Taubman Centers Inc. Q1 2009 Earnings Call Transcript

 |  About: Taubman Centers, Inc. (TCO)
by: SA Transcripts


Welcome to the Taubman Centers first quarter earnings conference call. The call will begin with prepared remarks and then we will open up the line to question. (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’ll turn the call over to Barbara, for opening remarks.

Barbara Baker

Thank you, Jackie and good welcome everyone to our first quarter conference call. Yesterday, we released our first quarter results and 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 Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures, are included in our earnings release and 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 then he’ll be discussing the company’s operating statistics, current market conditions and how they impact our outlook for the year. Then Lisa, will discuss our financial performance and balance sheet. Bobby, will return with closing comments and then we’ll be available for your questions.

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

Robert Taubman

Thanks, Barbara and welcome everyone to our call. The strong head winds against retail real estate that have impacted our asset class, since last September continued during the first quarter.

Nonetheless, our FFO results were up and we beat consensus quite significantly, both on an adjusted and a non-adjusted basis, but there were a number of positive items that both Lisa and I will describe late their relay more to the timing than an improved outlook. My comments will focus on our operating statistics and the retail climate.

First, sales; as anticipated, mall tenant sales continued to drop dramatically during the quarter down 13.5% per square foot. This is consistent with public reports from retailers. Even though sales were negatively impacted by a later Easter than last year these numbers were still somewhat worse than our 2009 forecast.

As you will recall, we anticipated being down 10% for the first three quarters and flat for the fourth quarter. However, notwithstanding our first quarter result, we are beginning to hear some encouraging reports from retailers about their April results and customer traffic. So, we are maintaining our sales forecast for the year.

We continue to believe strongly that the best sales trend information is on a current quarter-over-quarter basis and we’ll continue to report that way as we believe others should. However, in order to allow more comparability to our peers. We have begun reporting 12 month trailing sales. For the 12 month period ending March 31, our sales per square foot were down 6.6% to $522 per square foot.

There has been much written about Michigan. All four of our Michigan centers performed relatively well in the quarter and as a whole, significantly less negative than the portfolio. Michigan is now in the sixth year of negative GDP growth as it works its way through a difficult restructuring led by the auto industry. We anticipate the restructuring will likely continue for at least the next several years before stabilizing and resuming growth.

According to U.S. Census Bureau in the year 2005, Michigan’s population peaked at 10.1 million people. At March 2009, it is estimated the population has fallen to just about 10 million. Current estimates are that population is likely to stabilize at around 9.8 million, which is only 300,000 people less than its peak. Once stabilization occurs, population will likely grow at less than the national averages, which are roughly 1% a year, but even modest growth creates new demand.

We continue to believe we are weathering the storm well. Our four Michigan assets are stable for the long term. They are well maintained, well merchandised and positioned to increase market share as weaker, less dominant assets are challenged by this environment.

Nationwide, sales at luxury and tourism centers continue to be impacted the most. These centers typically have the highest sales productivity and over the last five years have grown faster than the portfolio. So even with the recent declines, their sales levels remain very high on any relative basis.

Let’s talk a moment about luxury. There is no question the higher end shopper is cutting back and it is too early to predict how long this will continue. We believe this change in behavior is primarily tied to the stock market and overall consumer confidence, not a longer secular trend. Traffic is generally better than sales, which means the shopper doesn’t yet have the confidence to open up her pocketbook.

As I explained on our year end call, luxury can be as few as one or two tenants or as much as 25% of sales in a center such as Short Hills. On average across our portfolio, luxury represents less than 10% of all of our sales. Meanwhile, even though most retailers including the luxury brands have reduced their capital plans, we are seeing some encouraging activity. We were pleased to recently announce some great new tenants that will be coming to our shopping centers.

Here in Michigan, this includes a number of restaurants, such as Tin Fish, a terrific local concept that was so happy with their performance at our Partridge Creek center that they recently signed a lease at Twelve Oaks and at Great Lakes Crossing, Toby Keith a 20,000 square foot country western themed restaurant was announced just this week. It will be only their sixth location in the country.

Elsewhere Savannah, a southern themed restaurant with entertainment will be opening soon at Willow Bend. Brio will be opening in May at Westfarms, joining the recently opened P.F. Chang’s and Brio has also just announced at Cherry Creek. In addition, a 10,000 square foot BJ’s Restaurant & Brewhouse was recently signed at Sun Valley.

Other exciting announcements include Michael Kors and True Religion Jeans at Beverly Center. Crate & Barrel and International Plaza, Artesia at Short Hills, Tumi at Cherry Creek and True Religion at the Pier in the fall. In addition a number of terrific tenants have recently committed to Willow Bend including Artesia, Acacia, Pure Beauty and Sephora, which will join stores like Adrenalina that have recently opened at the center.

We headed into 2009 with relatively high occupancy, over 90%. We ended the first quarter at 88.6% down 1.3% for the first quarter of 2008. However, remember that 90 basis points of this decline was a result of two Linens ‘n Things and one Circuit City store that closed in late December, totaling about 125,000 square feet.

In addition, we are successfully increasing the number of temporary tenants, which are not included in our occupancy statistics. At quarter end, temporary tenants comprised 2.1% of our space. That’s the highest we’ve had in a first quarter since 2005. We continue to believe that we will end the year with an approximately 200 basis points decline in occupancy to the prior year, but as we’ve said, we expect a number of temporary tenants to significantly increase during the year and mitigate the NOI impact.

Rent per square foot across the portfolio including both consolidated and unconsolidated properties was up 1.1% for the quarter, but we’ve set the year to be modestly down. Our NOI growth for the quarter excluding lease cancellation income was 0.2%. Without several nonrecurring items, NOI would have been down 1.6%.

We continue to expect negative comps in NOI, as we move through the year, particularly in the fourth quarter, which traditionally is when occupancy picks up and when we report the most percentage ramp. In our initial annual guidance, we forecasted decline in NOI of negative 2% to negative 5%. Given our current outlook at this point in the year, we now estimate that the NOI decline to be in the more negative half of this range.

There are several factors impacting our NOI for the year. First tenant credits, this includes the effect of early terminations, rent relief, bankruptcies, and bad debt. It will show up as lower occupancy and lower rents. Bankruptcies for the quarter inched up to 1.1% that’s slightly higher than last year. Nonetheless, we expect bankruptcies will increase unless sales don’t pickup significantly. Similarly, bad debt is likely to grow.

Second is, sponsorship and other income. Over the past several years, we’ve worked very hard to maximize this source of income. Together with temporary leasing and carts, nontraditional income peaked at about 12% of our NOI. Given this economy, we expect atrophy of this income stream. This type of income tends to be shorter term deals and subject to the swings of the economy. Therefore, when the economy improves, sponsorship income should recover relatively quickly.

Third is percentage rent, which as a percentage of total rents is only 4%, significantly less than our peers. Notwithstanding in this environment and depending on actual sales, especially in the fourth quarter, NOI could be affected by as much as 100 basis points and finally, in the area of recoveries, we expect a lower recovery ratio and a negative impact from reduced cam capital related revenue. As you recall, the expense relating to cam capital is in depreciation, which is excluded from FFO and NOI. This also represents about 100 basis points of the anticipated decline.

As I said in our recent annual report, we are continuing to nurture our development pipeline both in the U.S. and in Asia. We want to be well positioned when things recover to be able to exercise our best options to allocate capital appropriately and grow our business. Consistent with this, we have reduced our predevelopment spending from $18.5 million in 2008 and now believe it’s likely to be in the $11 million to $12 million range in 2009.

Our one new project in the U.S., where we have committed capital is City Creek Center in Salt Lake City. We are developing this with City Creek Reserve an affiliate of the LDS Church. Although it is early, leasing is progress well for the project’s scheduled 2012 opening. The ownership is structured around a participating ground lease. We expect to invest $76 million in this project, with an 11% to 12% un-levered return. We will fund this capital at opening.

After six years of hard work, we’re delighted to be formally moving forward with this project. Salt Lake City is a terrific market with wonderful long term metrics and is underserved at the higher end. We are also very proud to be working so closely with the LDS Church and to be an integral part of such an exciting and unique revitalization of an urban core. We don’t have any other significant specific project news, but we are happy to take questions during the Q-and-A.

Now, I’d like to turn the call over to Lisa and then I’ll return at the end of the call for some closing comments. Lisa.

Lisa Payne

Thank you, Bobby. As usual, I’ll be focusing on 2009 first quarter variances. This quarter, we reported adjusted FFO per share of $0.73, that’s up $0.05 or 7.4% from the first quarter of last year. This excludes the restructuring charges for the quarter.

Let’s begin with rents. They were up $0.01 from last year. This was due to a prior year adjustment and the positive impact of the lease up of Partridge. These items were partially offset by lower occupancy. Recoveries were off $0.01. That was due to lower occupancy and decreased cam capital expenditures.

Lease cancellation revenue contributed $0.025 to our growth. Our share of lease cancellation was $3 million, compared to $1.1 million in the first quarter of 2008. As we’ve said many times, lease cancellation revenue is quite lumpy and difficult to predict. We now expect lease cancellation revenue of $8 million to $9 million for the year.

The remaining portion of other operating income was down $0.015, primarily due to lower garage and sponsorship revenue. Other operating expense was positive by $0.04. This was a result of lower professional fees and a reduction in predevelopment expense primarily related to reimbursements for work that was expensed in earlier periods. The amount of predevelopment expense for the quarter was not indicative of the run rate. As Bobby said, we expect it to be $11 million to $12 million for the year.

General and administrative expense impacted our results favorably by about $0.02. This is primarily due to lower professional fees, travel and a lower accrual for bonuses. We are watching our costs carefully. For example, we’ve reduced the use of consultants and travel during the quarter.

Land sale gains were negative by $0.015 versus last year. As there were no land sales during the quarter. Given the lack of liquidity in the market, especially for real estate, we now expect lands sales to be less than $1 million perhaps even zero for the year. Interest expense was favorable by about $0.01 for the quarter. This was due to the positive effect of lower LIBOR rates on our floating rate debt. It was partially offset by expensing rather than capitalizing the interest on our Oyster Bay project.

Now, turning to our balance sheet; our interest coverage for the quarter was 2.6 times. Our debt to total market capitalization stood at 65.7% at quarter end. We have ample cushion under our fixed charge coverage test, which is our most restrictive debt covenant. This loan covenant requires that we maintain more than 1.5 times fixed charge coverage. Our coverage ratio at the end of the quarter was a solid 2.2 times.

Our revolvers are secured and our $550 million line can be extended to February 2012. We have no debt maturities until fall 2010, when our $264 million share of the loans on Partridge, MacArthur Center and Arizona Mills come due. Although it is early, we have begun discussions with potential lenders. Further, the size of these loans should be quite manageable at the current EBITDA multiples averaging about six times.

With that, I’d like to turn the call back to Bobby.

Robert Taubman

Thanks, Lisa. As we said in the release for the full year 2009, we continue to expect FFO per share to be in the range of the $2.69 to $2.94. We are maintaining this wider range because of the uncertain economic environment. Excluding the impact of the $2.5 million restructuring charge recorded in the first quarter, we are expecting adjusted FFO to be in the range of $2.72 to $2.97.

As we look at 2009 and beyond, conditions continue to be difficult. Unemployment currently stands at 8.5% nationally and it has been increasing each month. Retailers have sharply curtailed their capital spending. The financing markets continue to be very tough, and the CMBS market is clearly gone at least for now. Nonetheless, there are some positive signs that encourage us to think that conditions will improve.

Since their lows in mid March, the S&P has gained 29% and REITs have done even better and are now up 51%. Consumer confidence, which still is at a very low level, has increased slightly and there are signs that capital is just beginning to become available as evidenced by nearly $7 billion of equity raises in the REIT sector recently.

In summary, we are managing our way through this crisis. We remain alert to opportunities that may arise and we are determined to come out of this an even stronger more competitive company.

Now we’d be happy to open the call for questions. Jackie.

Questions-and-Answers Session


(Operator Instructions) your first question comes from Jay Habermann - Goldman Sachs.

Jay Habermann - Goldman Sachs

Here with Jon, as well. Bobby, can you comment a bit on the same-store sales trend and just how you think that might impact rents?

Robert Taubman

Well, obviously as sales go down, occupancy costs go higher and we do get push back from retailers. I mean, they’re trying to figure out where they’re going to allocate their precious capital, their managing their companies for cash and they’re going give us some push backs, but the retailers need to be in our centers and all of that is in our outlook as we have discussed this with you.

Jay Habermann - Goldman Sachs

Then I just want to switch gears for a moment and talk about Asia and the Macao deposit. Is that still on plan for return this August?

Robert Taubman

Yes, it is.

Jay Habermann - Goldman Sachs

So there’s no further change in terms of the financing or any other contingencies that the plan is to have that $54 million returned at that time?

Robert Taubman

Yes, Jay. I mean obviously as we have said, Macao is a perfect example of a project that was a terrific project that is, the financial crisis has impacted. It is unlikely to find financing in this year, in 2009. We’re hopeful that in 2010 there will be a market that will allow financing to occur, but we don’t know.

Our money comes back in August. We still like the project, but when the money is available and the possibility that being built is there, we will then make an assessment about us going forward with the project.

Jay Habermann - Goldman Sachs

Then can you talk about obviously GDP and you mentioned some perhaps some impact to your malls, can you give us any indication of perhaps how that filing might impact your centers?

Robert Taubman

Well, I think we are all trying to understand the impact of the bankruptcy on how assets are controlled, how assets are used as security for debt and they’ve been very deliberate in the way that they have made their filings. General Growth has great assets. If some of those assets at some point become available obviously we would look at them, but we’ve been very consistent that liquidity is very precious in this environment and we’re going to be very selective about what we do.

Jay Habermann - Goldman Sachs

Then just lastly on the dividend, you maintained the cash dividend, do you anticipate that being the trend throughout the year?

Robert Taubman

Yes, we intend to pay our second quarter dividend cash. We have good liquidity. Certainly the capital markets remain uncertain, but we’re going to keep monitoring what others are doing and we’re going to keep having a sense of the markets relative to our balance sheet and our timing and our needs, but we have every intention to pay our dividend in cash.


You next question comes from Paul Morgan - FBR Capital Markets.

Paul Morgan - FBR Capital Markets

Just going back a little bit to GDP as well as kind of the broader landscape, I mean, are we getting any sense from tenants that they’re looking at the financial position of the land lords and have you been able to poach tenants or take advantage of the fact that whether it’d be a life style developer or GDP or others that might not be able to provide TI’s or the timing that they’re looking for? Is there anyway that you can take advantage of the situation?

Robert Taubman

There’s no question that tenants are becoming acutely aware of which landlords have the strength to meet their commitments and meet the obligations that they make for themselves orally and otherwise. I absolutely see tenants making choices about based on who the sponsor of a specific project is. So, we absolutely believe that will help and accrue to us and especially as you come through crisis that is like this the memories don’t say that quickly. Eventually they will, but they don’t say that quickly.

In a time like this, they’re clearly going to be opportunities and we’re seeing all kinds of things. On the development side, on the acquisition side, on the debt side, there is all kind of things, but capital is very precious right now. We told people back in November at the NAREIT conference that, our number one priority was to meet our obligations.

Number two, we were going to figure out, how to position ourselves better for the future and number three we were going to look for opportunities for growth. Those are still our priorities. That’s still how we look at the world and because the markets there is lots of good talk right now and there has been an up tick in the market clearly, but having said all of that, we are still in uncertain about where we are headed.

Paul Morgan - FBR Capital Markets

If you were to look at acquiring assets that came to market, I mean is there a commitment to keeping it on a leverage neutral basis and then that affect? Are you making bids with institutional partners?

Robert Taubman

Well, let me answer that, again capital is precious. We’re going to look for anyway to help ourselves and grow, where we can leverage off of other people’s balance sheets and clearly there are few people in the institutional markets that are looking to invest, have more exposure to large retail real estate like we’re involved with and we’re talking to every one of those people.

Paul Morgan - FBR Capital Markets

Last question on occupancy costs, I mean that 18.4% looks like a pretty big number, but I am guessing that’s a blend and a lot of the numbers that bringing it up are some recent deals. Do you have you have a number for leases that are expiring now the more seasoned leases? I mean are they considerably below that?

Robert Taubman

Well, if you are referring the to sort occupancy costs generally, the first quarter is always seasonally high because sales are lower in this quarter, yet expenses are the same for a retailer. As I mentioned earlier in periods of rapidly rising or falling sales, you get big swings in occupancy costs.

Now, if you look at sort of the year and you sort of think about, if we are able to meet our sales guidance that we have given you, what would be the range of total occupancy costs for the entire year on some pro forma basis against that outlook. We would still be within our historic range and the high end of that range has been 16% to 16.5%. So, I think that in a broad sense, we feel comfortable that we are going to be able to continue to meet our outlook as we’ve discussed it.


Your next question comes from Michael Bilerman - Citigroup.

Michael Bilerman - Citigroup

Could you talk a little bit about the leasing that you’re doing in the quarter in terms of the types of deal, length of deal, the types of spreads that you are seeing, I think you’re probably where Westfield talked last night about 40% of their leasing was on a two year basis with rents down with a lot more pressure at the lower end of their portfolio? CBL also talked about doing one year deals. So, I’m just curious how you are leasing in this environment?

Robert Taubman

As I said earlier, obviously we are getting some pushback from retailers. They want to be in our locations, they’re trying to push out openings wherever they can. We’re still signing leases. I think you heard that throughout our prepared comments. On a case-by-case basis, where we think that the rent levels should be higher than the specific tenant that maybe rolling over, we might consider a shorter-term lease, because it’s a way of dealing with the crisis that we are in right now. If you sign on to a longer term lease and what that means is they’re going to put the capital in store, remodel the store right now and be locked in.

So, if your view of value is higher because you’re looking out longer term and their view of value is lower, because their looking at today and neither of you are happy with being fixed in on a long-term basis with the number, than the way to deal with it is to talk about a shorter term lease.

We have made those decisions on a case-by-case basis as some of our peers that you’ve just talked about, not at the level that they are now reporting, but we have made those kinds of decision and I think they’re good decisions because we believe that eventually we’re all going to come through this crisis and life will be more normal again.

Michael Bilerman - Citigroup

That’s happening more, so I guess on renewals just trying to keep them out for another year or two and not doing much remerchandising or it’s a short term deals where new tenants are coming?

Robert Taubman

We’re very focused on proper merchandising always, but yes, you are right. It would be on renewals. You can’t really do it on a new lease, because in a new lease somebody has got to make a new capital investment and a whole capital investment. So, they’re not going to come in for two years and make a big investment. So, it really is only on renewals, it’s only on a case-by-case basis and it really is where there’s a big difference in the bid, and the ask.

Michael Bilerman - Citigroup

So, much less than 40% and probably somewhere in the realm of 10% to 20% of your leasing.

Robert Taubman

Well, I don’t want to comment on a specific number.

Michael Bilerman - Citigroup

Can you talk, you said, you’d answer some details on other developments. Can you talk a little bit about the structure and the return projection that you have laid out for City Creek? How we should think about the 11 to 12 relative to a income versus manager? Any management fees that you may get and to just understand that structure and then talk a little bit about Oyster Bay and Atlanta and any other development news that you can share?

Robert Taubman

Well, there’s a lot of questions in there. Let me see if I can sort of talk about development a little bit. We said, we’ve been working on Salt Lake City for six years and it’s going to open in 2012. So that will be a nine year period of time, which on average it takes about nine or ten years from inception to opening to build one of these things.

When you go through a nine or ten year period it’s not uncommon to go through one or two economic cycles. Now, fortunately we don’t go through economic cycles like this one very often. So, it seems much, much more severe and it is. Therefore, the idea of spending capital on a new development may seem difficult to some.

What we have tried to do, is to strike the right balance between money that we were spending, money we are spending today to nurture our development pipeline and have it well positioned, so that when capital returns, when retailers are interested in expanding and when the anchor stores are willing to commit and build with their own capital, then we will be in a position to take advantage of that.

Now, notwithstanding, I mean we don’t believe there is going to be a lot of shopping centers built in America over the next period of time. Even though there’s good growth in America. There’s about 1% growth in the country that’s about three million people a year. It really only takes about a quarter of million people to build a new shopping center, but obviously they’ve got to be in an area that isn’t already served.

We saw in Salt Lake City, an opportunity to work with the LDS Church to redevelop an urban core and bring to that market a destination that could serve the entire market on a 360 year basis especially for an un-served, unmet higher end need and Nordstrom’s and Macy’s speak to that need.

We saw in the Church, someone who wanted to build the kind of quality development that we are interested in building and we were able to structure a deal with them because this is part of a massive redevelopment with office buildings, apartments, hotels, and the like.

We found in them a partner that was willing to work with us and we ended up in a deal that we’ve discussed that is really participating ground lease that we are investing, we are committing, when we open $76 million and against that capital, we’ll have is expected a yield 11% to 12% leverage return.

We think that’s a very good return even in today’s world to expend capital on a long term basis. Remember, nine years, we will be from beginning to end. We think it’s a good return of capital and we think it will be a great asset to fit into our portfolio over a longer period of time.

Michael Bilerman - Citigroup

On the other developments in terms of, I know the Oyster Bay took another I guess step back in this quarter and I don’t know where things are on Atlanta, but is anything else closer to ahead at all?

Robert Taubman

Well, let me say on Oyster Bay. We continue to be in the appeal process. We expect papers to be filed very soon. We are of course analyzing all of our options. We’re going to expense any costs going forward, we’ve said that on our last call. In any event, we believe there is a significant delay here and in this world at this moment in time that’s not necessarily bad. Given what the return expectations were that we had talked about for several years that we have been looking at. So I think that sort of captures as much as with we can say about Oyster Bay right now.

As far as Atlanta and other projects, Atlanta is one of those projects that we’re nurturing in the pipeline. Once retailers are in a position to commit to that location, it’s a location that we have a lot of interest in that we think it’s a great location that market and the markets metrics are going to be good, North Atlanta is a great place to be over a long period of time.

Michael Bilerman - Citigroup

Lisa, I know the revolver with balance sheet is in great shape and revolver is 11 with an extension to 12. I’m thinking about, how well Dolphin has performed from when it was rolled into the facility originally, and just looking at Fairlane and Twelve Oaks? What sort of support levels, do you think that line of credit could come in this sort of environment?

Lisa Payne

I think number one, we feel very good that the revolver is secured, which we think puts us in a very good position to renew it relatively easily. I will say, I think any CFO will say, bank availability is critical, but we even this size, I have to say, I’m not happy or not, going to have to renew a $1 billion or $1.5 billion revolver that visit us still of a scale that with the kind of banks we have. We think we’re going to be projecting out in 2012 in relatively good shape.

Dolphin was added when we paid off that loan really to maintain the mortgage recording tax, which is so expensive in Florida. So in essence at the time, we were very over collateralized on the line and we are able with the release price to release Dolphin. We don’t feel we need to do that.

So, I think even out looking out to 2012, we will have very adequate collateral and maybe even over collateral. So, we’ll have to see what happens then. We’ll have to see how Fairlane is performing and Twelve Oaks is performing and really look at what are the right composition of assets, what’s the right scale and size and what are the underwriting criteria.

The big takeaway is, we have a lot of flexibility given that collateral pool for that line to get it renewed and maintain the size and perhaps depending on where the market is even be able to have addition additional availability or maybe have one of those financed separately, but again mostly for sure we have great confidence on the ability to refinance that line.


Your next question comes from Ben Yang - Green Street Advisors.

Ben Yang - Green Street Advisors

Earlier in the call, you said 10% of your sales come from luxury tenants. How do you define luxury? I’m trying to figure out, who you’re referring to and coming up with this estimate?

Robert Taubman

We talk about true luxury, we’re talking about higher end stores and it’s all the obvious names like Louis Vuitton and Gucci, and people like that Tiffany, Cartier, Bvlgari; we put Coach in that category.

I don’t have a list of all of the stores. I think that we could get you a list of all of the stores, but again it’s on average across the portfolio. We said 25% at Short Hill. It’s only two stores right now. Well, if you throw Coach in there and few other with a few stores at a place like Westfarms. So, its but on average overall it’s less than 10%. That’s what we said.

Ben Yang - Green Street Advisors

Then do you have any other thoughts on what an appropriate leverage ratio should be for your company? The reason I ask is that while your leverage today is healthier than many of your peers, it could appear rather aggressive a few years from now as REITs continue the de-leveraging process. What do you think leverage should be for you guys?

Robert Taubman

Well, I think it’s an evolving question, Ben. We for years, if you had a good asset that had good income streams like these assets do, you would look at eight to ten times multiples of EBITDA and look at that as a funding level. So I’m going to approach it from the funding level point of view as opposed to coverage.

Then we can come back to coverage if you want. Today, when you look at sort of the historic LTV’s, which maybe we’re closer to 65% on a more conservative basis, not some of the stuff that was done at 75% or 80% or even higher, but say 65% and look at old valuations, old cap rates that people were looking at, banks and other debt institutions, you would get easily ten times.

Now, today I think you’re probably hard pressed to get much more than five or six times, because people aren’t getting 65%. They’re giving maybe 50% and against very different kind of cap rates and valuations.

So, when you look at funding levels that different, you have to say is that the new paradigm or will that change and will things loosen a little bit there and there’s more liquidity in the marketplace, will it go back to sort of where it’s been that eight to ten times range historically? My view is that it will.

Now, in that context, historically we’ve talked about coverages north of two, 2.5 certainly as something that’s very comfortable, but we’ve never been really comfortable and have only and very short periods of our history had our coverage below two.

Now, you talked about fixed coverages as opposed to interest coverage, it perhaphs something lower than two, but if you just look at interest coverage north of two has been I think pretty much how we try to operate the company. So does that answer your question?

Ben Yang - Green Street Advisors

I’m just kind of not really; I guess we can take it offline. I’m just wondering if you are even considering taking any steps to maybe de-lever the balance sheet, I mean it’s our view that the new paradigm will be leveraged maybe in the 40% to 30% range when the credit crunch is over. Does that sound too realistic to you? Do you not buy into that view?

Robert Taubman

I think if you look at long history and you look at industrial companies and where they have been leveraged and you look at real estate typically, different types of real estate have been leveraged at higher levels more comfortably because their income streams have been more granular and more bond-like.

Now, a great quality class A regional mall that’s got a 150 tenants that has good sales volume is the most predictable income stream of any form of real estate. Regional malls are less commodity like than any other form of real estate. So, I believe strongly that there will be a separation of property type eventually.

Right now, real estate is one ugly word. Now, as time goes on, it will separate itself again and I think the high quality regional mall will in fact find a greater leverage level that people are comfortable with.

Now, we’ve never levered our company, not in any recent memory and we levered our company at the higher levels than some of our peers did, one of them, obviously general growth. So, we already are talking about the most conservative pay out ratios, the most conservative debt-to-equity traded equity day or how we want to look at equity and net asset value.

So, yes there could be a different paradigm. There could be a secular change in how financing occurs, but I think at the end of the day, whatever that is, even if real estate is in that 30% to 40% range, which I think maybe low. I think that regional malls will be higher than that.


Your next question comes from David Wigginton - Macquarie Research Equities.

David Wigginton - Macquarie Research Equities

Bobby, just curious you guys are talked about speaking to various institutional partners potentially. What types of opportunities are you seeing in the marketplace at this time? Are any even close to a price point that would be of interest to you and your partners?

Robert Taubman

As I said on the last call, when you talk about price point, these kinds of assets rarely sale on a distressed basis, whether there is the equity holder or the debt holders that are the constituent owners over these kinds of an assets, when you gotten to the point that you’re able to own a good regional mall. Even if you are distressed, the asset usually doesn’t sale at a distressed price. So, we’re not expecting dramatically distressed prices from anyone and I think that is sort of answering the first part of the question.

Secondly, as we talk to institutions, there are lots of properties, both development properties, as well as existing operating properties that are going to need capital on refinancing because of all of the discussion we just had with Ben about refinancing levels.

Most importantly that eight to ten times multiple of EBITDA, there was a lot of deals done in that period of let’s say six and seven that were at north of ten times. So, if they have to be refinanced in the next several years, they are going to need capital because they will not be able to roll their financing. So, there will be opportunities that emerge because of that problem.

Now thirdly, you get to sort of the institutions. Institutions, pension funds, insurance companies have always viewed regional mall assets as a great place to match their liabilities, whether it is a pension fund beneficiary or it is the insurance companies that have their liabilities, these have been wonderful ways, inflation adjusted ways that income streams that are very pure.

So, we have institution, who are very interested in working with us and want exposure to regional asset class. We have a moment in time, where refinancing is going to be very difficult and that will bring us assets we believe our dealer for us to consider with those partners.

David Wigginton - Macquarie Research Equities

So, it sounds like then you’re talking maybe a year, two or three out from now before we see any significant movement?

Robert Taubman

I think that it is just generically, quote the blood on the streets in real estate generally is the earliest, it’s going to be is late of this year and will be in full force in 2010.

David Wigginton - Macquarie Research Equities

Just one question on, I was looking on the Newswire, a few weeks ago and there was an article regarding the Atlanta project. Your name was brought up about I guess there was another development that was approved to go forward that would be competing with yours. How does that affect your game plan with respect to that particular? I recognize you said, it’s an evolving project there, but does that change your strategic approach?

Robert Taubman

No. I don’t think it changes our strategic approach. I think that as I said earlier, key to that project are the key anchor stores and we have very good relationships with those anchor stores and the project that you are talking about, I believe which is right near us, has retail as a part of large mixed use project that it’s planning, but it is other uses are more important to it than retail.

David Wigginton - Macquarie Research Equities

Does that positively affect your project, do you believe? Or does that negatively affect it?

Robert Taubman

Depending on how it ends up getting built, X number of years from now it could be very complimentary.


(Operator Instructions) Your last question comes from Michael Mueller - J.P. Morgan.

Michael Mueller - J.P. Morgan

My question was answered. Thank you.


Okay and I have no more questions in queue.

Robert Taubman

Jackie, thank you and thank you to all of you joined the call. I know it’s a busy day for earnings and we appreciate your interest in our company. Thank you. Bye-bye.


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

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