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Taubman Centers (NYSE:TCO)

Q2 2010 Earnings Call

July 28, 2010 09:00 pm ET

Executives

Barbara Baker - VP, IR

Robert Taubman - Chairman, President and CEO

Lisa Payne - Vice Chairman and CFO

Analysts

David Wigginton - Macquarie Research Equities

Paul Morgan - Morgan Stanley

Jay Habermann - Goldman Sachs

Quentin Velleley - Citi

Michael Bilerman - Citi

Craig Schmidt - Bank of America/Merrill Lynch

Ian Weissman - ISI Group

Ben Yang - Keefe, Bruyette & Woods

Cedrik Lachance - Green Street Advisors

Christy McElroy - UBS

Tayo Okusanya

Operator

Good morning, my name is Tabitha and I will be your conference operator today. At this time, I would like to everyone to the Taubman Centers second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. (Operator Instructions).

Thank you Ms. Baker you may begin your conference.

Barbara Baker

Thank you Tabitha and welcome everyone to Taubman Centers’ second quarter conference call. I’m Barbara Baker, Taubman’s Vice President of Investor Relations. Joining me on the call today are Robert Taubman, our Chairman, President and CEO, and Lisa Payne, our Vice Chairman and Chief Financial Officer. Yesterday we issued our results for the second quarter in our supplemental on information package. Both are available on our website www.taubman.com.

As you know, during this conference call we will be making forward-looking statements within the 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 various risks and uncertainties underlying our forward-looking-statements.

During this call, we will also suggest and discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliation of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release and in our supplemental information. In addition, a replay of the call is provided through a link on the Investor Relations section of our website. For our agenda today first Bobby will be providing an overview of the quarter followed by a discussion of the company’s operating statistics and external growth.

Then Lisa will discuss our financial performance and our balance sheet. Bobby will return to discuss guidance and provide closing comments. Then we will be available for your questions. And with that let me turn the call over to Bobby.

Robert Taubman

Good morning everyone. Thank you Barbara and thank you all for joining us. This was an encouraging quarter. We are delighted to report the continued strength in our tenant sales. We politely lead the industry. Sales per square foot which increased 10.8% in the first quarter continue to surge, up 12.1% in the second quarter. All three months were strong with each month up double digit.

As we said in the press release we are especially pleased that Michigan and Florida continue to lead the sales per square foot increases. In fact Realty Trust and Partridge were our two fastest growing centers each with increases of about 25%. On a trailing 12 month basis this brings us to $523 per square foot moving us closer to our peak of $555 for the calendar year 2007.

Women’s Apparel, which until this year has not shown real strength for several years, did well in the first half. This was led by concepts such as Ann Taylor, J. Jill, and Chico's. Victoria’s Secret and Aerie were standouts in the Women’s Specialty category. Top performing luxury tenants were Louis Vuitton, Coach and Cartier. Family Shoes were also strong with Foot Locker and Skechers up in the double digits.

Electronics was led by Sony and of course Apple with its very successful iPad launch in early April. Home Furnishings was also strong. Pottery Barn, William-Sonoma and Restoration Hardware were all up significantly. We signed some terrific leases. At Beverly, Superdry, an apparel concept from England (inaudible) a trendy, casual dining concept to be located in Center Court and D&G flagship modeled after the prototype in Milan, this 65,000 square foot store would be the first flagship in a mall in US. At Cherry Creek, (inaudible) one of the two new openings in the country now set for August. At Dolphin, Bloomingdale’s outlets, we have only four in the country. At Great Lakes Crossing, four outstanding outlets to open later this year, Banana Republic outlet, Chico's outlet, Polo Ralph Lauren outlet and Taubman Aerie outlet at Sun Valley, Safeway for their new upscale prototype in the former moving space next to the center.

At Willow Bend, Ocean Blue, and a sea food restaurant opening this year. At Shoreview, Rugby which is the newer concept by Ralph Lauren and four new luxury tenants, Miu Miu, Prada, Van Cleef and Dolce & Gabbana. And throughout our portfolio, 16 American Eagle leases, including four of the newest concept stores 77 kids ours will be among the first group of stores to open. We are still trending up now for nine months. Rents are beginning to strengthen. The retails are still sensitive to occupancy costs and are continually negotiating tough challenging ways. Opening rents were $46.55 for the second quarter, that's up from $44.80 in the first quarter.

We continue to believe that our opening rents will improve during 2010. We are confident that we will end the year measurably above 2009 levels of $46.63. Average rents for the quarter were $43.20, that’s down half a percent from last year. For the full year, we expect average rent will be down about 1.5%, that's an improvement from our original guidance of down 2% to 2.5%. Our ending occupancy was 87.9%, 90 basis points below last year. This is consistent with our guidance and we continue to expect to end of the year even with 2009 which was 89.6%.

Our temporary leasing program continues to be strong ending the quarter at 3.5% of tenant area. If we added this number to our permanent occupancy statistics, we would be ending the quarter over 91% occupied. Temporary leasing is becoming more our year round business.

We pursue innovative uses for our space that will provide more income to us and greater convenience for our shoppers by filling merchandize void. F or example, the new Staples Back-to-School Express that just opened at Stanford, it is one of three they are testing this year. Staples is an ideal use as our shoppers cannot buy back the school supplies at the same time they buy the back to school apparel.

During the second quarter only two tenants filed bankruptcy, both small local stores. At this point they are (inaudible) 0.1%. This is one of our lowest recorded numbers for the first half. Our comp centers NOIs excluding lease cancellations income was nearly flat declining only 30 basis points for the quarter.

For the full year, we currently expect our NOI to be down about 2%. Remember about 100 basis points of the decline is due to CAM capital accounting. NOI down 2% is an improvement from our prior guidance of down 2% to 4%. This good news comes from better than anticipated rents, increase percentage rents, better net recoveries and higher sponsorship income. As we slowly move away from the great recession, we are focused on augmenting the company's organic growth. In addition to our growth from US development, which we believe will provide at least a handful of traditional projects over the next 10 years, we are pursuing acquisitions albeit and of course development in Asia.

On acquisitions we believe good opportunities will be scarce and expensive. However, we continue to look for assets where we can add significant value that will be strategic to the rest of our portfolio. As to the outlet business, we believe this is a natural extension of our capabilities. Much of current bases at both Great Lakes Crossing and Dolphin Mall are outlets and in many cases, the leasing executives and retailers are the same for both the outlets and traditional retail divisions. In fact many of our tenants have encouraged us to enter this segment.

Further, as we've analyzed the business we believe it’s quite likely the pool of good development opportunities in this sector will exceed those of traditional malls. We will be disappointed if by the end of 2011 we haven't announced our involvement in at least one or two strong outlet opportunities.

Finally, Asia it is likely that it will be the end of the year before we announce our new President. As I said and many of you have may agree, getting the right person is critical. We have a strong existing team in Asia and are continuing to pursue opportunities in Korea and China. With four prongs of growth, US traditional center development, acquisitions, outlet and Asia, we are confident this diversity of markets and product size will create significant long-term value for our shareholders.

Now, I would like to turn the call over to Lisa. Then I will return at the end of the call for some closing comments.

Lisa Payne

Thank you, Bobby. This quarter our FFO per share was $0.61. Here are the variances from 2009 which are listed on page nine of the supplemental. First, rents, up a penny from last year. This was due to higher percentage rents and greater income from temporary tenants. Net recoveries are unfavorable by $0.015. That’s primarily because the timing of promotional expenses at the center and lower CAM capital spending.

We continue to expect net recoveries for the full year to be down on a year-over-year basis primarily due to reduced CAM capital spending. But net recoveries for 2010 should not be down as much as we originally anticipated. We have been working hard on reducing costs. Now that CAM is fixed in about 50% of our leases significant expense savings will drop to the bottom line. Part of the reason we originally guided to a wide negative NOI range was the uncertainty of whether we could achieve these benefits.

Now, we are confident that we will achieve these savings. Lease cancellation revenue down $0.035. This variance was the result of particularly high collections in the second quarter of 2009. To date, in 2010, we have collected $8.3 million including one large settlement in the first quarter. Our guidance now assumes $11 million for this line item. Other non-operating income favorable by a penny and a half. This was due a land sale gain. The first we have had since 2008. This is consistent with our original guidance when we said that we expected $1 to $2 million of gains this year.

Impairment loss on marketable securities favorable by $0.02. This was entirely due to the write down we recorded in 2009. Interest expense, favorable by $0.015. Average LIBOR rates and outstanding under our lines were both down slightly compared to last year. With the default rate on the loans, the Peer Shops impacted our results unfavorably by $0.025. And finally, deletion from share based compensation is impacting our results unfavorably by $0.015.

Now, turning to our balance sheet, our debt to total market capitalizations stood at 47% quarter end. Our interest coverage was 2.4 times and our fixed charge coverage stood at 1.9 times. It made great progress on our fall 2010 debt maturities, over the past few months the market improved significantly. As a result, we’ve been able to lock in excellent tenure rates and at the same time generate excess proceeds. At Patridge, in May-June we completed a 10-year mortgage financing at an all in rate of 6.25%.

The new non-recourse loan was for $82.5 million versus the $74 million loan previously on the property. Arizona Mills up 50% on property was refinanced in early July at an all in rate of 5.83%. The $175 million 10-year non-recourse loan reduced to pay off the existing 7.9%, $131 million on the property.

This generated about $40 million of excess proceeds that was distributed to the partners. We are currently working on a 10-year non recourse bank loan from MacArthur Center which we hope to close in September. Although the rate isn't lost yet, we currently expect it to be about 6%, with proceeds roughly equal to the current loan amount on the center.

What a change that this is from six months ago, funding sources are looking for quality properties with strong sponsors and bidding aggressively. With interest rates so low, loans from mall offer attractive income vehicle for investors. At The Pier Shop, we continue to work with the special service order transfer for a title but it is moving quite slowly.

In April, as is normal to the process, a mortgage lender filed a lawsuit exercising its right to order the property to be sold at a public auction. We recently received a draft of the settlement agreement and are working diligently through this document. We anticipate this will result in a foreclosure sale of the property, at which time the ownership will be transferred.

At this point, no auction sale has been scheduled. Although we are not funding any cash shortfall, we continue to record the results of operations as well as interest on the loan. The interest is adding default rate of approximately 10%. To the extent that NOI doesn't cover debt service, we have an accrual on our balance sheet. This will increase the gain on extinguishment of debt when title is ultimately transferred.

As we said, timing remains uncertain and it's not in our control. We now anticipate ownership transfer at the end of the third quarter, although it could drag on longer. Keep in mind the Pier unfavorably impacts FFO by slightly more than a $0.01 a month for as long as we own it however it has no impact on our cash. And with that I would like to turn the call back over to Bobby.

Bobby Taubman

Thanks, Lisa. As we said in the release, for the full year 2010 we expect FFO per diluted share to be in the range of $2.65 to $2.75. We are now including nine months to The Pier Shop in this guidance. So effectively we are increasing our guidance by $0.13 on the low end of the range and $0.03 at the top.

In summary, this was another solid quarter. We are increasing our guidance for a number of reasons. More visibility into the second half of the year, sales improvements are expected to result in the higher percentage rent strong resale and sponsorship efforts and CAM cost savings. So with this happy note, we would like to open the call to questions. Tabitha, are you there?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of David Wigginton with Macquarie.

David Wigginton - Macquarie Research Equities

Bobby, you talked a lot about your rents and how the sales has helped to improve, I guess, the outlook for the second half of the year. I guess what I wanted to focus on this morning is how you are reading the conversations that the retailers may have changed as a result of the improvement in sales and you said they are still sensitive to occupancy costs but I would imagine at this point with three quarters strong sales improvement then the leveraged (inaudible) are just starting to shift back in your favor and do you anticipate being able to push up rents any time soon?

Robert Taubman

I think that apparently frankly it’s endemic in all our comments. We are feeling a lot better about where we are.

Sales, clearly are improving. At the beginning of the year we were cautiously optimistic that we would be up 3% to 4% for the year. Today, it could be 80% or more.

And we are clearly getting back to where we were in 2007 and I think retailer expectations are very strong and you can hear it in the red numbers, in the occupancy discussions, in all of the discussions that I think we've given you and that is the reason that the biggest part of the reason that guidance is up.

David Wigginton - Macquarie Research Equities

Right and I guess it is more specifically what about the recess, or the spaces you were assigning (inaudible) last year. I know that you mentioned in previous calls that some of those are going to carry over into 2011 and even in 2012. I mean do you envision a situation where you are able to maybe push the rents up in those spaces higher or sooner now as a result of this or are you locked into those agreements for those time periods.

Robert Taubman

In many of the rent release deals that we made, we are locked in. And that’s we will extend out into 2011 and 2012. But as sales increase and retailers have better expectations, the demand for space goes up and we are nearly 90% occupied as we have suggested at the end of this year.

So we are giving you a point where we really have very good demand for the amount of space vacancy that we have. Since many of the rent releases are also on what we call our termination agreements so yeah and as you have increased demand you can take those guys out more quickly and you will get the higher increase in rent.

David Wigginton - Macquarie Research Equities

Okay so I mean you guy spend, just a final question on this topic here is that, are you experiencing increased demand and with the leases that you are signing it appears that you are so it seems like you have the opportunity to exercise some of those termination agreements here soon?

Robert Taubman

Well, we certainly hope so.

David Wigginton - Macquarie Research Equities

Okay and just moving on to I guess spending and its been well documented, the spending among more fluent consumers has been strong so far this year, is that a trend you expect will continue or would you say what we've seen up to this point is more of a normalization of spending among this cohort of shoppers that will level off in the coming quarters?

Robert Taubman

Well, we have set off through this certain last two years that it was our view is that this was long cyclical pause and not a secular change. And for many reasons we continue to believe that including the tenants like Louis Vuitton and Coach and Cartierare doing very well at this moment in time. So we think that we could be back to our peak volume from 2007 to 555 that we were at in some time in 2011. And that's a combination of the higher end as well as the more moderate tenants. So it's really very broad based, the increases that we are having.

David Wigginton - Macquarie Research Equities

My last question is more of a higher level trend question. Are you starting to see any signs or the shift among shoppers maybe a way from value centers back to full price malls or our consumers still very heavily focused on value?

Robert Taubman

Well, I think there is sort of this barbell where people are shopping at the lower end or shopping at the higher end. But as I said it's pretty broad based in our centers, by geography, by type of asset and more high end versus more value, we are getting very good response. We've announced for our tenants that we are putting in great weight so I think getting very good response at Great Lakes Crossing. We are very; our centers are very dominant in their presence within the market. In Florida as an example part of the reason we think we are doing better there is how better than to our relative basis is simply how dominant these assets are.

When people want to shop they are coming to our shopping centers.

Operator

Your next question comes from the line of Paul Morgan with Morgan Stanley.

Paul Morgan - Morgan Stanley

Have you backed out or tried to back out kind of what the impact of Apple on the sales growth in the quarter with iPad and iPhone?

Robert Taubman

Apple is really having a terrific year and obviously the iPad and now the iPhone are obviously all pushing their sales. But our increases as I said are very broad based even without Apple, they would be very high. And I would also comment that regardless of Apple's individual sales no matter how well they do they are going to have a very minimal impact on our NOI. But we are doing very well even without Apple's increased sales in the second quarter.

Paul Morgan - Morgan Stanley

I guess I am trying to kind of granulate the growth in sales with what you might see as a percentage rent line and is it correct that you are not getting much in the way of percentage rents or something.

Robert Taubman

I don’t want to talk about anybody's individual situation but we get percentage rents from just about very tenant in the shopping center. But we are not in the position to talk about their individual deal with us.

Paul Morgan - Morgan Stanley

There is and this maybe happened more than once but I just saw recently Forever 21 trying to be (inaudible) take part of the Pier space and I know that The Piers is trying to market portions of their stores. Have you seen, I don't know you don't have that many fears but I mean is that going on at your Piers and kind of what do you think about that in terms of competition when your department store is subleasing big chunks of their space to other tenants.

Robert Taubman

Well, you've got to look at each individual asset specifically and we have done a number of things with the locations that have come back to us overtime. We do have I think only four Pier stores in our portfolio and we have not heard specifically about any individual situation like that.

It would not surprise me because Forever 21 has increased the size of their desired space and they have approached us in many ways in our shopping centers to expand their size which we've been able to do in some but not all.

Paul Morgan - Morgan Stanley

Can I just kind of stick with the Forever 21, the number of stores went down by three, is there anything specific that's related Forever 21 there.

Robert Taubman

Actually, I’m not surprised that they went down by three. We may have consolidated for a while Forever 21 or XXI, because they are getting larger. When they get these larger spaces, they tend to consolidate their smaller specialty stores into the larger space. So instead of three individual stores maybe they will have one.

Paul Morgan - Morgan Stanley

Okay, great thanks a lot. Last question just on development generally and kind of how you are really seeing discussion are going for City Creek and then whether kind of the tenure of those discussions you are making you think about opportunities for developments that you had cancelled or redevelopments given the kind of lack of supply from other developers?

Robert Taubman

Well first it’s at Salt Lake City, I mean this is a great project and the retail community is embracing it and we are very pleased with the leasing efforts to date and its opening in spring of '12 and the center is well under construction. You can go on our website and look at the construction progress. As to other centers, we absolutely are looking at various developments that we have spent time on over the years. I don't want to be specific with any one individual asset but we are feeling much better about the possibility of new developments.

Operator

Your next question comes from the line of Jay Habermann of Goldman Sachs.

Jay Habermann - Goldman Sachs

Good morning everyone. Bob, can you comment a bit, you talked about acquisitions, pursuing outlets in obviously Asia but just want to focus on the outlet segment for a minute. Can you talk about the opportunities that you see, do you see this as ground up development or pursuing acquisitions and I guess within that strategy do you see more of value focus or do you think you are going to go for a little bit more of the higher end type Chelsea premium outlet type rent?

Robert Taubman

Well, clearly given our history, we would tend to look for the really strong assets in the category, and also given our history we are also very focused on development. And this again is a very natural extension of our capability, our relationships with the retailers in the same. We think it's very synergistic and it will diversify our product side. And I think that we are very much of the view that we will be able to develop high quality assets here. Acquisitions I think may be few and far between but we will absolutely look at them as we consider our opportunities.

Jay Habermann - Goldman Sachs

And I guess just touching a bit on Asia I mean given the strength of the recovery thus far on the US with the sales up almost 11% in Q1 and 12% the most recent quarter. I am just curious does that in any way sort of may be focus or put less focus on the strategy in Asia?

Robert Taubman

No, I think what you've heard today is we want to find external growth. And we are going to look for them in several ways and we talked about the four prongs of growth. US development which we think will be less on the traditional side as we said we hope to build a handful, the outlets we just talked about, acquisitions are very scarce, there have been very few of them and when they sell there's one that may sell now for the first time a 100% of the asset is going to sell on a very favorable basis slightly.

So, its between US development outlets and acquisitions. We feel Asia really augments what we are doing and provides us another opportunity, set another flow of opportunities to use our capability, to use their capital and build NAV.

Jay Habermann - Goldman Sachs

And just last question can you give us a sense of how July was in terms of sales. And I guess in addition can you just talk about, are you still seeing pressure on retailers just reducing their footprints i.e. store sizes or just total number of stores.

Robert Taubman

Well, first in terms of the July sales it would be only anecdotal. We don't, and tenants don’t even report it until, begin reporting until after 10 days into the next month, so into August. And we get broad anecdotal information that perhaps it’s a little softer but we have no reason to believe that the momentum that we seen won't continue and we did just mention a few minutes ago that we think we could be as high as 8% or even more in terms of sales growth for all of 2010. On the question of downsizing stores, I will refer back earlier to what I said but we really see a lot of retailer expectations that are strong.

And there is demand for space, people want to be in our shopping centers and I think you are hearing it in all those conversation and our statistics.

Operator

Your next question comes from the line of Quentin Velleley with Citi.

Quentin Velleley - Citigroup

Good morning guys I am here with Michael Bilerman, just coming back to the rent related questioning earlier on. I am just curious as to whether you had any actual examples of leases that you have terminated that you had given rent relief to only replace them at higher rents.

Robert Taubman

Well, there are many examples but we just can't talk specifically about an individual situation. But I think we've been very consistent that the rent relief that we contracted for at the end of '08 and through '09 will extend itself in many instances. Where it doesn't, we think that we can replace those tenants and we will likely replace them sooner than we originally anticipated.

We've also said at the rent release requests are coming in, they are almost non-existent at this point, and you know I say non-existent but they are at a normal level. And we do see average rents are better and our opening rents we expect to be at measurably for the whole year. I think there are a number of data points that you can focus on.

Quentin Velleley - Citigroup

And just speaking about those (inaudible) related to and the retail size increases you are seeing in the portfolio, have those tenants been getting increases in right sales at a similar price to the portfolio?

Lisa Payne

I am sorry; could you ask the question again, are you saying the rent release tenant?

Quentin Velleley - Citigroup

Yeah, that sort of basked of tenants, have they been getting the same recovery in retail size as what the rest of the portfolio has the 12% size growth.

Lisa Payne

We don't really bucket our tenants like that and get into that kind of fine analysis. I think what we had said before that we, it wasn't as if we were giving rent releases at 50% of our tenants. It was a fairly small number but when we gave it we gave a pretty significant amount. So not like it was a significant piece of the portfolio, so it's not as if we are analyzing that pool except at least from the rest of the portfolio at this point.

Quentin Velleley - Citigroup

Okay and just lastly I think you mentioned that you've got to gross again in one of your former (inaudible) boxes, Bob do you think that this is a trend that's going to continue in the mall space.

Robert Taubman

Well actually it is going in a moving box but it’s not attached. We said in our comments that it’s near the shopping center. Its actually a residual parcel that sits about I don’t know 100 yards away from the pennies lost and we replaced them in that, it is something that we own, its not a ground lease and we are delighted to have them join the center because they are not actually joining the center but I think next to the center because it does create a separate destination and trip. And it also creates a very good income stream for us.

Do I see it as a trend? Not in the United States, not in the traditional retail centers that we had. It is something that obviously exists in most foreign countries. And you see it obviously in hypermarket concepts like Wal-Mart is a good example or target doing that kind of things but not in the United States.

Quentin Velleley - Citigroup

And Michael Bileman had two quick questions, and just back going back to Apple. How many Apple stores do you have today in the portfolio and sort of total square footage of Apple's presence?

Robert Taubman

There are in roughly two-thirds of our shopping centers, and I would say that on average they are about $5,500 to $6,000 square feet.

Quentin Velleley - Citigroup

And they are doing like north to $5,000 a foot right?

Robert Taubman

We can't talk about any specific tenant Michael.

Quentin Velleley - Citigroup

Second one just in terms of the outlet, do you have any land parcels that you are closed to going under contract on in terms of development. I mean how far down the road I mean you said you want to have something announced by the end of '11 whether that would be acquisition or development. I am just wondering how far down the road are you in terms of on the development side identifying and even potentially optioning land for that.

Robert Taubman

Well if you talk about outlets, we said that we would in fact, we would be disappointed if by the end of 2011 we haven't announced our involvement in at least one if not two projects. That could be optioning land. It could actually be starting construction; the timeline to begin construction on outlet is much accelerated over a traditional center. While we don't have department store anchors that take a long time to negotiate a deal with, you do have key tenants, key specialty tenant, outlet tenants that you want to have to begin, the shopping center leasing program with. Entitlements are much easier. It’s a much smaller amount of land and typically at 30, 40, 50 acres of say at 80 to 100 acres or more. So you can move more rapidly on the outlook side.

On the traditional side, we’ve said that there are a number of projects that stop construction in 2008 that were either under construction already to begin construction, there were nine projects around the United States, two of which were ours. One we went forward with, which was Salt Lake City, the other Sarasota that we actually stopped construction at.

I think you should look at those nine projects as one that us and others are focused on trying get to go forward. And I think it is quite possible that in the next 12 months, 18 months that one or more of those projects will begin certain.

Quentin Velleley - Citigroup

And then specifically on the outlook do you have, I mean how far down the road you are in terms of identifying development parcels for that business.

Robert Taubman

Well, we would have begun to discuss that unless we feel confident that we could deliver on what we are suggesting. And that would mean that we are down the road on a bunch of different things.

Quentin Velleley - Citigroup

And you guys are doing this completely internal and I guess who is heading sort of that aspect of the business right now?

Robert Taubman

As I said, we feel strongly that this is a natural extension of our capabilities. If we felt that it was important to bring somebody in or create some other opportunity or joint venture we've done that many times in the past, and we would do it again.

Quentin Velleley - Citigroup

But for now it's all Taubman.

Robert Taubman

For now yes.

Operator

Your next question comes from line of Craig Schmidt with Bank of America/Merrill Lynch.

Craig Schmidt - Bank of America/Merrill Lynch

When the management had said there was a good opportunity for an outlet center south of Menlo Park I have was just wondered roughly where that would be I mean I know Jackson's Studio is three miles southwest and the Jersey Shore project is 33 miles of the southeast. Where did you sort of see that opportunity?

Robert Taubman

Well, I don't want to talk about any individual market Craig. We think there are a number of opportunities around the country to build out those centers and very high quality ones. There are others, many of our competitors are trying to do the same thing and I don't think it's appropriate to focus on anything at this point that would be (fatal).

Craig Schmidt - Bank of America/Merrill Lynch

Okay and then in the month of June markets in (inaudible) sales sort of pulled back, I know you suggested that your total sales were strong in all three months. Was that also true for (Lux) in the month of June?

Robert Taubman

Well, it was true, at least the three tenants that I mentioned, Louis Vuitton, Coach and Cartier. I can't answer the question specifically because I haven’t looked at it in that fashion. Obviously, we have the numbers but I haven't looked at it in a way of that question.

Craig Schmidt - Bank of America/Merrill Lynch

Okay and the 8% for the full year that suggested you around 4% or 5% in the second half sales gain?

Robert Taubman

The only thing what you have to remember is that in '09 we were down 12 in the first quarter, down 11 in the second quarter. We were down 8 in the third quarter because the Lehman on September 15 anniversary occurred and in those last two weeks of 2009 sales turned up. And then we were up 4%, 3.8% in the fourth quarter of '09. So as you track our increases so far this year we were up 10.8 against the down 12. We were up 12.1 against the down 11. So now we are going to be up against a down 8 and if you think about what the likely increases is even with the momentum it will likely track that kind of number and then if you look at the fourth quarter of '09 up nearly 4%. It’s anybody's guess if the momentum continues, if the economy continues all of the things that need to happen in order to show a roughly 8% up.

We began the year as I said thinking we are cautiously optimistic 3% to 4% and we now believe it's possible we could be at 8% or more. That would suggest since we ended last year at $498 that we will be around $540 a foot, about 3% away from $555 peak that we achieved in '07. So that’s how we are looking at it. But your crystal ball is as good as ours.

Operator

Your next question comes from the line of Ian Weissman with ISI Group.

Ian Weissman - ISI Group

Actually my questions have been answered thank you.

Operator

Your next question comes from the line of Mike Mueller with JPMorgan.

Mike Mueller - JPMorgan

Hi, a few questions, first of all Bob you talked about little bit about temporary occupancies. When you are looking at this year compared to last year do you expect the temporary occupancy level to be notably different than it was last year either higher or lower.

Robert Taubman

I don’t think notably different but it will be higher, we’ve been sort of in the out say broad 3% range. But we said its 3.5% at quarter end. And it is becoming more of a year round business and tenants are finding ways to catch things and it works for us. As we said, it sells merchandize for us and also creates income and new tenants.

We have one right for (inaudible) that was in our view that is now becoming a larger temporary online store. So there's a number of them that are out there. What could you get to, I think it clearly could get the 4% maybe it could get to 5%.

Mike Mueller - JPMorgan

Okay, second you talked about opening rent levels picking up in back half of the year. You obviously have some pretty good visibility on that, can you talk a little bit about, how much is it in I am sure it is hard to pinpoint but how much of it mixed driven based on the space that's actually coming online versus just the rents or bottom line getting better?

Robert Taubman

I think I would answer the bottom line rents are getting better.

Mike Mueller - JPMorgan

Okay and last question going back to the outlets for second. It seems like in the old days before development stopped, you used to talk about bringing online one center a year, one or two centers a year in terms of new development. How would you think about that now if you try to fast forward two or three years and look forward then through the outlets into the mix? So how do you think about the outlet development on top of the traditional mall development?

Robert Taubman

Well, we used to talk about one project a year in the context of trying to find a way to model external growth into the business. Something like a $150 million worth of capital investment a year. It might be lumpy, it might have two one year and not one another year. You might have a $400 million asset one year and $75 million asset the next, getting some opportunity there. As you think about the sort of four prongs of growth as you just focus on US development, Asian development and outlets. From that, we would like to figure out a way on average to invest at least $150 million worth of capital a year. Where it's going to come from and how and really it would be more than that, we could sustain much more than on our balance sheet. We have the capital today to do things. So it really is about finding the right opportunities with the right returns in the right markets. And but what we are trying to show is that we are going to find ways to build our external growth capacity.

Operator

Your next question comes from the line of Ben Yang with Keefe, Bruyette & Woods

Ben Yang - Keefe, Bruyette & Woods

Bobby you mentioned having about 53% of your leases on fixed CAM currently and you have done a tremendous job cutting cost which it helped to offset the decline in NOI but I am curious if retailers are still willing to sign leases with fixed CAM because it seems like they would want to participate in some of your cost saving efforts? Is that the case or not?

Bobby Taubman

Well, I think that the tradeoffs are very clear. We actually are I think the only company out there in our sectors that is willing to negotiate with the tenant either way. They can either have the certainty of fixed CAM and (inaudible) premium which they recognize by not participating in savings. Or they can negotiate a triple net leases they used to in the past.

If they want to take the greater risk then they will go in that direction and possibly have the savings. If they wanted a greater certainty then they will take the fixed and I think that as you can see in the growth of the number of leases in the timeframe that we have been doing this most tenants would prefer to take this certainty but not all.

Lisa Payne

Yeah, I would add that It's very, very high in the percentage of our tenants to our fixed. And we are electing fixed and new leases and I think that’s pretty broad with the industry and I think one of the reasons is they like negotiating a set occupancy cost at the start of the lease. And that’s what they can do with fixed CAM. And they will know what the CAM is they like that certainty and they like knowing that for the next 10 years they have, they know what they are going to have. And I think that far exceeds the potential benefit of a reduced CAM.

Ben Yang - Keefe, Bruyette & Woods

But from your perspective if costs are currently at barebones level does it make more sense for you to do fewer (inaudible) deals because those tenants can share in higher CAM cost down the road because it seems that that could be a drag on NOI growth as these costs start to rise again.

Lisa Payne

I don’t think we are cutting, we are actually very careful, and I don’t know I can’t speak to my our peers. We’ve been very careful in the way we are cutting the cost that it is a sustainable cost structure. And I would say it is not easy to just suddenly flip, when a tenant has decided in their business to go fixed and they are doing that with Simon and Partridge and Todman, you can’t suddenly say well its now the time to go next. So its really a trend that has happened and we are comfortable with it because we feel we price it appropriately at the start of the lease.

Robert Taubman

At remember that we are pricing every single year the rolling of every group of leases that year. So that.

Lisa Payne

We are not fixing them.

Robert Taubman

We are not fixing the whole portfolio and taking the risk. The risk is just in assets as is the fixed CAM amount by centers. And in the large sample of leases the diversity of that risk is tremendous to the landlord.

Ben Yang - Keefe, Bruyette & Woods

Okay got it and then final question, you saw some lender in the quarter, but your peripheral rent balance went up. Is that just related to the supermarket development you mentioned earlier or are there other re-development type opportunities at some of your other centers.

Lisa Payne

There was a piece of our Atlanta project that is going to be sold. Its not needed for the center if we decided to, if we are able to go forward. That got transferred last quarter into our land sales portfolio. I will prefer a land balance so that's the addition. What you are seeing is the addition of the Atlanta land.

Operator

Your next question comes from the line of Cedrik Lachance with Green Street Advisors

Cedrik Lachance - Green Street Advisors

Thank you. Just returning to development a little bit, looking at the City Creek development, could you give me more details as to how your yield structure is set there, is it based on the rents you will achieve or is it based on any other metric?

Robert Taubman

We've said in the past that our cost, our beneficial cost in the projects will be $76 million and against that dollar amount we expect unlevered returns of 11% to 12%. It's a very complicated participating ground lease that we have with the church and I think at the end of the day what the simplistic sort of description that we have given the 11% to 12% on $76 million absolutely describes what the economic return value is of this project, is to our shareholders.

Cedrik Lachance - Green Street Advisors

Can you give me sense of what may change it upward or downward? Are there any particular aspects of the project that could result to that yield changing?

Robert Taubman

Well, obviously higher rents, coming in on schedule with costs. There's participation on the cost side. There's future participation on the rent side to both the church and us, but it's down the road and I think if I come back to just simplistically the $76 million I think that’s really the way to focus on it. And even if we have significant growth above the initial yield let's say that the initial yield comes in at the 11% to 12% range that even significant growth on $76 million is not going to overall impact our numbers dramatically.

Cedrik Lachance - Green Street Advisors

In regards to the announcement you made a few months back for the international marketplace in the Hawaii, can you give us a little more details on that project, your timeline, the form of your participation?

Robert Taubman

I think what we have said publicly is as much as we can say at this point which is that we are going to spend the next working with the Queen Emma Trust as our partner in this project trying to figure out what is the best and high use of that incredible, unbelievable piece of graph.

So I think at this moment that is at the most that we can say.

Cedrik Lachance - Green Street Advisors

Okay and just going back to operating fundamentals I mean looking at the sales growth which of course is sizeable at this point but the occupancy gains are not there yet. I am trying to reconcile how sales have rebounded so much but occupancy remains substantially below the peak from a couple of years ago. And what do we see at this point, we have retailers that are doing well in their space but unwilling to get more square footage or do you have more of the weaker retailers are falling away and occupancy gains might be later down the road. Can you help me reconcile basically the difference between the large sales gains and the occupancy that seems to be somewhat flattish?

Robert Taubman

Well, first of all we’ve only discussed and in our industry and within this property type the sales are trend and the actual rent income and occupancy, our occupancy and income gains that come later are always trailing.

And typically it is about a two year trailing cycle, and real estate generically tends to trail all property types, tends to trail about two years. I would also comment that we are not dramatically offering off our occupancy peak. We are only about 200 basis points off where our occupancy peaks were and these things tend to seasonal and you can look over long periods of time in our reported numbers that you can see that seasonality.

So in the context of our peak its probably around 200 basis points. At this point of the cycle we are actually very, very pleased with where we are and feel we are coming through this much better relative to our peers. And I think I would also point to the tills as well. Some of our competitors actually include tills in their ending occupancy statistics and if we took 3.5% we said it would be over 91%.

Lisa Payne

I do think also occupancy trails it takes a while to negotiate a leave to get the tenant moved in etc. So the sales growth in this six months has frankly even exceeded our expectations and we are very positive about that. But it is not as if we are going to see that same instant move on occupancy.

Cedrik Lachance - Green Street Advisors

Okay, maybe just one final question with regards to Regency Square with the refinancing coming next year. Do you have any intention at this point to refinance the property or are you still thinking about sending the keys back.

Lisa Payne

We are continuing to lease and operate the center. As you know Forever 21 has opened up there very strongly and we’ve opened fairly large tenant Charming Charlie’s that a nearly 10,000 square foot tenant. So there is no plan at this point to default and we are continuing to operate the center.

Operator

Your next question comes from the line of Christy McElroy with UBS

Christy McElroy - UBS

Hey, good morning. With regard to your predevelopment cost in the quarter, can you breakout how much of that came from Asia versus the US and are you now incurring the predevelopment expenses at the Waikiki projects?

Robert Taubman

To the extent that we are incurring expenses and we are in Waikiki that would be all part of the reported number that we show for predevelopment expense, and we have not broken out those numbers for some time Christy and we reported as one number.

Christy McElroy - UBS

Okay, I mean I think previously we were to assume that it was mostly from Asia but now that there's sort of a US component, I mean it would be helpful in the future.

Lisa Payne

Christy I want to interrupt you, it was never all Asia, in fact if anything I think we said it was fairly balanced at one point. But we probably, we view our predevelopment as a bucket of cost of investing in external growth and we won't be breaking it out. But I also didn't want you to think that it used to all Asia. It's always been a mix of both the US and Asia.

Christy McElroy - UBS

Okay, can you provide a little bit more color specifically on what you are spending most of your time in Asia on at this point and Bobby how much time are you spending over there these days?

Robert Taubman

Well, we have been there a number of times this year. We have a number of at least probably two more trips this year planned. We are spending our time obviously making a decision on the Taubman Asia President. Also helping lead more on a day to day basis, our senior group there and its almost a 100% focus on development as opposed to acquisitions when we were there. We also as I said my comments are really focused on Korea and on China and those are the two places where we spend our time.

Christy McElroy - UBS

Okay, this is sort of a follow-up from a prior question. I think that you said that you raised your expectations for percentage rents in your new guidance. How much of that increase is coming from those rent tenants that probably now have lower sales breakpoints?

Lisa Payne

I would think very, very, I would be surprised if we are getting any percentage rents from rent released tenants.

Christy McElroy - UBS

Okay, and then lastly now that all of your preferred is redeemable any plans to call those issues given that the coupons are pretty high relative to where you could issue that today?

Lisa Payne

We always are looking at the preferred, I think yes versus debt. Its obviously better but the preferred are for us a terrific source of capital because all of our assets well we have the secured debts we are doing from unencumbered assets but we are a secured debt borrower so the preferred are truly subordinated and virtually like equity and when we look at the markets for preferred there is not enough savings at this point to refinance them with additional preferred. But we continue to look at, and if with the cost of doing such a transaction if it makes sense we would love to do it. But at this point we don’t see it.

Operator

Your next question comes from the line of Tayo Okusanya.

Tayo Okusanya

Just two quick questions, first one in regards to the releasing spread per square foot its given on a 12-month basis $0.91 as 2Q ’10. Since it is the new way you report the numbers could you give us a sense of what it will look like just on a three-month basis the way you used to report it before.

Lisa Payne

Unfortunately, we've gone through the trailing 12. We really don’t want to report both. We thinking the trailing 12 is actually more relevant because it’s a larger pool size. I will say the quarterly numbers were very, very strong and would look great. But I don’t want to get into a system where we are disclosing both.

And the reality is even though the quarter looks it was on very small pool size which is always our point with the statistics. And its trailing 12 months is at least a rational pull size to look at a trend. But the number was very strong which is why our trailing 12 is looking better.

Tayo Okusanya

Okay that makes sense Lisa thank you and then Bobby although most of the retail sectors that are within your malls are all doing well, are there any particular retail sectors you are somewhat surprised about that did not do as well as you expected.

Robert Taubman

That did not do as well as expected, the men’s category is a smaller category in our centers these days, they didn’t do as well. And some of the junior apparel tenants didn’t do as well. But we are very pleased as we said with women’s apparel and women’s specialty. Shoes have been very strong, especially family shoes. Then really across the board, food specialty was good. The electronics we talked about, sporting goods was good, home furnishings, we are delighted to see home furnishings. That really says something about economy even a little better. And the first half of the year was very good. So it really is across the board.

Operator

(Operator Instructions) Yes, sir, at this there are no question. Do you have any closing remarks.

Robert Taubman

Just thank you everybody for joining our call. We are delighted with our sales and completed our financing and are comp NOI looks better and it’s good to raise guidance. So thank you all for joining us. We will be seeing you soon. Bye, bye.

Operator

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

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Source: Taubman Centers Q2 2010 Earnings Call Transcript
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