Taubman Centers' CEO Presents at Citi 2014 Global Property CEO Conference (Transcript)

Mar. 3.14 | About: Taubman Centers, (TCO)

Taubman Centers, Inc. (NYSE:TCO)

Citi 2014 Global Property CEO Conference Call

March 3, 2014 10:50 AM ET

Executives

Robert S Taubman – President and Chief Executive Officer

Lisa A. Payne – Vice Chairman and Chief Financial Officer

Ryan Hurren – Investor Relations

Analysts

Christy M. McElroy – Citigroup Global Markets Inc.

Christy M. McElroy – Citigroup Global Markets Inc.

[Call Starts Abruptly] sessions at Citi’s 2014 Global Property CEO Conference. This session is for investing clients only and if media or other individuals are on the line, please disconnect now. Disclosures are available up here and on the webcast under the disclosures path.

We are pleased to have with us Taubman Center’s and CEO, Chairman, President and CEO, Bobby Taubman.

Bobby, please go ahead be preparing as well introduce the rest of your team and provide a couple of opening comments and then we’ll turn it over to Q&A.

Robert S. Taubman

Thank you, yes this is on okay good. I am Bobby Taubman and with me is Lisa Payne our Vice Chairman and Chief Financial Officer and Ryan Hurren who works with Barbara Baker; I think many of you know in our investor relations group.

Before we go any further, I need to tell you that we'll making forward-looking statements within the meaning of Federal Securities laws. These statements will reflect our current views with respect to future events and financial performance; of course actual results may differ materially because of various risks and uncertainties which are discussed in our filing with the SEC.

So with that behind us, a little over two week ago, we released our year-end results for 2013. As of FFO was up 9.5% for the year, NOI excluding lease cancellation income up 3.4%, average rent per square foot increased 4.5%. Rents, comp-center occupancy and comp-center lease space all were up as well.

Our mall tenant sales per square foot were up 1.8% and now stand at $721,000 a square foot. This is yet another record for our company and the publicly-held U.S. regional mall industry. It was a strong year. Between January 13 and January 14, we completed over $3 billion of capital transactions through property refinancing, asset sales, a preferred equity offering, a new term loan and the establishment of the new $1.1 billion line of credit that can be expanded to $1.5 billion.

In January, we sold our interest in Arizona Mills, the land at Oyster Bay and a 49.9% interest in International Plaza. In total, these transactions provided almost $400 million in cash and a reduction of nearly $250 million in debt. We lowered debt to market cap ratio by over 400 basis points to less than 35%. Further to the extent that some in the investment community, I’m sure no one here may have felt that we would be forced to issue equity to complete funding of our new development, I think we have put that to rest.

For those less familiar with our company, we’re currently working on four projects in the U.S. and three investments in Asia. In the U.S., The Mall at University Town Center in Sarasota, Florida will open on October 16 this year. The Mall at San Juan and San Juan, Puerto Rico will be the next to come online. It’s scheduled to open March 26, 2015.

Our third U.S. development is International Market Place in Waikiki, Honolulu, Hawaii. Our official groundbreaking is today, and the center will open in spring 2016. We’ve also announced our partnership with the Forbes family in The Mall at Miami Worldcenter. We are currently targeting to open in late 2016. It’s in the heart of downtown, surrounded by rail, freeways, cultural and sports attractions, and many new high-rise developments, including a new 1,800 rooms Marriott convention hotel next to our site.

In Asia, alongside Wangfujing, one of China’s largest department stores, we’ll own and manage CityOn Xi’an and CityOn Zhengzhou, both centers will open late 2015. And then finally, we are working with the Shinsegae Group, one of South Korea’s largest retailers, on Hanam Union Square in Hanam, South Korea, in the suburbs of Seoul. Initial unlevered returns at stabilization on these seven projects are expected to be between 6% and 8.5%. We also have various redevelopment projects underway or expected to begin shortly at The Mall at Green Hills in Nashville, Cherry Creek in Denver, Dolphin Mall here in Miami, Beverly Center in LA and Sunvalley in San Francisco.

Total cost for the five projects would be around $265 million. We expect to receive a weighted average return of about 8%. It’s always been our strategy to recycle capital for growth. The recent transactions, coupled with our substantial development and redevelopment pipelines underscore that strategy.

Most of our peers have mainly grown through acquisitions. Most of our growth has come through development. In our now 64-year history, new projects have always tended to come in chunky cycles. It’s really smooth. But they have also always created significant net asset value. As we prepare to open these seven new centers over the next three years, we believe the value created by these projects will materially increase our growth over the long-term.

Nonetheless there are always risks and the market voiced those concerns last year. So in August, believing our share price was significantly below our net asset value, we announced a $200 million share repurchase program. Through December, we’ve purchased 787,000 shares and still have $148 million available under our program.

So with that, we’re happy to open up the question. Christy?

Question-and-Answer Session

Christy M. McElroy – Citigroup Global Markets Inc.

Great. I’ll start off with the opening question that we’re asking in each one of our panels. What do you think is the most misunderstood thing about your company specifically. And what are you doing to address it?

Robert S. Taubman

Well. I think that number one is China and Asia generally. Number one is, on those seven projects which are roughly at $1.8 billion our share less than $600 million is in Asia, but there is no question at Asia has been I think most challenging thing for the investment community to appreciate about our company, and we would go as far with that as you would like.

Christy M. McElroy – Citigroup Global Markets Inc.

All right. Can you update us on your expectations as far as timing and yields, I think the last time at your Investor Day you talked about three years completion your expectation of 6% yield, but can you just go into a little bit more detail on how sort of lease up works in those markets in which you are building and sort of why your projections are low initially and sort of how you expect it to build going forward?

Robert S. Taubman

Well typically in Asia and specifically in China and remember you know of that less than 600 million which is again above one third of the overall, a little over 300 million in Korea, a little less than 300 million is in China as you break it down. and I think Korea, people have been more comfortable with, because the initial yield tend to be a little higher, closer to what they are in the U.S., the growth rate isn’t expected to be as strong in Korea as the growth rate is in China and the IRR has it where as you look out over 10 years, the lines do in the seven to eight in that range based on a 10% projected growth rate within the China portfolio. Obviously its growing faster than what China is growing at and the leasing structure tends to follow the idea of expectation of growth, both tenants and landlords have wanted shorter terms, tenants because there is so much change in the market and there has been so many bad projects as there that had been built in the market, but they want to test the location before the market and settles.

Landlords because of the expectation of growth, so that as leases turn they are able to capture higher level of rent based on the established now sales that’s kind of have in place. So typically it’s been shorter lease term than here in the United States with much higher expectation of continued growth and that then allows us as GDP growth grows, as sales growth grows, then rents grow and that allows the IRRs to cross, and China which is lower initial yield, ends up being a higher, higher IRR.

Christy M. McElroy – Citigroup Global Markets Inc.

At what point do we – I mean if we are more comfortable with Korea at this point, at what point do we get a little bit more visibility and start to get more comfortable with China versus as comfortable as we are with Korea?

Robert S. Taubman

Well what we said publicly now for sometime, is that we are focused on execution of all three of these projects, and that we are very unlikely that we would announce a new project that we would be involved in 2014 in those markets. So, we like you want to see good execution and if we start to take on another project it means that we are even feeling more comfortable at what we are doing, but I don’t think until the projects are actually open, I mean which is late 2015 for the two in China and late 2016 for the one in Korea. I don’t think people are really going to be comfortable, until they can actually go and kick the tires.

We are building again, great markets, Xi'an is almost nine million, Zhengzhou is nine million people, we are building in incredible locations in both markets, we have the leading department store in China as our anchor and our partner. They are million square foot projects in both cases. So they are big projects, they are not small projects and I think when people are actually able to see these things open, filled with tenants, they will feel a lot more comfortable about the investments that we’ve made.

You are still making a bad eye growth. So growth could stop at any point, would slow at any point, but our view is that the growth will continue, but once people can see it. I think that now the only decision they have to make is, is Taubman is going to make a lot of money here or are they are going to make some money here, but until it opens, there has been a view that we are actually destroying value as appose to creating value, but I think once it opens, they won’t feel that way.

Christy M. McElroy – Citigroup Global Markets Inc.

You already have your local partner. Have you thought – have you seen any interest, institutional interest in partnering with you in China or in Asia in general. And have you thought about that option to make the market a little bit more comfortable with the investment and sort of diversify some of your economic risk.

Robert S. Taubman

Yes, we have a lot institutional interest I think you have to decide, are you going to be at the project level, are you going to be at country level, are you going to be in sort of the macro level would be topped in Asia for the region. And all of those are options to us and it’s something that we’ve been thinking about at every level.

Christy M. McElroy – Citigroup Global Markets Inc.

Domestically, you’ve taken I think – and you referred to your NAV discount in your opening remarks, I mean you have taken I think a little bit more than contrarian approach relative to some of your Class A mall peers who are – you are focusing long ground up development and you are going to have some redevelopment projects, but I think the bulk of you are pipeline is ground up and whereas many of your peers are focusing much more on redevelopment. You just saw the stake in one of your better malls and you see many of your peers trying to buy in stakes. So, what sort of gives you the confidence moving forward that you can close that NAV gap by discount to your asset value and that you can ultimately show shareholders that your creating value?

Robert S. Taubman

One thing I suggested in my comments that its been our history to have these sort of chunky cycles that ultimately delivers significant net asset value and you know the last cycle wasn’t smooth either, and some of the projects that we thought would be home runs, were doubled or singled. Some of the projects we thought we are going to be doubled were grand slam home runs. So if private equity understands it sort of better and sees sort of what we’re doing in that context, because it like the private equity investment, but we’re in a public company structure.

So, it doesn’t have an obvious income stream and so it does, so until these projects open and they actually settle and they begin to stabilize, I think it will be hard for people to really recognize the full net asset value discount that we are at. I do think that where we have an asset by Tampa, international plaza that we did not announce the cap rates, but I think the sort of consensus discussion was that it was somewhere in the low course and when we are selling at consensus, its somewhere in the low fives and its an asset that has the margin is better than our medium, it was 720 a foot versus a center that was somewhat higher than that but not dramatically higher than that.

So you say to yourself is there gap, its just a valuation of the core and just its setting aside the development assets for a minute, its development pipeline for a minute. Our view is that there is a significant gap and the appreciation of that income stream that’s existing today and the only way you can justify that is that people believe that as I said earlier destroying value. So we don’t believe we are destroying value, we think overtime people have recognized that, the sense is that the consensus on any of the discounts that our stock is selling at is somewhere between 20% and 30% that as when you look into, so you have to judge – come to your own judgment about what their cores were, what its growth opportunity in and then what the development is would you add anything to that?

Lisa A. Payne

The only thing I would add is, I do think we are going to have data points close to today when we opened all the centers, because there are certain things alike we are going to be announcing weeks up overtime and we are in some very competitive situation domestically and we don’t announce those tenants, because we feel like we need to be further along the way, but over 2014 we are clearly in Asia going to have announcements to be made, we are going to hopefully in Asia we are out trying to get financing and we are going to hopefully announce financing. There will be data points we can share with the investment community both domestically in the U.S., I think through 2014 and early 2015. Bobby is right they all open and the sales productivity as known you are not going to absolutely know, but I think we believe 2014 is a critical year for us to demonstrate progress along the way that we are building them on budget and that we are leasing them up.

Christy M. McElroy – Citigroup Global Markets Inc.

So there are – I mean these should create catalysts to help the investment community in your opinion will reward you better for your capital allocation decision, there are several entities that are doing that.

Lisa A. Payne

Yes, although I will say – and I would also say that we have – we have to go back to 2001 on our last really big boom 2001 to 2005 and we announced we actually did this in one of our annual report the value creation and it wasn’t perfect, we hit singles, we hit home runs, but when you blend them all together we created enormous value creation and that why we are in the development business, its higher risk, but much bigger gains when executed appropriately and we’ve demonstrated the track record that we can do that.

Robert S. Taubman

Yes, and in our Investor Day, we actually took people through, its something like 35%, 40% or more of our share price today is in those developments that we’ve built now. so again, we have a lot of conviction about development, being best allocation of capital for a mall company like ourselves.

Christy M. McElroy – Citigroup Global Markets Inc.

In regards to Puerto Rico can you give us a sense for – I mean obviously there is so much bad practice about the local economy, can you give us the sense of how consumer spending has been trending at the local level especially at the high end, which is ultimately your core customer and where sort of pre-leasing stands and what are retailer saying about the all the bad practice.

Robert S. Taubman

Well I’m not sure we can answer all of those question, but…

Ryan Hurren

Look inside DDR the website.

Robert S. Taubman

Yes, I was going to mention that Dan Hurwitz with DDR did a terrific job of – in our view nailing this question of Puerto Rico consimer then owning great retail asset to Puerto Rico, its something like 12.5% of its income that was NOI and truly nail what it was owning these kinds of assets there, there is tremendous lack supply for enormous demand in the market and when you are on the ground there is lot of stuff about how the government has managed overtime , their finances that isn’t great, but when you are on the ground things are going well.

Hotel registrations there years in a row are up, in 2013 they were up 5%, luxury car sales three years in a row up, last year up 10%. When you talk about retail sales in the market its been very strong especially in the high productivity asset, so it is – there is a lot of noise out there, tourism, tourism is 5 million people, its one of the biggest tourism markets around and tourism just continues. So a lot of noise, but on the ground things doing very well, we’ve very good response on the leasing side, we have been specific other than to say that we are pleased with the merchandizing, et cetera.

It’s a very competitive market. Plaza Las Americas is a dominant asset in the market, we are trying to build something a little different, anchored by North Princeton Sachs, there has been no retail venue for the high end in that market and we feel that we are going to satisfying that opportunity for that customer base both existing in the local market which there is plentiful as well as in the tourist market which we expect to have a very high proportion of tourism.

We are right near the airport, right near all the beach hotels, we are close to the old downtown, we expect to have a very high tourism, and the grey market people don’t really appreciate again its how the government has managed things, they don’t collect taxes they are well, they don’t do a lot of things they are well, but we do write to give they are going to misunderstand for those of you that are listening from the government, bit the academic studies show that a minimum there is a grey market of 25% and it could be 40% north, so I understand why bond prices are spiking and there is all the noise, but nonetheless we are building something for many generations and we think the lack of supply especially on the high end there is tremendous demand for this asset.

Christy M. McElroy – Citigroup Global Markets Inc.

And in your leasing discussions retailer are not being swayed by the noise?

Robert S. Taubman

No but they would certainly use it in a negotiation with what the pricing should be.

Lisa A. Payne

And I would add, that’s in every market that we are in, the toughest part of it is, I mean the story is great, its competition, means we are going into markets where the opportunity is there, but in every case we’ve got tough competition and so this isn’t easy, and just like in 2001 it may not – everyone of them is coming out of the gate as a home run, although we feel very good about everyone, but because its so hard to build is why overtime they are going to create enormous value.

Christy M. McElroy – Citigroup Global Markets Inc.

Can you talk a little bit about the project in Miami that you are doing with Forbes, what kind of value you see there, obviously its not your core competency which is high end malls, can you talk about why you decided to do the project and ultimately what is the value creation opportunity.

Robert S. Taubman

Well never once Florida has been great to this company and its over 25% of NOI of the company today, and we have been very successful with Forbes family, we are 50/50 partners with them at Millennium mall in Orlando and 50/50 partners at Waterside in Naples, two very , very successful projects, in both cases they led the development effort and we share leasing efforts and we again built terrific projects that have grown nicely overtime.

Miami and Miami Dade county is one of the really undersupplied markets in the United States and retailers we talked off as retailers would be happy to tell you, when you look at the high quality, high productivity, you have Aventador right nearby here, you got Bal Harbor nearby here, Gaylon South is here, Dolphin Mall is one of the best assets I would say. So for a market, for one county to have a handful of the best assets in the United States is really remarkable and the reason is its been really hard to build new supply here in this mark for years and years, why that is its not clear, but its been really difficult. The demand in this market you contract the difficulties build and supply with what’s happened over the last 23 years on the demand side, you have had unbelievable growth in population, strong growth in GDP, a diversified economy that continues to be more diversified, you have got tourism and Latin American tourism had just been incredibly high and very important. So you have got all of these things on the demand side that are really positive, very limited supply, so what you have in our project and the two projects that are next to us, the design district just to the north of us two miles which is being led by Craig Robins, who is a local developer, and LVMH, the tenant and their subsidiary called L Capital, is a true high-end luxury district that’s going to have about 400,000 square feet of retail as part of their overall mixed-use development of about 1.5 million square feet.

Just south of us in the Brickell area south of the historic Miami center of downtown Swire is building a little over 600,000 square feet of retail, but it's primarily a residential-based project, big high-rises. If you know Brickell, it's filled big high-rises right now and over 2 million square feet of residential that they are building on. Our project is about 750,000, 800,000 square feet of retail, anchored by a Macy's and anchored by Bloomingdale’s. Macy's has been in downtown. They want to stay in downtown, so this an opportunity for them to do that. It's completely surrounded by all kinds of new activity, new development.

Its already been announced its well down the road, the 1800 room Marriott convention center that will be actually adjacent to our project, that Marriott will also be actually part next to both the high-speed rail between Orlando and Miami with one stop, that's being built by Fortress. There is other like rail in the market. The American Airlines center, the New Perez Museum, all the roads that lead into the two interstates and everything that leads right into the downtown and the tremendous residential construction, there is four brand-new towers in the last five years that have been built right there, there is another three or four underway, and our site is actually entitled not for us we are only involved with retail, but grand partner in this has over 15 million square feet entitled on the 25 acres that we are part of. So these are massive mixed use, this is what our largest mixed used private projects in the United States and we think that we will being to satisfy the new – the need for new supply in the market all three projects taken to out there.

Christy M. McElroy – Citigroup Global Markets Inc.

If there any question from audience, please let me know at any time.

Robert S. Taubman

You promised one initial question.

Christy M. McElroy – Citigroup Global Markets Inc.

Oh I did do it, did I ask at initial question

Robert S. Taubman

And then its not what you did that.

Christy M. McElroy – Citigroup Global Markets Inc.

No.

Robert S. Taubman

There must be other questions.

Christy M. McElroy – Citigroup Global Markets Inc.

But we have the rapid fire at the end, but we will wait for that I do have plenty of other questions tough. In terms of malls sort of evolving into – over time, into less of strictly shopping destinations and more into sort of experiences that you talked about the redevelopment projects that you’re doing, you talked about obviously, there is an ongoing effort to – in your leasing, in your renovations that you’re doing. Can you talk about how you see your malls evolving over time? And you’ve had a couple of Saks closures. Can you talk about how those department-store closures kind of play into that evolution, and where your malls are going from here?

Robert S. Taubman

Well, my father used to say that the mall needs to be a flexible stage that evolves over time, and you have to build an envelope that allows that change to occur. And basically, that’s what we’ve done. Because the enclosed regional mall really reflects the well planned high productivity kind of reflects what’s happening in the retail and consumer environment internationally. So we think that – again, it does evolve over time.

If we look at what we are doing with the Saks pad at Cherry Creek, we’re putting Restoration Hardware. We’ve announced them in a 53,000 or 54,000 square foot of retail stores. We’re adding another 30 somewhat 1,000 square feet, we’re using the other space – we’re actually tearing the building down, but we’re using 35,000 square feet of space for new tenant next to the Resto store. That store didn’t exist in that context years ago.

Now they have three stores in the market and they’re going to focus all of their attention on that one store in the market. It actually plays with their future vision of retailing and the omnichannel kind of store that they represent. If you look at their sales today, almost half of their sales are online, yet here is this magnificent store that they are building that they expect to be extremely profitable and very high productivity, why? Because people come in, there’s the sales representative that shows them a specific product. They sit on the couch, they feel the curtains, they look at the plumbing fixtures or whatever hardware they want to do and they can take it home with them or they can have it delivered to their house the next day from a central inventory point.

So we think that as you look at the evolution of a center, the center is going to continue to do all the things it has done historically, which is provide a terrific, convenient, comparative shopping opportunity at every price point level. But it’s also going to be the place that people want to be, it’s going to be a place for showrooming of product just like I described with Restoration. It’s going to be a true – it will be a place for people to pick up, for people to get deliveries, for people to take back things. It will be a place that people want to be entertained. So, you see food, you see high-quality food, as well as fast food. You see all different types of entertainment coming in centers.

So it’s going to evolve over time as the market requires it to and as we respond to it, and wherever omnichannel or retailing goes, the mall will be a central part of that. The high productivity assets will be a central part of that.

Christy M. McElroy – Citigroup Global Markets Inc.

What has been the biggest change that you’ve instituted in your company over the last year, if any?

Robert S. Taubman

The biggest change. We were focused on execution, Christy. We really are. We got seven projects underway. We got a very full pipeline. Our core is very important. You asked us the investment community asked us to talk more about what we’re doing in the core on the redevelopment side, which we did. I mentioned in my comments that we've got five projects around the country that we had brought to the point where we want to discuss them publicly it's over $40 billion with 8% unlevered return. So, we are focused on our core. We focused on our pipeline. We are focused on execution.

Lisa A. Payne

I guess would add to that because I had a little time to think about it while he had to talk. That's what's great about being the CFO and not CEO. We have actually brought in a tremendous amount of talent into the organization brought in a new head of leasing, we brought in a new Treasurer, we brought in head of technology, who has been a terrific add. Anyway, so we are really focused on our talent development, and we are focused, I think, also on, I would say, ensuring that we have an innovative, creative culture. It's not easy for a real estate company who has assets to be as innovative as, I think, we feel the next ten years are going to need and that requires a lot of leadership at the top to instill the ability to take more risks and take, I mean, we take risks on development and I’m talking risks on new ideas. And so we’ve got to spend a fair amount of time on that as well.

Christy M. McElroy – Citigroup Global Markets Inc.

What do you see over the next five years as the – and this is more of a US-focused question, but what do you see as the greatest opportunity and the greatest risk in retail real estate over the next five years?

Robert S. Taubman

I think that there is an enormous opportunity on the technology side to do a lot of positive things both that your tenants are working on and you are working on, from marketing, to logistics to logistics to – how people park in a projects and how they don’t. There’s so many different

Lisa A. Payne

Binding.

Robert S. Taubman

Yeah.

Lisa A. Payne

Partnering with our retailers to ensure that the bricks-and-mortar are the critical part of their omnichannel strategy. And I think there are tremendous opportunities that we’re starting to see. And I think some of it will be monetized. And I’m not going to answer how much, but I do believe we are going to find ways to monetize technology with our retailers.

Robert S. Taubman

Yes, and all our peers are trying to focus on it as well. We've signed [indiscernible].

Lisa A. Payne

There will be a win-win. Whoever figures it out, we'll all apply it, and it's going to be a win for the whole industry.

Christy M. McElroy – Citigroup Global Markets Inc.

And the greatest risk?

Robert S. Taubman

Well if you are talking about in the industry, I think again, on the flipside [indiscernible].

Lisa A. Payne

Technology.

Robert S. Taubman

Technology I firmly believe that retailers are moving to omnichannel or they won't survive. You have got to – brick-and-mortar – highly productive brick-and-mortar is going to be part of anybody’s platform, for branding, for all kinds of reasons that – you need to excite that customer. You can do it in store in a way you can't do it online the same way. And that branding need is there. You see online people that are now opening hard store – brick motor stores. In both directions, people are recognizing it. So I would say the opportunity, the technology and the risk is technology.

Christy M. McElroy – Citigroup Global Markets Inc.

Okay, I will do the three rapid-fire questions. It’s towards the end.

Robert S. Taubman

I haven’t word with IR yet, so. Here we are.

Christy M. McElroy – Citigroup Global Markets Inc.

All right, well, you will be surprised. What will be same-store NOI growth for your property sector in 2015?

Robert S. Taubman

2015?

Christy M. McElroy – Citigroup Global Markets Inc.

Yes.

Robert S. Taubman

34%.

Christy M. McElroy – Citigroup Global Markets Inc.

If you could snap your fingers and sell a portion of your assets today, with no strings attached, in order to create your ideal portfolio, what percentage would you sell?

Robert S. Taubman

20%.

Christy M. McElroy – Citigroup Global Markets Inc.

Are cap rates for your assets higher or lower one year from today?

Robert S. Taubman

The same.

Christy M. McElroy – Citigroup Global Markets Inc.

Higher or lower one year from today?

Robert S. Taubman

I would say probably for our assets I think in the marketplace lower.

Christy M. McElroy – Citigroup Global Markets Inc.

Okay. Thank you so much, guys.

Robert S. Taubman

Thank you everybody for coming.

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