Taubman Centers' (TCO) CEO Robert Taubman on Q2 2014 Results - Earnings Call Transcript

Jul.31.14 | About: Taubman Centers, (TCO)

Taubman Centers, Inc. (NYSE:TCO)

Q2 2014 Earnings Conference Call

July 31, 2014 11:00 AM ET

Executives

Barbara Baker – VP, Corporate Affairs and Investor Relations

Robert Taubman – Chairman, President and CEO

Lisa Payne – Vice Chairman and CFO

Analysts

Vincent Chao – Deutsche Bank

Tayo Okusanya – Jefferies

Dan Oppenheim – Credit Suisse

Christine McElroy – Citi

Craig Schmidt – Bank of America

Alexander Goldfarb – Sandler O’Neill

Ross Nussbaum – UBS Securities

Michael Mueller – JPMorgan

Haendel St. Juste – Morgan Stanley

D.J. Busch – Green Street Advisors

Todd Thomas – KeyBanc Capital Markets

Operator

Thank you for holding, and welcome to the Taubman Centers’ Second Quarter 2014 Earnings Conference Call. The call will begin with prepared remarks and then we will open up the line for 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. [Operator Instructions]

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

Barbara Baker

Thank you operator, and welcome to our second quarter conference call everyone. 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 discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release and in our supplemental information.

In addition, a replay of the call is provided through a link on the Investor Relations section of 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 an opportunity to ask a question.

And now, let me turn over the call to Bobby.

Robert Taubman

Thanks Barbara, and good morning everyone. Yesterday we released our results for the second quarter of 2014. FFO was up 6.7%. Adjusted FFO was up 14.7% Comp NOI for the quarter was solid. We were up 4.5% excluding lease cancellation income. During the quarter we also announced an agreement to sell a portfolio of seven malls to Starwood Capital Group. The transactions expected to close in the fourth quarter.

We’ve included statistics for all centers in the supplemental, but in this call I’m going to focus on the operating statistics for the post sale portfolio. Comp centre NOI excluding these cancellation incomes for the remaining portfolio was up 4.6%. We saw strong gains in average rent per square foot.

For the second quarter rents were $60.88 up 5.3% over last year, trailing 12 month releasing spreads were very strong at 23%. Occupancy declined 1% about half was a large 53,000 square foot single tenant in one centre that continues to pay rent through the end of the year.

The remainder was a combination of tenants that had been struggling near bankruptcy or for a variety of reason as determined to discontinue their retail operations.

Stores such as Love Culture, Juicy Couture, Sony and Coldwater Creek have left or are leaving the mall. With nearly every store we’re getting back a good location and a great mall.

We’ve already identified replacement tenants for many of the spaces. So we see it as an opportunity with tenant, with better merchandising and higher rents.

However inevitably there are timing issues with occupancy and when income growth occurs, but at 91.6% occupied 93.8% including temporary tenants, we remain near all time highs for the second quarter. Trailing 12 month mall tenant sales per square foot in the post sale portfolio, we’re $806 per square foot down 0.7%.

For the second quarter sales were down 1.2%. The quarter stated off with a good April, followed by late Easter. We had a decent May the port things tapered off in June. As we look at our categories, the story that we told in the first quarter continues.

Home furnishings, jewelry, duty and food remain strong. Teen retailers continue to struggle as does unisex apparel, juniors and electronics. In fact excluding Apple, our sale strength for both the quarter and 12 month trailing were positive.

Results winter data were 200 basis points better for the quarter and over 100 basis points better for the trailing 12 months.

When we announced the sale for Starwood a number of you asked for us to provide information on our development returns on the six assets developed over the last 15 years included in this portfolio. As the sale price, the levered and unlevered IORs were 13.4% and 9.5% respectively.

Solid returns and certainly above our cost of capital during this period. However these are just a subset of the development program that we’ve repeatedly shown has generated very strong returns. When you include just one more asset International Plaza, which we sold a 49.9% interest in early this year, and also developed during this timeframe our levered and unlevered IRRs increased to 15.6% and 11.2% respectively, but that’s still just part of the story.

Keep in mind we also developed Dolphin and Millenia to the nation’s best shopping centers during this period. When you include these two, our levered and unlevered IRRs are 20.5% and 15

And finally, if you look at the Investor Presentation on our website on page 7, we’ve done a slightly different analysis looking at the development business as a whole since 2001. This one does not include MacArthur’s since it opened in 1999, but it does include Chesterfield as well as all predevelopment expense and write-offs including Oyster Bay.

Using a 5% cap rate, our levered and un-levered IRRs were 21% and 16%. I know that’s a lot of numbers. So please feel free to speak with Barba, Ryan or Lisa and they’ll be happy to walk you through each of the analysis. As we repaired our next group of centers over the next three years, this track record gives us confidence that the value created by these projects, these new projects, will materially increase our growth.

So let’s talk about those new projects. The opening of University Town Center in Sarasota, Florida is just around the corner. We’re open to shoppers at 10 am on October 16th. Construction to centre is nearly complete; it will be over 90% leased till opening. And we’re on target for our budgeted cost of $315 million and returns of 8% to 8.5%.

As a reminder, we’re 50% owners of the project.

It’s the first regional mall shopping centre built in the market in 35 years. Sarasota has about 1.2 million people and nearly 5 million tourists a year. The market is tremendously underserved when it comes to better retail offerings, and there is a void for a dominant fashion shopping destination.

The mall at University Town Center will fill that void; it will be anchored by Dillard’s, Macy’s and Saks and features over 100 stores and restaurants. All of the restaurants and over half the stores will be unique in the market.

Located at I-75 in University Parkway, the area is most heavily traffic interchange, the centre will clearly be the premier shopping and dining destination in Sarasota and its surrounding communities.

We’re very excited for the opening, and invite you to come visit our newest property. Construction continues at the mall at San Juan, the building shell is 80% complete and anticipated to be finished in early September. We remain on budget and continue to believe we’ll earn a return of 7.3 quarters to 8%. Leasing is progressing as well.

Today, approximately eight months away from opening, we are at the same point we were with Sarasota, eight months ahead of its opening.

Moving to international marketplace in Hawaii, we’re under construction and things are moving along nicely. Initial retailer response has been tremendous, as we’ve said previously we believe this will be one of our most productive centers.

Finally in the US, our redevelopment program is on track. We remind you we have five centers with a total invest of $265 million and returns in the 7.5% to 8% range.

In Asia, we continue with construction and leasing of all three projects. We’ve also made good headway on financings both in China and in Korea. We’re targeting to have committed facilities arranged by the end of the year for each project.

Now before I turn the call over to Lisa, I’d like to mention a recent study completed by A.T. Kearney which we and other of our peers sponsored.

The study accessed the behaviors and preferences of shoppers, as well as the importance of traditional retail. A.T. Kearney concluded that physical stores are clearly customer’s preferred shopping channel. The study solidified that brick and mortar is the foundation of our new channel retailing and a place where the most significant consumer retailer value continues and will continue to be created.

I encourage you all to read the report; it’s available on A.T. Kearney website at atkearney.com as well as on our own Taubman.com.

Now I’ll turn the call over to Lisa and I’ll return with some closing comments.

Lisa Payne

Thanks Bobby. This quarter our FFO per share was $0.80 up 6.7% included in this quarter’s results are $0.6.5 from costs incurred related to the expected sale of seven centers to Starwood. This includes charges for a discontinuation of hedge accounting on the interest rates swap previously designated to hedge the MacArthur loans.

Excluding these items, our adjusted FFO per share was $0.86, 14.7% better than our second quarter of 2013 FFO of $0.75. Here are the items that most impacted our year-over-year results and are listed on page 11 of the supplemental. First rents up $4.05 from the prior year from increased rents per square foot in our centers.

Net recoveries were favorable by $0.1.5 a result of higher cam and promo revenues.

Next, lease cancellation income which was favorable by $0.3.5 this was largely the result of a national tenant that is discontinuing its retail operations. Other operating expense, favorable by $0.2 primarily a result of a greater capitalized cost in Asia and lower U.S. predevelopment expense, this is partially offset by an increase in bad debt.

General and administrative expense was favorable by $0.01. Interest expense was favorable by $0.03, a result of numerous items including interest savings from the payoff of our loans on Beverly Center and Stony Point.

Also our loan on the mall at Green Hills is now floating at favorable rate. And then finally the impact of our first quarter dispositions and non-comparable centers affected our results unfavorably by $0.4.5. The majority of this is due to the dispositions of Arizona mills and our 49.9% interest in International Plaza.

Now before I turn the call back to Bobby I’ll discuss our key guidance measures for all centers which includes the full year of operations for assets being sold to Starwood.

Our original guidance assumed comparable centre NOI excluding lease cancellation income to be up about 3% for the year.

However if sales persist at their current pace percentage rent will be impacted and our original projection of 3% could be challenged.

This impact could be as much as 50 basis points. Regarding occupancy given the level of unexpected closings including bankruptcies we now think we will end the year a 100 basis points to 150 basis points lower than 2013 in permanent occupancy.

We do expect that this occupancy end NOI impact will be lessened by temporary inline tenants. As Bobby said these are generally very well located stores and in excellent centers. We expect a number of them will be filled by temporary tenants by year end.

And in 2015 the majority of these spaces will be filled with permanent tenants at significantly better rent. We now continue to expect our quarterly run rate to be between $12 and $13 million for the rest of the year.

We’re now estimating our share of U.S. and Asia predevelopment expenses will be lower at $5 million to $6 million for the year as we focus on the execution of our existing development projects particularly in Asia.

Lease cancellation income is difficult to predict. We now expect our share will be about $5 million.

And then lastly we now expect net revenues from U.S. and Asia third-party management leasing and development services to be between $5 million and $6 million.

Now I’ll turn the call back to Bobby.

Robert Taubman

Thanks Lisa. We’re very pleased with the quarter as we have successfully initiated a significant transaction that further demonstrates our ongoing strategy to recycle capital and grow our business with the highest quality assets and selective development. We are all looking forward to the opening of Sarasota which will be a clear winner. As I said we welcome you all at the opening.

So let’s open the call to questions. As Barbara said please limit your questions to two. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And your first quarter comes from the line of Vincent Chao from Deutsche Bank.

Vincent Chao – Deutsche Bank

Just wanted to touch base on the commentary about the bad debt expense and the occupancy, the declines expected here. And just curious we heard about a few – that you alluded to in your comments but just curious what the wash looks like today and how much additional fallout are you really expecting here in the back half?

Lisa Payne

I would say that these two Love Culture and Coldwater Creek were very significant numbers and obviously we always do have a watch list. I don’t think there is in my view any large ones looming that have that significant of one, but clearly there are continually to be some on our watch list that we could have some unexpected closings between now and the end of the year.

I’d also mention even with our bad debt increase, it’s still very low versus our many, many parts of our history.

Robert Taubman

And just generically Vincent on bankruptcies I think its 1.4% as we track, we’ve been tracking them since we’ve been a public company. And we look at the number of leases that go into bankruptcy because sometimes they don’t close, sometimes they do close. It gets liquidated all different kinds of things happen, but this is something that we put in our filings.

So through the first half of the year, we’ve had 1.4% of our leases going to bankruptcy. So historically for the full year it’s been anywhere from 0.5% to 4.5% of the leases that go into bankruptcy. Usually the first half of the year is about 60% on average again over many years. And the second half is about 40%, so if it works to historical norms that 1.4 will end up being something like 2.5% of the leases will end up in bankruptcy. That doesn’t mean that 2.5% of the stores will close.

In this case Love Culture’s closing its stores; Coldwater Creek is closing its stores. And actually the Love Culture bankruptcy auction is today. So we’ll actually know later today exactly what happens because someone may still come in and operate some of the stores.

So, but again its well within the stores norms, on the other hand we’ve been at the very strong occupancies, and so we should be able to lease these spaces fairly rapidly in the coming months.

Vincent Chao – Deutsche Bank

Okay. Thanks for that. And just, wanted to go back to your comments on sales which were trending lower throughout the quarter, it sounds like. Just curious what the initial take is on July?

Robert Taubman

Well we don’t have much anecdotal other than when you read. You can read from specialty store chains. And you’ve got to remember when you look at sales, we have been copying as an industry, but in our company we’ve been copying at very strong numbers.

We had 17 quarters in a row, which is four plus years of very strong increases through the end of ‘13. Then obviously we had the weather issues that we’re in the first quarter. So we did trend flat to down, and as we said we were actually positive excluding Apple. And you can see that with the spreads the leasing activity is very strong and the demand for space is good. So, even though there’s this six month period where sales have been a little softer, the tenant demand is still very good.

Vincent Chao – Deutsche Bank

Good. Thank you.

Operator

Your next question comes from the line of Tayo Okusanya from Jefferies.

Tayo Okusanya – Jefferies

Lisa I just had some questions around guidance, when I look at all your new guidance assumptions, it seems like a lot of guidance assumptions are coming down. You have dilution from the asset sales in fourth quarter, but yet the guidance number has still stayed the same versus the number you gave during the fourth quarter earnings call. So I’m just kind of trying to understand what the difference is, that keeps guidance basically flat just giving all this additional pressure on the numbers.

Lisa Payne

Well first of all I want to reiterate what I said on the call, which is the guidance numbers we continue to give is for 100% of the portfolio. We don’t know the timing of the sale. Therefore we are not giving updated guidance with a – and we don’t have use of proceeds firmly established. So the guidance that has remained, there’s obviously does not have any dilution from the sell.

And when you said, we did have, we did suggest that occupancy is likely going to be impacted, but we believe we’re going to be able to fill these contemporary tenants. NOI growth as we indicated could be challenged, but there’s a range of what’s going to happen in sales within our guidance. We do have a $0.10 range and I also mentioned that certain of our expense lines are actually coming in on predevelopment particularly that we’re saving money. And lease cancellation income is actually going to be higher.

So there’s a lot of pluses and minuses. And with that range we feel very comfortable that it does encompass the ability for us to hit those numbers.

Tayo Okusanya – Jefferies

Great. Thank you very much.

Operator

Your next question comes from the line of Dan Oppenheim from Credit Suisse.

Dan Oppenheim – Credit Suisse

So wondering about the comments in terms of the lower occupancy at year end and then filling some with temporary tenants. Wondering what the thought is there in terms of just strategically filling versus just looking to get permanent tenants in place for the spaces either later this year or into ‘15. How much you’d think you would fill temporary versus just trying to fill that on a permanent basis?

Robert Taubman

Well I mean obviously you’re always going to fill with permanent tenants when you have the right tenant. The temporary is in fact meant to be temporary. Like Coldwater Creek is an example, we think we’ve already leased all of them as temporary tenants through the end of this year. But we would like to see permanent tenants come in there. We are consciously pushing for higher rents. I think you would start to see that in our spreads, hopefully you’ll see it in quarters going forward.

And we believe that with a very selective high quality portfolio like ours, that’s exactly what we ought to be doing. So we’ve got good occupancies, in the interim we’ll fill it with temporary tenants until we get the right tenants at the right rents.

Lisa Payne

I would just add that even if our leasing people who are right now actively negotiating for the right tenants in that space to maximize rents and to maximize the best merchandise opportunity. It may take until we can negotiate the lease, get the terms we want. It could take four to six months, well that will take you past Christmas.

We decide, let’s put in a temporary through Christmas, get a lot of income and then allow the new tenants to begin and finish their construction of the new store etcetera. It’s really a frictional vacancy opportunity to fill in income during that time.

Dan Oppenheim – Credit Suisse

Got it. Okay and then related to that at a count of 100 to150 basis points lower occupancy, you’re saying you’re still monitoring some tenants. Is that including an assumption for further tenant bankruptcies or is that based on what has occurred to date?

Lisa Payne

I think it’s mostly what’s occurred to date, there’s a modest amount. We do tend to see these closings happening, unexpected closings happening more in the first half anyway obviously if people get, if these retailers can make it to Christmas they’re going to want to have a Christmas holiday. So we have a little bit of buffering there but it’s primarily what’s done year-to-date.

Dan Oppenheim – Credit Suisse

Great. Thank you.

Operator

Your next question comes from the line of Christine McElroy from Citi.

Christine McElroy – Citi

Hi guys, just in regards to the sale of the seven assets to start with. Can you talk a little bit about, do you have a specific timing within the fourth quarter of when that deal should close. And also what are your plans in terms of near term use of proceeds. So how should we expect 2015 to kind of play out, close the deal from a source and usage perspective?

Robert Taubman

Christine I don’t think we can talk specifically as to the timing in the fourth quarter. It’ll get done when it gets done. We have consents that we’re working on – financing consents and the like, they’re working on their financing packages and all that stuff, but, we both believe that it is very likely to close in the fourth quarter of this year.

As far as use of proceeds, what we said very clearly is that we would like to like to find a 10:31 exchange opportunity, and if we don’t we’ll do a special dividend.

We are not going to reach for something that is not strategic within our portfolio. We worked hard to have the high quality portfolio that we will have wholesale and we’ve got terrific projects in the development pipeline both here and in Asia, and we are now calling out balance sheets in terrific shape.

We don’t have to – we don’t have to reach, we want to find the right assets to stick within our portfolio or we will make a special distribution.

Christine McElroy – Citi

Are there any other assets beyond ‘07 that you had potentially sell to either Starwood or another buyer, should we expect to see any additional dispositions potentially over the next six months or so?

Robert Taubman

Christy, generically the answer is absolutely no. It is out strategy, we’ve talked about it continuously to recycle low productivity assets in new investments that we believe are going to create significant NAV, and we are going to do that. We will do that over time, so I say no and that’s where we are at.

Christine McElroy – Citi

Thanks Bobby.

Operator

The next question comes from the line of Craig Schmidt of Bank of America.

Craig Schmidt – Bank of America

Great. I had a question on the completion date of mall at Green Hills of 2018, is the timing something that self sides your control or – why would you extend that completion date so far out?

Robert Taubman

Well, we are actually going through a department store and when you go through a department store to make that something like to happen. You have to build the store, don’t have to, want to go out of business, so you have to build their store first, and build all of the parking and everything that they’re going to need, during that interim period and then you can start building the deck. So, I mean, we start building the malls aspects. So, we’ve done this in a number of locations over the years. It typically takes about three years and this event is going to take close to three years.

Craig Schmidt – Bank of America

Okay. Great. And then is – did you expect that you’ll give the leasing update on Puerto Rico in the next earnings call?

Robert Taubman

Yes, we do expect that we’ll give you some leasing update as we did at Sarasota. Basically we are about five months out with Sarasota and we’ll do the same thing likely in Puerto Rico.

Craig Schmidt – Bank of America

Okay. Thank you.

Operator

Your next question comes from the line of Alexander Goldfarb from Sandler O’Neill.

Alexander Goldfarb – Sandler O’Neill

Two questions. First, Bobby I certainly appreciate your comments on the development returns, the internal IRRs for the sale properties, is – as you look towards development, is it always sort of this way where you get a few just blow out successes and then others that don’t perform as well or in your view as you guys have done one more development there’s a way to sort of cut down on the ones that don’t have the best IRRs and really only focus on the top IRRs? Is that possible or is that just by the way a development, it’s always sort of a – some do really well and others, not so much?

Lisa Payne

By the way – this is Lisa obviously. I’m going to led by the answer, but I do want to just clarify when we gave you the IRRs for all the Starwood Assets that we’re selling some within those are really good and some maybe not so good. So, I wouldn’t want you to think that – so frankly when you look at our whole assets the ones we’ve built since 2001, it isn’t just a couple of barn burgers.

There’s actually couple of barn burgers and then there’s a bunch that are really good, and then maybe one or two that weren’t so good. But I don’t want, I wouldn’t want us because we put all those seven together. Those are, there are some very, very, good returns, quite happy with the returns we had on a quite a few of those assets. So Bobby…

Robert Taubman

I mean look, it is a little bit like private equity, okay. You just don’t – you don’t know absolutely you can do all the projections, all the market analysis. You can talk to tenants beforehand, you know who your anchor stores are, you know who your competition is, you can do every analysis you want, but you can’t predict for everything that is going to happen in the marketplace at any given point in time, and, so it is a little bit like private equity.

You do everything you can to mitigate risk, in every single one of these projects, and you do end up with a variety and range of pro forma’s but at the end of the day we’re looking for assets that as we talked about that, that stabilization are going to be around at least 8% on an un-levered basis, and stabilization of some assets may take a few years longer, but if you can get to that level, you’re going to make money whether interest rates are low, whether interest rates are high you’re going to end up making money because overtime these kinds of assets that we are building with very predictable income streams have proven to be very valuable and with a very low cap rate.

I think you also have to look at we’re talking about a 15-year period of time. Fifteen years is a long time to look at when you are talking about these kinds of IRRs, these kinds of return. And depending on when you start, when you don’t start, which asset you’re looking at one point of time, why you guys were looking at book, you would knowing sort of the cash flows that were occurring over long periods of year.

So, it is – we’re very proud of the returns that we have achieved on the fixed assets that we are selling to Starwood. We think they are very solid assets and that’s when you include IP and Millennia and Dolphin three of the best malls in the United Sates, you get much higher, but you also can include them in the thought process either, and the Investor Presentation on page 7 actually includes everything, all the write-offs, all the predevelopment expense, everything. And that really gives you a snapshot of what development business is and what we believe we will going forward for the new assets that we have under construction.

Alexander Goldfarb – Sandler O’Neill

Okay. And then the second question on is on your re-leasing spread the 23%, is that high or we should expect more maybe mid to upper teens, and the second part is, you mentioned a number of retail categories or retailers who are struggling, but obviously still are tenants in your malls, are you getting those sorts of re-leasing spreads out of those, so those retailers who are struggling are still committing to be – to pay the rent enough, started to stay in the malls or are the leasing spreads driven by the stronger tenants for these struggling tenants or struggling categories you mentioned are getting – are paying those same re-leasing spreads?

Robert Taubman

Well there is a lot of questions in there. Leasing spreads are going to be valuable. We think that mid teens is very, very healthy, 20% plus is extremely strong. We really focus on average rent, an average rent, this quarter was up 5.3%, 5.2% year-to-date because when you look at the average rent growth that’s going to go down like confidence it’s going to drop to bottom-line. And that’s what really shows sort of a healthy portfolio.

But, clearly when we talk about these tenants that are in trouble right now, you take Love Culture as an example. I think our rents were in the, around 50, 55 bucks per square foot, on average in the whole of the portfolio. And these are larger stores. So, I think we had about a 125,000 square feet of Love Culture in 12 stores in the portfolio. So that’s roughly 10,000 square feet. If you look at those shopping centers, those shopping centers are in terms of new stores are averaging close to $100 a foot.

Now I can’t – now those are gross numbers, now I can’t – I can’t tell you that in a 10,000 square foot store even though at a good location that you’re going to get a $100 rent. I wouldn’t assume that we would. So, it’s something in between, but is there a good rent spread over those locations?

Yes, depending on the merchandizing and depending on what you put in there, obviously it’s a big store in a good mall you’re going to try to good merchant in there, it’s going to make a destination trip for customer. So we will see where the rents are, but I think they are going to be higher than the Love Cultures were, quite likely they would be higher than where Love Culture was.

Lisa Payne

Yeah I just want to add – I want to emphasize our statistic and all of us do their statistic differently we are doing the statistic as we think about it of what’s impacting NOI in the quarter. So it is whatever closes in the quarter and whatever opens in the quarter. So it isn’t the same space so it wouldn’t really even look at a, one of these weaker tenants likely when their renewal comes. If they are not doing well they’re unlikely going to pay the kind of rent we’re going to want.

And so there won’t even an opening rent. They’ll in the closing rent. But I just want to reemphasize our spread is whatever opens and whatever closes. So it is absolutely what is driving NOI growth in that quarter.

Alexander Goldfarb – Sandler O’Neill

Thank you.

Operator

Your next question comes from the line of Ross Nussbaum from UBS Securities.

Ross Nussbaum – UBS Securities

Thanks. Good morning everyone. Bobby on the acquisition front do you have any papers being exchanged, any NOIs, contracts, serious negotiations. Is there anything you can sort of update us on versus the last strategy call you had?

Robert Taubman

No we can’t update you beyond what we’ve told you in terms of – I’m sorry the question was on?

Lisa Payne

New acquisitions.

Robert Taubman

Yeah from 31 right, right okay. So the – no I can’t update you. We were having a lots of conversations with a lot of different owners of good assets. But we don’t have anything identified at this moment in time we’re into contracts.

Ross Nussbaum – UBS Securities

Lisa you mentioned on Asia, I think you mentioned that G&A expense was going to be lower in the back half of the year as you focused on existing projects. I just want to make sure I understood that comment. Are you suggesting there is layoffs in Asia or that you’re not spending as much time and money on pursuing future project. Can you just clarify that comment? Thanks.

Lisa Payne

Sure it was that our pre-development expenses will be lower than what we had projected and that is due to the fact that we’re spending less. And it could be third party consultants. It could be time allocated by our people. And there is also we think we said there’s also more capitalization of people because people are spending more time on their true developments. And therefore their time’s getting capitalized to those projects. We’re not expensing as much there is no layoffs expected or planned in Asia these people are flat out busy trying to execute and delivering on the projects that we are bringing on in the next few years.

Ross Nussbaum – UBS Securities

Thank you.

Operator

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

Michael Mueller – JPMorgan

Under re-developments Green Hills is the biggest project there. Can you give us a sense about how much of that $265 million is tied to that project?

Robert Taubman

Green Hills is by far the biggest project and I think it’s about half –

Lisa Payne

I’d say it’s about half but slightly more.

Michael Mueller – JPMorgan

Okay that was it. Thank you.

Operator

Your next question comes from the line of Haendel St. Juste from Morgan Stanley.

Haendel St. Juste – Morgan Stanley

Good morning. So Bobby I guess as you think about, as you think about potentially how to reinvest some of the proceeds from the Starwood sales I’m curious if you’d consider high quality street retailers as part of the thesis of the cash given some of the similarity of the tenant base and also what’s your thoughts on street retail long-term within the Taubman portfolio.

Robert Taubman

Well I think Sandeep laid out a great case forward in his call recently. It is something that we thought about over the years. We haven’t, we have not done anything of consequence at Taubman and street retail. We talked about it as a possibility as an example in the Palm Springs assets that we don’t have to sell because it basically is street retail. We talked about it elsewhere but again I think Sandeep laid out a very good case.

There’s certainly a possibility we’re focused on more traditional retail that you’ve seen in our portfolio. But again we would not do something, we’re not going to reach for something. We’re going to be very comfortable that is strategic that we can add value to it, that it belongs in our portfolio long-term.

Haendel St. Juste – Morgan Stanley

They’re not ruling it up but it’s not eminent.

Robert Taubman

That’s correct.

Haendel St. Juste – Morgan Stanley

And then one more if I may. I know you’re given a formal leasing update on Puerto Rico next quarter but was curious if you could perhaps talk about the type of leases you’re signing in Puerto Rico. Our leases that this one based some of the leases on percentage sales are you signing fixed leases and it’s been any change over the past quarter?

Robert Taubman

Now let me talk specifically about this structure of leases but I would say that we’ve announced the luxury component is a very important piece of leasing of San Juan. And we did announce Louis Vuitton and Gucci as two signed stores in the last quarter’s call to give you some flavor for. We have made very good progress on a luxury front. We continue to feel strongly that our project there anchored by Nordstrom’s and Saks in the location incentives going to be the upscale venue.

There really isn’t anything on the, I didn’t like this or even thought about, I mean I don’t like this. And we’re going to re-upscale the luxury manual obviously have strong moderate tenants as well. And we’ll cover a full complement of merchandizing but the luxury component would be terrific.

So we will talk more about leasing on the next call. And we certainly look forward to opening projects that we think it’s going to be a sensational project and fit right into the development portfolio.

Haendel St. Juste – Morgan Stanley

Okay. So if I may would you perhaps consider doing percentage leases for higher quality Louis Vuitton and Gucci or you’re saying –

Robert Taubman

I really don’t want to comment on the structure of individual leases.

Haendel St. Juste – Morgan Stanley

Thank you.

Operator

[Operator Instructions] Your next question comes from the line of D.J. Busch from Green Street Advisors.

D.J. Busch – Green Street Advisors

The occupancy cost ratio excluding the Starwood malls is roughly the same as when those miles were included considering how much higher the sales productivity and quality is in the pro forma portfolio. How much higher do you think the target cost ratio is today or whether you signed new deals today in the portfolio on average versus prior?

Robert Taubman

Well yeah there’s been lots of conversation about total occupancy cost on the calls. We’ve been pretty consistent that we believe the high quality assets of which the wholesale portfolio will certainly be there at $800 plus a square foot. The 17% kind of level that we talked about for long time for new leasing, we believe is very attainable. So we will be very focused on that, tenants don’t wake up in the morning saying they want to pay 17% of sales as a total occupancy number. There’s always a deed asked and there’s always a negotiation but I think that as you can see in the leasing spreads we’re going to be very focused on rent going forward and trying to achieve those higher numbers.

D.J. Busch – Green Street Advisors

Okay. That’s all I had. Thanks.

Robert Taubman

Thank you.

Operator

And we do have a follow-up question from the line of Christine McElroy from Citi.

Unidentified Analyst

[indiscernible]. Bobby I think in your opening comments you talked about working on getting loan commitments for the three projects in Asia. And I’m just curious as you’ve put forth almost about 40% of the construction cost at this point into those three projects, you’ve spent about $209 million of the $560 for your share. What sort of sizing are you guys talking about for loans and what would those term sort of be like?

Robert Taubman

It’ll be different in China as it would be in Korea. Our best estimate at this point and we have a number of banks to provide its term sheets in Korea, is that it’ll probably be around 50% loan-to-cost. The in China it’ll probably be something like 40% on average or perhaps a little less against loan on cost.

In all cases we’ve talked about from a liquidity standpoint our balance sheet that we’ve assumed financings because we had no idea, where they were going to end up or how or what’s the structures we’re going to be. None of that but we are, we have made very good progress on all three. We had multiple institutions we are talking to and we are getting very well down the road that we would be talking about it, our commitments on all three.

Unidentified Analyst

And more the terms, do you like the terms of the lengths, how long were they, and would they be recoursed to you and your copartners developing it?

Robert Taubman

At this point and to be different in China as opposed to Korea. In Korea, it will effectively be a construction loan with the ability to probably go out five years in total. In China it may be something slightly different than that. As to recourse, at this point in time, and I caution to say at this point in time, there is actually no recourse assumed in any of these three loans at this point in time. So the equity is being put in, first, and as you pointed out, we have a significant amount of the equity already in place, what will be required, about the equity growth first in that effectively non-recourse lending. I point out in this country that is not possible today.

To you to get a construction financing, you have to guarantee its repayment, there are certain burn-off requirements as you lease up the project and it opens but you are still guaranteeing repayment and completion. So it can vary different requirements at both locations the commitment letters are completely different but the fact is that we were talking about it because we do believe we are going to be able to arrange financing in each of those three assets.

Unidentified Analyst

Right. And then the [indiscernible] study which was certainly interesting, when you say that you and your mall appears operative, what exactly does that mean, I don’t know does that mean you funded, it, did you challenge or have the ability to challenge its finding or you just were a participant amongst others, I am just trying to better understand – you and your peer’s role in the study?

Robert Taubman

We did fund the study, and we also did participate in the thought process and research but it’s very much their study, and they spend a lot of time and effort on it and you are welcome to talk to them about the principles – welcome those kind of conversations.

Unidentified Analyst

Okay, and then just lastly on the IRRs and I am assuming the details having it is great to be able to break it down between all those categories, but I am just curious as you think about giving confidence to go forward, as you think back to last almost 14 years, we have obviously had a tremendous amount of Cap rate compression in overall real estate but also within the mall business, do you think that due to time frame back in 2000-2001, imply cap rates were high single digits at one point they booked double digits, maybe not pretty represent the private market but somewhere in that ballpark and today for high quality assets, are you sure where that is?

I am curious if you are able to distinguish between sort of income versus the cap rate compression part and as you approach these new projects I got to imagine you are not going to be thinking about cap rate compression to the same degree of what’s it occurred over the last 15 years, so I am just curious how you sort of put all that together?

Robert Taubman

Well, I will take a shot at it and maybe Lisa will join but, first of all when you look at Cap rates, in moments in time, you know obviously interest rates inflation make a huge difference. So when you go back to double digit kind of Cap rates you had a whole different environment both on the expectation of inflation where interest rates were, I remember when interest rates were effectively for long term money, it almost approaching 20% and in essence people were taking low teen fixed returns with equity kickers on the long term lending and it [indiscernible] all the time.

So, the world is very different today, you have to make decisions within that context. We have always talked about trying to create a certain margin about a 300 basis point on valuation as to where we expected they, when you look at a 13.5% leverage return against sort of the weighted cost of capital on these fixed assets, you know pick a number, 6.5% to 7%, call will be higher.

We are significantly above in essence it had minimum sort of 300 basis points kind of a differential that we would like to achieve and create that an excess value over time. Obviously, Cap rate compression helped all of this in the real estate industry and especially at this company and our peers.

I think there’s now recognition that the predictability of the income streams in these assets, in this business model are really exceptional. And that’s people, institutional owners, investors want all these kinds of assets.

So again we feel very good about the risks that we’re taking with our capital, how we’re allocating capital on the new projects that we’re involved in. Including those in Asia, which have lower returns, lower initial returns which should have higher growth rates and should meet the IRR kinds of hurdle rates that we’ve targeted for each of them going forward.

Lisa Payne

Yeah I think the only thing I would add is. And focusing on the U.S. development business it is a high yield generally high yield NDA. And even the assets we sold I think you were the who calculated that as of the today the blended portfolio is just above the 7% yield on cost but frankly there are many assets in that group that are above 10. And so and these aren’t as we said that this isn’t the – when you put Dolphin and Tampa in there. The returns, current returns forget the cap rate compression piece of an IRR.

The cash on cash returns are environment enormous, and so yes clearly cap rate compressions takes these returns up into the 20s but even with a just great cash flow engine like Dolphin IP, Millenia. We’re seeing very excellent returns just on that kind of cash flow.

Unidentified Analyst

Okay. Thanks for the color.

Operator

Your next question comes from the line of Todd Thomas from KeyBanc Capital Markets.

Todd Thomas – KeyBanc Capital Markets

Yeah hi thanks. Just post closing for the Starwood deal I’m thinking about investment opportunities with sales in the post closing portfolio up over $800 a foot. Previously you’ve mentioned that any investments made would be quality accretive to the portfolio from a sales perspective so up another $100 a foot you’ve obviously limited the universe even further for potential investments. I was just wondering if you know you’re investing criteria would potentially change here a bit?

Robert Taubman

Well I think it’s a good point. And it’s something that we have thought about. And basically we want to build Class A assets. Class A assets are certainly $500, $600 square foot assets. And when they are in good markets, they grow more. We believe that Sarasota, Puerto Rico and Hawaii as the three U.S. domestic assets. Asia’s a whole other discussion about sales productivity. But the three assets here on average will certainly meet the $800 number. And I just, I’m very bullish about all three of these assets in each of their markets and what their productivity will be.

Todd Thomas – KeyBanc Capital Markets

How about for potential investments that you look to make acquisitions of operating assets?

Robert Taubman

Again we want something that fits into our portfolio, that does limit our universe. But we’re going to be very strident about our targeted investments, where we want to be. What part of the spectrum we want to play.

Todd Thomas – KeyBanc Capital Markets

Okay and then just one follow-up on that and sort of along the line of questioning regarding to see retail. Most of your centers today are traditional department store anchors. I was just curious if you have any thoughts around lifestyle centers that have many of your inline mall tenants maybe just no traditional anchor exposure or perhaps something with a mixed used component?

Robert Taubman

We would consider something that like a lifestyle setter or with, that’s part of the mixed-used project. And we are having conversations with – I don’t know verbally but very, very high quality assets that are retail assets, we will take them in any form.

Todd Thomas – KeyBanc Capital Markets

Okay. Thank you.

Operator

And there are no further questions at this time. I would now like to turn the call back over to Mr. Taubman.

Robert Taubman

Well, thank you. And we hopefully many of you will come to our Sarasota. We look forward to seeing you there, just let us know you’re coming and we’ll take care of you. And then after that we’ll have to see you in Puerto Rico. Thank you everybody. Good bye.

Operator

This will conclude today’s conference call. You may now disconnect your line.

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