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Executives

Robert Taubman - Chairman, President and CEO

Lisa Payne - Vice Chairman and CFO

Barbara Baker - Vice President, Corporate Affairs and IR

Analysts

Michael Bilerman - Citi

Dan Oppenheim - Credit Suisse

Samit Parikh - ISI

Alexander Goldfarb - Sandler O’Neill

Todd Thomas - KeyBanc Capital Markets

Ross Nussbaum - UBS

Ben Yang - Evercore

Michael Mueller - JP Morgan

Cedrik Lachance - Green Street Advisors

David Wigginton - DISCERN

Vincent Chao - Deutsche Bank

Haendel St. Juste - Morgan Stanley

Caitlin Burrows - Goldman Sachs

Taubman Centers, Inc. (TCO) Q3 2013 Results Earnings Call October 25, 2013 10:00 AM ET

Operator

Thank you for holding. And welcome to the Taubman Centers Third Quarter 2013 Earnings Conference. The call will begin with prepared remarks and then we’ll 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 everyone to our third quarter conference call. 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 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 those 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. 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 had solid results this quarter, consistent with our expectation. NOI excluding lease cancellation income was up 3.2%. Rents, occupancy and leased space all up.

Average rent per square foot in the third quarter of 2013 was $48.66, up 4.6% from the comparable period last year. Year-to-date, average rent is up 4.7%. We continue to expect average rent per square foot for the year to be at least 4% better than 2012.

Trailing 12 month re-leasing spreads also remained strong at 16%. Ending occupancy in all centers was 90.9% on September 30th, up 50 basis points from last year. This is the highest third quarter ending occupancy we have seen.

And temporary tenants comprise another 3.6%, bringing combined occupancy to 94.5%. In comp centers ending occupancy 91.3%, up 80 basis points from last year. Occupancies expected in the year up slightly.

Leased space in comp centers also improved ending the quarter at 93.1%, 60 basis points better than last year. Mall tenant sales per square foot grew modestly in the quarter 0.4%. Year-to-date, sales were up 2%. This brings the company's 12-month trailing mall tenant sales per square foot to $699, an increase of 2.6%.

Sales performance tapered up towards the end of the quarter. The political standoff and government shutdown was likely a factor as many have suggested, including the ICSC. Some have also pointed the retailers facing tough comp, which is certainly true in our centers and that consumers are spending more on big-ticket items, such as cars and home furnishings, resulting in lower income for soft line retail, whatever the reason sales have moderated.

Here are the highlights from some of the key categories this quarter. In home furnishings, Pottery Barn, Z Gallerie and Restoration Hardware all had great quarters, continuing this category outstanding run. In luxury, Cartier, Fendi and Christian Dior was especially strong. Men’s and women’s specialty were solid this quarter as were men’s and women shoes. Fast food also did well.

Women’s apparel was up but only modestly. Unisex and junior apparel two of our largest categories were once again soft. Electronics was much better than last quarter narrowing the drag from over 200 basis points to about 100 in this quarter.

Geographically, performance was mixed and there weren't any noticeable trends. Some centers were strong, some held their own. Heading into the pivotal fourth quarter holiday season surveys are suggesting good increases. They range from 2.4% per shopper track to 3.9% for NRF and as high as 4.5% for Deoitte. This is good news for retailers and hopefully for percentage rent.

Now for an update on our development project. At the Mall of San Juan we remain on schedule for March 26, 2015, notwithstanding, the torrential rain and record rainfall that Puerto Rico has endured this year.

We also had a rare general contractor problem and as a result for the first time in 15 years we decide to terminate the contractor. This is only the second time in our history that we've done so. We’ve transitioned quickly to a contractor very well known to us and together we have done a complete review of all aspects of the job.

At this point we are 70% brought out with appropriate remaining contingency. We now believe the total project cost will be about 10% higher at $475 million. We expect our after-tax return and stabilization to be between 7.75% and 8%.

We are still over a year away from delivering spaces to tenant. Leasing for the center gained considerable momentum in all of the various price points for moderate to bridge to luxury.

In addition having the best anchors, Nordstrom's and Saks will have a unique mix of tenant. We continue to expect about 60% will be new to the island. A number of you have asked us about Puerto Rican economy. So we thought it would be helpful to provide a few data points.

Auto sales while not a perfect proxy is something we track since the data is released without much lag time unlike other official data. For 2013 year-to-date through September, auto sales on the island are up 2% versus 2012 and 15% versus 2011. But if you look at the luxury auto sales they are up 10% versus ‘12 and 12% versus 2011.

At a brand level, Lexus is up 20% year-over-year and BMW is up 29% year-over-year. So you see that the consumer is still purchasing, particularly on the upper end, it’s clear the shopper is still shopping.

Tourism also continued to be strong on the island. Hotel registrations were up 10% in 2012. From January through April 2013, which is the latest available data, registrations were the highest in at least the past 10 years versus the comparable period.

Unemployment data compiled by U.S. Department of Labor shows that the unemployment rate in the San Juan MSA has been declining for the past 21 months straight and 27 out of the last 31 months, dating back to January 11.

People often harp on how much higher the unemployment rate is compared to the U.S. average but it's always been higher in part, due to the large underground economy. We continued to believe, this project is one of the best opportunities anywhere as do both of our anchors.

At International Market Place in Hawaii, it’s early but the reception we received has been phenomenal. We are seeing terrific early interest in the project from tenants. We expect to break ground early next year with an opening spring of 2016.

In Sarasota, leasing a University Town Center is going well. We are on target for 50% new-to-market tenants and we are ahead of the leasing pace we had at our last major development, City Creek Center. Although, we haven't made any store announcements, a few restaurants names have become public through the permitting process, Brio and Seasons 52 will be part of a strong restaurant line up.

On August 2nd, we held the grand opening of Taubman Prestige Outlets Chesterfield in suburban St. Louis, Missouri. Over a hundred thousand people came through the center during opening weekend. Many tenants mentioned sales were above expectations and exceeded plan.

A dozen stores reported that they had record-breaking weekends for an outlet opening in their chain. Our focus remains on the continued lease-up of the center. Today, we are delighted to be opening our food court. In addition, the strong lsocal sit-down restaurant, Nadoz, will open by year end.

Our key brands continued to do very well and we believe that over time we will have a successful project. During the quarter, we acquired our partners 10% ownership interest in the center and the joint venture we formed in 2010. We will continue to selectively look at outlet sites. We will target projects in markets with high barriers to entry and require significant pre-leasing before we begin construction.

In China, construction and leasing are on track, at both Xi'an and Zhengzhou. In Korea, we will be holding our official groundbreaking at Hanam on Monday. Major construction will begin in January for a late 2016 opening.

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

Lisa Payne

Thanks, Bobby. This quarter, our FFO per share was 89%, a 12.7% increase over our third quarter 2012 FFO per share of $0.79. Included in last year’s results, are $0.07 from charges related to the redemption of the Series G and H Preferred Stock in the third quarter of 2012. Excluding these items, our FFO per share was $0.035 better than our third quarter 2012 adjusted FFO of $0.86.

Here are the items that most impacted our year-over-year results. They are listed on Page 10 of our supplementals. First, rents, up $0.0 45 from the prior year, primarily a result of higher average rents and occupancy in our centers.

Net recoveries in the quarter, unfavorable by $0.015, due to lower promotional revenues. Net revenue from management, leasing and development services was favorable by $0.035, primarily due to the receipt of the final installment of our leasing success fee at IFC Mall in Seoul. We received a smaller leasing success fee in the third quarter of last year as well.

For the year, we are now expecting net third-party revenues to be modestly over $10 million. Other operating expense, unfavorable by $0.015, largely a result of increased professional fees and predevelopment spending in the U.S. For the year, we are expecting predevelopment expenses, including both the U.S. and Asia to be about a $11 million at our share, unchanged from last quarter.

General and administrative expense was unfavorable by $0.025. As we’ve said, we now classify certain Asia costs in G&A as opposed to predevelopment expense, consistent with the presentation of our U.S. business.

Interest expense was favorable by $0.02, primarily due to capitalized interest on our development projects in the U.S. and Asia. Next, non-comparable centers, unfavorable by $0.01, a result of the operations of our center in Chesterfield which opened in August and City Creek Center.

About half of the variance is due to a bad debt charge during the quarter from the late opening of a large tenant at City Creek. The impact of our acquisition of additional interest in International Plaza and Waterside Shops affected our results favorably by $0.03 in the quarter.

We increased our ownership in the centers in the fourth quarter of 2012. Dilution from our August 2012 common equity offering, net of interest expense reduction impacted our results unfavorably by $0.02. And finally the preferred equity offering that we completed in August of last year and March of this year, impacted our results unfavorably by $0.01. The full year impact of the March offering will be $0.065.

Now turning to our balance sheet. In August, we announcement the 200 million share repurchase program. We believe that our shares are trading at a significant discount relative to the value of our cash flowing assets alone without factoring in all the value we will create with our strong development pipeline in the U.S. and Asia. And at current trading levels, we can repurchase shares on a basis that is accretive to our earnings and net asset value, while maintaining our strong balance sheet and pursuing our internal and external growth initiatives.

As we mentioned in our release, during the quarter, we repurchased 313,000 shares at an average price of $67.68 per share. Total cost was about $21 million. We will continue to monitor both price and liquidity needs going forward.

In September, the interest rate on our $105 million loan on the mall at Green Hills was amended through the maturity dated December. The interest rate, which was previously fixed at 6.89%, is now floating at LIBOR plus 1.85%.

In December, we expect to place a new loan, which will have a five-year term within interest rate of LIBOR plus 1.60%. Next week, we will be closing on the construction loan for University Town Center. This will be the first construction loan for a regional shopping center since the recession began. The loan is led by Wells Fargo and a $225 million construction facility represents 70% loan to cost.

We have a three-year initial term with four one year extension options. The spread is 170 basis points over LIBOR and may be reduced to 160 basis points upon meeting certain conditions. This spread is a, 100 to 150 basis points lower than we expected, when we decided to move forward with the project. We are very happy to obtain such an attractive rate.

In November, we expect to complete an unsecured term loan for a minimum of $400 million with similar covenants as our current $1.1 billion revolving line of credit. The term loan will be partially used to payoff the current $300 million loan at Beverly Center which is pre-payable without penalty in November.

Additional proceeds will be used to reduce outstandings on our revolver. The rate on the term loan is very attractive. All in pricing is expected to compare favorably to our $1.1 billion revolving line of credit. The unsecured term loan is the new form of capital for us. It’s cheap, flexible and relatively long-term in nature. It worked perfectly for our capital structure.

Before I turn the call back to Bobby, I’d like to make a few comments regarding guidance in our outlook for the rest of the year. For the year, we continue to expect NOI growth of about 3%. If you do the math, obviously this means we predict the fourth quarter to be essentially flat compared to last year.

This is largely a result of net recoveries, which we anticipate to be down and percentage rents which are uncertain. Net recoveries will be lower due to the timing of expenses and the mismatch between fixed CAM revenues and CAM expenses.

And with that, I’ll turn the call back to Bobby.

Robert Taubman

Thanks Lisa. As we said in the release, our results were in line with our expectations and we’re maintaining our FFO guidance of $3.57 to $3.67 per diluted share for the full year 2013. Overall we feel good about the quarter and look forward to finishing the year on a solid note.

FFO growth should be strong. Given our range, we expect to be up between 7% and 10% over last year's adjusted FFO, that’s after absorbing the $0.065 for the March preferred offering. Occupancy remains at all-time highs and NOI and average rate continue to climb.

Now, we’re ready to open it up for questions. As Barbara said that earlier, please limit your question to two. Jay, are you there?

Question-and-Answer Session

Operator

(Operator Instructions) the first question comes from Michael Bilerman with Citi. Your line is open.

Michael Bilerman - Citi

Good morning. Bobby, I was wondering if you can just sort of give in a little bit more detail on what happened in Puerto Rico. I think, when you started, when you announced the project, it was about $405 million and that moved up to $430 million and now we are at $475 million. I understand you have let go of your general contractor and it's only the second time in your history that you have done that. But can you sort of maybe help us a little bit of what occurred, it's 18 months from opening, so where exactly are all the increased costs? What happened?

Robert Taubman

Well, first of all the increase from $405 million to $430 was about scope change. We added whole another level with restaurants to the project. So that -- and at that point, there was no change at all in the return. If anything, we felt even better about the returns.

So what’s happened now is we had a performance issue with the contractor. That’s why we terminated him. It’s the combination of that, the rains. The rains created lots of impact to the foundation work, the excavation, the utility work. There were additional cost as a result of the rain. But most of this is about performance of the contractor.

And we are on schedule. We intend to stay on schedule and its tight schedule but we feel very confident at this point, we can do it. As I said, we’re working with the contractor we’ve worked within the past. Actually the one that we terminated somebody that we had done projects with before. But they had a change of ownership which was completely unanticipated and the people that were on the job were not on the job anymore.

So it’s unfortunate thing. It happens very, very rarely with us but that's what happened. It’s part of what happens in development. We have narrowed the range, specifically to say that we are confident that we will be within that range.

Michael Bilerman - Citi

Okay. That's helpful. Maybe we can just sort of address the stock buyback which you had announced intra-quarter and you acted on. I think, Lisa, you talked about both a significant discount to your existing assets and not taking to account the development value creation. I guess, it's almost like treating a symptom in terms of being able to buy back the stock versus potentially looking deeper at why the discount exists.

And potentially, have you given more thought to looking at the development pipeline, whether it be Asia or others and saying, you know what, the market just is not going to give us credit. They probably won't give us credit until these projects open, which is many years out. Does it really make sense for us to be doing it? Did that sort of -- as you think about putting the stock buyback, was there a bigger discussion about, well, should we abandon Asia and should we just put it aside and just focus on the U.S.?

Robert Taubman

Michael, as management and also very significant owners in this business, we need to look on a very long-term basis as to how we feel about the opportunities that are available to the company. We spent a lot of time on the Investor Day in June trying to explain to our investment community out why we have pursued Asia, why we believe in Asia, why we believe it’s a generational opportunity for the company. We have our money out next to our investor community and we believe in what we’re doing.

I agree with you that until the rubber meets the road, which could easily be two or three years that the jury will be out on whether we’re making the right decision. And I also agree with you that the investment community does not like the risk associated with this decision.

But it's a decision that we really thoughtfully have made. We’ve spent an awful lot of time on. We tried to explain in the investor conference all the ways that we've attempted to mitigate risk. And it’s not like we don't recognize that there are differences between operating here and operating there. They are very significant differences. But we believe in the strategy and we believe in the model of being in Asia. And yes we have considered it fully.

Michael Bilerman - Citi

But decided to move on, I just want to make sure that that is not still a discussion point anymore. It was thought about and then…

Robert Taubman

There is nothing that changed since our discussion in June and we absolutely have decided to -- very much so. We haven’t wavered it of with respect to our interest in Asia.

Michael Bilerman - Citi

Okay. Thank you. The next question comes from Craig Schmidt with Bank of America. Your line is open.

Craig Schmidt - Bank of America

Thank you. I just wondered if you could outline for us what are some of the thoughts regarding Stamford Town Center. And how you could work to replace the Saks Fifth Avenue store, and if there is any change in anchors regarding the shops that will move in?

Robert Taubman

Good morning, Craig. First of all at Stamford, we do have -- we haven’t announced our plans yet for the Saks anchor but we have very specific plans that we will -- that we intend to be pursuing in 2014 and will make the appropriate announcements along the way.

With respect to Willow Bend, we don’t have any update. We obviously we did deal with the one box that we had and we added (inaudible). We added Restoration Hardware and -- both in big stores and we are very happy with that. The center has become sort of a focus for home furnishing in the northern Dallas area in a very positive way. And we’re searching for the right answer on the Saks pad.

Craig Schmidt - Bank of America

Great. Thank you.

Operator

The next question comes from Dan Oppenheim with Credit Suisse. Your line is open.

Dan Oppenheim - Credit Suisse

Thanks very much. I was wondering. In terms of Puerto Rico, comments have already been very helpful. As you think about that, whatever there are changes in contractors and such, there's clearly initially the costs, but then over time there can be timing issues. What is it that you are looking at in terms of the confidence in terms of still being on schedule with the project overall?

Robert Taubman

I think we have a high degree of confidence. Again we’re over 70% bought out and I think that’s very critical. So the individual subcontractors in those trades -- the materials have been bought. The people have been planned for. There is very clear critical past schedules for each one of those trades. So I think we feel very confident. We’re pleased with our recent program. So I think the combination of things, the March -- I think its March 25, 2015 date is very far.

Dan Oppenheim - Credit Suisse

Okay. And the comments on the fourth quarter in terms of the -- speaking broadly, you started off talking about some deceleration at the end of the quarter and then in terms of percentage rents uncertain for the fourth quarter. Can you elaborate in terms of how you are looking at the overall environment right now and the expectations for the certainly fourth quarter but then into 2014?

Robert Taubman

Well, I think we cautiously optimistic. We have seen moderating sales. We were flat in the second quarter. We were only up 40 basis points this quarter. As we commented there is a lot of holiday surveys out there, including the National Retail Federation and ShopperTrak and others that are showing the holidays and depending on which survey, its November, December but it’s at least thanksgiving through Christmas obviously.

But the holidays are being shown at somewhere between 2.5% and 4.5% growth. Now that would be obviously a very positive upturn against the flat sales we had this quarter and last quarter. Percentage rent is uncertain. We’ve been conservative as to how we’ve looked at our guidance in the context of what we expect that of percentage rents.

And we will be pleasantly surprised and that should reflect but not -- it doesn’t track absolutely but it should reflect in percentage rents if sales do in fact grow in that 2.5% to 4.5% range. We are tracking at 2.6% for the year -- I’m sorry for the trailing 12 months and 2% for the year. So at a minimum, we hope to be above that 2% level but will need to see.

Dan Oppenheim - Credit Suisse

Great. Thank you.

Operator

The next question comes from Samit Parikh with ISI. Your line is open

Samit Parikh - ISI

Hey, good morning. I wanted to ask a question on International Plaza, if you are still looking potentially at selling that 50% stake that you acquired or looking out to potential buyers of that. And based on sort of, Lisa, what you were talking about with how you feel the stock is trading at a discount to net asset value. Is there a thought process of using potential proceeds for maybe a sale and a stake of that or another asset to buy back stock?

Lisa Payne

We are still marketing International Plaza. I think we are -- I think cautiously optimistic and clearly we can -- where there’s a lot of interest. It’s really a question of whether again we don’t like to -- but we love all of our children and we really love this child. And we need to have a price that we think represents the value but we are optimistic. And we did take that into consideration as we thought about the stock buyback. We’re obviously doing the stock buyback incrementally.

And yes, as part of our capital plan having IT sale will clearly reduce our revolver and give us even more liquidity then what we had announced at the Investor Day which was at that point that we had this whole pipeline basically fully funded with our plan. And this is incremental capital over that point. So yes we hope to have more news to talk about in the next quarter’s call.

Samit Parikh - ISI

Okay. And then just moving on to -- just one more question on China, are you still considering an international partner -- institutional partner there or is that off the table?

Robert Taubman

Well, what we’ve talked about…

Samit Parikh - ISI

…Or in Asia, sorry, in general?

Robert Taubman

Well, what we’ve talked about -- to be clear, we do have partners in both our projects in China already. And in fact in both projects, we actually have two partners, the local real estate partner as well as our strategic partner, Wangfujing, who is now the largest department store operator in China with their recent merger that they had with [Spring] Department Stores.

In Korea, well we’ve talked about is we are also partners there. We have strategic partner in Shinsegae, who own 70% of the shopping centre that we’re working on there. And they’re one of the largest retailers in Korea and very significant company. They are a part of the whole Samsung extended family of companies.

Now, in addition to them, we have talked about the possibility of bringing an institutional investor for some time. We had made no announcement about them but that is that remains a very serious option for us to consider.

Samit Parikh - ISI

Okay. Thanks.

Operator

The next question comes from Alexander Goldfarb with Sandler O’Neill. Your line is open.

Alexander Goldfarb - Sandler O’Neill

Good morning. Just want to go back to the stock buyback program for a minute. Bobby, you’d mentioned that you guys laid out definitely detailed at the Investor Day but since then you guys are of about 8.5%, the REITs are up about 3% and the mall index is only down 1%. So if we move this forward and say that the market's concern is the development program, Asia -- now some of the projects are delayed there a few months.

Puerto Rico obviously had a contractor issue. But if you guys exhausted $200 million program and the stock hasn't reacted at all, does that mean then the board would reevaluate the development program and may in fact say, you know what, the development program is what ails and therefore let's curtail that or what’s the thought at that point?

Robert Taubman

First of all, let me correct some things you said about delayed in China. We didn’t delay anything in China. We had shown 2016 as our date and what we have done is narrow that and delay 2016. So we haven’t -- I’m sorry 2015.

So we haven’t delayed anything in China. And I think I answered the question earlier very definitively that Michael had asked with respect to our focus and our strategy on China. We believe that with respect to the share buyback, well we believe that at the time of the investor conference that in essence, the share price that we’re selling at a time which is significantly higher than where it is today.

That at that time, we felt that we were significantly undervalued and that in essence, we were getting no credit in the investment community for any of the development pipeline that we had in place whether here or in Asia, notwithstanding our history of creating enormous value in development.

We recognized that development is something that the capital markets see as a very high risk and is something that you have to ultimately put the income in place for the investment community to really embrace it. So, we appreciate the fact that this is extended period of a very significant development pipeline that is of concern.

I’d remind that people, it’s roughly a $1.5 billion in total and we are roughly a $10 billion company. So it is roughly about 15% of our asset base, is way less than back in the early 2000 when we were 35% to 40% of our asset base, taking a similar kind of development pipeline risk that ultimately turned out to be a very good decision for this company and for the investors in the company.

So, I don’t think I can say more than we’ve said already. The share repurchase program is in place. We are speaking very clearly in our actions. We have purchased $21 million worth of stock at roughly $67 plus the share and we made our intentions very clear.

Alexander Goldfarb - Sandler O’Neill

Okay. Second question is on redevelopment. GGP has their site in Norwalk, which is up the road from you guys, obviously. Just thinking about, whether it's Stamford Town Center, or Cherry Creek or Willow Bend. I mean, if you go down the mall list, there seems to be -- there would presumably seem to be a lot of potential redevelopment opportunities that may be lower-risk items that maybe things that you could show the street quicker. What are the thoughts on expanding or rolling out a redevelopment program that addresses some of the existing assets where people can see much more tangible projects at work?

Robert Taubman

We always look at our asset. It’s a first place to look for any redevelopment opportunities and we had very substantial redevelopments that we've done in many shopping centers. We have several that we’re looking at now. You’ve mentioned a few and we’re working on them very diligently and when we have something to discuss, we will. It’s not as if we’re ignoring our core business as we focus on our shop -- our new development. We are doing both at the same time. It's our responsibility.

Alexander Goldfarb - Sandler O’Neill

Okay. Thank you, Bobby.

Robert Taubman

Thank you.

Operator

The next question comes from Todd Thomas with KeyBanc Capital Markets. Your line is open.

Todd Thomas - KeyBanc Capital Markets

Hi. Thanks, good morning. So, first, a follow-up on San Juan. Can you just give us an update on the hotel and casino portion of the project, maybe what has transpired there over the last several months in terms of the New Century obtaining financing and beginning construction? And do you have any visibility on when they are planning to be complete with their portion of the project?

Robert Taubman

But we have nothing that we can say publicly at this point. They are obligated to open the hotel at a similar timing with our shopping center and we are working with them closely. And when we have something to say publicly, then we will and but we are very optimistic that we will have a very good story there soon. I don't think that I can comment on their financing or anything like that until we are able to talk publicly about the brand.

Todd Thomas - KeyBanc Capital Markets

Okay. And then just regarding your comments on slowing the softening sales environment, I was just wondering if you had any insight or thoughts about slowing tourist traffic at some of the centers that you own that have a higher exposure to tourism and maybe international traffic, just given the government shutdown and all the political uncertainty. Any insight into whether travel plans from abroad were impacted, maybe canceled, and if there was any negative impact to sales in the quarter as a result?

Robert Taubman

I’m not aware of any, but I -- it’s pretty recent and it would be anecdotal coming out of our shopping center managers as opposed to hard data. But again, I’m not -- I don’t know of any.

Lisa Payne

Yeah. And I don’t think our tourist centers were particularly different than any of the others in our portfolio. So, I wouldn’t say there is any trend there.

Todd Thomas - KeyBanc Capital Markets

Okay. Thank you.

Operator

The next question comes from Ross Nussbaum with UBS. Your line is open.

Ross Nussbaum - UBS

Hi. Good morning, everyone. A couple of questions. Not to beat a dead horse on Puerto Rico, but I'm just wondering. Obviously, I guess you guys didn't wake up overnight and say, oh my God, the costs are up on this project that it was building over a period of time. Where was the project manager and the development team in stepping in and saying, wait a minute, what the heck is going on here? Why do the costs keeps coming in over budget?

Robert Taubman

Well, I think that, it is because of that development team and because of certain thing on top of it that we made a decision which is a very complicated and difficult decision and rare as I pointed out earlier that to terminate a contractor for performance and replacement.

I think, we actually were very proactive in an extremely positive way because we weren’t getting the answers out of the contractor that we thought were important. So, I actually command our group being very much on top of a problem that have could have been much more serious and we feel very strongly that we have our arms around it at this point.

Ross Nussbaum - UBS

Do you plan on suing or have you already filed suit against this contractor?

Robert Taubman

I can’t talk about anything with respect to any potential litigation. We’ve resolved our basic differences with them and we are focused on getting the shopping center opened on schedule as I said earlier.

Ross Nussbaum - UBS

Lisa, with respect to the refinancing of Green Hills and Beverly Center by effectively taking both of them from fixed down to floating, if my math is right, we are talking about somewhere around, what, $0.15 a share benefit to FFO on an annual basis, give or take. Is that roughly what we are talking about? And why take over $400 million of debt and put it floating on those assets, why not go long-term fixed?

Lisa Payne

Well, a couple of things. First of all, we are likely going to put in place a swap. It may be that we decide to make it a one-year delay because we do feel rates are pretty firmly going to be -- floating rates pretty low for next year. But our developments, we are looking at our floating rates and our development of borrowings will increase significantly by the end of ’14.

So, I would say we’ll be giving you an update as to the fixed portion of this but we will not be floating on both those loans long term. Now the choice of keeping it under a five year level is because we are working on -- as Alexander asked us the question of redevelopment, we are working on a very positive one at Green Hills, which is why we are making it a shorter-term loan there. And then also at Beverly, we are working on a potential renovation that would be significant there as well. So that’s the reason for the term and then we will be likely hedging those loans in someway.

Robert Taubman

And Ross, I would add that, we have always had sort of a guideline in our heads to have very low floating rate debt as an overall percentage of our balance sheet and while it’s floated back and forth, it’s been for a quiet a while and I want to say 10 years plus, probably less than 25% even at peak periods of construction. So, I mean, more recently it has been much less than that. But we are very focused on and keeping, having long-term fixed rates where we don’t want to get caught in any vices.

Ross Nussbaum - UBS

Okay. With respect to the buyback, clearly it would not be leverage neutral, I guess, one could define how you are looking at that. But when I think about your funding needs on the development side over the next couple of years and I look at the buyback, from a risk perspective, how do you balance that in your head in taking the leverage of the company up versus buying the stock back?

Lisa Payne

Well, we thought a lot about it. We continue to look at our funding needs and I think as we shared at the Investor Day, we are kind of in a moment during through 2016 of, you are right taking on more leverage as we finish these projects. But as soon as we are finished with the intention of obviously having positive cash flow, we can refinance and the leverage actually becomes no different than it is today.

Now as it relates over to the next couple of years, we are really, really focused on liquidity and we monitor that actively. As we said, we are still very positive on doing an IP transaction. We are working on these construction loans and monitoring to make sure we have adequate plenty of liquidity.

And then likewise looking at the balance sheet, because if we decided as we move along here, we may not finish out the whole $200 million, we did get it approved. We are cautiously going, gradually keeping us -- keeping ourselves very price sensitive and we will monitor our liquidity as we move forward on the program.

Ross Nussbaum - UBS

Okay. Just switching gears, on your recoveries in the fourth quarter, let me ask it this way. What percentage of your leases are you not getting full reimbursement of real estate tax increases and is it that item that's the issue?

Lisa Payne

I don’t have exactly that number. It’s really focused the -- real estate tax issue is really only focused on two centers. And so that is not what’s impacting the fourth quarter. Every year, I think we have said in the fourth quarter, we tend to have the mismatch of revenues, CAM revenues and CAM expenses come to root. We have probably a greater level of expenses in that quarter and that’s really the impact, it’s not in this case, the real estate taxes as an issue.

Ross Nussbaum - UBS

Okay. And final quick question.

Lisa Payne

I know and one last thing, I mentioned, just sorry…

Ross Nussbaum - UBS

Yeah.

Lisa Payne

… a lot on that, the overall recovery ratio year-over-year is going -- is projected to be roughly equal.

Ross Nussbaum - UBS

Okay. Lastly the percentage rents, I am struggling to model it and I am sure you could understand why, which is in 2Q it was down…

Lisa Payne

So do we.

Ross Nussbaum - UBS

Right, it was down a million bucks year-over-year in 2Q, in 3Q it’s up a million bucks year-over-year? I am trying to understand how you are getting that level of year-over-year volatility that it could be down one quarter, up another quarter?

Lisa Payne

It’s very, I mean, I am going to answer the question, I probably answer it like this and it’s frustrating to you, it’s frustrating to us. It’s very difficult to model. It varies tenant by tenant specific and I think, this is not a big dollar amount here.

In a quarter our percentage rent is $9 million. So when you say it’s up, it’s jut very, very tenant specific and it’s also driven by roll over. If a tenant rolls over into minimum rent and we extend the lease, it could be mark to market into minimum rent as well. So, yes, it’s a $1 million, but a $1 million on our portfolio, it doesn’t take a lot for that to happen.

Ross Nussbaum - UBS

Thank you, Lisa.

Lisa Payne

And by the way, we try to give you guidance on percentage rents in some ways. But it is very difficult for us. We could be surprised in the fourth quarter. We have been surprised for the last few years. But it will be dependent on sale and we can be surprised up or down.

As Bobby indicated we are kind of expecting a sale to continue kind of like the 12 -- the prior 12-month number. We are kind of expecting that in the fourth quarter, if sales are much better than that, we are going to see better percentage rents.

Operator

The next question comes from Ben Yang with Evercore. Your line is open.

Ben Yang - Evercore

Yeah. Hi. Thanks. Maybe for Bobby, I appreciate your comments on the Puerto Rican economy earlier. But could you also maybe comment on what is happening in China specifically, maybe address some recent media reports suggesting that there might be a growing mall bubble in China? And then also some reports that some luxury retailers are no longer looking to extend the secondary and tertiary cities, which obviously is where you guys looking -- are looking to develop?

Robert Taubman

Well, first of all, the -- there is always a lot of sensational article that are written about China. And there is a lot of misinformation out there. But there is no question there is a lot of supply being built. The question is, is it good supply and is the stuff we are building in good locations with good partners, with good anchor stores and are we going to differentiate ourselves both in the planning, the programming, the location, the access, as well as the leasing and the merchandising.

And, we believe strongly from the conversation that we have been having on the leasing, leasing the spot that we are doing just that. We are creating very much a dominant shopping center with large critical mass of retail that will differentiate itself regardless of what supply gets build within the marketplace that we are in.

These sites we are in are growing dramatically. We were just in China. And as an example, our San Jose site, the amount of growth within a 3 kilometer area has gone from 250,000 people to over a million people in a three-year -- three, four-year period of time. And the expectation is that there is going to be another million people within the 5 kilometer radius, 5 kilometers is 3 miles. By the time we open the shopping centers and certainly by 2017.

So it’s just that you can’t imagine the growth. You have to be on the ground and see it with your own eyes before you actually understand it and believe in it. But, so, there are lots of articles being written in a very generic way.

Now as to retailers and first tier versus second tier markets, it’s absolutely true that luxury retailers generically are pulling back worldwide and are having the view that maybe their brands are getting too saturated in markets.

So tenants like Louis Vuitton as an example or a Gucci, or pick your brand, all of them are starting to say, maybe we don’t want to have as many locations and you are terming the second and third tier cities. But it’s not just in China or just in Asia, which is a very large percentage the big segment of these brands worldwide. It’s all over the map. We see it in the United States as well both the second and third tier cities for luxury, a lot of these companies are pulling back. They want more dominant locations.

So, what -- we haven’t built these projects on the basis of Louis Vuitton coming to them. There is a much broader term of representation. International tenant as well as Chinese based tenant. So, and there are the numbers of tenants that are interested in going to these locations we have much higher coverage, frankly, in China then we would in the United States, typically with brands with -- that would go into our centers here.

So, again, there is a lot being written. There is all kinds of conversations about China. In the meantime, the growth is very strong in that country and it’s very strong in the cities that we are operating in, a much higher than the average growth in the countries all.

So, I don’t know if you saw recently, but their GDP was revised upward again and it’s in the range close to 8% now. So, 8% on a base, that is 56% of size at the end of 2012 of the United States and really the second largest GDP in the world now, so.

Ben Yang - Evercore

Okay. So it’s helpful. But maybe going back to the slide picture, obviously the population growth in some of your -- around some of your developments is not a secret. I mean, can you maybe comment, are there currently any other developers looking to build the mall that will compete against your malls in China when they open?

Robert Taubman

Well, I mean there is tons of people looking at doing things. There is no question but I mean I’d like to take the Xi'an site, where we are the -- there is really nobody in the northern region. There is one other project that is being considered to be built that I will say within our market but we’re basically alone in the north.

In Zhengzhou, there is another project that is at the -- I will say the extremity of where our market is. I will say in the secondary or tertiary area of where we expect to be. That is under construction as we speak but we plan to -- I mean we know it’s there. And our -- the tenants that are interested in us or that are interested in them, they are going to play day and day in both locations. They will be in both locations and given the population density, they should.

So I don’t -- we are -- you can’t control what’s going to happen from a supply perspective. And there are countless numbers of retailers that want to be there, but there is a reason that Wangfujing is our partner. And there is a reason that they want to anchor these stores, these shopping centers with very substantial location.

Ben Yang - Evercore

Got it. May be just final question, I am sorry, if I missed it but why did you buy your partner out at Chesterfield. And given that the center is probably not performing as expected, it looks like you bought them out at cost. Is that right?

Robert Taubman

Well, I think first of all, we both wanted the flexibility of a non-exclusive relationship. We were not just in this center but we also had a joint venture to work on other projects. And we felt that having a non-exclusive relationship would be better, as to how much it was a nominal amount. We’ll give more specificity in our filing, but given all the preferences, we were the capital partner and given all the preferences, it was a very nominal amount.

Ben Yang - Evercore

Great. Thank you.

Operator

The next question comes from Michael Mueller with JP Morgan. Your line is open.

Michael Mueller - JP Morgan

Thanks. Most were answered. I was just wondering if you can comment a little bit on the leasing spreads in the quarter and just sequential change from Q2 to Q3. Does it feel like you are going to be hovering in this teens range for the next few quarters?

Lisa Payne

It’s always as you know this is very difficult for us to project. We still are seeing our average rent for the whole portfolio going up at least 4% which is very strong. We do expect overall opening rent for the full year to be just modestly off of 2012.

We’ve had -- the opening rents are strong. We’re getting still very good rent. We do see a little bit of a moderation and it will be obviously depending on what closes as to what it spread looks like. But I would say it’s very difficult for us to pin down in exact opening spread percentage but I hope that gives you some guidance.

Michael Mueller - JP Morgan

Okay. And one last time going back to San Juan in the costs, just had a curiosity in terms of the cost increase. I mean, how much of that is relating to when you swap a contractor out, the new contractor costs more than old contractor, was it a function of -- your cost get reset and then all of a sudden, you have to reset the cost and the prices are higher than where they were year or two ago. I mean can you just give us a little more clarity on that?

Robert Taubman

Mainly in the hard cause of the job, its not in soft cause. Although soft cause in the monitoring of the construction process is higher in a place like Puerto Rico than it would be in U.S. -- in the Mainland U.S. So there is some increase due to the change out but the substantial differences are keeping the project on schedule and the hard costs the individual trades.

Michael Mueller - JP Morgan

Got it. Okay. Thank you.

Operator

The question comes from Cedrik Lachance with Green Street Advisors. Your line is open.

Cedrik Lachance - Green Street Advisors

Thank you. Bobby, you’ve talked a lot about the public not recognizing the value either of the Asian developments right now or the overall development platform as it stands. When you look at how your family and your ownership has been over time, you've had the company privately. You’ve been public for the last 20 years. So you have chosen to partner with the public market. If you look at how the value of what you see and the development is treated by the public market, how do you think about this continued partnership with the public versus looking at taking the company private?

Robert Taubman

I don’t feel Cedrik that because we may have challenge in explaining or articulating our views of the opportunities of development and the risks, that means that we need to change the structure of the business. Remember as I said earlier, it’s about 15% asset -- 15% of our asset base, roughly 85% is stuff that the public should readily understand.

We may disagree at any given time about the prospect, immediate prospects to that 85%. The core is substantially what our business is. And so our external growth has been -- we’ve always been in the development business both as you say as a private company but also in the 21 years that we’ve been public.

And it’s proven to be a very good venue being in the public market in the long term to recognize the value of the investments that we put in place and what we’ve been able to do as the company to execute on those investments. So I believe that eventually the public markets will in fact value our new development. It may take a while but I think eventually they will.

Michael Mueller - JP Morgan

Okay. So just looking at -- returning to the IP transaction and the marketing of that asset, I believe it has been marketed for quite some time. When you talk about being price-sensitive on it and being -- making sure that you get the right value, have you gone through a bidding process at this point and you haven't been satisfied with the pricing or what is keeping the asset from transacting?

Lisa Payne

Actually we spent -- spoke to quite a few potential investors. And I think of that a very, very positive response. We’re now just working through, I would call it more of the negotiation of the term. I think we’re probably pretty close to feeling good on price because it has been a very, very active market. And I think the pricing we’re going to be satisfied with.

We just need to make sure that we have governance and management et cetera negotiated. So it’s really negotiation but these deals take a long time to close because they’re complicated. We have very, very good governance now. We had basically control of the asset and we are bringing in now more of an institutional partner and that takes time to negotiate.

Michael Mueller - JP Morgan

Okay. Thank you.

Operator

The next question comes from David Wigginton with DISCERN. Your line is open. David Wigginton with DISCERN, your line is open.

David Wigginton - DISCERN

Thank you. Bobby, I'm wondering if you could just comment on how the outcome of the Oyster Bay referendum may have impacted your strategy there for now?

Robert Taubman

Well, we’re analyzing all our options. We’re continuing to expense our costs. We don’t need the land next door to build, we never did and our view of the world is it remains the best sites in the United States to build a shopping center. So we’re looking at all our options.

David Wigginton - DISCERN

Do you have any intention or any idea what the buyers’ intention is for that lands?

Robert Taubman

Well, it’s been pretty clear that they’re trying what they -- by buying land, to stop us for moving forward. I think they have been pretty clear about it publicly.

David Wigginton - DISCERN

Okay. And just kind of returning really quick to your comments on the Puerto Rican economy. Are you at all concerned about I guess the local government's financial situation over there? I recognize that local governments generally don't have an impact on specific real estate projects, but just given the amount of people that are employed by the local government and also just, I guess, the overall impact that could have on the economy if there is some sort of debt situation over there? Is there any concern your part, how that might impact your projects?

Robert Taubman

No. I mean the bottom line is that we have got great anchors. We have had great, very strong tenant response. I mean, retailers want to be Puerto Rico at all price points. I mean just in the last few months, the number of retailers that have announced new stores and they are ranging from people like PF Chang to Macy’s that is opening another store and another center in another part of the state.

Cheesecake factory, I mean, all kinds of people at various price points want to be there and there is no current venue for upscale merchandize. There just isn’t. So with Nordstrom's and with Saks we provide that venue. And we are not there for the short-term. We are there for the long-term. And there is almost 4 million people that live there, there is 5 million tourist that populate that place every year. There is growing tourism down there. I mean the number of new hotels at the high end that have opened down there is incredible and there is more underway.

So I think the fundamental answer is that there maybe short-term bluff, but in the long-term the market that retailers are wanted to be in for years with. We have tried to build the shopping center down there for 25 years we have been looking. So we are very excited about this project.

David Wigginton - DISCERN

Okay. Thank you.

Operator

The next question comes from Vincent Chao with Deutsche Bank. Your line is open.

Vincent Chao - Deutsche Bank

Hey, guys. Most of my questions have been answered here. But maybe just going back to the sales commentary, the deceleration you saw in the third quarter, just curious if you had any color initially here in October if you are seeing any change in that trend or maybe even on just the traffic level?

Robert Taubman

It would be very anecdotal and we really don’t.

Vincent Chao - Deutsche Bank

Okay. Okay. And then I just want to confirm, when you are talking about the 2% to 5%, 2.5% to 4% sort of holiday surveys sales expectations for the holiday season, is that what is baked into your percentage rent outlook or is something less than that baked in?

Robert Taubman

Yeah. It’s less than that.

Lisa Payne

That’s right.

Vincent Chao - Deutsche Bank

What?

Robert Taubman

It’s 2.5% to 4.5%.

Vincent Chao - Deutsche Bank

I am sorry?

Lisa Payne

It’s roughly in that range.

Vincent Chao - Deutsche Bank

Okay. So if they hit that range…

Lisa Payne

On the lower end of that -- on the lower end of the range.

Robert Taubman

It’s on the lower end of the range.

Vincent Chao - Deutsche Bank

Okay. Thanks a lot. Appreciate it.

Operator

The next question comes from Haendel St. Juste with Morgan Stanley. Your line is open.

Haendel St. Juste - Morgan Stanley

Good morning. You talked earlier about the empty anchor pad in Stamford, the Saks pad. Can you update us on the plan or expectations for replacing the empty anchor pads that in Tampa and the Cherry Creek malls?

Robert Taubman

I think as I said earlier, we are working on these things and when we have something to announce we will. I would say that we are getting very close at Cherry Creek to an announcement and very close at IP to an announcement. So, both of these things are moving along well.

Haendel St. Juste - Morgan Stanley

Yeah. Fair enough. Can you also give us a sense of what the current occupancy today in St. Louis is, how that lease up has fared versus your expectations and what your expectations on the next couple quarters are in light of, I guess, Simon's recent expansion there?

Robert Taubman

Well, as we said at the opening and we are opening roughly 70% of the stores at the time we were all over 80% committed. We remain in that situation. We are very focused on leasing it up and we believe that over the time we are going to have a successful center.

As we said earlier, we are opening up the food court today actually and food has been something that’s been very important that asked before by many of our customers, so we are happy to be satisfying that customer need. And our key brand continue to do very well in that shopping center, people like Polo, Gap, Banana Restoration Hardware, J. Crew, those guys are all doing very, very well and that’s what we hope. We will continue over a long periods of time.

Haendel St. Juste - Morgan Stanley

Fair enough. Now, we shouldn't expect, I guess, change in strategy there and I guess, overall, on the outlets business, wondering if your experience in St. Louis thus far has impacted your view on this business going forward, any thoughts on, any change in your view of continuing to be as active in this niche of retail development?

Robert Taubman

Well, I think, we have said in our prepared comment that we are going to continue look very selectively. The bar is high. We want to be in high barrier entry markets and we want to have significant pre-leasing done with the key, the key brand that really are the anchors to the shopping centers.

Haendel St. Juste - Morgan Stanley

Appreciate the color. Thanks.

Robert Taubman

Thank you.

Operator

The next question comes from the Andrew Rosivach from Goldman Sachs. Your line is open.

Caitlin Burrows - Goldman Sachs

Hi. This is actually Caitlin Burrows. Just a quick question related to internet shopping. Amazon also reported last night with a 31% increase in North American sales and obviously, the topic of internet shopping has been, talked about for a while now, but have you noticed any recent acceleration in their impact to your business?

Robert Taubman

No. I mean, we have been talking for some time about how technology is actually enhancing our business at every level and how important social media is, and how much we are trying to connect our centers to the whole world of social media and use it to our advantage. We think the omni-channel retailer is the retailer of today and the future. And people are going to shop in every venue and they are going to - absolutely best retailers who are going to touch our customers seamlessly, however they do it.

So we have had three years of unbelievable sale -- sales growth that’s double digit basically and to see this moderation especially in the context of a weaker economy and all the uncertainty in Washington and everything else. It’s not something that it should be surprising and trees don’t grow to skies. So we are -- hopefully, we will see a good holiday sale and we will see how it goes.

Caitlin Burrows - Goldman Sachs

All right. Thanks.

Operator

The last question in queue comes from Michael Bilerman with Citi. Your line is open.

Michael Bilerman - Citi

Great. Bobby, just coming back to the overall development pipeline, and I totally understand that your share is $1.5 billion relative to the size of the company. But in aggregate, it is a $3 billion development pipeline, just given that you have a number of partners. So just given the size and the size of some of these projects, clearly sometimes things can go wrong like in the case of Puerto Rico. I guess, have you gone back and how much confidence do you have in the aggregate $3 billion in terms of running through the hard costs or any other issues that you can share with us in terms of that confidence that the others won't move?

Robert Taubman

What we have said on China, they were on track both on leasing as well as the construction and the scheduling. I will think about your question more, Michael, is there some way that we can share something that will give the sense of greater confidence and there is a risk in development. There is no question. That’s why you have a range of returns and sometimes you meet right in that range, sometimes it’s better, sometimes it’s worse. And overall, we had a really good history and even within that history, it’s a range, solid rate and some of the less rates.

Michael Bilerman - Citi

Right.

Robert Taubman

And that’s going to happen here. So, I can’t -- we are really all over it. We built a whole platform in Asia. We have got construction people, development people, leasing people, marketing people. We’ve build a whole structure over there, so that we can have the confidence that we can in fact execute on these projects. And I think that -- for our money and our moneys next years, that’s really important to us to have that confidence and how I can share with you more on that, sure but I will think about it.

Michael Bilerman - Citi

Okay. And then just coming back to Chesterfield Plaza, how should we think about the potential sale in terms of relative to your purchase price in December of $275 million and then your pro rata share of the $325 million of debt? How should we think about that as a benchmark relative to where you are trying to get to -- at, above, below? I'm just trying to figure out where we should think about cash proceeds from the sale of that interest?

Lisa Payne

Michael, I think I’ve delivered as much as I can about the transaction. We are working on it. It’s going to be -- as we said, we are very price sensitive. We think we are getting a very good price for this asset and we are working on it hard. We’ll announce it when it’s ready to be announced.

Michael Bilerman - Citi

And you went into -- when you bought it and the interest was about a 4.5% cap, if I remember?

Lisa Payne

In that range.

Robert Taubman

Yes. 4, I think we announced 4, 6.

Lisa Payne

Right, perhaps.

Michael Bilerman - Citi

And then just the last thing, Neiman Marcus and going to Roosevelt Field and sort of everything is happening in Oyster Bay. Is there any sort of update there in terms of what you can share?

Robert Taubman

No. I think I have said it already. We are continuing to analyze all of our options and we will see what happens.

Michael Bilerman - Citi

Okay. Thanks for the time.

Robert Taubman

Thank you, Michael.

Operator

There are no further questions at this time. I’ll turn the call back over to Mr. Taubman.

Robert Taubman

Well, thank you, Jay and we thank all of you for joining us in following the company. We look forward to more questions from you. Thank you. Bye-bye.

Operator

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

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