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Executives

Robert S. Taubman - Chairman of the Board, President and Chief Executive Officer

Lisa A. Payne - Vice Chairman of the Board, Chief Financial Officer and Director

Barbara Baker - Vice President, Corporate Affairs and Investor Relations

Analysts

Christy McElroy - UBS

Todd Thomas - KeyBank Capital Markets

Paul Morgan - Morgan Stanley

Craig Schmidt - Banc of America Merrill Lynch

Alexander Goldfarb - Sandler O'Neill & Partners

Michael Mueller - JPMorgan

Cedrik Lachance - Green Street Advisors

Ben Yang - Evercore Partners

Taubman Centers, Inc. (TCO) Q1 2013 Earnings Call April 26, 2013 11:00 AM ET

Operator

Thank you for holding and welcome to the Taubman Centers First Quarter 2013 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, Corporate Affairs and Investor Relations.

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

Barbara Baker

Thank you, operator, and welcome to our first quarter conference call. Yesterday, we released our first quarter 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 thank you everyone for joining us this morning. We’re pleased to once again announce strong results. Funds from operations, up 20%. NOI, excluding lease cancelation income, up 5%. And we also increased our regular quarterly dividend to $0.50 per common share, increase of 8.1%. Since we went public in 1992 we’ve never reduced our common dividend and this was the 16th time it’s been increased and it has averaged a 4.2% compounded increase over those 20 years.

Sales in our centers were solid. Our trailing 12 month tenant sales per square foot are now up to $698. This represents an increase of nearly 6% for the 12 months ending March 31, 2013. Similarly, sales per square foot were up 5.6% in the quarter. We think 5.6% is a great number. This is not only in acceleration sales over the fourth quarter of last year when our increase was 3.5%; it is also way ahead of anybody’s inflation number. And sales from the quarter were strong across the board. In fact we saw growth in 22 of our 23 merchandize categories, men’s and women’s specialty and men and women’s shoes were strong, as were electronics and home furnishings as they have been for a while.

Retailers that shined this quarter include Aerie, Abercrombie Kids, Express, Champ Sports, Foot Locker, Forever 21, Banana Republic, Gap, J Jill, Bath & Body Works, Victoria’s Secret, Pacific Sunwear, Brooks Brothers and Talbots. In home furnishing, Z Gallerie was up considerably. Restoration hardware had another phenomenal quarter. Clearly it was a great quarter for moderate to upper moderate concepts. There’s been lots of discussion about luxury. Many of the tenants, but not all were modestly down and Apple had a slight positive impact on our sales growth.

There’s no question the tremendous increase in sales we’ve seen over the past three years, including this quarter, has created a halo over our entire business and has led to increased occupancy and rents. Merchants want to do business in the most productive retail environments and retailers want to be in our centers. Ending occupancy in all centers was 90.3% on March 31, 2013, up 0.8% for the same period last year, including temporary tenants, which comprised another 3.5%; our combined occupancy of 93.8% is the highest first quarter occupancy we’ve ever had.

Our occupancy has also been driven by the lack of tenant bankruptcies. Between 2008 and 2011, on average 2.2% of our total tenants filed bankruptcy annually. Since the beginning of 2012, bankruptcies had been virtually nonexistent. Just 0.7% of our tenants filed bankruptcy in 2012 and only 0.2%, 20 basis points, have filed thus far this year. Obviously as bankruptcies have decreased, we’ve been less impacted by stores closing. We expect ending occupancy in comp enters to be up about 50 basis points at the end of the year.

Sales have also been driving rents. Average rents in our centers were up a solid 4.2% in the quarter. Re-leasing spreads were very strong at over 23%. We expect rent per square foot growth of at least 4% for the year.

Leasing is an absolutely critical function for us and we’re delighted to have recently announced the addition of David Joseph as Senior Vice President of Leasing. David will oversee the leasing department, including the leasing of our core properties and U.S developments. David has a very impressive background and a solid track record in both retail real estate and leasing. He has a wide range of experience and a three dimensional view of the business. David comes to Taubman after 12 years at Walton Street Capital. There he was the principal responsible for identifying retail acquisitions, managing their portfolio, and the overall strategy for Walton's retail properties. Previously, he served as the Vice President of Leasing at Urban Retail Properties in Chicago and as a leasing associate at Faison Associates in Charlotte. Next week David will take over leasing from my brother Billy who has been the acting head of leasing since July of last year. Billy will continue his role as Chief Operating Officer in charge of Development Center Operations and of course Leasing. David is inheriting a very talented team, with deep retailer relationships and a portfolio of assets with significant leasing momentum. We’re delighted he’s here and look forward to his leadership.

Now a quick update on our developments in the U.S and Asia. In Puerto Rico we recently announced The Mall of San Juan will host its grand opening on March 26, 2015. There’s been tremendous interest from a broad range of tenants, including from luxury. We’re very pleased with the early response. At the site, mass excavation work began in October and is currently 60% complete. Utility work is also underway. Foundation work on the deck has begun and mall foundations will begin in May along with structural fabrication work on the mall and three parking decks. We’ve also figured out a way to add additional GOA on a partial third level to expand the number of restaurants in the project. Total project costs are now projected to be about $430 million, up from $405 million previously. We are continuing to expect a return of 8% to 8.5% at stabilization.

In Sarasota, the mall at University Town Center is on track for our opening on October 16, 2014. Retailer interest in the center is very strong. Leasing is going well and we’ve already signed a number of key tenants in every merchandize category. Earthwork on the mall site is finished. Underground utility installation work is well underway and foundations are now 90% complete. Steel for the mall building will be delivered in the coming days and vertical construction will start next week.

In Chesterfield, we’re on schedule with construction for an opening on August 2, 2013. We continue to make progress with leasing and thus far have about 40 tenants that have pulled permits to begin construction. Amongst the names identified are six key tenants. That’s Polo, Brooks Brothers, Gap, Banana, J Crew, Abercrombie and Abercrombie Kids. Given the size of the market and our location, including its viscidity, its access, and its proximity to synergistic, highly productive existing retail, we’re confident that we’ll have a successful project over time.

Over in Asia, construction is underway at our projects in Xi'an and Zhengzhou. There is tremendous activity on these projects and we have just begun the leasing efforts. We’ve had initial meetings with over 200 different tenants. Given the normal cycle of retailer decision making in China, which tends to be much closer to opening dates than in the U.S, it will be some time before we’re likely to make announcements on leasing.

In Hanam, South Korea, we’re finalizing our overall program and the project design. We’re very excited to be working with Shinsegae Group on this world-class project. We’re hopeful to begin construction either later this year or the beginning of 2014. Our focus over the next year in Asia will be on the execution of these three projects. With the possible exception of an investment in Macao, our role would largely be leading the leasing effort. We do not expect to announce another ground up development project over the next 12 months. In total, our share of development investment is about $1.2 billion, roughly 11% of our total market capitalization. About $550 million is in Asia and approximately $650 million is in North America. Our next likely announcement will be in Hawaii.

Many of you have recently received a save the date for our upcoming Investor Day on June 20 in New York City. The agenda will include a review of each of our development projects. Executives responsible for each of the projects will deliver their presentations. Look for the formal invitation soon. If you are an investor and you did not receive a save the date and you’re interested in attending the event, please contact Barbara Baker.

Now I’d like to turn the call over to Lisa. I’ll return at the end of the call with a discussion of our guidance and closing comments.

Lisa Payne

Thank you, Bobby. This quarter our FFO per share was $0.90, a 20% increase over our first quarter 2012 FFO per share of $0.75. Here are the items that most impacted our year over year results and are listed on page eight of our supplemental. First, rent, up $0.725 from the prior year, a result of higher occupancy, rent per square foot and percentage rent. Net recoveries were favorable by one and a half cents due to higher occupancy, higher revenue from fixed CAM tenants and lower expenses in the quarter. It’s important to note that as tenants continue to convert to fixed CAM, the mismatch between the timing of fixed CAM revenues and CAM expenses will increase. That is we’ll recognize revenue fairly evenly over the year while the majority of expenses will be incurred later in the year. Therefore we expect net recoveries to moderate in the second half.

Lease cancelation income favorable by $0.01. Lease cancelation is always difficult to predict, but our guidance for the full year includes an estimate of $3 to $4 million at out share.

General and administrative expense was unfavorable by $0.045. As we mentioned last quarter, we now classify certain Asia costs in G&A as opposed to pre development expense consistent with the presentation of our U.S business. This is consistent with the average $13 million run rate that we discussed last quarter.

Non-operating income favorable by $0.025. A penny was from a land sale gain and $0.015 was from a gain on the sale of marketable securities. The securities were purchased to facilitate a tax efficient structure for the disposition of a mall in 2005. Interest expense was favorable by $0.03, primarily due to capitalized interest on our development projects in the U.S and Asia.

Next, the results of our non-comparable center City Creek were favorable by $0.025. The center has been enthusiastically embraced by the community and it’s off to a great start. The additional interest in International Plaza and Waterside Shops that we acquired during the fourth quarter of 2012 impacted our results favorably by $0.03. and finally, dilution from our 2012 common equity offering, net of interest expense reduction, impacted our results unfavorably by $0.02.

Now turning to this quarter’s financing activity, we’ve recently secured proposals for construction financing at University Town Center in Sarasota. There has been an overwhelmingly positive reception from banks. Pricing and structure will be attractive. We’re finding that the market for this type of loan is about 70% loan to cost that spreads over LIBOR in the area of 175 basis points. We’ll likely do a three year loan with extension options. We’re pleased with the response and we plan to start working on San Juan’s construction financing soon.

We’re also planning on securitizing City Creek Center this year. Closing is targeted to be sometime in the second quarter. Interest has been robust and we’re confident that we’ll receive attractive pricing. Expect financing proceeds to be in excess of our cost for the center.

During the quarter, we completed a number of transactions to prudently manage our balance sheet. In March we announced an increase to our primary line of credit to $1.1 billion, up from $650 million with an accordion feature that increases the borrowing capacity to as much as $1.5 billion if fully exercised. The new unsecured line provides us additional financial flexibility to fund our operations and development pipeline. As of March 31, we have availability under our lines of credits of nearly $950 million.

Also in March, we completed a $170 million, 6.25% preferred stock offerings. This was the lowest perpetual preferred coupon ever achieved by an unrated REIT issuer. The net proceeds were used to reduce outstanding borrowings under our revolving lines of credit. The rate differential will impact FFO by $0.065 for this year.

And in January, we completed the previously announced $225 million, 10 year non-recourse financing on Great Lakes Crossing Outlets. As you’ll recall, we received approximately $100 million of excess proceeds after the repayment of the previously outstanding loans. As we refinance our assets, we’ve been able to demonstrate the superb NOI growth of centers to have enjoyed and the value they created for our shareholders.

When you think about it simplistically, a 5% cap rate, $1 of NOI growth would translate into $20 of equity and while that equity or value is earned systematically along the way, the proof is in the excess proceeds we receive when we’re able to convert this value creation into real cash loan proceeds that we can then recycle into investment opportunities. We’ve employed this approach since we started as a public company in 1992. Over that period, we’ve substantially improved our balance sheet and issued very little equity while developing 13 properties, acquiring 10 and acquiring additional interest through another 15 transactions. We believe this strategic recycling of capital has been crucial to creating value for our shareholders.

We feel very comfortable with our ability to fund all of our capital needs for the foreseeable future and we’re absolutely committed to maintaining a strong balance sheet. We believe it’s a key competitive advantage that allows us to respond to opportunities such as the two acquisitions we made last December. Our analysis shows that if we elect not to raise any additional capital due to sale of joint venture interest, such as in IP or Hanam and further if we decided not to sell common equity at any point during the development cycle of our current pipeline, our debt to market capitalization would only increase to about 40% from its current level of 33%. So we feel very good about the execution of our financing and capital plan. We also feel the investment community should expect us prudently to maintain the balance sheet we worked so hard over 20 years to create and we will continue to do so.

I’ll now turn it back to Bobby for an update on guidance and closing remarks. Bobby?

Robert Taubman

Thanks Lisa. As we said in the release, for the full year 2013 we’re expecting FFO per share to be in the range of $3.57 to $367. We’ve adjusted the top end by $0.03, but held the bottom. Here are the factors we took into consideration. Comp center NOI of at least 3% for the year; the impact of the preferred offering to $0.065; third partly fees which are more certain, now expected to be $8 to $10 million; the uncertainty for Chesterfield; pre-development expense, including both the U.S and Asia which is now expected to be about $12 to $13 million and sales which have started the year positively.

Net-net, even at the bottom of the range, this is a 7% year over growth. At the top, it’s 10% growth. This growth is a testament, is a continued strength of our core. Three years of really strong sales have positioned the company for ongoing increases in earnings. All our key metrics reflect this strength. This core, combined with our prudent financial management, has led to the sustained improvement of our balance sheet which in turn has enabled us to pursue very profitable external growth opportunities.

Development has always been at the heart of this company and the foundation for its success. We believe about $30 of our current share price can be directly attributed to the group of centers we completed between 2001 and 2007. Centers like Dolphin Mall, The Mall at Millenia and International Plaza. Similarly, we believe we’re creating significant value from our current crop of projects.

Now we’d like to open the calls for questions and as Robert said please limit your questions to two. Melissa, are you there?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Christy McElroy from UBS. Your line is now open.

Christy McElroy - UBS

With regard to Saks closing its store in Sanford in Q1 '14, what were the circumstances around the decision to close? How much rent are they paying and what are your plans for that space going forward?

Robert Taubman

We have a number of things that we’re considering. We’ve anticipated their closing for some time. It’s all part of their overall strategy that they’ve announced and continue to discuss on their calls for the last several years where their management is trying to focus on their highest volume stores. So we’ve anticipated it and we hope to be able to make announcements in due course on that project.

Christy McElroy - UBS

And just following up on Lisa's comments about capital recycling, I think a few years back you were looking at potentially selling that mall, but I think you couldn't get the pricing you wanted. Now that private market demand has picked up back a bit, has there been any resurgence of talks to try to sell it again?

Lisa Payne

That sale was driven quite a bit by our current partner and we do not have any discussions right now to consider selling the center.

Christy McElroy - UBS

Any other malls in consideration for sale?

Lisa Payne

None for sale, but as we’ve talked about, we may consider joint ventures and in particular with International Plaza, although as we said we don’t believe our capital plan requires that. It would only be since we just bought that it could be done very tax efficiently and might be a good opportunity for us to begin a strategic relationship with a financial partner. But other that there’s nothing else being considered.

Robert Taubman

And I would only add to the comment about our partner in Sanford that it’s a pool of capital that has natural match maturation cycles for any private equity investor.

Operator

Your next question comes from the line of Todd Thomas from KeyBank Capital Markets. Your line is now open.

Todd Thomas - KeyBank Capital Markets

I’m on with Jordan Sadler as well. First question, looking at the spread between opening and closing rents as it continues to widen here, I was just wondering for deals that you’ve worked through over the last couple of months and quarters, as there has been a fair amount of uncertainty here and abroad during that time frame, should we expect to see that spread continue to widen from here or does it feel like it's peaking?

Lisa Payne

As we talked about spread, it’s a very sensitive spread. They’re not that much -- we’re not that many pool of tenants in there. It’s very sensitive to what happens in closings and openings and those are not the same space. So to be clear the openings and closings are not the same space. So it’s highly dependent on what may close that quarter versus what may open. We do feel given the sales growth that we’ve had that our opening rents are going to stay strong, but it’s very, very difficult to really guess. And by the way we do still feel very good about the leasing momentum we have, but I wouldn’t make a prediction on those spreads.

Todd Thomas - KeyBank Capital Markets

I guess just more broadly on that, I guess with sales growth tapering off here from peak levels several quarters ago, how does that really reconcile with retailer negotiations today? How should we reconcile the environment with the rent growth that you're seeing? I know you've commented that the sales growth can't grow to the trees, but how should we think about sort of rents in that context as well?

Lisa Payne

I’ll make a comment and then Bobby may add. First of all our occupancy costs from the one that we’ve had are at historical very low levels. So that will allow us and as we continue to lease, we’re going to capture what that sales performance has already done. My second comment would be while sales are moderating, we think our sales this quarter are exceptionally strong for the market. We’re at over 5%. We’re way above inflation. So our retailers are still quite happy with their performance in our assets.

Robert Taubman

I don’t have really anything to add. I think that Lisa has hit the key points. Total occupancy costs are low. There is a lot of embedded rent growth over time and 6% trailing sales is phenomenal when you think about how long inflation is today.

Operator

Your next question comes from the line of Paul Morgan from Morgan Stanley. Your line is now open.

Paul Morgan - Morgan Stanley

Lisa, you talked about financing the developments and that it would take you to a 40% leverage if you just used that. Just maybe comment a little bit more because you've got -- I guess it's $400 million in equity if you're financing most of them with construction loans at 70% LTV. How should we think about the equity component of that? Are you comfortable using leverage and going to that 40% LTV? Certainly you could with refi proceeds and other things, but is that how you are going to approach it?

Lisa Payne

Well, I guess I’d say number one, we just raised preferred and while I wouldn’t call that -- I’m not wanting to say that’s equity, but it’s certainly very permanent capital and in our business we love that structure. So I don’t view us as actually putting 100% of these projects on our line or financing under percentage because we’ve done that. We raise equity. Recently we’ve actually raised two slugs of equity. So we don’t look at the capital here as just one chunk, how are we going to finance this? We look at it as an ongoing capital plan and we are right along our capital plan and I would say we are very comfortable going to 40%. What I’d say is though we always want to make sure we have the appropriate liquidity to go and pursue what may happen or opportunities that may come about. So I think we are very comfortable with our plan of now funding the rest of this with our line. We are raising construction financing. We’re going to continue to do re-financings of our existing portfolio. But having said that, we also over time as other opportunities come along, we’re going to have to look at the capital plan and think about equity options at that time.

Robert Taubman

I would add Paul that we’ve anticipated our capital needs really in front of them and two equity offerings as well as this preferred, we didn’t have to do them when we did them, but we did them in anticipating and in creating an ongoing flexibility in the balance sheet so that when opportunities arise just as Lisa said, we’re able to then take advantage of them. We don’t want to sit then wonder if we can raise the gap. We don’t want to be subject to the vagaries and volatility in the market. We want to know what we can do all the time. So I really think that we’ve anticipated it well and we’ve found very good times in the market over many years frankly to buy capital and I think you’re seeing that again and again in our case.

Paul Morgan - Morgan Stanley

And then my other question, as you look at your -- I recall your same-store NOI guidance when you said you had at least 3% and one of the reasons that it was going to decelerate was that the percentage rents were going to face pretty tough comps. Maybe you could provide a little color down. It sounds like maybe the sales growth outpaced your expectations in the first quarter and certainly lease spreads are up very nicely. Is there any reassessment of that? If we see sales growth of the type that we've seen in the first quarter, is that going to boost your outlook for same-store? Are there other factors where you're sticking at that 3% range?

Lisa Payne

Do you want me to take this one?

Robert Taubman

Go ahead.

Lisa Payne

Okay. Yes. I would say yes, we are thrilled with the sales, good sales. But we still are expecting percentage rents to be relatively flat. Also recoveries. We had a very strong recovery year last year. we’re still expecting strong recoveries, but that we expect to be flat. And then we are increasing, as we add -- we’re putting some money into IT in our centers as we’re doing some work in upgrading IT. We’re absorbing Woodsfield in the other operating expense category. So there’s a bunch of things happening that will probably moderate the strong growth. But we do still feel that the 3% number is going to be very strong.

Robert Taubman

And I would say it’s early in the year and we’ve been positive, notwithstanding all the things that we talked about, including the preferred $0.065 in our guidance.

Operator

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

Craig Schmidt - Banc of America Merrill Lynch

In front of ICSC, I just wondered what some of your goals were. I assume obviously some of the ground-up mall developments, but would you also be doing or talking about leasing in China?

Robert Taubman

Absolutely. We’ve got a team that’s coming from Asia. As I said in my prepared comments, we’ve already had meetings with over 200 retailers. Many of those are global as well as in market. There’s a lot of coordination that’s going on between our U.S leasing group and our Asian people. So they’ll absolutely be there, as Rene will be, seeing many of you. So it’s a very coordinated effort and we will be focused on our new projects as well as the core.

Craig Schmidt - Bank of America Merrill Lynch

And then in terms of the St. Louis Outlet, I know you had mentioned the tenants you had signed. What do you think what percent you'll be open in August?

Robert Taubman

Craig, we’re not going to give a number. Leasing continues as we’ve said. We’ve mentioned a number of names that have pulled permits. It’s a very competitive situation. It is the largest market in America without an outlet center. We think we have a great location and we think the asset has great potential. So we’re positive about where we are right now.

Operator

Your next question comes from the line of Alexander Goldfarb from Sandler O'Neill. Your line is now open.

Alexander Goldfarb - Sandler O'Neill & Partners

First, good to hear that there are more restaurants coming to the San Juan project. I'm sure that will be good for that given the propensity down there. Lisa, just want to talk about Asia for the first question. As you guys think about financing Asia, are you thinking about financing it over there or using some multicurrency or something to eliminate some of the U.S dollar risk and the corporate risk? Or would that be funded off of the Taubman's corporate line of credit?

Lisa Payne

Alex, we are -- first of all in China, both projects our partner Wangfujing is solely responsible for obtaining the financing. That would be in order to minimize currency risk we would intend to finance in the local currency and although the Chinese currency doesn’t tend to be as volatile, but still to the extent that we can. And taxes and I would say both in Korea and China that the tax structuring, really to minimize taxes you want to borrow at the project level or in the country. And so yes, we would be borrowing in both of those countries. I’d also say though that as it relates to our equity contribution, that would be funded from the U.S and put into the country and that would be from cash refundable from our line of credit but our preferred, but it would be funded by the parent to the entity.

Alexander Goldfarb - Sandler O'Neill & Partners

Okay. That's helpful. And then the second question is, just as far as guidance goes, first-quarter was pretty strong. You certainly beat our number by $0.02 on the NOI. So just curious why the top end came down, if that's more related to some of the upcoming financing activity or if maybe Chesterfield is going to be more of a -- is going to be a meaningful enough drag that that's the offset. Just want a little more color on what to expect for later in the year.

Lisa Payne

Well, we did say that lease -- maybe I hope I understood your question right. We did say that our management leasing and development we’ve upped that guidance by $0.02. We’ve reduced our pre-development costs by a penny. And then obviously we are pretty still now comfortable. We’ve had good sales and feel very good about the core NOI growth. But all that really enabled us to modify and absorb the preferred stock offering in the high end of the range.

Alexander Goldfarb - Sandler O'Neill & Partners

But as far as -- the preferred stock is only $0.065. You beat consensus by 6. So net that would seem like a wash, which sounds like maybe it's Chesterfield or some of the upcoming re-financings that are pulling the overall number down?

Lisa Payne

Yeah. The preferred is impacting on the second half of the year. so I may be missing your point. I guess we feel like what we’ve done is absorb. We’ve changed the midpoint by $0.015 and so we’ve absorbed $0.05 of the preferred in the second half of the year.

Alexander Goldfarb - Sandler O'Neill & Partners

Okay. Maybe I’ll just follow-up (crosstalk).

Lisa Payne

I’m not as focused on consensus. I’m focused on what we guided people too. That may be our mismatch. In terms of our guidance where we were for the first, when we said it, we brought the midpoint only down $0.015, but we had a $0.065 impact on the preferred. That’s how we look at it. But maybe we can talk after if there’s more clarification.

Alexander Goldfarb - Sandler O'Neill & Partners

Yes, that would be helpful. Thank you, Lisa.

Operator

Your next question comes from the line of Michael Mueller from JPMorgan. Your line is now open.

Michael Mueller - JPMorgan

I guess first question, Lisa, you mentioned the potential to sell down interest in Korea and International Plaza. What's the likelihood that something happens at one or two of the Centers and do you think there's a shot it could happen this year?

Lisa Payne

Well, we have engaged an advisor and we’ll be speaking to joint venture partners, potential joint venture partners on International Plaza over the next two to three months. The decision there is frankly going to be is there a strong enough reason to give up this fabulous asset and is the pricing enough to knock our socks off, because as you know owning these assets, finding assets like International Plaza to buy is extraordinarily difficult. So yes it would be a great source of capital. We feel like we will still fundamentally control it as it relates to all the leasing and management and capital raising, but it’s going to have to be a fabulous deal with a great partner and we’d frankly like to use it as a way to maybe do other things with the partner. So we are going to be approaching the market.

We’re going to start talking to people at the ICSC. I don’t have a probability because I think it’s going to depend a lot on what we find when we take it to market. On Hanam, we are speaking and have spoken with a potential partner. That is going to be -- we’re still doing a lot of work on that project in terms of the design and the planning. And so that’s probably going a little slower, not for any bad reason, just going slower and maybe Bobby can comment on that a little more. But we really do think we’ll continue to work and potentially bring in a partner there. But that won’t be -- I do not believe that will likely be this year unless it’s at the very end of the year. Is that fair, Bobby?

Robert Taubman

Yeah. I agree with everything Lisa said on both International Plaza as well as in Korea.

Michael Mueller - JPMorgan

Okay. And I guess, Bobby, it seems like there is a disconnect between how you view the risk adjusted returns in China versus what a lot of The Street thinks as well. And I was just wondering if you could comment on what do you think The Street is missing?

Lisa Payne

I’d actually like to comment a minute on that and maybe Bobby can add ,because we are going to spend a fair amount of time on how we are approaching each of the Asia markets versus U.S because there has been a lot of discussion with our investors about allocation of capital. And I think -- and so I don’t want to spend a lot of time, I would take a lot of the thunder away let’s say. But I think the way we want to frame the discussion is, what are hurdle rates that we expect in the U.S versus the hurdle rates we’re going to expect in Asia? And the facts are the hurdle rates we’re going to get or we use to benchmark our returns in Asia are absolutely higher than the hurdle rates we do in the U.S. And you would expect that and we believe that is the case and needs to be appropriate.

The actual returns that we are getting in the U.S, frankly somewhat because of cap rate compression in the U.S for assets like Sarasota and San Juan, are frankly very high above our hurdle rates in the U.S. And our Asia projects as we’ve underwritten them are frankly right at hurdle rates. So yes we do believe over time we are going to demand higher returns from our Asia projects and we’re going to spend a little more time going through how we look at each of these and how we think about allocating this capital at the investor day in June. And Bobby, you may want to add.

Robert Taubman

Mike, I would add that we’ve done an awful lot on the risk level to try to mitigate risk in Asia. First of all as you look in China, we have two investments that are over $100 million, a little over $100 million. Those are not huge investments and they’re meant to be tall in the water investments. Secondly, we have very strong strategic partners, good local real estate partners and we have Wangfujing who’s both anchoring those developments as well as putting Pari Passu capital at risk. Certainly we don’t take entitlement risk and we’ve come into these developments further along in their process and we have really thoroughly tried to underwrite them. Our market research process absolutely is mitigating the risks that otherwise might be seen. So in addition to what Lisa talked about just in terms of hurdle rates IRRs, we are doing a lot on the ground to just strategically mitigate risk.

Operator

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

Cedrik Lachance - Green Street Advisors

So Bobby obviously we talked a lot about ground-up development projects when we think about your capital allocation. Where does redevelopment fit in your capital plans over the next two or three years?

Robert Taubman

Wherever we can do a major redevelopment we’ve done it and we have probably hit over 80% -- over 80% of our projects are either new or had been significantly redeveloped the last 10 years. We do have a couple of things that we’re working on that are more significant more than just a box here or a box there that allows us to refocus an asset. To the extent that we’re able to put all the ducks in a row, we want to, to then make those significant reinvestments we will. But we take great pride in the fact that our portfolio is very up to date and that we are reinvesting in it all the time. And I know that there’s a lot of announcements by others about their redevelopment efforts and that they’re getting good returns on them. And we hope to as well to the extent that we haven’t focused on one and it will be continuous. But where we’re finding the best risk adjusted returns is in new developments. And as I said in my comments, it really is the foundation of this company.

Cedrik Lachance - Green Street Advisors

And so to stay on new developments, will Outlets consume an area of growth again in the future for you or is it an area where you'll spend less time on?

Robert Taubman

What we’ve said all along is that we’d like to get a handful of these things over the next decade, that it’s one of the prongs of external growth for us that it can augment that organic growth that we have. It does diversify our product type. It is synergistic with the leasing executives and the other things that we’re doing within our company. Retailers are encouraging us to do it. It is absolutely a natural extension of our capabilities. We believe that we have a project in Chesterfield that will be successful over time.

Cedrik Lachance - Green Street Advisors

Are you working on any particular sites outside of Chesterfield?

Robert Taubman

We are always working on things, Cedrik and the answer is yes.

Operator

(Operator Instructions). Your next question comes from the line of Ben Yang from Evercore Partners. Your line is now open.

Ben Yang - Evercore Partners

Bobby, maybe going back to China, you said -- you made some comments that you do not take entitlement risk there, but you do take some leasing risk when you do those projects. And I think you also said that leasing typically comes closer to opening, based on some of the practices there. And then also you mentioned coordination between leasing here and abroad, including at ICSC next month. Can you at least comment on the level of interest from U.S retailers that are evaluating some of your projects in China?

Robert Taubman

It’s very high. Almost every major retailer here is trying to figure out what they want to do in Asia. So it’s extremely high.

Ben Yang - Evercore Partners

Okay. But not enough to quantify in any way for investors?

Robert Taubman

No. I think that if you want to go through the major specialty retailers in this country, almost every one of them have a program moving in Asia. So it’s a very long list and they’re all focused on China. There are others focused on other markets, including Korea, but if you’re going to be in Asia you’ve got to figure out China and their retail community, not just the U.S retail community but the broader international community understands that fully. And it’s not just luxury. It’s at every level of price point.

Ben Yang - Evercore Partners

Okay. And then maybe second question, sticking on China. Based on your comments, I think it's fair to say that China is riskier than what you are doing in the US, but would you characterize China as maybe a Wild, Wild West in some ways, of build for developers there? Or is it more kind of common sense that happens in development that occurs in that market?

Robert Taubman

I think historically as recently as five years ago, there was more of the Wild West that in essence there were programs being built that weren’t very sophisticated that were really being built by residential and other commercial developers that really did not understand retail programming. It was being pushed by various government -- at various municipalizes and cities and government and it was the extra that you had to do in order to get the residential that they really wanted. So there was a lot of Wild West some time ago. But I think it’s becoming much more pragmatic, better programed, better projects, a larger critical mass and with better thought process.

Operator

Since there are no further questions in queue at this time, I’ll turn the call back over to our presenters.

Robert Taubman

Melissa, thank you. Thank you all for joining us on our call. As we said we feel very good about the quarter and we appreciate you following us and we look forward to seeing many of you at the ICSC. Bye bye.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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