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Taubman Centers, Inc. (NYSE:TCO)

Q2 2011 Earnings Call

July 20, 2011, 10:00 AM ET

Executives

Barbara Baker – VP, IR

Robert Taubman – Chairman, President and CEO

Lisa Payne – VP and CFO

Analysts

Alexander Goldfarb – Sandler O’Neill

Jay Habermann – Goldman Sachs

Craig Schmidt – Bank of America Merrill Lynch

Christy McElroy – UBS

Quentin Velleley – Citi

Michael Bilerman – Citi

Benjamin Yang – Keefe, Bruyette & Woods, Inc.

Todd Thomas – KeyBanc Capital Markets

Michael Mueller – JPMorgan

Tayo Okusanya – Jefferies & Co.

Cedrik Lachance – Green Street Advisors, Inc.

Paul Morgan – Morgan Stanley

Mark Gifford – Bloomberg Research

Operator

Thank you for holding and welcome to the Taubman Centers Second Quarter Earnings Conference Call. The call will begin with prepared remarks and then we will open the line to questions.

On the call today will be Robert Taubman, Taubman Centers’ Chairman, President and Chief Executive Officer; Lisa Payne, Vice Chairman and Chief Financial Officer; and Barbara Baker, Vice President of Investor Relations.

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

Barbara Baker

Thank you, operator, and welcome everyone to our second quarter conference call. Joining me today on the call are Robert Taubman, our Chairman, President and CEO and Lisa Payne, our Vice Chairman and Chief Financial Officer. Yesterday, we released our results for the quarter and our supplemental information package. Both are available on our website, www.taubman.com. And if you would like to have them sent to you automatically each quarter, please sign up under Request Information on our website.

As you know, during this conference call, we’ll be making forward-looking statements within the meaning of the federal securities laws. These statements reflect our current views with respect to future events and financial performance, although actual results may differ materially. Please see our SEC filings, including our latest Form 10-K and subsequent reports for a discussion of the various risks and uncertainties underlying our forward-looking statements.

During this call, we’ll also be discussing 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.

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, and then we’ll be available for your questions.

We ask that you limit your questions to two, and then if you have more, queue up again. That way everyone will have the opportunity to ask a question.

And with that, let me turn the call over to Bobby.

Robert Taubman

Thanks, Barbara, and welcome everyone to our call. We’re delighted with the continued strength in our core, led by the unprecedented growth in tenant sales; now six quarters in row are double-digit increases. This is especially satisfying considering the slow pace of the economic recovery.

Sales per square foot for the quarter was up 14%. This is on top of an over 12% increase in the second quarter of last year. We believe we will once again lead our industry, both in trend and in absolute sales productivity. Our trailing 12-month sales per square foot is $600. This is a significant milestone for our company and is likely at least a $100 greater than any other public regional mall portfolio. Once again, all of our centers showed growth in the quarter with luxury and value centers leading the way. The rebound of tourism is also a major factor since so many of our centers are located in gateway cities.

Now let’s look at specific sales categories. Luxury’s performance is outstanding. Gucci, Louis Vuitton, Burberry and Dior are world top performers. Jewelry was our leading category, selling across all price points. Tiffany, Cartier and (inaudible), all had double-digit increases for the quarter. Women’s apparel continues to improve. Chico, J. Jill, and bebe are doing well. Junior and unisex apparel were also strong. Among the leaders were Forever 21, Abercrombie & Fitch, Hollister, PacSun and H&M.

Victoria’s Secret continuous to be an outstanding performer, clearly one of the most successful of all retailers. Shoes are also doing very well. Foot Locker is showing some real strength. Electronics continue to rise, led this quarter by Sony. And finally the home category was up significantly. Restoration Hardware was a standout.

These sales increases are driving retailer expectations especially in high quality properties. For the first six months of 2011 we signed substantially more leases than in the first six months of 2010. There are several reasons for this. First is the substantial turn off space related to our 2001 openings; second is the new space related to the opening of Salt Lake City. Third, as sales began to improve in 2010, we’ve made the strategic decision to focus on rents more than occupancy as we sense the market was improving and our patience would be rewarded with better pricing. And fourth is simply the momentum from these very strong retailer sales. All of it is good news.

For example, at Beverly, we keep growing our critical mass of luxury tenants. Gucci just signed a significantly expanded store to accommodate designer ready-to-wear. Montblanc tripled the size of its store and Louis Vuitton opened its second expansion. These were all indications the tremendous volume being done in luxury category at Beverly.

At International Plaza, we added Stuart Weitzman and Henri Bendel. At Dolphin, we’ve signed more outlets including Juicy Couture and expansions of successful Michael Kors and BCBG stores. At Great Lakes Crossing Outlets where the sales and leasing momentum continued to be very strong following our rebranding, we signed GUESS Factory and lot cultural outlets. In addition, we’ve just completed a package of flagship H&M stores international plaza, Cherry Creek and Willow Bend, where this would be the only H&M location in North Dallas. Also H&M at Beverly is expanding to become its Los Angles flagship location.

Occupancy quarter end was 88.2%, modestly above our guidance. In addition, there was 3.6% in temporary tenant, a record for the second quarter. Combined the total was 91.8%. At year end, our year-over-year occupancy is expected to be up, but not as much as our previous guidance due to the recent announcement that Borders will liquidate, instead of it as much as 100 basis points, it’s now likely to be something less than 50 basis points up.

Moving to rent, we’re very pleased by the 3.9% increase in our average rents per square foot compared to last year. We now expect to be modestly above 3% for the full year. NOI was up, a strong 4.8% excluding lease cancellation fees.

Rents, percentage rents and recoveries were the primary drivers offset by a slight increase in bad debt. We continue to expect NOI growth excluding this cancellation to be about 2% for the full year.

Bankruptcies were 0.7% for the quarter and now stand at 1.1% to date. This is up from 2010, but still relatively low compared to our history. The up-tick was related to the (inaudible). We are making good progress on our external growth initiatives and our recently completed $112 million equity offering enhances our liquidity as we consider future investments. Given the offering, I know many of you are anxious for announcements, but as you know, we live in a very competitive world and we will share updates with you when we can.

We continue to be on schedule for the opening of Salt Lake City in March 2012. Leasing is now about 85% committed. The vast majority of these are fully executed leases and we are delighted with the quality of the tenants.

We continue to be on target for an 11% to 12% un-levered return on our $76 million investment. In Asia, leasing is going very well at IFC Mall in Seoul opening in the third quarter of 2012. We are currently about 75% committed, mostly with internationally recognized brands. Our success clearly demonstrates both our ability to lease and merchandise the center in Asia any added value that we can bring.

Now, I’d like to turn the call over to Lisa; then I’ll return at the end of the call for closing comments.

Lisa Payne

Thank you, Bobby. This quarter, our FFO per share was $0.61 equal to the second quarter of 2010. Excluding the non-cash impact of Pier and Regency, we would have been up $0.03. Here are the items that change year-over-year and they are listed on Page 11 of the supplemental.

First, minimum rents up $0.04, that’s primarily the result of rent per square foot growth which, as Bobby said, was a healthy 3.9% for the quarter. Percentage rent, up a penny, strong sales drove this line item and given the current sales momentum, we’re assuming solid growth in percentage rent through the year.

Net recoveries favorable by $1.05, that’s primarily because of our change in methodology for allocating the revenue from our fixed CAM tenants that we talked about during the first quarter. As a reminder, prior to this year, quarterly CAM revenue was based upon an estimated annual recovery rate on expenses with a true-up in the fourth quarter.

Effective 2011, we changed this methodology for our fixed CAM tenants. This affects about 70% of all tenants. We’re now recognizing the fixed CAM revenue when it is built, while continuing the ratio methodology for triple net tenants. This caused a favorable impact in this quarter and we expect a positive effect in the third quarter as well.

However, we anticipate a significant negative impact in the fourth quarter, which will fully offset the positive from the first three. This is just a matter of timing. For the full year, we expect the overall recovery ratio to be modestly down from 2010.

Next is lease cancellation revenue, down $2.05. Year-to-date, we only collected $2 million. Therefore, it’s hard for us to project more than $4 million to $5 million and there could be some risk in this forecast.

Other operating expense unfavorable by $0.02, that’s primarily due to increased U.S. and Asia predevelopment cost, and to a lesser extent, an increase in bad debt. This really involves only a few tenants. The predevelopment expense is the result of increased activity in the U.S. and our focus on expanding our presence in China.

Accordingly, we are now raising our guidance on this line item by $3 million to about $20 million. However, offsetting this, we are now expecting a $2 million to $3 million increase from our prior guidance in net third-party income from various sources in the U.S. and in Asia.

General and administrative expenses were up about a penny, that’s because of increases in bonus expense and travel. We continue to expect the full year to be consistent with 2010. Non-operating income was favorable by a half a penny, due to a reduction in land sale gains. We currently do not expect any additional land sales in 2011.

Interest expense, favorable by $0.03, that’s primarily due to low floating rate loans – to low floating rates on our International Plaza loan, which had previously been fixed. In addition, we had favorable rate variances from the extension of the Fair Oaks loan, which floated during the second quarter, and from the refinancing of MacArthur in September of last year. These positives were partially offset by our Partridge Creek loan, which was refinanced from a floating rate loan to a higher fixed rate loan in June of 2010.

As of June 30, Regency is in default on its loan as the cash flow generated from the asset is now insufficient to cover debt service. Therefore, we’re now recording default interest 10.755%, which is in our guidance. This loan is due in November and we are not financially supporting the asset. Unfortunately, we cannot predict when we transfer of title for either Regency or the Pier will occur.

Before turning to the balance sheet, I’d like to make a comment about quarterly NOI expectations. As Bobby said, we expect our NOI growth rate excluding lease cancellation income to be about 2% for the year. Given our strong NOI growth to-date, this means just looking at the math that we’re expecting the second half of the year to be about flat. The good news is we expect our strong rental growth to continue.

So why do we expect flatter NOI growth in the second half? Our explanation lies primarily in recoveries as we just described. The methodology change shift TM revenue from the second half of the year into the first half of the year.

In addition, TM capital will some – will be somewhat down for the year, most significantly in the fourth quarter, which was unusually high in the fourth quarter of 2010.

Now turning to our balance sheet. Our debt to total market cap stood at an all-time low of 34.8% at quarter end. This is due to our equity offerings and strong stock price. We’ve now completed the refinancing of our $250 million sales loan and we are pleased with the result. The new $275 million 7-year, non-recourse financing is interest-only for three years and has been swapped to an all-in fixed rate of 4.27%. We received $11 million as our share of proceeds for this 50% owned property and paid off our lines of credit.

We’re working on the refinancing of the International Plaza loan, which is currently floating at LIBOR plus 1.15% and is pre-payable at any time. We now expect this refinancing to occur in the fourth quarter with proceeds of approximately $325 million. These proceeds are equal to the loan level prior to the extension earlier this year. At today’s treasury rate, we would be able to refinance this property for 10 years at interest rate currently under 5%.

Given the favorable financing environment, we’ve decided to extend our $550 million revolver now. It would otherwise mature in February 2012. There is significant interest in the banking community and we expect to upsize the facility to $650 million. Now the spread of the new facility is increasing by a 105 basis points to 175 over LIBOR. We believe this pricing is extremely competitive in today’s market. We expect to close in the third quarter.

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

Robert Taubman

Thank you, Lisa. For the full year 2011, notwithstanding the $0.02 dilution from our equity offering, we’re maintaining FFO guidance in a range of $2.88 to $2.98, excluding the Pier and Regency. Including a full year impact of these two assets, our FFO guidance is $2.64 to $2.74, the $0.24 non-cash reduction.

In conclusion, we’re very positive about our business and believe the ongoing momentum in our core demonstrates the strength of the high-quality regional mall. We’re pleased to have raised equity during the quarter and continue to be positive about our external growth prospects in the platforms we’ve created.

Now, we’d like to open up the call to question. As Barbara said, please limit your questions to two at a time. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Alex Goldfarb from Sandler O’Neill. Your line is open.

Alexander Goldfarb – Sandler O’Neill

Yes, hi, good morning. The first question is just on development, the press down in Florida had a number of stories on Sarasota and there was also the press release you guys had out on Puerto Rico. Just wondering if you think that we’re going to see anything with either of these projects this year, or if your decision about a go forward with either of these projects has changed?

Robert Taubman

Good morning, Alex. We’re very positive about our ability to start a project some time in 2012. So, we don’t believe that we’ll be able to actually start a project in this year, but we do expect to be making visible progress on a number of them, that you will see through the end of this year.

Alexander Goldfarb – Sandler O’Neill

Okay. And then the second question is just going to – I think it was Lisa’s comments, on the $2 million to $3 million more of third party income and the increase in the predevelopment spend. If you can just provide a little more color on what’s driving that additional $2 million to $3 million and then the flip side to that is, are there any parameters to how much predevelopment spend the Board allows or are there any governors to it, or is it totally at management’s discretion?

Robert Taubman

Let me answer the question about predevelopment. First of all, it’s all part of our budget all the time. The Board is very interested in our external growth. So, I mean, obviously if they felt that there was something that was askew believe me they would speak up. All our numbers are being expensed.

I mean, all our costs are being expensed, it’s actually in our numbers. We think the risk/reward ratio is extremely good. Literally if we could build one project based on the history of the size of projects and the kinds of returns that we had – if we only build one project every five years, we get our money back, even at $20 million a year spending. We knew we would not be happy with that and we actually expect to build more and we expect as we build more we’re going to make a lot of money. So, yes, the board’s interested and yes we expect this to be very fruitful spending. Lisa?

Lisa Payne

You were mentioning on the third party contract – on the revenue from third parties, we are not really at the point of disclosing the details of our third party contracts and where we are getting that money from. I think it’ll become more visible as we go through the year. But we do today, as we look forward and see the contracts we have in place in Asia and in the U.S., we do feel very positive that we are going to be about $2 million to $3 million...

Alexander Goldfarb – Sandler O’Neill

$2 million to $3 million.

Lisa Payne

Sorry, I thought, yeah, $2 million to $3 million more at this point than we thought at the beginning of the year.

Alexander Goldfarb – Sandler O’Neill

Okay. Thank you.

Operator

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

Jay Habermann – Goldman Sachs

Good morning, everyone. In the past, Bobby, you talked about occupancy costs and I guess targeting 16% to 17% on a trailing two year basis on sales. I guess with sales now approaching $600 plus and perhaps higher in the back half of the year, do you still see that mid to upper teens as reasonable just given the environment you alluded to at the start of the call?

Robert Taubman

Yeah, I mean Jay, good morning. Obviously, we are always leasing to that. We’ve talked about 17% in the past, but certainly in the 16% to 17% of trailing two year sales we feel very confident that we will be able to continue the lease.

Now, when you have this kind of an accelerated increase in sales, there is always a lag, because retailers don’t really – they don’t know if they should really believe in the sales growth that we’ve had. So they’re going to – we’re going to negotiate that this trend is going to continue in the basis of $600 and forget about what happened a few years ago.

They’re going to say, well, we can’t forget about what happened a few years ago. So, you’re going to have the net normal bid and ask as if we’re in that kind of a negotiation. But we actually believe that the sort of 15% number that we’ve been at sort of surrounding between I’ll say low 13% and high 16% depending on those movements in sales, but surrounding 15% for the portfolio is in fact the right number.

Jay Habermann – Goldman Sachs

Okay. And just maybe back to the external growth. Can you talk a bit about any developments on the outlet strategy, anything there with the joint venture, any sort of updates (inaudible)?

Robert Taubman

You know, Jay, it’s a very competitive space. It’s a very competitive world out there in development generally. And to the earlier question from Alex, we’re in the market, we are working hard, and we’re going to be very disappointed if we can’t find good investments to make an outlet in U.S. mall and in Asia.

Jay Habermann – Goldman Sachs

Okay, thank you.

Operator

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

Craig Schmidt – Bank of America Merrill Lynch

Thank you. I’m wondering are you still interested in pursuing an outlet center in South Houston given the JV in Galveston.

Robert Taubman

Craig really we’re trying to make it clear, it’s a very competitive market and I really do not want to comment on any individual market at this point.

Craig Schmidt – Bank of America Merrill Lynch

Okay. And then, do you think you’ll be able to break ground on a regional mall in 2012 in the U.S.?

Robert Taubman

I think it’s – we’re very hopeful to start a center in 2012 for 2014 opening and we’re very consistent, we’ve said for the last year that over the next 10 years we expect to build four or five projects in the U.S. and we are very – we believe a lot in that prediction.

Craig Schmidt – Bank of America Merrill Lynch

Okay. Thank you.

Operator

Your next question comes from the line of Christy McElroy from UBS. Your line is now open.

Christy McElroy – UBS

Hey, good morning. Given the kind of sales growth that you’ve been seeing, how should we be thinking about percentage rent growth in the back half of the year? Lisa, I know you said you expect solid growth, but can you put some sort of parameters around that in terms of growth expectations?

Lisa Payne

Well, I would say it is in our guidance, we do have a range in our guidance and this is something that’s very tenant specific. And so that’s really all I can give you guidance for. We do think it’s going to be up. We think we’ve had good experience of percentage rents to-date with what we currently report, but we would expect it to accelerate more than that in the back half of the year.

Christy McElroy – UBS

Okay. And then given that René has made it pretty clear that it’s his number one priority, can you provide an update on your search for JV partners in Asia?

Robert Taubman

We can’t be specific. Again, this is the same competitive issues that we are talking about, but René is clearly focused on three things. One is building out his team, his platform and clearly what we’re doing with IFC in Seoul supports that effort. Secondly, he is focused on executing our strategy which we said loud and clear is to focus on China and Korea and build those relationships with retailers and developers and potential partners as well as with government officials that you are suggesting. And from that, we think that deals will follow the right partners.

And we are looking at a number of deals as a result of that – those partnership-relationships that René is building, some of which he had for many years at his predecessor company. So the real focus and the third thing he’s doing, he is trying to build out our investment pipeline and we absolutely believe that deals will follow those partnerships that we create. The right partner relationships that we build. So I – Christy, the answer is, yes, we’re making progress and I cannot be more specific.

Christy McElroy – UBS

Thank you.

Operator

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

Quentin Velleley – Citi

Yeah, good morning. Just firstly in terms of the math on the average base rents which were up 4% and the minimum rents were up 3% and occupancies roughly flat. I’m just wondering if you can run through the math on what the difference is.

Lisa Payne

I am not sure I understand your question, Quen. Can you restate it?

Quentin Velleley – Citi

Your average base rents were up about 4% in the quarter. And I just want to get the math on that when your minimum rents are up about 3% and your occupancy flat, so what was driving the additional 100 basis points?

Lisa Payne

On the – sorry, on...?

Quentin Velleley – Citi

On the average –?

Lisa Payne

Do you mean our prediction for the year is going to be – it’s up 3%.

Quentin Velleley – Citi

No, it’s all of the quarter, maybe we can follow up; let’s follow up after the call.

Lisa Payne

Okay. Go ahead.

Quentin Velleley – Citi

Can I just – in terms of the predevelopment, the increase in expenses that you’ve got in the U.S. And Alex had asked this earlier, but where exactly are the expenses coming from? Are you hiring more people? Or there are just more costs flowing through? I just sort of want to understand what’s going on and exactly what projects they relate to?

Robert Taubman

Well, first of all, the predevelopment expense is a combination of expenses in the U.S. and Asia. It’s one line item number. It’s not just the U.S.

Secondly, they come from first our internal costs. The number of people that we have here that charge their time. It’s done on an hourly basis. They charge their time to individual projects. And if it’s an outlet center, if it’s an idea for a new mall; Puerto Rico was mentioned there, Sarasota was mentioned.

They charge those in their time there. You also have in that expenses related to third-party consultants and any option payments or anything like that that (inaudible). So the first place you could look for – where we’re spending this is just what’s visible out there? Well, what’s visible is Puerto Rico, it was Sarasota is – Hawaii is an example, okay? So we have made progress, some of that visible. In Puerto Rico, we’ve had a lot of announcements. There has been a lot of litigation. There has been a lot of things that have happened that has been very positive in the directions building this project.

At Sarasota, there is a lot of movement. In Hawaii, there has been some visible progress. So, we’re spending money there. In Asia, we’ve talked about, what’s the first thing that René is doing? He’s building out his team and building out his platform. We have added some people there. There is a tremendous pipeline and deal flow that we’re working on there. But we’ve said we’re not going to be specific, but that’s what we are doing. You’ve heard we’re looking at lots of outlet sites. We’ve been non-specific as to where we’ve been focused, because again, it’s a very competitive world out there.

So, that’s where we’re spending the money, that’s how it breaks down and it is more than what we anticipated, but again, it’s all expense and we think the risk reward ratio on this is very good.

Michael Bilerman – Citi

Lisa, if I can ask – it’s Michael Bilerman speaking. If I can ask first question maybe in a different way, when you look at your average base rents in place at $45.30 relative to $43.66, that’s up almost 4% six months, six months. Your base minimum rents on a gross basis of the income statement are up about 2.8% – $244 million to $250 million. So what’s causing that delta for the average base rent per foot to be – to show a greater increase effectively than what’s being reported on the P&L from an income perspective?

Lisa Payne

Right, by the way, I figured out that I didn’t know what’s the three – the 2.8I didn’t know what the 3% – the 2.8% that he was referring to, now, I did figure that out while Bobby was answering. The answer is; first of all, the rent per square foot number is a very sensitive number given it’s – it’s $40 – whatever the number is, it’s a very sensitive number. What goes into the minimum, the growth minimum rent is also the termination of low performers or what you call the expiring rents. So my assumption, and I can get into the math a little more behind here is that it’s also in there, it’s closing rents as well as rental lease in there. It would impact that not just the per square foot over the whole portfolio average rent per square foot.

Michael Bilerman – Citi

But I guess directionally, it shouldn’t be that different, if anything it should be greater on – I guess on the P&L which show a greater increase in the per square foot valuation. I guess if I can follow up...

Lisa Payne

Actually when you’re talking percentages, also remember one’s off of a totally different – I’m not sure why 3.9% on a per square foot number necessarily correlates to the exact number in the growth rent number. You know what I’m saying?

Michael Bilerman – Citi

The square footages remain the same?

Lisa Payne

Right.

Michael Bilerman – Citi

And we can follow up more on...

Lisa Payne

But the mix is different. So, let me see if I can come up with a mathematical proof to what I’m saying, but I – after the call.

Michael Bilerman – Citi

Okay. Thanks.

Lisa Payne

Okay.

Operator

The next question comes from the line of Ben Yang from Keefe, Bruyette & Woods. Your line is now open.

Benjamin Yang – Keefe, Bruyette & Woods, Inc.

Yeah, hi, good morning. There were a few higher quality properties that came to market a few months ago that I recall you’re interested in. Can you give an update on where you stand on these potential acquisitions?

Robert Taubman

Well, I don’t think it’s appropriate for us to comment on our private market knowledge as it were of where those deals are. I would say that, that the expectations for pricing will be met that whether in La Jolla or Carlsbad, wherever that asset was in St. Louis or ultimately I think in Birmingham, I don’t think anybody on the call is going to be disappointed with what – where those assets trade. The scarcity and the demand to a high quality shopping centers with high sales productivity is – the pricing is very evident of their scarcity value. And I think you’ll see that as the deals are announced.

Benjamin Yang – Keefe, Bruyette & Woods, Inc.

Okay, great. And then final question, it looks like you guys exclude the Pier Shops and Regency from most – or maybe all of your operating metrics and I wonder if you could just give a quick run-down on what your metrics look like including these assets and I’m thinking specifically like sales per square foot occupancy and same-store NOI?

Lisa Payne

All right. Ben, we don’t even – to manage our business, we don’t even look at them that way. Because they are in the process of hopefully soon, but as I said, we’re making no prediction of being out of our portfolio. And so we don’t – I don’t even have a statistic in my hand that has them in.

Benjamin Yang – Keefe, Bruyette & Woods, Inc.

When you report growth year-over-year, I’m assuming it’s kind of an apples-to-apples that they’re excluded this year and excluded the prior year, is that fair to assume as well?

Robert Taubman

Yeah.

Lisa Payne

I believe so. Yes, we take them out of both years, I mean, that’s different, I will come back to you, but yes we take them – it’s absolutely comparable.

Robert Taubman

Yeah and Ben let me remind you that even when they were in, they were less than 2% of the NOI...

Lisa Payne

Right.

Robert Taubman

...collectively, taken together of the overall portfolio, and then I’ll make one other comment – Pier I think is slightly above the average of the $600 that we’ve announced and Regency is well below, but these are small assets. So they wouldn’t make that big a difference one way or another anyway.

Benjamin Yang – Keefe, Bruyette & Woods, Inc.

Okay.

Robert Taubman

They have been taken out of both periods, though.

Benjamin Yang – Keefe, Bruyette & Woods, Inc.

Okay. So I’m going to just squeeze then one quick question. Forever 21, it looks like you lost four during the quarter, is that – what’s the story behind that?

Robert Taubman

My guess is that...

Lisa Payne

We think they’re moving.

Robert Taubman

...yeah, they are moving and relocating in the larger locations.

Lisa Payne

Right.

Benjamin Yang – Keefe, Bruyette & Woods, Inc.

Right. Thank you.

Operator

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

Todd Thomas – KeyBanc Capital Markets

Hi, good morning. I’m along with Jordan Sadler as well. Bobby, maybe sounded like you were saying a bunch of new store concepts, and I was wondering if you could talk about that demand today, maybe help us understand how deep it is and what you’re expecting with regard to new in line concepts and store openings. And then just on new leases as a follow-up to an earlier question. Can you just talk about what occupancy costs you’re targeting for new leases?

Robert Taubman

Well, first of all, the new concept I can’t be specific. All I could do is be anecdotal. And given these kinds of sales – very robust sales trends, tenants are very expansion-minded with their new ideas in our properties. There’s an old saying, when you want to test a new concept, don’t take the test in a secondary location – really test it, put it in a primary location. So people want to get in the better quality assets to see whether or not their ideas can actually work. So we are making a number of deals. There is good demand across our centers for new ideas; but again, it’s only anecdotal, I can’t be specific.

With respect to where we’re trying to lease the portfolio, I said earlier that we have – for a long time, tried to be at 17% and north of two-year trailing sales on total occupancy cost for new tenants, that’s on average across the portfolio. I used the number 16% to 17% because at this moment in time to convince a tenant on average across the portfolio that they should be at 17% of a $600 number, which is rapidly moving in terms of the accelerated trend, it’s hard to do. So the new numbers, it’s likely to fall closer to 16% for at least some period of time, until the retailers believe that this level of sales is truly sustainable and that will take a little bit of time.

Todd Thomas – KeyBanc Capital Markets

Okay. And then with regard to the 14% tenant sales growth in the quarter, Apple reported last night, it looked like their retail sales were up 36% in the quarter year-over-year. I know in the past you’ve discussed that breakout a little bit, so I was just wondering if you could give us a sense of what’s happening to the store sales X Apple again, or perhaps try some detail maybe how much that number skewed by Apple in the quarter?

Robert Taubman

Well, let me say just generically first and then I’ll touch on Apple. That all our assets are up across the portfolio, it’s a very good performance; you’re seeing the result of dominant assets really performing well.

Now, our best performers are those assets that are – at sort of the barbell either luxury, so the high end or value centers like Great Lakes Crossing and Dolphin. Now, we’re also seeing a big rebound in tourism. So centers like Melanie and centers in Tampa and the like are doing very, very well. So, Florida as an example, overall on average was better than the average in our portfolio. So that’s sort of the general statement macro.

With respect to Apple, we are not going to breakdown on a quarter-by-quarter basis, how their numbers impact, we did that, that one time in order to respond to the comments that were out there at that time. But they were up against, notwithstanding the numbers you just talked about. They were up against very strong comps because they introduced the iPad the 1st of April of last year, so the beginning of the second quarter. And their trend in our shopping centers this quarter, our trend – our trend, Taubman’s trend, was actually slightly better than the Apple trend. So we would have done better if you took Apple out of our stats and by including them in our stats this quarter. I should say that Sony which now has five stores in our center and we’re negotiating with others, their trend was actually better. So we’re seeing electronics as a category to be sold in the mall in a very favorable way. Okay?

Todd Thomas – KeyBanc Capital Markets

All right, great. Thank you.

Operator

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

Michael Mueller – JPMorgan

Yeah, hi. Lisa, going back to the pre-development fee income lines again. How much of the increases should we think of as being 2011 specific as opposed to something that should carry through to a run rate if we’re thinking about 2012?

Lisa Payne

We have not done our budgets in our pre-development areas either in the U.S. or Asia for 2012 at this point. These – I will say that this expense is – since we expense as we go, clearly some of the work we’re doing if we – let’s just use as an example, we put Sarasota in a service or get it approved by the board and begin capitalize because it’s a project. Clearly some of those costs will end up not being expensed anymore in 2012. However, we’re going to continue to keep looking for other sites and other opportunities. So I’m not here – I don’t think I can say there is any specific cost that I would point out that won’t continue, but I also as of yet don’t have the business unit’s budget for 2012 to give guidance for 2012.

We tried to say, we would like to keep this in the $16 million to $17 million range, but without question the activity level which we believe will bring fruition to new projects is very, very high right now as we’re trying to start a project in 2012 in the U.S. working on the outlets and working on Asia and really bringing in a lot of new talent in Asia. So that at this point I can’t really say that the run rate is going to come back down in 2012 and I can’t say that it’s going to stay the same.

Michael Mueller – JPMorgan

Okay. And what about on the fee line – the fee income line?

Lisa Payne

What we have talked about, I think, to many of – to some of you that we do have an incentive fee in Asia that we have at AIG without predictions on how and when we’re going to get paid that. So there is going to be lumpiness in the third-party income, but, so at this point I don’t have any specific guidance for 2012 on that as well. You may want to add, Bobby?

Robert Taubman

But it should be better in 2012 because of the ISC things, but we also have other ins and outs of the third-party line. But it should be better in 2012 and that would be more of an anomaly and then you would be looking at 2013 and beyond.

Michael Mueller – JPMorgan

Got it. Okay. And then second question Bobby. In terms of sales, can you talk a little bit about how they trended, say, in the back half of the second quarter? And any color you can give us on what you’re seeing in July so far just given the economic headlines and what’s going on in the world?

Robert Taubman

Well, first, in terms of the quarter, we don’t break-out months. We’ve done it very rarely when there are events occurring. But, just generally, it was about the same through the quarter. So April, May and June were roughly in the same range.

With respect to anecdotal in July, we really don’t have anything that’s meaningful, it’s very early and we’re not – if you think about momentum, and I’ve talked to some of you about this, our original guidance this year was only 3%, 4%, now that was on top of over 12% in 2010. So we’re delightedly surprised that here we are at 14%, but when we talk about momentum we’re clearly in our centers with our retailers in a very positive cycle. When sales are strong, retailers sense that and they want to take advantage of the demand and that demand to me – to them means that, number one, they’re selling through at retail getting very high margins and good turns on their merchandise.

So what does that do? It encourages them to buy more inventories, it encourages them to actually put more salespeople on the floor. Well, when you do that, it’s that positive cycle. It leads to greater sales and it creates this sort of momentum that typically doesn’t fall off the cliff.

Without some event, if there’s some enormous event like there was with September 15th in Lehman a number of years ago, then something will just stop it in its tracks, but it’s much more likely that this is going to sort of slow over time. I mean trees do not grow to the sky. We can’t sit here and say this thing that’s going to grow at 14% indefinitely. We don’t believe that, and, but we don’t really know how long it is going to last but we know that this positive cycle that really creating strong retailer momentum within our centers.

Michael Mueller – JPMorgan

Okay, great. Thank you.

Operator

Your next question comes from the line of Tayo Okusanya from Jefferies & Company. Your line is open.

Tayo Okusanya – Jefferies & Co.

Hi, guys. Good morning. Just a quick question on 2011 guidance, when I just think about the $0.10 range, how I would be thinking about you hitting the higher end of that range versus the lower end. What some of the key variables are?

Lisa Payne

There is a lot of things moving, as you know, which is why we have a range. Clearly what happens as we go to the rest of the year with percentage rent, we’ve said it’s going to be a range. I think that’s a big one. I think lease cancellation is also one that we cannot predict, we’ve given a prediction. But, we said, we know we can’t say that we’re going to hit that number. That’s all we want to make sure we’re in the range there.

There is also just tenants opening, do we hit the right number we expect because does everything open when we think it’s going to open. We have CAM capital, we may or may not spend as much as we think, we currently have a budget that’s been very volatile over the years, as well as all kinds of net recoveries. Pre-development, we’ve given you a range on pre-development expenses. So those are the things that come to my mind right now, but I will say we do feel very comfortable within the range. We think it’s the right range and is not so wide for a company of our size.

Tayo Okusanya – Jefferies & Co.

Very helpful. Thank you.

Operator

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

Cedrik Lachance – Green Street Advisors, Inc.

Thank you. In regards to redevelopment, it’s an aspect that’s I don’t think you’ve touched on for a while. Is there anything in the portfolio where you think you can add a wing or add some value to your redevelopment?

Robert Taubman

Yeah, hi, Cedrik. Sure, I mean there are number of centers that we have major redevelopment opportunities in that we’ve been working on but we don’t talk about them until they become real, because they often involve our anchor stores, our department stores and moving them around, relocating them, expanding them or moving them in order to really get a substantial redevelopment. We have talked more recently about all the stuff we’re doing at Short Hills and we are spending some money at Short Hills, and I think a couple of quarters ago we spent some time talking about it in our prepared comments. And if you go out there now you will see that there are very significant changes that have occurred, but we don’t have anything at this time Cedrik that we’re prepared to really discuss.

Cedrik Lachance – Green Street Advisors, Inc.

Okay. And in terms of your development projects, when you look at the local markets where those projects can be located and you think about redevelopment by others in those areas, are there any of the development projects you’re looking at that could be impacted by the redevelopment of others, that would add supply that might be sufficient for those markets?

Robert Taubman

I am just thinking quickly in my head about the three U.S. malls, and I think the answer is no, it’s not likely in any of the Puerto Rico, Sarasota or Hawaii, which are the three visible projects that we’re talking about the most, that an expansion of any one of our competitors; A, this is not likely; B, some of them are trying, but it’s just not going to happen. And so, I think the answer is no, there isn’t anything in those markets that’s likely to happen, that would offset our opportunity to move forward.

Cedrik Lachance – Green Street Advisors, Inc.

Okay, thank you.

Operator

Your next question comes from the line of Samir Khanal from Morgan Stanley. Your line is open.

Paul Morgan – Morgan Stanley

Hi, it’s Paul Morgan here. Just a question on retail bankruptcy, so you had 70 basis points in the quarter and 110 year-to-date. At the same time, obviously sales are growing substantially. I mean, could – maybe – probably what’s going on, if your comment is whether – because of cost inflation for some of these retailers, the top line matters, but not quite as much and as we think about the second half of the year, you could see decent top line comps for sales growth and still have fall out if retailers are – see profitability erosion because of margin compression, maybe kind of what the commentary you’re hearing from them there is?

Robert Taubman

So, good morning Paul. I don’t say – I think if you look at the numbers or look at the tenants, I mean Borders Books. Borders Books is going out of business because of the technology and the changes in the world, where we actually believe that there is a place for a book store, national book store. But there isn’t a place at this point for two national book stores.

If you look at Sbarro, there is nothing to do with the margin pressures that you’re talking about, it’s a restaurant. So Sbarro is the reason for the uptick. And frankly if you think about bankruptcies generally, there is always some bankruptcies and it’s ranged anywhere from I think on the low end for a year of something less than 1% to something greater than 4%, I think 4.5% of all of the number of leases that we have in place is the way we use the statistics, or create – define the statistics, is the range.

So we were at almost 4.5% in 2009 in the moments of stress, this year we’ll probably going to be around 2%. I mean it’s just – with the gas, based on where we’re right now, maybe less than that. So, I don’t see undue pressure in the retail community. I know there is a lot of conversation about cotton prices and labor prices in China and all kinds of stuff. Will they be able to pass on to the consumer those margins or those costs and what does it do to their – the margin, how much is it shrinking? But if you go back to our comments that the luxury tenants are doing really well. They are passing on pricing increases. The more discount value opportunity doing great and in the middle at least in our shopping centers, we are doing just fine. So I am not – I am not concerned about the question that you raised, it is not evidencing itself at least at this point in any of our discussions.

Paul Morgan – Morgan Stanley

Okay, great. And then on the rent issue – for your average base rents, are those – that’s not your whole portfolio, is that just under like 10,000 square feet?

Lisa Payne

The average base – you mean average rent per square foot?

Paul Morgan – Morgan Stanley

Yeah, what you showed there, the 45-ish?

Lisa Payne

That includes everything, all assets, all rents.

Paul Morgan – Morgan Stanley

So even like a department store that’s paying rent?

Lisa Payne

No, I’m sorry. No, no, no, no. It includes all small shop tenants that are paying rents. By the way in occupancy just to be clear, we have statistics in the definitions on page 24 of our supplemental and as it relates to occupancy that does include value and outlet center anchors in the occupancy and that is not in rent per square foot, which maybe one of the differences to Mike Bilerman’s question.

Paul Morgan – Morgan Stanley

Yeah, yeah, because I mean if you...

Lisa Payne

The mix...

Paul Morgan – Morgan Stanley

If you upsize the store and the rent per square foot is smaller, but they may fall outside the average rent number that report...

Lisa Payne

Yes.

Paul Morgan – Morgan Stanley

I mean that could be something that’s going on. Okay, great. Thanks.

Lisa Payne

Yes.

Operator

Your next question comes from the line of Mark Gifford from Bloomberg Research Your line is open.

Mark Gifford – Bloomberg Research

Yes. Bobby, I was wondering if you could talk a little bit about the mix of concepts that you are looking at and just the success of Apple and some of those and I am just wondering if other companies that have comparable products like Samsung are looking at concepts, and do you give a heavier weight to those types of store types relative to apparel or other product types?

Robert Taubman

I’m not sure what you mean by heavier weight, you mean in terms of who we would rather have in our centers?

Mark Gifford – Bloomberg Research

Right, in terms of the production of sales per square foot. I’m sure you’d want to try to get the person that produces the most. So is that not how you look at it?

Robert Taubman

Well, you have to look at a merchandise mix of the overall center because the customer has to have the view that they can in one convenient stop find whatever types of merchandise that they’re looking for. So you’ve got to have a broad mix of merchandise, you can’t have only jewelry stores because they pay a lot of rent to you because then no one will come.

So, yes, electronics is something that’s very key and very important today for the customer. So if Microsoft wants to open a store which they have, if Sony wants to open stores, we would welcome that especially because the productivity is so high and – but the productivity is two things, it’s traffic but it’s also average transaction size.

In the case of Apple, clearly, they have been able to do both. They are a completely unique tenant that has – never before has retailing seen a tenant as productive as that tenant. So you see others now trying to enter the business like a Microsoft or like a Sony and if Samsung or others want to enter, we would welcome those discussions. But you need a broad mix to merchandise in order to be that one stop shop, that comparative shopping opportunity that the customer value so highly.

Mark Gifford – Bloomberg Research

And have you noticed a significant volatility in terms of revenue sources from that, and how it impacts your total sales per square foot or is that still pretty steady through the quarters?

Robert Taubman

No, no, I mean Apple may – remember, the top line sales of a retailer really has very little to do with our – and I’d say little to do, it has everything to do in the long term, but in the short term our income streams come from the rents that we get paid. Our minimum rents are 96% or some number like that of our total rental stream.

So it’s very predictable granular income. If we have 150 tenants in a shopping center, they’re all paying minimum rent to us. So it is a very predictable, very – the income streams have very little volatility to them. And you saw that as we came through the recession. We had one year down, 2009 was down I think 2.7%, we were up in 2008, we were up in 2010. Okay. So, that’s very predictable income stream coming through the great recession.

Mark Gifford – Bloomberg Research

Right. Given the strong performance of the center, you think you’d be able to push rent harder if you knew that number, like you said if the retailers are just trying to understand whether or not that’s a stable number going forward before they may be agree to paying the higher rents that you might be demanding?

Robert Taubman

Well, we are pushing for higher rents and you’re seeing that in our opening rent numbers and you hope to see it moving for our average portfolio growth in rents. All of these things are – all the metrics are very positive in the business today and it does come back to the top-line, the sales because retailers want to be in our centers. So, I think the general answer is, in the short term, it doesn’t matter that much except one percentage rent generally. But, in the long term, it means everything and our tenants are doing well.

Mark Gifford – Bloomberg Research

Okay. And then, Lisa, just one other question on the revolver that you’re expanding; does the asset mix change on that at all? Are you adding more assets to it or is it the same assets in there?

Lisa Payne

It is the same assets in there. The assets have grown in their NOI and therefore support this higher level that we’re able to achieve.

Operator

Your next question comes from the line of Jay Hagerman from Goldman Sachs. Your line is open.

Jay Habermann – Goldman Sachs

Hi, sorry, just one follow-up. I guess, Bobby or Lisa, on strategy and just with regard to leverage and if you think about the potential for the development pipeline to increase over time, should we expect leverage to stay roughly where it is today? I mean, do you anticipate, clearly with a ramp-up perhaps in development over time, to keeping leverage low in this environment?

Lisa Payne

Well, Jay, we did say when we raised the equity that one of the reasons we were getting ahead of the curve was the importance we see in maintaining our balance sheet strength. It proved very wise and productive during the downtown. We do see, as we are looking out, some great avenues of growth. Right now clearly our debt-to-market cap is at its all-time low, partially because of the equity, but more because of our stock price performance. We really look at coverage and EBITDA ratios, and I’d say where we are today, plus or minus, is where we are comfortable.

Now, development is great because when we bill to 8% to 9%, yes, we’re still going to have “equity in those projects”, but we are going to able to refinance when they stabilize and get a lot of the capital out, which is why we have been able to sell fund for the last 15 years with all the development we’ve done. But, the financing markets are definitely a little bit less than they – in proceeds than they were over the last decade.

So, we’re going to have to put more equity in, which is why we did the equity raise. But, I do still think we’ll be able to do a lot of external growth by – in the financing markets because we’re not buying retail; we’re building wholesale, and we will be able to finance out most of our equity when the projects stabilize.

Jay Habermann – Goldman Sachs

Okay. And, just one other follow-up with regard to the outlet business; do you have a sense of how much you have spent to date in pre-development costs?

Robert Taubman

Well, it’s all included in the numbers that we have been talking about. So, it’s – to the extent that we end the year closer to $20 million, we spend $10 million year-to-date. It’s all in those numbers. So, we’re not going to break out a business line or a geographic area in that number; it’s one line item.

Jay Habermann – Goldman Sachs

Okay. Thank you.

Operator

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

Michael Bilerman – Citi

Yeah, it’s Michael. I am going add just a quick follow-up. When you look at the 21 assets that make up the $600 per foot productivity, and I know you don’t breakout individual assets or talk about the more outlet oriented assets versus the others, but I am just wondering if you draw a line in the middle. What was the top 10 and the bottom 10 assets in terms of productivity?

Robert Taubman

Well, Mike, we don’t break out those numbers and there is clearly a range, but all of our children, we love, and I think that our least performing asset from a sales productivity standpoint wouldn’t be so bad in somebody else’s portfolio. So – but we get to the $600, it’s pretty evenly weighted above and below, just – without answering the question specifically.

Michael Bilerman – Citi

Do the top 10 assets – what sort of percentage of NOI would those make up relative to the bottom 10 performing assets?

Robert Taubman

We haven’t broken it out. Obviously, it would be greater. The top 10 would be better, would be higher weighted EBITDA but it is something – I tell you what, we will look at it and think about whether or not we want to have more disclosure on that subject.

Michael Bilerman – Citi

Right.

Robert Taubman

But, we have never done that and I don’t want....

Lisa Payne

It’s better to think about it before you answer the question.

Robert Taubman

Right. That’s what I did.

Michael Bilerman – Citi

I wouldn’t ask the question if it – the information was already out there.

Robert Taubman

Okay. Thank you, Mike.

Michael Bilerman – Citi

Okay. Thanks.

Operator

And, there are no further questions at this time. I’ll turn it back for closing remarks.

Robert Taubman

Thank you and thank you everybody for being on the call. Obviously, we are delighted with how our core is performing. We’re very pleased with where we are in our balance sheet, and we hope to be able to show you progress in the months and – to come on our external growth opportunities. So, again, thanks for the call. Thank you, operator. Bye-bye.

Operator

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

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