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Executives

Robert Taubman – Chairman, President, Chief Executive Officer

Lisa Payne – Vice Chairman, Chief Financial Officer

Barbara Baker – Vice President, Investor Relations

Analysts

Christy McElroy – UBS

Todd Thomas – KeyBanc Capital Markets

Jordan Sadler – KeyBanc Capital Markets

Craig Schmidt – Bank of America

Jay Habermann – Goldman Sachs

Paul Morgan – Morgan Stanley

Alex Goldfarb – Sandler O’Neill

Michael Bilerman – Citi

Sumit Purik (phon) – ISI Capital

Michael Mueller – JP Morgan

Ben Yang – Keefe, Bruyette & Woods

Cedric Lachance – Green Street Advisors

Steve Sakwa – ISI Group

Taubman Centers, Inc. (TCO) Q3 2011 Earnings Call October 21, 2011 8:30 AM ET

Operator

Thank you for holding and welcome to the Taubman Centers’ Third Quarter Earnings conference call. The call will begin with prepared remarks and then we will open the line to questions. If you would like to ask a question during that time, simply press star then the number one on your telephone keypad. If you would like to withdraw your questions, please press the pound key.

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 will turn the call over to Barbara for opening remarks.

Barbara Baker

Thank you, Operator, and good morning everyone. Welcome to our third quarter conference call. Yesterday we released our results for the quarter and our supplemental information package. Both are available on our website, www.taubman.com. 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 10-K and subsequent reports for a discussion of various risks and uncertainties underlying our forward-looking statements.

During this call, we’ll also discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of 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 has the opportunity to ask a question.

And with that, I will turn the call over to Bobby.

Robert Taubman

Thank you, Barbara, and welcome everyone to our call. This was another excellent quarter and an important one for Taubman Centers. Sales per square foot was up nearly 12%. NOI was up 8.6%. We made two strategic acquisitions in the U.S. and one in Asia, and we made good progress on our development programs in both places.

We’re delighted with the continued strength in our core, led by our tenant sales, now seven quarters in a row of double digit increases. We recognize trees don’t grow to the sky, and eventually sales growth will begin to moderate; but in the meantime, we’re enjoying it. The 11.7% sales per square foot increase for the quarter comes on top of a 13.2% increase in the third quarter of last year. Year-to-date sales are up 13.3% and our trailing 12-month sales per square foot is now $615. As sales have accelerated, total occupancy costs as a percentage have fallen. We’re now expecting occupancy costs in the range of 13% for 2011. This indicates significant built-in rent growth for the future.

All our centers are reporting growth with Florida, luxury and tourism centers leading. In the luxury category, all the LBMH concepts are performing well, as are Gucci, Coach, and Burberry. Victoria’s Secret continues to be hot. Abercrombie is leading the unisex category while American Eagle, PacSun, Express, H&M and Forever 21 are reporting very solid results. Phoebe, J. Jill, and White House Black Market are leaders in women’s apparel, and Brooks Brothers for men’s. The full offer concepts have been on fire all year and home is beginning to show increases. Great design is driving very strong results at Restoration Hardware and Z Gallerie is also doing well.

With this fantastic sales growth, we’re signing leases at attractive rates and at a faster pace – about 50% more leases than at this time last year. Occupancy at quarter-end was 88.5%. In addition, there was 4.6% in temporary tenants, a record for the third quarter. Combined, the total was 93.1%. Consistent with our last call, by year-end we’re expecting an increase in year-over-year occupancy of about 50 basis points.

Moving to rent, we’re very pleased by the 3.8% increase in our average rent per square foot compared to last year. Our opening rents have been particularly strong. We now expect to be up about 3.5% for the full year. That’s ahead of our original expectation.

NOI was up a strong 8.6%, excluding lease cancellation fees. Rents, percentage rents and recoveries were the primary drivers. We now expect NOI growth excluding lease cancellation to be about 3% for the full year. That’s up from 2% at the time of our last call. We’re still projecting negative year-over-year NOI during the fourth quarter. This is due to the accounting methodology change we’ve been talking about all year, and the impact of CAM capital.

Over the past quarter, we’ve been very focused on our four prongs of growth: acquisitions, U.S. mall development, outlets, and Asia. We’re making measurable progress in each of the four categories. First, acquisitions – we were very pleased to announce our agreement to acquire the Davis Street assets: Green Hills in Nashville and the El Paseo properties in Palm Desert, California. There are few high quality dominant centers outside the ownership of public REITs in the U.S. We estimate there are less than 60 significant full-price centers with sales over $700 a square foot. Of that number, only about 15 are privately-held, including these two that were owned by Davis Street. Given that the principles of Davis Street included tax-paying individuals, we believe the ability to use our partnership units gave us a distinct competitive advantage as they understood the benefits of owning the highest quality assets in the business.

We’re in the midst of the due diligence process and expect to close before year-end, but the exact timing is ultimately dependent on ledger assignments. Assuming our current projections, which are still preliminary, the 2012 cap rate based on the $560 million acquisition will be about 4.5%. This was a rare opportunity to secure some of the best assets in America in a way that will create value for shareholders. Further, we are buying 100% ownership of both the centers and their land. Most importantly, we feel we can grow income quickly as the average occupancy cost of these centers is less than 10%.

Why is occupancy cost so low? First, the Davis Street team has been focused on the merchandising and dominant positioning of the centers right through the Great Recession. Second, Nordstrom’s was just added to Green Hills September 14 and has had an outstanding opening, one of the best in their history. Third, El Paseo Village began leasing in 2008, yet Davis Street was able to secure some wonderful tenants such as Juicy Couture, Apple, Banana Republic, Kate Spade, bee-bee, and Lucky Brand Jeans, but at some impact to rents. And most significantly, sales have accelerated as renovation, expansion, and new tenancies have opened in these centers. What looked like a good but uncertain story to tenants who negotiated leases in these locations over the last several years has turned into a huge win, and the higher than planned sales have pushed occupancy costs to these very low levels.

With about 50% of the small shop leases expected to turn by 2015 and the opportunity to add our programs in the areas of sponsorship, specialty leasing, marketing and CAM management, we expect that we can grow NOI significantly. The compound average growth rate should average 7 to 8% over the next four to five years; and even at that time, these assets will still be below our Taubman portfolio average occupancy cost.

We also expect to find ways to profitably expand the assets. While it would be difficult to significantly impact NOI before 2013, today’s low interest rate environment makes these acquisitions about neutral to FFO per share in 2012, excluding likely positive adjustments for purchase accounting. We believe this is the definition of a true strategic acquisition.

U.S. development is also very active. We believe we’re in the final predevelopment stages in Puerto Rico. Puerto Rico, and specifically the San Juan metro area, has a significant population with high disposable incomes. Many of these residents are currently shopping off the island. This, coupled with the upscale tourist that Puerto Rico attracts, creates a unique opportunity for a well-located shopping center offering luxury and better merchandise. Both Saks and Nordstrom’s have announced their commitment to this project. We’ve also received approval from the City and Commonwealth and strong endorsement from both the mayor and the governor. We are currently working through our competitors’ latest appeal, which we expect once again to be unsuccessful, but believe we’ll be in a position to start construction by late summer next year. If we’re successful, we could open this center as early as 2014.

Our feasibility efforts at Waikiki are proceeding well and we hope to make visible progress on this outstanding site next year. And in Sarasota, we’re working with the land owner to reinstate and modify our original agreements and are hopeful we’ll be in a position to begin construction sometime in 2012. As we’ve said in the past, this is a terrific site in a great market completely void of a true upscale shopping venue.

We continue to be on schedule for the opening of Salt Lake City in March 2012. Leasing is now about 88% committed. In September, we announced our first 20 new-to-the-market tenants, including such names as Coach, Brooks Brothers, and Tiffany. We continue to be on target for an 11 to 12% unlevered return on our $76 million investment.

Now turning to outlook, I said at the beginning of the year that we’d be disappointed if we didn’t have a visible outlet project in 2011, and it looks our first will be in St. Louis. We have an outstanding site along I-64, the key western freeway, with excellent access and visibility. It will serve the broader St. Louis market – nearly 3 million people – who do not have an outlet center. We’re well into our leasing efforts. On a parallel basis, we’re working through the approval process and hope to be in a position to begin construction next year. This would put us on track to open in late 2013.

In Asia, the integration of Taubman TCBL is going well and we expect to close in November. As we’ve begun working with our new colleagues, we’re even more impressed with their capabilities, knowledge of the markets, relationships and reach. We believe they will help us accelerate our investments in China.

As background, TCBL is a retail property agency business, the only one like it in China. Founded in 2005, it is headquartered in Beijing and has offices in seven leading cities. The company services a client base of local property developers, retailers, and institutional investors including HSBC, RBS, JP Morgan, Morgan Stanley Real Estate, and Angelo Gordon. It brings us a platform with expertise in research and planning, asset management, leasing and investment services.

We’re investing $24 million – 12 million in cash and a 12 million capital comp credit for the minority owners. We’ll have a 90% controlling interest in the newly formed company. We’ve been looking at several projects with them and continue to be optimistic we’ll have a project to announce there in the next 12 months.

Turning to Korea, as many of you read in the news, we’re exploring the potential to work on a mall with Shinsegae, a leading department store company in South Korea. Shinsegae would be a terrific partner. We’ve made a $21 million initial investment which is reflected in the other assets line item on our balance sheet. Our interest in the project is fully refundable after the completion of due diligence and is secured by a letter of credit. The project is still very preliminary, but it is a promising opportunity.

Also in South Korea, leasing is going very well at IFC Mall in Seoul, opening in the third quarter 2012. We’re currently about 90% committed and have announced such internationally recognized brands as H&M, Zara, Guess and Lacoste. Our success clearly demonstrates both our ability to lease and merchandise a center in Asia and the 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 some closing comments.

Lisa Payne

Thank you, Bobby. This quarter, our FFO per share was $0.63, up $0.04 from the third quarter of 2010. Included in these results were $0.02 of acquisition costs; therefore, our adjusted FFO was up $0.06 from last year, about a 10% growth rate. Excluding the non-cash impact of Pier and Regency for both periods, we would have been up $0.09.

Here are the items that changed year-over-year – they are listed on Page 11 of the supplemental: minimum rents up $0.04. That’s primarily the result of rent per square foot growth, which as Bobby said was a healthy 3.8%. Percentage rents up $0.02. Strong sales drove this line item. Given the current sales momentum, we’re assuming solid growth in percentage rent throughout the rest of the year. Net recoveries favorable by $0.055. That’s partially due to our change in methodology for allocating the revenue from our fixed CAM tenants. We discussed this on our calls during the first two quarters. For the full year, we continue to expect the methodology change, which has positively impacted the first three quarters, to be fully offset in the fourth. In addition, this quarter we benefited from an increase in CAM capital expenditures. We also expect CAM capital to be a negative variance in the fourth quarter. But overall, as we said last quarter, we anticipate the recovery rate for the year to be modestly down from 2010.

Next is lease cancellation revenue, off half a penny. Year-to-date, we’ve only collected $2.5 million, a sign of the strong sales environment in our centers. Tenants don’t want to leave; therefore, we’re taking our full-year forecast down to $3 million. Other income was up a penny. That’s from an improvement in sponsorship and other center-related items. Other operating expense, unfavorable by $0.035. The majority of this variance is from increased predevelopment expense. That’s the result of increased activity in the U.S. and our focus on expanding our presence in Asia. We continue to believe this line item will be about 20 million for the year.

Interest expense, favorable by $0.02. That’s primarily from low floating rates on our IP loan – International Plaza loan – which had previously been fixed. While there was no variance in the quarter, we’re assuming our net third party income will be 10 to 11 million for the year, up from about 8 million in 2010. This is due to increased third party leasing fees primarily in Asia. This is not a change from second quarter guidance.

Now turning to our balance sheet. Our debt to total market capitalization stood at a very strong 38.7% at quarter-end. We’re working on the refinancing of the International Plaza loan. It 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. At today’s treasury rate, this 10-year financing will be priced at just under 5%.

As we said on last quarter’s call, we upsized our revolving credit facility to 650 million. With only 20 million outstanding under the revolver as of September 30, we have plenty of capacity when we close on the Davis Street assets and pay off the approximately $270 million of installment notes that were part of the acquisition. We also believe that we’ll be able to achieve additional proceeds of at least 50 million when we refinance Green Hills in early 2013.

Given our equity offering in June, we were well prepared to take on this acquisition. The impact on our leverage ratio was modest, an increase of only about 3%. This week, the Company successfully redeemed the Series F 8.2% preferred equity for $27 million. This is 10% below the face amount and a 2.2 million discount from book value. This will positively impact the company’s FFO by a non-recurring 2.2 million in the fourth quarter; however, as you can see in the guidance table, we plan to exclude this amount from adjusted FFO.

In addition, there will be an ongoing positive impact to the Company’s FFO beginning in the fourth quarter of 2011. At current interest rates, this is positive by about $0.02 annually. This is due to the reduction in distributions partially offset by a modest increase in interest expense on the borrowings used for the redemption.

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

Robert Taubman

Thanks, Lisa. As we said in the release, as a result of the strong fundamentals this quarter, we are raising and narrowing our guidance range. We now expect FFO per diluted share excluding the Pier, Regency, acquisition costs, and the preferred buyback to be $2.95 to $3.00 per share, up from our prior guidance of $2.88 to $2.98. Bottom line FFO guidance including these items is now $2.66 to $2.71.

We remain bullish about our business. Our core looks great. Sales have been just incredible. We’re delighted with the Davis Street announcement and we feel very good about the progress we’re making on the development front, both here and in Asia, and with (inaudible).

So with that, we’d like to open the call up for questions. As Barbara said, please limit your questions to two. Alicia, are you there?

Question and Answer Session

Operator

Absolutely. At this time I would like to remind participants in order to ask a question, you may press star then the number one on your telephone keypad.

Our first question comes from the line of Christy McElroy with UBS. Your line is open.

Christy McElroy – UBS

Hi, good morning everyone. With regard to the outlet site in St. Louis, can you comment on the competition you’re facing from Woodmont Outlets for a site nearby; and the TO Ventures JV, is that a platform from which you intend to pursue future outlet development projects?

Robert Taubman

Good morning, Christy. I’ll take the second question first – absolutely. TO Ventures includes Bruce Zalaznick, that we have talked about on prior calls, and the relationship that we’ve formed with him. And it’s a 90/10 relationship with him, and it’s going to be 100% of our outlet development.

As to the competition, as we’ve talked about previously, every market in America is going to have competition. We think our site is terrific. We’ve made a lot of progress on the leasing front and we think we’re very, very well positioned to compete with them in that market. We think at the end of the day, only one project is going to get built and that’s the way it should be.

Christy McElroy – UBS

And then can you say what the NOI growth was in Q3 excluding the impact of the change in recovery for accounting methodology?

Lisa Payne

Yes. The accounting methodology was probably about 1%. We also had the CAM capital impact, which was also about a 1% impact.

Christy McElroy – UBS

Okay, so it would have been about 6 or so percent.

Lisa Payne

Correct.

Christy McElroy – UBS

Thank you.

Operator

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

Todd Thomas – KeyBanc Capital Markets

Hi, good morning. I’m on with Jordan Sadler as well. Bobby, thanks for the expected 2012 cap rate on the two domestic acquisitions; but thinking about acquisitions going forward, I was just wondering if your underwriting has changed in the last few months, given the increased cost of capital and also the availability of capital, and also even expected changes in growth projections.

Robert Taubman

Good morning, Todd and Jordan. You know, acquisitions come periodically for us, and this was a very rare opportunity to acquire two very high quality assets. And for us, while it’s a strong cap rate, the growth rate is remarkable and we believe there’s a lot we can do with the assets. Davis Street’s team did a great job, but we feel that we can add our programs and really improve the growth of the asset.

Todd Thomas – KeyBanc Capital Markets

Okay. Any thoughts around what the expected yields might look like for the outlet in St. Louis?

Robert Taubman

No, we’re not—until we’re ready to go forward, we don’t want to make any comments at all about returns. But once we do get ready to start construction on an asset, our history has been that that’s exactly what we do.

Jordan Sadler – KeyBanc Capital Markets

Bobby, it’s Jordan. Just following up on the returns question – are you adjusting what you would expect in terms of new investment for return, given what’s happening to the fundamentals from the overall environment, from a macro perspective as well as what’s happened to sort of capital costs over the last few months; or is it kind of just a longer term view that you’re espousing?

Robert Taubman

We don’t really focus on—I mean, obviously interest rates matter in the long term, but at the end of the day, we have said for many, many years, we are trying to build to about a 300 basis point spread as our margin. And if we can build—I mean, today cap rates for good quality assets are clearly 5 and below. We’re proving it by buying the two assets at a 4.5 cap rate. And whether they’re outlet centers or full-price centers, assets are trading in that range if they’re high quality. So to have a 300 basis point spread on an unlevered basis would start really at about 8% for a high quality asset. Now, historically we’ve built north of that, and obviously if we can build at 9 or 10%, it’s better than building at 8. But if you can get a 300 basis point spread on your investment, you’re going to make a lot of money; and we’re delighted to be able to put into the ground any asset that we think that will be (a) high quality and (b) have a 300 basis point spread.

Jordan Sadler – KeyBanc Capital Markets

That’s helpful. Thank you.

Operator

Our next question comes from the line of Craig Schmidt with Bank of America. Your line is open.

Craig Schmidt – Bank of America

Thank you. Good morning. Regarding the Chesterfield Outlet project, when do you think you might be taking down the land?

Robert Taubman

Well Craig, we’ve said that we would hope to be in a position to complete entitlements soon and actually be in the position to start construction next year and open fall 2013. So if we’re going to start construction, typically what we do is wait until the day we want to start construction to actually close on the land. That’s the best risk avoidance that you can have. We believe that the agreement that we’ve put in place with the landowner will in fact allow us to do that, so sometime probably in the fall – summer to fall – of next year, assuming we’re ready to start construction, as we’ve said, we’ll be taking down the land then.

Craig Schmidt – Bank of America

Great. And is there any additional work that needs to be done on the land? I know they describe it as floodplain development.

Robert Taubman

No, nothing significant. The road system is fundamentally there. There are no significant roads that need to be created. It’s a terrific location – incredible visibility, great interchange. I mean, it’s all right there; and we’re delighted it’s in the western corridor, which is the number one corridor in St. Louis, and it’s along what was known as I-40 – it’s now technically I-64, but it’s considered I-40 in that market. It’s really a terrific site.

Craig Schmidt – Bank of America

Yeah, looking at an aerial, it did look like great visibility and great access off the highway. It was said that you were meeting with the planning commission the week of October 10 for rezoning. Was there any outcome of that or is that still under review?

Robert Taubman

Well, we do have another meeting coming up in November, and we’re optimistic that that will be a positive meeting.

Craig Schmidt – Bank of America

Okay, thanks a lot.

Operator

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

Jay Habermann – Goldman Sachs

Thanks. Good morning. Bobby, you mentioned occupancy of about 93%, and 4.6, I guess the temporary tenancy, which is at a record level. I’m just wondering – in terms of converting some of that tenancy to permanent space, how are you seeing that trend? And can you talk a bit about some of the expected store closings – clearly the Gap recently – as well, so I guess contrasting the positive sales with pressure to increase occupancy.

Robert Taubman

Good morning, Jay. Thanks for your question. Number one, we’re always trying to find permanent tenancies within the temporary tenancy world, and there is some amount that do convert every year. This has moved from what was a cottage business into a very professionally managed business, and there are many tenants out there that are new tenants that have resulted from manufacturers of products and the like that have really been great. I happened to be at Great Lakes Crossing this week. There are 186 tenancies in that shopping center. Every single location will be occupied for the Christmas season. 170 of them are actual real tenants – permanent tenancies – and 16 are tills. We expect of the 16 other locations, 11 will convert into permanent tenancies in the coming year. Now, there will be obviously some unexpected, unscheduled fallout as well; but that gives you some sense as to how we’re managing for net operating income, in essence, a given shopping center.

Now the second question was on Gap. We really expect very little impact from the Gap. We have 41 locations at this point in time. We had three others, and as they’ve announced, they’re consolidating some of their multi-store formats into single locations. As an example, at Short Hills, we had a Banana Men’s and Women’s and it’s now in one store. At West Farms, we had a Baby Gap; it’s now gone into the main Gap store. So we expect—when you have a good asset—there’s a lot of stores that are closing, but we really do not expect many closings at all. When you’re in a location that’s high quality, that’s where Gap wants to be; and they really have too much exposure at this point, which is why they want to close 200 locations. It’s going to have very minimal impact in Class A assets.

Jay Habermann – Goldman Sachs

Okay. And just a second question on China – I know you expect to close on the TCBL acquisition soon. Can you talk about is there going to be a change in strategy there, I guess, given that you’ve got sort of more on-the-ground personnel, and talk about maybe the identifying of a partner and potential projects as you talk about the next year or 18 months.

Robert Taubman

We don’t see any change in strategy at this point. We think the marrying of Taubman and TCBL really creates a unique platform that really will allow us to accelerate our investments in China. It clearly increases our knowledge base and our confidence in the markets. It increases our contacts, our relationships. The platform that’s being created there with seven offices in all the leading cities, including Beijing and Shanghai, that—TCBL has worked in over 50 cities in China. There are 39 cities with over 5 million people in China. They’ve worked in almost every single one of those, so they have a tremendous knowledge base that should be very, very helpful to us, and we’ve been very impressed with our new colleagues as we’ve gone through the beginning of the integration process.

We mentioned in our comments that we would be hopeful in the next 12 months - René has said this publicly, as we have – to make some announcement in 2012, and we’re very much on track. We can’t comment at this point, but as René stated at the beginning, we’ve spent a lot of time talking to strategic partners, retailers, capital sources and the like, and we’ve made a lot of good progress on that front. We would hope that emerging from those strategic discussions coupled with now the TCBL platform, that we’ll have some things to talk about in 2012.

Jay Habermann – Goldman Sachs

Okay, thank you.

Operator

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

Paul Morgan – Morgan Stanley

Hi, good morning. On the NOI going from 2 to 3% for the full year, I mean, you are halfway through the year already. What was the big upside surprise to you, and were you maybe more cautious on sales and percentage rents, or other things that in the past three months moved?

Lisa Payne

Paul, it’s Lisa. It’s really a couple of things. About half of the increase comes from positive rent, both positive news on opening rents as well as percentage rents, and probably some good news on rent relief as well. Kind of all in there is rents, and then about the other half from savings on the CAM side. So it’s a lot of good things, and all good, positive things that came together to make it—even though it was halfway through the year, made us able to increase by a percent.

Paul Morgan – Morgan Stanley

Okay. And then you said that the acquisitions were neutral to 2012 FFO. What does that assume from a permanent financing perspective?

Lisa Payne

Well, their loans are in place so there is no refinancing in 2012. It assumes borrowings under our line of credit for the repayment of the installment notes, and the neutral is, as we look at it today, without any changes on accounting, which will happen – acquisition accounting. We haven’t finished due diligence, so we haven’t come up with what our normal straight line of rents and other things. So, excluding those things, which we think will be probably modestly positive, it’s going to be break-even.

Paul Morgan – Morgan Stanley

Great, thanks.

Operator

And our next question comes from the line of Alex Goldfarb with Sandler O’Neill. Your line is open.

Alex Goldfarb – Sandler O’Neill

Good morning. Just going quickly to luxury for a moment – I guess a popular conception is that luxury sales tend to track the stock market, and given that you guys reported a pretty strong third quarter, just curious if that’s sort of a lagging data point, in which case you may expect things to change going forward; or perhaps the popular correlation isn’t as strong and maybe there’s a disconnect between the stock market and luxury sales.

Robert Taubman

Alex, good morning. There’s clearly been a strong correlation over the last three years with the stock market direction and our sales trends. We have no reason to believe that with broad movement that that won’t in fact continue. What I think you’re seeing is that it isn’t day-to-day. It was essentially immediate after Lehman on September 15 because it was just such a shock and such an event to the overall system. But this volatility in the market doesn’t seem to be bothering our shoppers, especially our more affluent shoppers at this moment in time. And there is significant momentum in our centers today with retailers who are buying good inventory, putting more people on the sales floor; and that kind of a cycle typically won’t fall off a cliff without a very significant event.

I would also say that not all our sales are luxury. Yes, we are upper moderate to luxury much more so on a relative basis than others, and we do think that that is a reason, along with tourism, along with our geographic spread, as to the reasons that we are outperforming the rest of the industry.

Alex Goldfarb – Sandler O’Neill

Okay. And then the second question is just regarding Gap – you mention that you’re not expecting a lot of closures, just given the productivity of your centers. Sort of curious where their rent is versus market for that same space. My understanding is they tend to take pretty good space.

Robert Taubman

Well, they do take pretty good space, and if we are going to get back stores – and I really want to underscore that I don’t think we’re getting back a lot of stores. I mean, we’ve gotten three back. Maybe we’ll get another three back – I don’t know. But it’s really almost no impact to us. We’ve very little exposure here. I do think that we’ll have upside in those locations.

Alex Goldfarb – Sandler O’Neill

But wouldn’t you want to be encouraging more closures if they have such prime space and conceivably you could get better rent payers in there?

Robert Taubman

Well, you have to look at the overall merchandise of the shopping center. If they’re performing well, then the customer is telling us that they want that store in that location. So it all is based on performance. We have been very proactive with Gap, with other companies. If they’re not performing in a given asset, we try to move them out; and part of our very aggressive leasing style is in fact to do exactly what I am talking about – it’s the churning of the space. We end up with more unscheduled terminations than others, and you can see it generally in our lease cancellation because we push so hard to try to move people out. Now, lease cancellation is down, as Lisa said, because sales are so strong and people don’t want to leave. It’s hard to get them out – they’re making money.

Alex Goldfarb – Sandler O’Neill

Okay, thank you.

Operator

Our next question comes from the line of Michael Bilerman with Citi. Your line is open.

Michael Bilerman – Citi

Yeah, good morning. Just going back to the occupancy for a second – when you look at whether it be ending average or leased space relative to last year, at least on an occupancy and lease basis, those are modestly down. When you roll in that temporary tenants, how would those numbers compare on a year-over-year basis?

Robert Taubman

I think it’s up.

Michael Bilerman – Citi

Up modestly? Up 100 basis points? Up 200?

Robert Taubman

It’s up modestly. It’s up 30 to 40 basis points from the prior year, including temporaries. It was 92.7 in 2010 in the third quarter.

Michael Bilerman – Citi

Okay. And Lisa, we went through this a little bit last quarter in terms of the average base rents in the portfolio, which at least sequentially went down a modest tick even though your rent spreads continue to widen. I assume that you’re leasing space that’s not in your pool that you’re looking at; I assume it’s just larger spaces. But what else may be going on for the average base rents in your portfolio to be down sequentially rather than moving up as you’re signing these leases higher and higher?

Lisa Payne

Okay. Well remember, average rents have two things in it – people who close and people who open. So at the beginning of the year, one of the things that happened was we had that big, big increase the first quarter – like, 4%, 3 to 4% - and some of that was we had a lot of closings that were at a low rent. Well, we’re now filling those in as we go through this year continually with good opening rents, but that has flattened out somewhat. I’d also mention that we’re talking about $0.08 here, so we feel very good—we look at the year-over-year numbers quarter by quarter very sensitive to what’s in, how long they’re in; and we’re going to be up 3.5% for the year overall – very, very strong performance.

Michael Bilerman – Citi

Okay. And then just on the same store NOI, I realize you’re saying the full year is going to be 3; but it sounds like the fourth quarter headline number is going to be pretty negative. Can you just give us sort of what that number in a range will be so that no one is surprised about the magnitude?

Lisa Payne

Well, we’re up 6% for the year—I mean, year-to-date, and we’re going to be roughly 3. So I think if you do the math, we’re going to be down in the kind of high 3s to 4% range.

Michael Bilerman – Citi

Okay. And then just last one—

Lisa Payne

And remember, a lot of that is methodology on CAM as well as CAM capital. The core, we continue to expect to perform—the fundamentals we do believe we’re going to have good percentage rent in there, we’re going to have continued good increases from rent per square foot, but we are going to see CAM capital and methodology impacting us a fair amount, probably in the range of $0.09, $0.10.

Michael Bilerman – Citi

Right, I appreciate that, and I think people jump to the wrong conclusion in the press release without remembering that data. I’m just trying to make sure that everyone’s aware when you print the big negative number that it’s more to do—

Lisa Payne

Well, I thank you. I’ve been saying it every quarter. I don’t know how often or more I can say it – like, warning! Warning!

Michael Bilerman – Citi

Well I guess in the third quarter press release, you could have put in the adjusted number. Maybe that would have toned people down.

Lisa Payne

We could, yes.

Michael Bilerman – Citi

The only other question, Bobby, as you think about the venture in China—and I know opportunities come up and if they wanted to sell the business, then that was what you had to do. But was there a thought about just using them as a consultant for a period of a year on a fee basis – you know, half a million dollars, a million dollars – rather than putting in 24 and owning a consulting firm?

Robert Taubman

Absolutely. We spent a lot of time discussing the various opportunities, but we felt the best alignment of their interest and our interest was to in fact do what we’ve done. They are going to be owners—what really drove them was the idea that they could be investors in projects that we would also be an investor in, and that’s really what drove them to want to do it in this way. From our perspective, that alignment is really what we wanted. It’s one thing to hire someone; it’s another thing to have them as your owner next to you.

Michael Bilerman – Citi

Does that impact at all the conflict of interest as they advise on the consulting side of their business?

Robert Taubman

We don’t feel that—it will be very much at the margin. We’re going to be building a few projects at a time, and they’re managing literally dozens and dozens of projects at any given time. They work for capital sources, for retailers, for residential developers mainly but also some commercial developers. We really don’t see the conflict as being meaningful at all.

Michael Bilerman – Citi

Okay, thank you.

Operator

Our next question comes from the line of Sumit Purik with ISI. Your line is open.

Sumit Purik – ISI Capital

Hey, good morning everyone. We just had one question, really, and it was we know, Bobby, earlier you spoke about the tourist markets in the quarter being among the strongest in your portfolio. Just speaking specifically about the southeast region and maybe Florida, the Brazilian real is down considerably against the dollar, and we know historically that’s been a high correlation with the sales growth in southern Florida high-end malls and tourist markets. Do you expect a negative impact from that maybe in Q4 next year going forward, just because the purchasing power of the Brazilian consumer is down?

Robert Taubman

Yeah, I mean, there’s no question that South America and Latin America are really important in the context of all of southern Florida and retail sales, and it’s very important in Dalton Mall where 85% of our primary market is Hispanic-speaking as their primary language. Having said that, we don’t see anything falling off the cliff in the fourth quarter. Something may moderate as you move into 2012 if there is a big difference in the dollar and the real. You know, tourism is important. The opportunity that they see in Dalton – to use Dalton specifically, but greater Florida – is to really see stores and merchandise that they really don’t see in South America in the same way. So they’re there seeing their families, there’s a lot of cross-family there, and that’s what generates a lot of the tourism dollar.

Sumit Purik – ISI Capital

Okay, thanks.

Operator

Our next question comes from the line of Michael Mueller with JP Morgan. Your line is open.

Michael Mueller – JP Morgan

Great, thanks. Bobby, with the development pipeline picking up in the U.S., I was wondering if you can basically try to quantify potential dollars invested by Taubman that could be coming online in 2013, 2014 between the outlet center, it sounds like potentially two malls – you know, thinking about that on the domestic side. And then any way to roughly peg dollars that could go out the door in Asia as well over that time period?

Robert Taubman

Well, we’ve been pretty consistent. We can’t be specific on any one project at this point, but we will be specific, again, when we begin construction. In that quarter, we’ll begin talking about the investment amounts as well as the return expectations. But we’ve been very consistent in the past talking about on average a development costing about $200 million, a new regional mall, our beneficial interest in it; and an outlet center, we’ve talked about roughly $150 million. So if you use those numbers, you look at the fact that in the context of Sarasota we are going to have partners. We’ll have partners as well in San Juan, but a more minority position for them than it’s the reverse, as it were, in Sarasota as to San Juan. I think you can begin modeling these things without the absolute numbers that you’re looking for.

Michael Mueller- JP Morgan

Got it, okay. And then Lisa, I know in the TCBL press release back in August, you talked about a 3 to $5 million loss in 2012, your share of the losses. Can you talk a little bit about the geography on the P&L and how that will be flowing in, which line items, et cetera?

Lisa Payne

We would expect a good amount of that to be in the third party revenue and expense area because that’s really the business line that they’re in; and obviously today, depending on how much of that we continue to do as we integrate there, but we will clearly see a big impact in third party revenue and expense. I also would say the cost of integration of integrating the two firms likely will flow through other operating expense, that we will likely see some increases there. But that’s really the two areas you’ll see the impact.

Obviously as we start doing development, if we do development, we’ll start then looking at what happens in other operating expense as we flow through some of those costs, but that’s really the two areas.

Michael Mueller – JP Morgan

Got it, okay. Okay, thank you.

Operator

Our next question comes from the line of Ben Yang with Keefe, Bruyette, Woods. Your line is open.

Ben Yang – Keefe, Bruyette & Woods

Yeah hi. Good morning. Bobby, I think you mentioned that you expect about a 7 to 8% NOI growth rate in the Davis assets over the next four to five years. I don’t know if I missed it, but did you comment also on the size of the investment you think is needed to capture that NOI growth, and would that investment also include potential expansion or further redevelopment of these malls?

Robert Taubman

No, we haven’t commented. You’re right in the number – 7 to 8% over the next four to five years. We haven’t commented on investment, but we don’t believe that outside of the day-to-day normal stuff, like a tenant allowance or a lease commission, that there will be significant capital in those numbers. If in fact we find a way to expand profitably the assets physically, then we will be talking about what we’re doing at that moment in time.

Ben Yang – Keefe, Bruyette & Woods

So that 7 to 8% is just pure organic growth under your platform?

Robert Taubman

Correct.

Ben Yang – Keefe, Bruyette & Woods

Okay. And then I’m just curious – what do you think the occupancy cost can get to for these assets, because I guess one of them is open air and I think open air centers typically warrant a lower occupancy cost than an enclosed mall. I’m just curious what the ceiling could be for these assets.

Robert Taubman

I actually don’t agree with you that an open air mall should have a lesser occupancy cost than an enclosed one. It’s all based on productivity. These assets are $700 a square foot assets. They really could be at a higher level. I took you through why they are lower – a lot of it was the timing of when these were negotiated and leases were signed, but also they were really creating very dominant properties in markets that didn’t exist. So that takes an effort, and now that they are performing so well, we really do believe that we’re going to be able to turn these over at much higher levels. Remember, our portfolio is at 615 a foot, and we’re trying to lease at 16 to 17% occupancy cost at that level. We see no reason that over time – and 50% of the leasing will be in through 2015 – we see no reason that those numbers shouldn’t be at that level.

Lisa Payne

Right. I will say the target for new leases will be in that 16 to 17, but as with any asset, it takes a long time to grow—I mean, that’s what gets us to the 7 to 8% growth rate over the next five years, is leasing at that 16% number. But the overall assets will take a while because all the leases have to turn. By the time they all turn, sales have grown even more so you never catch up to that 16, obviously, which is why our average portfolio is get down on those to the low 13s by the end of this year.

Ben Yang – Keefe, Bruyette & Woods

Okay, great. Thank you very much.

Operator

Our next question comes from the line of Cedric Lachance with Green Street Advisors. Your line is open.

Cedric Lachance – Green Street Advisors

Great, thank you. Bobby, just one question – you talked about cap rates for good quality properties being in the low 5s or even below 5%. When I look at your stock, it trades at a 62 implied cap rate. So where does buying back shares fit in your cap allocation plan?

Robert Taubman

Well first of all, good morning and thank you for getting up, Cedric, so early; and all of those other people on the west coast that have joined us. It’s a good question. It’s one of the things you can do with capital. We feel there are so many great opportunities out there right now, both on the development side, both in U.S. malls and Asia and outlets. We were very fortunate to be able to find these assets. We would rather make a strategic acquisition, as we just did with these two assets, and really help ourselves overall because whenever you have assets that are this good, there’s a halo in terms of the overall portfolio. We think that’s better than buying back stock; but you’re absolutely right that buying back stock is something we would consider, and we think that a big reason – I said it in my conversation – that these assets were available to us is that the individuals are long-time real estate players in the shopping center business. They understand the value of our portfolio and they believe that at $55, which was the exchange price, we are way undervalued for our pricing, and that’s how we feel. But the key to making this asset--buying these two assets in our view was in fact those unit availability at an acceptable price for both parties. So I think we end up with a win for both of us. But buying back stock is in fact something that we would consider from time to time, and in fact we have done it. I think we’re one of the few companies that over the years, up until this issuance of stock, had actually bought back more stock than it had issued since it’s been public.

Cedric Lachance – Green Street Advisors

Thank you.

Operator

And again, if you would like to ask a question, you may press star then the number one on your telephone keypad. Our next question comes from the line of Paul Morgan with Morgan Stanley. Your line is open.

Paul Morgan – Morgan Stanley

Hi, just a couple follow-ups. On the acquisition, do you know what the occupancy costs are without the Apple?

Robert Taubman

Well, we’re not breaking out Apple. A lot of analysts out there have said that it’s 50 to 100 basis points on average in occupancy costs in shopping centers across America, including ours; but we have not broken it out at all.

Paul Morgan – Morgan Stanley

Okay. It just seems relevant to me because you’re talking about going from where the occupancy cost is right now to 16%, and that upside—in certain malls, it can be a couple hundred basis points from what I’ve seen. But you’re seeing there’s no reason to think it’s different from that general number people are throwing out?

Robert Taubman

Correct. I would say also, Paul, that almost every shopping center in America that’s doing $700 a square foot has an Apple store. So it’s apples to apples when you talk about great assets and their values, and when you look at our portfolio, most of our assets have an Apple store in them. There’s not an inconsistency here, so the extent that we’re leasing at 16 to 17% in our portfolio with Apple throughout the portfolio, it’s all consistent.

Lisa Payne

And that’s why we gave the guidance of 7 to 8% growth rate over the next five years. That’s factoring in everything we know about the assets, Apple in, and what we think we can lease it at for the next five years.

Paul Morgan – Morgan Stanley

Okay, great. And then maybe just broadly, Bobby, you talked about the strength in the third quarter, but what are you thinking about the holiday right now, just broadly speaking? And then maybe categories that seem to be relatively strong and weak?

Robert Taubman

Well, we’re not prognosticators of the holiday season, but NRF – National Retail Federation – says that it’s going to be 2.8% for the holiday season. The ICSC said 3%; Shopper Track said 3%. We’ve been outperforming all year. We’re up 13.3% for the year. Obviously, we’ll be disappointed if we’re not somewhere between those two numbers, but we have been very pleasantly surprised throughout the whole year. We believed at the beginning of the year that it would be a 3, 4% kind of increase for the year, so to go double digit on double digit through the whole year is pretty amazing. As I said, trees don’t grow to the sky but we’re enjoying it right now.

Paul Morgan – Morgan Stanley

Okay, great. Thanks.

Operator

Our next question comes from the line of Steve Sakwa with ISI Group. Your line is open.

Steve Sakwa – ISI Group

Thank you. Just two quick questions. Lisa, as it relates to the balance sheet and funding some of this development, I realize that you have not issued a lot of equity; but do you entail or envision kind of financing everything with debt as you look through the three or four projects that are being contemplated?

Lisa Payne

I think it’s going to obviously depend on the timing of those projects, also what the construction financing market will bring to us. We think these are very attractive projects and we are going to do construction loans on the domestic ones, at least. International is kind of a whole different area that we’re getting into. But as it relates to the domestic side, we do think we’ll get good construction financing which will minimize the amount of project equity, if you want to say. We do have availability under our line. I think we also have the ability to tap the preferred market if that is attractive. And then finally, if literally all of it happens in a short period of time, we are absolutely going to maintain a conservative balance sheet. We think these opportunities are very attractive and are going to provide great shareholder value. If have to raise a little equity, we’ll do so.

Robert Taubman

We can also raise equity at the project level if we want as well—

Lisa Payne

Very true.

Robert Taubman

--which is something else that we would consider.

Lisa Payne

And I’ve had numerous calls about it, as well. But we like to try to maintain our value creation if we can.

Robert Taubman

Yeah, when a window opens up like this, to build assets that would be in the top half of our portfolio, and every one that we’re considering is at that level, you want to try to—what we just bought was a $700 asset and a 4.5% cap rate. So these are rare assets, and if you can build $700 assets, that’s what you want to do.

Steve Sakwa – ISI Group

Okay. And just on the St. Louis site, can you remind me how far you are from some of the top malls in the market, and do you anticipate or think you might have any kind of issues with tenants that are in those malls that might also be in the outlet business?

Robert Taubman

We’re about 12 miles or so from Plaza Frontenac, which is sort of the middle—the heart of that market, of the best part of the market, and it’s due east. And all I can say is our initial leasing has gone extremely well. There’s a very strong reception for a solid, significant outlet mall within the St. Louis market.

Operator

Our final question comes from the line of Michael Mueller with JP Morgan. Your line is open.

Michael Mueller – JP Morgan

Thanks. One last question – before the downturn, Stamford Town Center was on the market to be sold. What are the plans for that asset now? Do you plan on holding it or is it going to go back on the market at some point in time?

Lisa Payne

That asset, Mike, actually was put up and we did hire Eastdale (phon), mostly at the request of our partner, UBS, and we were going along with that for good partnership relations. We thought maybe it was a good time, and so therefore we did put it on the market. There’s no desire to do that at this time, but I don’t want to speak for our partner. Maybe sometime in the future they might think about it, but nothing at the current time. We’re quite happy with the asset and think there’s a lot of opportunities there.

Michael Mueller - JP Morgan

Okay, thank you.

Operator

We have no further questions at this time. I turn the call back over to the presenters.

Robert Taubman

Well again, I want to thank everybody who got up on the west coast for taking our early call. We were really pleased to report yet another strong quarter and the continuing progress that we’re making on the external fronts, both here and in Asia. We look forward to seeing all of you in (inaudible) in Dallas. So thank you again, and thank you, Alicia. Goodbye.

Operator

You’re welcome and have a great day. This now concludes today’s conference call. You may disconnect your lines.

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