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Taubman Centers, Inc. (NYSE:TCO)

Q4 2008 Earnings Call

February 12, 2009, 11:00 am ET

Executives

Barbara Baker - VP, IR

Bobby Taubman - Chairman, President and CEO

Lisa Payne - Vice Chairman and CFO

Analysts

Jay Habermann - Goldman Sachs

Quentin Velleley - Citigroup

Michael Bilerman - Citigroup

Ben Yang - Green Street Advisors

Michael Mueller - JP. Morgan

Vincent Charles - Deutsche Bank

David Wigginton - Macquire

Operator

Thank you for holding. And welcome to the Taubman Centers' Fourth Quarter Earnings Conference Call. The call will begin with prepared remarks and then we will open up the lines to questions. (Operator Instructions)

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 and welcome to our year end conference call. Joining me on the call today are Robert Taubman, our Chairman, President and CEO; and Lisa Payne, our Vice Chairman and Chief Financial Officer. Yesterday, we released our fourth quarter results and our supplemental information package. Both are available on our website, www.taubman.com.

As you know, during this conference call, we will be making forward-looking statements within the meanings 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 reports, including our latest 10-K and subsequent reports for a discussion of various risks and uncertainties underlying our forward-looking statements.

During this call, we will also discuss non-GAAP financial measures as defined by SEC Reg 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 our website.

For our agenda today, first Bobby will be providing an overview of the quarter and the year, then he will be discussing the company's operating statistics and our development projects. Then Lisa will discuss our financial performance and balance sheet. Bobby will return with guidance on 2009 and closing comments and then we will be available for your questions.

With that, let me turn the call over to Bobby.

Bobby Taubman

Thanks, Barbara. Good morning everybody and welcome to our call. There were clearly strong headwinds against retail real estate during the fourth quarter. As those of you I met with at the November NAREIT conference know. We were bearish then on the global economy.

Unfortunately it has continued to worsen and it is difficult to predict when the environment will improve. This mood was reflected in our sales results for the quarter.

Nonetheless our adjusted FFO per share was up nearly 15% and comp center NOI was up strongly at 4%. Fortunately as we worked through this storm we have no debt maturities until late 2010. We were extremely disappointed it was necessary to take impairment charges totaling $124 million in the quarter.

University Town Center in Sarasota was put on hold because of the economy's impact on retailers. This project did look very promising just a few months ago. We continue to believe it should be an attractive opportunity when the economy improves.

More recently there was the surprising and unexpected decision from the Court regarding Oyster Bay that led to our decisions we announced earlier this week. I will discuss this later along with our other development projects.

Now, the details on our operating statistics. We continue to lead the industry in mall tenant sales per square foot which averaged $539 for 2008, in excess of 2006 levels and down 2.9% from 2007.

As we said on the last call, sales turned south in mid September, the decline steepened throughout the quarter with luxury and tourism centers experienced the most negative impact from the slow down.

Several centers that have recently been remerchandised such as Fair Oaks, Fairlane, Regency, Stamford and Westfarms were down but less so then the overall portfolio. This illustrates the importance of continuously reinvesting in centers to maintain their freshness and customer appeal even in tough times. And Dolphin defied all trends, finishing the quarter and the year with double digit increase.

Dolphin has become one of the most productive centers in our portfolio. As we said luxury price point tenants have been especially impacted. I thought it will be helpful to describe what luxury in a centre means.

First although we are generically known as the luxury mall owner. Luxury can be as few as two stores in the center all the way to a short hills where more then 25% of its sales come directly from luxury tenants.

Luxury remains aspirational to both our customer and our retailer. In the center such as Westfarms which recently added its first two luxury tenant Louis Vuitton and Tiffany to the customer it’s a price umbrella over upper moderate to better price stores such as J. Crew, Banana, (inaudible) and William-Sonoma. To the retailer, its clear affirmation of our high productivity center in an affluent market.

The definition of luxury is going to move up but we believe customers will still want brand and luxury even though they may think of it differently.

This evolution is already beginning a coach, where they are reengineering their model to address what may be a new era. And at recent conference call, President Mike Tucci described Coach's plan to rebalance their product line and bring down average price points by 10% to 15%.

At the same time, they are planning to generate excellent margins and provide desirable products to capture the customer's imagination. We believe that like Coach, good retailers will adapt and they will continue to seek locations in the right real estate.

For the moment the leasing environment is not good. Retailers are weaving from a tough fourth quarter, where margins were decelerated and are looking at an uncertain '09.

In many cases, they are dramatically reducing inventory levels over 2008, managing for cash and concerned about financial covenants to impact their credit lines.

In this environment capital spending is way down, and any openings they can delay into either 2010 or 2011, they will.

We have fully executed leases, for 80% of our leasing plan for 2008 which is in line with our history. Although we are concerned it will be difficult to execute new leases and open additional stores.

This is especially true for future unscheduled terminations including bankruptcies, which we expect to increase this year as they did in the fourth quarter. It is likely this would be somewhat offset by a higher level or temporary tenant leasing in 2009.

Fortunately, we are going into 2009 with high occupancy, 90.3% at year end 2008. As we said in the release the 90 basis points decline in occupancy from last year was largely due to national bankruptcies, two Linens-N-Things and one Circuit City totaling about a 125,000 square feet.

Leased space at 91.7% is 1.4% over the year end occupancy level indicating a backlog of tenants who have committed to opening stores in the future. This spread is inline with our history.

Rent per square foot across the portfolio including both consolidated and unconsolidated properties was up a healthy 5.6% for the quarter. Rent per square foot growth was positively impacted by the adjustment at Arizona mills last year.

Excluding this amount rent per square foot would have been up 3% for the portfolio inline with our original guidance.

Our strong rent growth and positive recoveries led to a solid core NOI growth excluding lease cancellations up 4% for the quarter and 4.9% for the year slightly ahead of where we thought it would be on the third quarter call.

In summary, in a difficult environment our centers continue to produce strong NOI in the fourth quarter.

Now moving to the development. First step is University Town Center. As we said in December we announced the delay in this project. This was a very difficult decision for us and our partners, but we thought it was prudent given the dramatic change in the retail environment.

We believe this is a wonderful opportunity over the long term and [if apartment] continue to believe in Sarasota and this site. Given the world we are all living in it makes no sense to speculate on how long the project will be on hold. The impairment charge was $8.3 million in the fourth quarter. We have no asset remaining on our books and we will be expensing as we go.

Turning to Oyster Bay. As I mentioned earlier in late January we were surprised to receive an unfavorable ruling from the Appellate Division of the Supreme Court of the State of New York. This ruling reversed the favorable order that it had issued last June eight months ago, directing the Town to immediately issue a special use permit for the mall. The court also upheld the Town Board's demand for a Supplemental Environmental Impact Statement or SEIS for 750,000 square foot mall.

As we said in our release, we feel this is a fraud legal decision and we are seeking an appeal. There is no augmented right to appeal. Therefore, we intend to file appropriate motion for provision to appeal to the Court of Appeal, the highest court in the state. The probability that permission to appeal will be granted is statistically low. We are evaluating all of the alternative. In any event, this ruling has created a significant delay. Frankly, in these times, we can't imagine why any community would want thousands of jobs and millions of dollars of tax revenue that the mall will provide.

Nonetheless, given the continued delay and the ultimate uncertainty as to whether we will obtain the right to build the center as designed, we have taken $116 million charge to income in the fourth quarter. The charge includes the cost of our previous development activities including consultants, materials and payroll, plus the previously capitalized interest. The remaining Fs in our books is about $40 million. This represents the cost of a land and slight improvements including the cost we have incurred to remediate the land.

Effective the fourth quarter of 2008, we are expecting all ongoing cost for the Oyster Bay project, including interest until there is highly probable that we will begin construction at this center. We continue to believe Oyster Bay would be another shot hills and a tremendous asset to NASA County and Long Island.

Now, let's move to Salt Lake City, a project moving forward very nicely. The majority of the documents are now signed, subject to finalizing certain conditions, when these conditions are satisfied hopefully by our next call, we will be able to provide the full economics of the project. Meanwhile, construction is progressing and we are leasing space for [42,000 square] opening. We are delighted to be working with the LDS Church which is providing a 100% of the constructions funding. Also progressing very well as crystals, the shops we are leasing for MGM Mirage at CityCenter in Las Vegas. We successfully signed the leases that we wanted and we have achieved our merchandising and rent plan. The stunning retail and entertainment experience designed by Daniel Libeskind will open in late 2009 along with Aria a 61 storey 4000 room, gaming resort.

Luxury non-gaming hotels including Las Vegas' first Marnell hotel, the 1500 room (Inaudible) hotel and Veer Towers, two other financial buildings were also be opened.

Moving to Asia, Macau is a project that has been clearly impacted by the financial prices. It is on-hold until financing can be arranged. The timing of which is very uncertain, the $54 million an escrow will be returned in August, there continues to be tremendous retail interest in Macau, though the project is unlikely to move forward in 2009.

In Songdo, there is an amazing amount of construction underway. With roughly 50 office towers, office and residential towers going up and the bridge and subway connection almost complete. The 65 storey Asia tower is now above the 50th floor and the mall infrastructure parking has made substantial progress.

Recently we announced a nine screen Megabox multiplex which along with Lotte and Tesco finishes the anchor leasing at the center. We continue to target a 2011 opening until full financing to the center is completed we will not make a final determination about whether we will make an investment in this center.

Given the overall retail environment and capital market status, we have reduced our predevelopment spending in both the US and in Asia. In 2008, we spend $18.5 million on predevelopment activities. We expect to spend about $13 million in '09 including roughly $2 million that we will be expensing for efforts at Oyster Bay.

Consistent with this reduction, in January we went through the difficult process of downsizing our organization, reducing our overall workforce by about 40 positions. This primarily impacted the areas that directly or indirectly support these development initiatives. We believe the company is now right sized to efficiently pursue targeted growth opportunities in this environment while ensuring we have sufficient support within all of our teams to maintain the strength of our core assets. We will be taking a $2.6 million restructuring charge in the first quarter of 2009.

Now I would like to turn the call over to Lisa, then I will return at the end of the call to provide additional detail on our 2009 guidance.

Lisa Payne

Thank you, Bobby. As usual I will be focusing on 2008 fourth quarter variances. This quarter we reported adjusted FFO per share of $1 up $0.13 or 14.9% from the fourth quarter of last year. This excludes the impairment charges for the quarter.

Let’s begin with rents which were up a penny for the quarter. A healthy increase in minimum rents was partially offset by a decline in percentage rent from the weak sales environment. In addition rents from temporary tenants were up for the quarter. The mall at Partridge Creek contributed a penny to our growth, 15 stores opened at Partridge during 2008 and the center is nearly fully occupied. This property past its one-year anniversary in October, so its contribution to our growth will be much smaller in 2009.

Network coverage from tenants contributed $0.02 to our growth during the quarter. This is primarily due to the timing of CAM capital project which can be volatile. Net revenue from third party contract was up a penny and a half for the quarter, this was due to our US third party business largely relating to City Creek center and Salt Lake City.

Lease cancellation revenue contributed $0.065 to our growth. As we reported in our third quarter 10-Q, we received a $5.3 million legal settlement in early November bringing our total lease cancellation income to $8 million for the quarter and $12.3 million for the year. The remaining portion of other operating income was favorable by a penny and a half, this is comprised of various types of shopping center related revenue including garage and sponsorship which was up substantially in the quarter. Other operating expense was unfavorable by $0.02 compared to last year. This was due to bad debt expense which was higher than last year, and in addition, we had a difficult comparison in this line item, due a credit in the fourth quarter of 2007.

General and administrative expense impacted our results favorably by about $0.045, this was primarily due to a lower accrual for bonus and the mark-to-market of deferred long-term contracts. In addition, we are carefully watching our costs and reduce the use of consultants and travels during the fourth quarter. This product under our previous $8 million run rate for this line item.

Interest expense was unfavorable by about a penny for the quarter. This was primarily the result of our decision to seize capitalization of interest on our Oyster Bay project affected the fourth quarter. This was partially offset by the favorable effect of lower LIBOR rates on our floating rate debt.

Now turning to our balance sheet. Our debt-to-total market cap stood at 57.3% at the end of the quarter. Our 2008 interest coverage was 2.7 times. We have ample cushion under our most restricted debt covenant fixed charge coverage. This loan covenant required to be maintained more than 1.5 times fixed charge coverage.

Our coverage ratio for 2008 was 2.2 times. Our revolver is secured and can be extended to February 2012. We have no debt maturities until fall 2010, when our $264 million share of loans on three assets, Partridge, MacArthur Center and Arizona Mills comes due. Further the size of these loans is very manageable as the current EBITDA multiple averages about 5 to 6 time.

And with that I would like to turn the call back over to Bobby.

Bobby Taubman

Thanks Lisa. As we said in the release for the full-year 2009 we expect FFO per share to be in the range of $2.69 and $2.94. This is a wider range than typical for us, because of the uncertain economic environment. Excluding the impact of the $2.6 million restructuring charge anticipated in the first quarter, we are expecting adjusted FFO to be in the range of $2.72 to $2.97.

Already adjusted FFO forecast includes an incremental $0.10 expense for three quarters of carrying cost related to Oyster Bay.

Keep in mind we also expensed $0.03 of these costs in the fourth quarter of '08. Adjusting for this differential 2009 FFO would be forecasted at $2.82 to $3.07 per share. Therefore the comparable growth rate embedded in this guidance after all the noise from 2008 adjusted FFO per share of $3.08 is minus 8% to flat.

Our 2009 FFO guidance is based on the following assumptions. Occupancy is expected to be down about 2% by year end 2009.

We do think the related revenue impact will be mitigated with temporary tenant leasing. Revenue stream that are supported by month-to-month or shorter-term contracts such as sponsorship and RMU income are assumed to be down substantially.

Percentage rents are also expected to view off significantly as we expect sales to be down at least through the first three quarters of this year.

In addition, bad debt and bankruptcies are assumed to increase. As always lease cancellation income is difficult to forecast. We are assuming at the mid point of our range about $7 million to $8 million of this income.

An unfavorable comparison to this years $12.3 million. Now excluding the volatility of lease cancellations comp center NOIs is expected to be in the range of 2% to 5% lower.

As we look at 2009 and beyond there are formidable challenges. The economy will likely get worse before it gets better. Capital markets remain frozen and it's unclear when liquidity will return. Consumer confidence is at an all time world and they are dramatically reducing their spending.

Unquestionably, retailers would be increasingly impacted. So, it will be tough time at least through 2009. We do not know when the economic downturn will end. But I'm confident that Taubman Centers will emerge as a strong and growing company. Here's why I know we will weather this storm.

We have the most productive assets in the industry. We have a solid balance sheet with no near term debt maturities. Our management is completely committed and aligned with shareholders with very high insight of ownership.

We have successfully managed through tough times in our 59 year history and we will take whatever actions we need to take to respond to the changing conditions. And most important, the regional mall has continued to prove its resiliency and its unique value proposition to the customer. We are well positioned to continue to be a leader in this industry.

Now, we would be happy to open the call for question, Tim?

Question-and-Answer-Session

Operator

(Operator Instructions) Your first question comes from Jay Habermann from Goldman Sachs. Your line is now open.

Jay Habermann - Goldman Sachs

Hey, good morning, here with [Johan] as well. You know, Bobby, just starting with Oyster Bay, I know this has been going on for sometime, but, just trying to get a sense of the appeal, and if you are unsuccessful over the next few quarters, does this potentially mark the end?

Bobby Taubman

Well, Jay, obviously we were very disappointed with the ruling and the impairment and we are going to forward with the appeal, but as we said in our comments, we are analyzing all our options. We are going to expense all the cost as we go. Whatever happens, if we are going to build, it's going to be a significant delay. But we are going to look at everything. We have got three stores, that are terrific stores in Neimans, Nordstroms and Barneys who believe this is one of the best expansion opportunities they could ever see in United States. So we are going to stay the course and we are going to analyze every option we can.

Jay Habermann - Goldman Sachs

Okay. And then just I want to switch to Asia, I know you have made a sizable commitment there, I think as most recently you had mentioned 40 positions, did you make any reductions as part of this broader reduction in workforce you mentioned sort of in other areas where you have been focusing or development. So are you reducing at all the commitment level to personnel in Asia?

Bobby Taubman

Yes, we have and we have reduced it substantially both areas as well as here and as I said of the 40 positions, the areas primarily impacted with the development in areas that support development.

Jay Habermann - Goldman Sachs

So, I think you talked about $15 million to $17 million annual run rate of cost in Asia, how has that changed running going forward?

Bobby Taubman

Jay, what we talked about in 2008 was that the combined pre-development spending was $18.5 million between Asia and United States. And what we said is that we have taken that $18.5 million back to 13 and in the 13 our $2 million where the Oyster Bay costs as well.

So we have really taken pre-development, because we have been capitalizing the Oyster Bay costs we have really taken pre-development back from $18.5 million to 11 on an apples-to-apples basis. And that's pre-development and then there is also overhead that is in sometime captured within that capitalizing or expensing of pre-development that also is in development. And that's all part of that 40 positions that I mentioned.

Jay Habermann - Goldman Sachs

Okay. And just give us a sense at this point for your '09 lease rolls, what's been addressed at this point and even comments with regard to 2010. Just given your pretty cautious view on retail for the next few quarters?

Bobby Taubman

What we said is that in our 2009 leasing plan we actually have executed leases of 80% of our plan which is above where we would normally be at this time of year. What we are most concerned about is not the only the 20% that is not executed try to get them open this year to sign them and get them open this year but also all the unscheduled terminations that occur in the normal course and we all think this is the normal course.

We think there is going to be more than the normal course of unscheduled terminations to the tenants that are not able to continue for whatever reason including bankruptcies. We also expect that GAAP and the other things that we talked about. So as we look at '09 we think it's going to be a difficult year that's why we have structured the guidance and the range that we talked about. We do see in tenants that are trying to manage cash for right now as they manage their inventories down and their capital spending for new store openings down that they are willing to look at '10 and certainly '11 in a different light. Because they want good locations and that's what we offer.

Jay Habermann - Goldman Sachs

Okay. Thank you.

Operator

And then your next question comes from David Wigginton from Macquire.

David Wigginton - Macquire

You addressed the luxury retail at the beginning of the call there. I'm just wondering in general do you think that luxury retailers have over expanded in the last couple of years?

Bobby Taubman

Good morning David, yeah we're trying to say I think that obviously they are looking for growth. Most of the markets that they have gone into I think that they had done very well in their early opening at Westfarms was very good and they generally have been very selective in the locations that they have taken. The market has changed, whether or not it's a secular shift in sales we do not know. But we view that eventually strong assets are going to show their resiliency.

David Wigginton - Macquire

Okay now lot of people suggested that the discounts that were offered by a lot of luxury retailers in the fourth quarter were diluting the brands and even potentially changing, the consumers psychology do you agree with that or is that just more of a response in the environment on the operating environment and people will continue to want a pay full price for luxury goods.

Bobby Taubman

Well again I think that its hard to know what this point as to whether or not there has been any secular shifts. We said as I said in my comments, we believe strongly that customers always going to want good brands and they are going to want luxury items and luxury items in a sopping centre like ours can be very inspirational both to the customer, the shopper as well as the retailer. I think that there eventually, the customer there clearly there is going be an evolution but eventually that customer will come back to luxury at full price.

David Wigginton - Macquire

On another front the stressed opportunity I realized this is not kind of a capital constrained and are you seeing any distressed opportunity that have sort of picked your interest at this point?

Bobby Taubman

Well I think what you are seeing is number one there has been no transactions and without any liquidity out there its hard to have transactions but generally better assets are even strong hands and those stronger hands are not going to trade at distressed prices unless other aspects of their financial world are forcing them to do so. I would also suggest that any distressed sale is a necessarily an indication that there going to be tons of distress sales and that were, that’s what the value should be on a long term basis.

So I don’t think you are going to see a lot of good assets come out on a stress basis. There maybe a few and we are going to be looking at everyone we can. But I wouldn't assume there is going to be a lot.

David Wigginton - Macquire

Have you taken a look at any of the Las Vegas retailer projects in Macau?

Bobby Taubman

We are looking at everything we can look at and try to understand what we can about the market and obviously there are [definitely] people out there right now, we can be looking at acquisitions like this. And we are going to look at wherever we can.

David Wigginton - Macquire

That’s great. Thank you.

Operator

And your next question is from Michael Bilerman from Citi.

Quentin Velleley - Citigroup

Quentin Velleley here with Michael. Just going back to Asia, I know you mentioned the pre-development expenses in title would about $30 million. But you first said that there was some (inaudible) which related to Asia as well. I am just wondering what the total cost for next year, the estimate for running the Asian platform will be and also given that you have got one project on the go, whether or not you are looking at other opportunities still.

Bobby Taubman

First of all with respect to Asia’s court overhead. All of Asia’s expenses included within the pre-development spending that we talked about before. There is overhead within the US, that is not included in that predevelopment spending, and as far as Asia is concerned and if it's not 100%, it's nearly all, that would be included in that pre-development number that really is the $11 million plus to $2 million for Oyster Bay.

With respect to other projects that we are focused on, we talked publicly about Macau and we have talked about Songdo, but there are number of other things that we are pursuing spending time on that are not publicly disclosed that when it makes sense to do so, if it does we will.

Quentin Velleley - Citigroup

And with those projects likely be more of a management role or could it involve use of your capital?

Bobby Taubman

I think both things are true, but in this environment we are going to be very cautious about where we put capital.

Quentin Velleley - Citigroup

Okay. Great. Just in terms of your 2009 leasing, just wondering with those leases, what tenants assigning leases on in terms of a gross occupancy cost ratio, and how that fits relative to your current gross occupancy cost ratio across the portfolio?

Bobby Taubman

Well, if you are talking about in essence our historic where we are now at about 15% total occupancy cost. I think we were 15 plus for '08. Are we staying within that general range of total occupancy cost with our new tenants, I think the answer is yes. We always sign leases that are higher occupancy cost at 15%, and historically we talked about publicly on average around 17.5% at signing. And then you work into sort of the average for the whole portfolio.

We are seeing a lot of interest from a lot of tenant including new concepts. As I said '09 is difficult to get stores open for but people want to be in our centers and as you look out past '09 we feel better, but this whole world is changed in last four-five months and we all have to recognize that and we all have to also recognize that none of us know where this is going to end up.

Michael Bilerman - Citigroup

Bob, it's Michael speaking, is there a sense of retailer I mean you talking about you just said sales you expect will continue to go down to the third quarter. How are they sort of budgeting their rents relative to projected sales? Are they trying to be more cautious upfront and I believe if they are signing.

Bobby Taubman

Well, there is no question that there is push-back from tenants right now. And especially as they try to manage their cash and think about their capital in the same precious way that we are right now. But, as you keep hearing you say retailers want and need our location. Our locations are producing cash flow for them and they need that cash flow. So, when renewals come up, they need to renew these locations. Now, it's not actually true, but, it's generally very true. And when we talk about across the board, the sales in these centers and for these individual tenants, as they manage their inventory down, and obviously sales will come down. They will hold their margins and be able to keep a lot of that cash flow. Now, they are going to push back on rent, but again, there is a balance here in this negotiation that I think has to be respected.

Michael Bilerman - Citigroup

And last one to clarify, you talked about 80% of your leasing plan had already been completed. How does that relate to your role next year, I don’t think you released this role in supplemental, but somewhere in the range of 8% to 10% your leases are rolling in 2009. Is your leasing plan different than what the roll is? I am just trying to align things, have to think about where you are relative to occupancy?

Bobby Taubman

Well, every year you have this same issue which is your leasing plan isn’t only for 2009 budget. Some of it will be for 2010 or 2011. So, when you look at any, the mall of any company, but certainly the mall companies, as you are looking at stores tending to close at the end of the year or the end of January, there is a significant amount of each year's plan that represents that year. I don’t know the exact number but 80% of our plan for '09 are executed leases and that’s a very strong statement against, statements that have been made by our peers. And what we are telling you is that even in that strong statement, our sense of leasing stores and getting them open in '09 here sitting in the middle of February full this year to get cash flow it's going to be very tough and that's how we feel.

Michael Bilerman - Citigroup

It was just a question of comparing, what is the plan relative to the role and that's what I was trying to figure out, and we know, how much is rolling this year especially and what's going to be your retention rate on those leases and also new leases to back fill in terms of where your occupancy ends up?

Bobby Taubman

Michael, I can't give you an exact number right now, we look at our budget and then we also look at our leasing plan and they don’t line up absolutely the same, you would have to do it on a center-by-center basis, which we do but I don’t have the answer for you right now.

Michael Bilerman - Citigroup

And just last question, you talked about this 18.5 going down to 13 in the pre-development cost, some of that is new capitalized cost coming on, so there is really looking at $8 million delta. If any there flow to your G&A line or is that truly $8 million of savings?

Bobby Taubman

Yes, its savings.

Lisa Payne

Its all savings.

Michael Bilerman - Citigroup

Pure savings?

Lisa Payne

Yes.

Michael Bilerman - Citigroup

Okay.

Bobby Taubman

$7.5 million in essence of savings.

Lisa Payne

18.5 to 11, correct, the reduction in fourth, did hit us a little, we will benefit very modestly some G&A because although most it was for people who were involved in the pre-development side there was some that had some of that overhead Bobby talked about was what was in G&A that will not be eliminated but very modest.

Michael Bilerman - Citigroup

Okay, and that 11 million is probably 50-50 between Asia and the US.

Lisa Payne

Yes, we haven’t given that guidance but it’s probably not far off that.

Michael Bilerman - Citigroup

Okay, thank you.

Bobby Taubman

Thanks a lot.

Operator

And then your next question is from Ben Yang with Green Street Advisors.

Ben Yang - Green Street Advisors

Hi, good morning. Booby question on development specifically Oyster Bay you had unfavorable corporate links in the past yet you never took a write-down until this time and you also said that you plan to stay the course that anchors are still interested, I am trying to figure out what’s the difference this time around? Is it the timing of this project getting built; is there anything else regarding that changed?

Bobby Taubman

Well I think that this court decision was very different than past court decisions. We really had, I think this is our 12th court decision and we have really had 11 court decisions in a row that had been generally favorable. There was only one that was a prior a [parallel] level decision that reversed a portion of the lower courts judgment on something. So we basically had only very positive rulings and the lower court judge Spinner’s decision that was right prior just eight months ago was extraordinarily favorable. And we really felt like we were at two yard line moving forward.

So what we really have to do here now is absent the appeal which we are hopeful but statistical probability is low that the court will take the appeal, and if they do take the appeal then we have to win the appeal which will then put us in that very positive position on the court to two yard line. But if we don’t get that appeal taken and we don’t win then we really have to go back to the EIS process and in that EIS process the Town has clearly showing its interest in delaying this project.

So we are more skeptical we have been, we have felt that it is highly probable that we would move forward with this project. And we do not feel that way today. We have got to go back through a process that involves a town that is shown a great deal of interest in delaying this project and the events of the court ruling was a significant of event.

Lisa Payne

Yeah and I would like to add I think the really difference here which caused us to do the impairment is that the probability of the appeal being successful is very small. With given that, what that means it has to go back as Bobby said through a town EIS process which will cause significant delay and will cause us to basically redo a lot of the work that in order to capitalized cost. And probably the plans and whether we would even build the mall that we deigned.

So all of that because its triggering another EIS process most likely that's the event that causes what we think is a dramatic change in the probability of building the mall in the format and framework of what we would capitalize all these cost to do.

Ben Yang - Green Street Advisors

Okay, so if you do not get the appeal. Are you likely to build some thing smaller at that side or do you think you might just sell the land to another developer.

Bobby Taubman

I really we are going to analyze all of our options Ben, and we are going to make he best decision. But this project could be an amazing project and wonderful for the community, wonderful for mass accounting. The idea that this town has decided to take this position is unbelievable especially in this environment.

Ben Yang - Green Street Advisors

Okay and then Bobby you said also that your expectation of that sale all during the first three quarters of '09. Can you tell us what your expectation is for the full year? Is it possible that the 14% sales decline that you reported during the fourth quarter enter this year?

Bobby Taubman

Well Ben remember our sales projection to us versus a retailer is less impact full because it really is only about how it impacts our percentage rent. And percentage rent for our company is only about 3% of our overall income. But having said that we have assumed for the first three quarters a 10% decline and we assume in the fourth quarter it be flat because the comparison would be against the 13.7% decline that we have just discussed.

Ben Yang - Green Street Advisors

Great thank you.

Operator

And your next question is from Michael Mueller with JP. Morgan

Michael Mueller - JP. Morgan

Well can you hear me?

Bobby Taubman

Yes Mike, go ahead.

Michael Mueller - JP. Morgan

Lisa, in the past you gave specific line item guidance for items such as G&A, net fee income, land sales, I wonder if you could throw out some of those details as well?

Lisa Payne

I think what we decided to do in this case was first to focus on the big variance here which is the core NOI growth which we indicated we are estimating to be down 2% to 5%. That 2% to 5% is going to be offset lower pre-development which we just spoke about and lower interest rates which obviously you guys can model. We did give you lease cancellation income and we will, I would say that G&A is probably fairly flat for the year. And I would also say that land sale is likely to be somewhere between zero and $2 million, it's a pretty wide range. We could have as little as none given the environment or may be as high as two. This is a pretty wide range that we have given and there is a large numbers moving around in there, but the big, big number is the down NOI 2% to 5%.

Michael Mueller - JP. Morgan

Sure. I understand that. Any significant change we should think of for the net management fee. I know that there is an expectation that would ramp up at some point?

Lisa Payne

I would say that within this range it is going to be fairly flat.

Michael Mueller - JP. Morgan

Okay, great. For the Oyster Bay cost the $0.13, the 10 and the 3, I think you mentioned in 2009 you would recognize three quarters of that. Are those not ongoing per year, so you would have $0.10 per year in 2009 of interest expense plus other $0.03 of carry for the full year. So you get $0.13 impact during the year why is the $0.10 versus the $0.13?

Lisa Payne

We had $0.03 in the fourth quarter. Moving at an incremental $0.10 in the year of that $0.10 incremental or I guess you call it $0.13 overall about $0.10 is interest and $0.03 is other stuff which involves the PO process and is just an estimate of other cost. The $0.10 of interest is a permanent number we are not going to be capitalizing that any more, so that ongoing 2010, '11, '12. The $3 million of incremental depending what we decide to do with Oyster Bay. If we ended up continuing down the process we will be giving you estimates on cost. If we decide to stop the process than that $0.03 is a variable number.

Michael Mueller - JP. Morgan

Okay $0.03 is…

Lisa Payne

$0.10 of interest is now expensing the allocated part out of interest that we had capitalized and that's a permanent $0.10.

Bobby Taubman

Mike, if you think about the $0.03 is basically the $2 million of redevelopment spending that I had mentioned before and the $0.10, if you think about what Lisa is saying, what we have incurred this expense and its part of our debt, and what we are doing is taking that average interest cost against that debt and that’s creating an $8 million a year cost, and that’s permanent.

Michael Mueller - JP. Morgan

Okay. But the $0.03 is in there it is impacting numbers for the year as well for 2009.

Lisa Payne

These are estimates of what we are going to spend. And by assumption of what we are going to send in addition to our interest expensing, correct?

Michael Mueller - JP. Morgan

Yeah. Okay, for full year, I know that lease spread can bounce around, particularly quarter-to-quarter and even on a full year basis. But it looks like maybe somewhere in the neighborhood of plus 7% in '08. Can you talk about some expectations for 2009?

Lisa Payne

Lease spreads as I know we mentioned are very challenging for us to estimate since the pool of what tenants are going to leave on an unscheduled basis and open et cetera. So, I really do not have a number. I would say that we continue to see just as we did this year, good leasing spread because of the 80% deals that we have done. Were done in a, frankly before the November, December downfall. And so, I would expect spreads to be fairly robust on the leases that have been in the 80% portfolio.

Michael Mueller - JP. Morgan

Okay. I mean for incremental, do you think they will still be positive?

Lisa Payne

Incremental, we got a lot of sales growth build up over the last five plus years. So, we do expect rent to be incrementally positive. Yes.

Bobby Taubman

Yeah, and the remember Mike, in any given quarter, we have talked about this ad nauseam. But in any given quarter we have very little confidence in a trend to come out of lease spreads especially given consolidated, unconsolidated reporting. So if you want to look at in on a year basis, we had nearly a 20% lease spread, that's good but again in our small example any one or two tenants can really change that. So we do not have as much confidence saying to you this is a fundamental, but you should really focus on like other fundamentals in our business.

Michael Mueller - JP. Morgan

Sure, and one last question, the comp guidance obviously minus 2 or minus 5 for '09, Bobby, what does your gut tell you about 2010. Do you think you are still making it in 2010?

Bobby Taubman

My gut does not tell me that. But its just a gut, the world is funny place right now and we have tried to layout the risks here, there are lots of opportunities too, and all I know is that this company is built to survive and built to grow when the market turns back.

Michael Mueller - JP. Morgan

Okay. Thank you.

Operator

(Operator Instructions) Next question is from Vincent Charles with Deutsche Bank.

Vincent Charles - Deutsche Bank

Yes, hi guys, just a couple of questions on. Maintenance and other OpEx look like there a little bit higher than, that's just seasonality is there anything else in there?

Lisa Payne

I am sorry, could you repeat the question.

Vincent Charles - Deutsche Bank

Sure, just looking at the OpEx items, a little bit higher than they have been I just want to you clarify just seasonality or if there is anything else in there that would you be aware of?

Lisa Payne

Well, there in that line item, as where we see have bad debt which did move up in the fourth quarter and pre-development expense which also moved up in the fourth quarter and pre-development expense which also moved up in the fourth quarter that we have dealt with that and said it's going to trend down. So there were some I would call it seasonal issues in the fourth quarter in that line item.

Vincent Charles - Deutsche Bank

Okay great and just on tenant reimbursements, relationship and the occupancy decline that you are expecting how should we be thinking about that, that has been running pretty positive source of covering ratio?

Lisa Payne

I would say, you are talking about a tenant recoveries yeah then there will be pressure in that line item if there is significant bankruptcies or significant occupancy issues. It is very variable based on cam capital which is volatile but I would say in our guidance we would expect it to be fairly flat to maybe modestly down in 2009.

Vincent Charles - Deutsche Bank

Okay thank you.

Operator

And at this time there are no more questions in queue.

Bobby Taubman

Well thank you for joining us. It maybe a tough environment but as I said we have got a good company, good balance sheet, good people. We look forward to talking to you throughout '09. Thank you, thank you Tim bye-bye.

Operator

This concludes today's conference call. You may now disconnect.

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Source: Taubman Centers, Inc., Q4 2008 Earnings Call Transcript
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