in sales always.

Vincent Chow - Deutsche Bank

Right.

Robert Taubman

And that’s why we are today at a number like below 13%.

Vincent Chow - Deutsche Bank

Okay and then just on what you are signing more recently, what does that look like? I am assuming it’s much higher than 12.7?

Lisa Payne

Yeah, we target 17% occupancy costs on our new leases for basically tenants that are below 10,000 square feet. So, large tenants obviously need to be excluded. So, that’s why we have such healthy rent growth assumed for next year.

Vincent Chow - Deutsche Bank

Okay, so you are not having any trouble getting the 17 then?

Lisa Payne

Well, tenants never like paying rent but we think we get the highest in the industry. So, it’s always a challenge but that’s what we metric our leasing team on 17.

Operator

Your next question comes from the line of Cedrik Lachance from Green Street Advisor. Your line is open.

Cedrik Lachance - Green Street Advisor

Just looking at the TCBL assets that you sold recently in China and I am curious what did you buy exactly when you bought TCBL? What do you still have there? And in terms of the personnel that came with that transaction, what did you spend bulk of their time on, is it a historical business and the historical consulting business that they had or are you spending more and more time helping your ventures into China?

Robert Taubman

When we got in the TCBL, it was meant to be our platform for our China investment. It was met to accelerate our ability to have execution capability right then and there and give us confidence and relationships to make greater confidence in investments and (inaudible) a greater relationships overtime.

There is a lot of talent. There were 200 people in the company and we also hoped that the third-party business would cover overhead as we built up our asset platform over there, and builds up the income that would flow from that again recover the execution capability that we were creating.

When we get into it, we determined that the third-party business model that we had hope would be able to cover lot of overhead. It wasn’t going to cover sufficient overhead to really make it worthwhile for us to continue to really pursue the third party business and try to make that model work. And in that process of us determining that, some of the principles of TCBL working with Xi’an came up with a very opportunistic offer that was made, which we then accepted.

At the end of the day, we got execution capability we sought about 40 people came in to the company, came in to Taubman Asia to go with 40 to 45 people we already have. So in total we now have about 85 people in Taubman Asia, and we clearly have several years in our ability to get up to speed. It has given us significant confidence in our ability to execute on the two China projects, the second one that we now announced. We got back the 10% of equity in China that we were providing to the TCBL original principles. We got a presence in our office in Beijing and Shanghai that was very significant for us to be able to put in place immediately, and as you look back over ’12, we were able to announce the two investments that we talked about.

At the end of the day on the actual cost of TCBL, we got our capital back less the taxes that are shown in the fourth quarter numbers. So we are very happy with where we ended up in the transactions, because we have that execution capability and we are moving forward with our investments.

Cedrik Lachance - Green Street Advisor

Earlier I think you talked about changing the treatment on the G&A associated with some future development, what does it mean for where your shadow pipeline stands out. So projects you are working on that are not on your development schedule at this point, how many of those you have in US and abroad, and how far out can you see in terms of development prospects.

Lisa Payne

Well, I'd say that just to reiterate we are changing the presentation to be frankly in line with the US. So entry development now it will be what is truly the same kind of work that we do in the US consultants, development, people looking at sites, etcetera.

Robert Taubman

Option payment.

Lisa Payne

Option payment and things like that. It’s going to be $13 million to $14 million. The kinds of things that are in there obviously we are still looking at - we are doing some things in the US that we think could prove to be a pipeline for probably Bill (inaudible) really building in…

Robert Taubman

Let me say Hawaii is something that's very visible. And we've talked about the possibility of it actually beginning construction this year or early next year, it’s something that we are working on very closely. And then we have other things that some of which that you mentioned Oyster Bay or others that we are working on. But we have nothing specific today, and we've talked about in this decade wanting to have at least a handful of projects and we are well on our way with Salt Lake City, San Juan, Sarasota, and if we are able to do with Hawaii that would be the fourth sort of traditional mall project in this decade in our company.

Lisa Payne

And then do you want to mention Asia…

Robert Taubman

And then Asia obviously because we talked about Xi’an, Gyeonggi-do and the Hanam project which is east of Seoul; those three are the beginning of our platform that are part of Asia.

Lisa Payne

But in the predevelopment pipeline work we are looking at other sites in China. We've actually mentioned that we continue to look in Macau and those probably are the two areas of focus right now.

Cedrik Lachance - Green Street Advisor

Okay, and then perhaps final question. Are you making any progress in hiring a new head of leasing or are you going to continue with the current arrangement?

Robert Taubman

Well, first of all, leasing had a terrific year, really a great year in 2012. We got a great team, had all levels of the leasing department and the transition to Billy’s leadership was seamless. But we're taking our time purposely in filling the position. We do have a search that we're in the middle of, and it's likely that we will come to some conclusion in the next period of time, several kind of period of time. Our plan is to replace the person that we had, but things are going very well in the interim.

Operator

Your next question comes from the line of Ben Yang of Evercore Partners. Your line is open.

Ben Yang - Evercore Partners

Bobby, can you just clarify what your role is in you China developments? I mean, it's clear that you are not the developer but not entirely clear if you are doing the management or leasing of those projects or your partners doing that part of the business?

Robert Taubman

Well, Ben, we talked about in Gyeonggi-do, exactly what our role is, to help design the project and program the project, to lease it, to market it and to help manage it, and each project is slightly different. But essentially and construction really is being handle by (inaudible) in the Gyeonggi-do project. Construction is more being handled, the initial construction Xi'an by the local partner. But we're effectively doing the same kinds of things in each of our projects that we are very involved in the programming, very involved in the leasing and at various levels we will be involved in the management, marketing, construction and those areas where obviously equity players coming up with our capital side by side with our other partners. So we are interested in all aspects of how you get one of these things built, open and operate.

Ben Yang - Evercore Partners

Got it sorry I missed that. But have you ever quantified the fee income that you are going to get from those China projects.

Robert Taubman

All we have talked about is what the initial unleveraged yields would be and what the growth rates would be.

Lisa Payne

But I would say that there is not going to be significant, we don’t today expect significant fee income. We are really doing this for value creation.

Ben Yang - Evercore Partners

Just second question, just going back to the TCBL sale, was your decision to sell that business may be there might not be a third project on the ground anytime soon despite I think Lisa you said that you are so looking at China. And I think you had previously said that there was an opportunistic sales, but when you consider that you sold it for a loss when you [included] cash taxes may be there were some other factors that led you to sell that business pretty recently?

Robert Taubman

We have a very robust pipeline of projects. What we need to do is choose those projects carefully, and part of dealing with all of the risks out there in an Asian effort is to do things carefully and I would say one at a time. So we are working on pipeline Lisa addressed some of that. We are working on a pipeline. So the TCBL transaction had nothing to do with the status of that pipeline.

Lisa Payne

I would just add Ben, what we really ended up with, we realized over the year, how much time and energy we were spending to try to get the third party business to break even. So when we got this opportunity and it was an opportunity to dispose a bit at basically a breakeven, there was a tax cost; but maintain we kept a significant group that does market research. We kept a big group is doing leasing for us, not third party for us and then development that will help us build our development platform there.

We decided that the third party business in China is going to be a very, very difficult business to breakeven on, and it was going to take a lot of energy. And so this became actually a great opportunity for us to focus on a principal business there which was our intent anyway.

Operator

(Operator Instructions) your next question comes from the line of Quentin Velleley from Citigroup. Your line is open.

Michael Bilerman - Citigroup

It’s a Michael Bilerman. Lisa, just thinking about the development schedule and you think about development now that’s in place driving a lot other companies growth over the next few years. We want to just get a better sense of, you have these estimated expected return at stabilization. How do you define that, when is that and how should we think about the initial returns on this projects, because obviously with the amount of capital that’s being spend, it would have the significant or numbers in ‘14, ‘15, and ‘16 depending on what those initial returns are relative to stabilize returns?

Lisa Payne

Yeah, well we typically so most of these centers got to go through each one, open kind of in the third quarter, let's say the one now San Juan I think we are talking about doing in first quarter. So generally we talk about stabilized return as the first, if it opens up in the last quarter of the year, it would be stabilized not the following year but the year after.

If you are opening though in the first quarter of the year, it won't stabilize in that year but it will stabilize the year after. So we open up, our goal is to open up these centers very, very substantially occupy and very substantially lease sometimes though it will take a quarter or two to get all of the stores opened.

So, that's really what I talk about the 8% to 8.5% will be that either full year or second full year if you are opening in the back side of a year. So, back off from that, I'd say you assume day one it’s probably in the 6% to 7% range following up to that 8%.

Michael Bilerman - Citigroup

And then I guess thinking about you know how committed a $1.2 billion call it towards these developments of which you spent 230 so call it just about another $1 billion of capital and while I recognize you can get construction loans, you can use your line of credit, a $1 billion of capital on your balance sheet and we are talking about something that's approaching 10% of gross asset value is a lot and clearly the company has talked about other projects.

You still have another potential site in Korea, the Hawaii project, other stuff happening in Asia and I'm sure you are not taking your foot off the pedal in the US on other outlet sites or other retail sites. I guess, how can we get comfortable on the, at some point you are going to need equity and I'm just wondering if you are thinking about that, I understand preferred is an option but thinking about more so from an [after sale] perspective or a common equity perspective what point does that come into play?

Lisa Payne

Well, I guess first of all, I'd say that you are right the numbers were at roughly 10% of assets but that's really over the next two years. This isn't all coming on our books in one year. It’s spread out over multiple years. We do think we will be able to get construction financing of something like 60% to 65% of costs.

Also remember that, as we are successfully bringing these assets online at the 8% to 8.5% range you not only finance out that construction loans, you don't finance out a 100% but you finance out more given let's say the multiples today for high quality assets are kind of in the 10 multiple range.

So, there is a self funding or self financing here when we get to permanent financing. Having said that, we do have lots of opportunities, I do think preferred, given how low our leverage is right now which is the lowest it’s been in the long time. I do and how little preferred that we have we love that security. We've been very effective using that security. I would look at that as potentially a way to have “permanent capital” that's have a fixed charge coverage but at the current rate it would feel like a good time to potentially tap that market.

We do have the ability if we decided to which we are thinking about bringing in a partner on something like an International Plaza that we just bought. That was one that, frankly, we think it could easily be a capital source for us that we have to weigh against whether we wanted to do a common equity, but all of this, none of this we feel is something we have to do in the next 12 months because we do have an extended period of time where this funding takes place.

And in the meantime we're going to find construction loans because we want to get at least, make sure we got the capital. But I would say and I would say this to my boss that across the table that I feel very good given what the opportunities we right now have, but if we certainly have another deal that’s announced or two more deals that are announced, you are right, we're starting then, lets say what else do we need to do?

Robert Taubman

The only thing I would add to all of that is that we talked about sort of reflective of the last 20 years that we more than quintuple the size of this company. We only raised equity a few times in that history. So the growth of NOI in the core and the growth in the base new assets that we created has been so good and so exceptional that we've been able to continually refinance. So as Lisa talk about 10 multiple of EBITDA, we've been able to take out our cost and actually grow and refinance without selling equity. So why we had such a good total shareholder return, we haven't issued a lot of equity, we had a great quarter and the assets that we've added in overtime have proved to be very valuable.

Michael Bilerman - Citigroup

And the good news is cap rates are falling in half of that time as well.

Lisa Payne

And we did by the way pull out a 100 million from Great Lakes Crossing post the end of the year, and we're going to be looking at pulling out money on City Creek. So we do have refinancing coming that I did mention before as well. That are happening this year and probably next year.

Michael Bilerman - Citigroup

That’s very helpful commentary. Just one another question on St. Louis, and the good news about both projects being owned by public companies as there is public disclosure on both. I am just curious you talked about having the better site and you got up quicker and that’s what gave you the confidence to move forward as you did, but do you look at the return that Simon is quoting on their return it doesn’t appear to have any impact at all from competitive pressures. And so do you feel like they are just too big and they have too much sway with the retailers, that is almost anti competitive is that what you are accusing them of?

Robert Taubman

Look I can’t comment on Simon’s reporting, but he is in $85 billion company it’s a 100 million plus project and it’s lost in the rounding. So I don’t think - look both of us are going to open up these projects in August and life will go on, and they won’t be as good if only one project was built as I said, but life will go on it’s in our guidance and they are both going to be okay they just aren’t going to be as great as they could be if there is only one.

Michael Bilerman - Citigroup

And size is a factor is something getting lost, but they actually give out projected returns on their developments and it’s still a 10 yield. So they are still forecasting a solid return even though on an $80 billion base it won’t do much. I am just trying to gain a little bit more perspective of why they are being successful over you and if there is something else going on.

Lisa Payne

Sounds like you actually believe the 10…

Michael Bilerman - Citigroup

It’s in disclosure it’s in the 8-K just like your returns are in 8-K. I assume public companies are not trying to flip one by the street.

Robert Taubman

You figure out how to audit it. Are there other question (inaudible).

Operator

There are no further questions at this time. And this concludes today's conference call. You may now disconnect.

Robert Taubman

Thank you, Lindsay and thank you everyone. And we look forward to see you soon, bye, bye.

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