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Taubman Centers, Inc. (NYSE:TCO)

Q4 2011 Earnings Call

February 9, 2012, 12:00 p.m. ET

Executives

Barbara Baker – VP, Investor Relations

Robert Taubman – Chairman, President, CEO

Lisa Payne – Vice Chairman, CFO

Analysts

Christy McElroy – UBS

Jay Habermann – Goldman Sachs

Quentin Zilli - Citi

Craig Schmidt – Bank of America

Alex Goldfarb – Sandler O’Neill

Todd Thomas – KeyBanc Capital Markets

Ross Nussbaum – UBS

Paul Morgan – Morgan Stanley

Michael Mueller – JPMorgan

Ben Yang – Keefe, Bruyette & Woods

Operator

Thank you for holding and welcome to the Taubman Centers’ Fourth 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 will turn the call over to Barbara for opening remarks.

Barbara Baker

Thank you, Operator, and welcome to our year-end conference call and also thank you for staying with us through all the calls this morning. Yesterday we released our year-end results and our supplemental information package. Both are available on our website, www.taubman.com.

As you know, during this conference call we’ll be making forward-looking statements within the meanings 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.

When we get to questions, we ask that you limit them to two. And then if you have more, queue up again. That way everyone has an opportunity to ask a question. And now, let me turn the call over to Bobby.

Robert Taubman

Thanks, Barbara, and again, welcome everyone to our call. This was another excellent quarter and the combination of a really terrific week for Taubman Centers. The fundamentals of our business are outstanding, and the company is firing on all cylinders.

Sales for square foot for the year were $641, up 13.7%. This comes on top of a 12.4% increase in 2010. It is now an unprecedented 8 quarters in a row of double-digit sales increases. NOI was up a strong 4.9% for the year. We completed strategic acquisitions in the U.S. and in Asia. City Creek Center in Salt Lake, is opening in March, and we made excellent progress on our development pipeline.

With our high quality portfolio and external growth opportunities, we’re confident we’ll continue to create strong net asset value for shareholders. Based on Green Street’s NAV calculations, our net asset value growth has been the highest of all reeds covered over the last ten years.

Tenant sales grew across the board. Geographically and nearly all merchandized categories. In fact, nearly two thirds of our 23 sales categories were up double-digits in 2011. And for those of you curious about Apple, they had a great November and December, and did improve our fourth quarter and our year.

However, even if we exclude Apple, we were up double-digits for every quarter of the year, and for the entire year, we were up well over double-digits excluding Apple. Geographically, our Florida centers boosted by strong tourism were the largest contributors to sales growth.

As I said in our last call, we recognized trees don’t grow to the sky, and that eventually sales growth will begin to moderate, but in the meantime, we continue to enjoy it. As sales have accelerated, total occupancy cost as a percentage of sales have fallen. As expected, occupancy cost for the year were 13%. This indicates built in ramp growth opportunities for the future.

We’re signing leases at attractive rates and at a faster pace. In 2011, we signed more leases than we have since 2005. At this point, we have commitments for about 85% of the leases required to meet our budget for 2012. This is higher than what is typical at this time of year.

Occupancy for all centers at year-end was 90.7%, up 60 basis points from last year. Temporary tenants comprised of addition 4.8 at year-end. This brings the total to 95.5%. This is the highest combined occupancy number we’ve ever had.

Moving to average rent per square foot, we ended the year up 3.6%, consistent with our last guidance. Our opening rents continue to be strong, up 13% from opening rents in 2010. Not surprising, the most significant increases were at centers that have shown the best sales growth over the past several years, our luxury and value centers.

NOI excluding lease cancelation fees was up 9. – excuse me, 4.9% for the year. We started the year with a NOI guidance of 1 to 2%. Throughout the year we saw significant improvements in rents, percentage rents, and recoveries, all driven by strong sales growth.

Consistent with this, only 30 basis points of our leases went in to bankruptcy in the quarter, and only 1.5% for the year. In fact, since year end, we’ve had vitally no unscheduled closings, a rare phenomenon for the first month of the year.

We continue to be very focused on our four prongs of growth. As anticipated by year-end we closed the acquisitions and took over management of Green Hills, in The Gardens, in Village at El Paso. This was a rare opportunity to acquire some of the best assets in America. And we continue to believe we will create significant value for shareholders.

In Salt Lake City, we’re on schedule for the opening of City Creek Center on March 22. This is the only regional mall scheduled to open this year in the U.S. Leasing is now 92% committed. We continue to be on target for a 11 to 12% unlevered returned on our $76 million investment.

In the U.S., our pipeline projects are moving forward. In Sarasota, the zoning is complete. We’ve been working with the landowner very close to reinstating and finalizing our agreements. We expect to start construction in the second half of 2012, with an opening in fall 2014.

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’re also in the final predevelopment stages in Puerto Rico. Saks and Nordstrom’s have announced their commitments. We’ve received approval from the city and the common wealth, and strong endorsements from both the Mayor and the Governor. We expect to start construction this summer, and are targeting a late 2014 opening.

In Missouri, we have now completed the zoning for our outlet project in Chesterfield, just outside Saint Louis. We expect to receive our final site plan approval and commence construction in April, and open in the fall of 2013. With 2.8 million people and no outlet center in the market, tenants have responded strongly. We have an outstanding site with excellent visibility and regional access.

These three projects represent at least $500 million in investment at our share. As construction begins on these projects, we will provide cost, returns, and specific details with respect to program and anchors.

In Asia, the integration of Taubman TCBL is going well. We’re working with them on several projects and hope to be in a position to have an announcement very soon. Meanwhile, IFC Center in Seoul, South Korea is over 97% leased, and on track for its third quarter 2012 opening. IFC is a 5 million square foot mixed-used project, which includes office, a Conrad International hotel, and about 400,000 square feet of retail space. The center will include over 80 retailers, including H&M, Zara, Uniqlo, Gap, Banana Republic, and the first [inaudible] in Korea.

We’ve received the first installment of the leasing success that is expected, and we’ll receive another late in 2012. Our success with this project clearly demonstrates both our ability to lease and merchandise this center in Asia, and the added value that we can bring.

Now, I’ll turn the call over to Lisa, and then return at the end of the call with the discussion of our guidance and for other closing comments. Lisa.

Lisa Payne

Thank you, Bobby. This quarter, our bottom line FFO per-share was $2.95, bringing our full-year 2011 FFO per-share to $4.86. The quarter included a $2.03 gain from the extinguishment of debt at Peir and Regency, $0.02.5 from the Series F redemption, offset by $0.04 of acquisition cost.

Excluding these items, our adjusted FFO per-share was $0.93 for the quarter and $2.84 for the year. This was significantly better than we expected. So now let’s look at the year-over-year variance for the quarter, as outlined on page 12 of the supplemental.

Minimum rents, up $0.04.5, the result of strong opening rents during the year and lower rent relief. Percentage rents, up $0.05.5. Holiday sales were much higher than we anticipated when we gave our guidance in the third quarter call. We expected sales growth to moderate during the fourth quarter due to the difficult comparison with the strong 2010 holiday season. Therefore, we were thrilled with the performance of our centers this year.

Net recoveries, unfavorable by $0.06.5. That’s primarily from the change in accounting methodology for our fixed CAM tenants that we’ve been talking about all year. However, the total CAM variance was less negative than we expected. This was because of unanticipated property tax refunds, energy expense savings, and overall expense management at our centers that dropped to the bottom line. Our center management teams have done an outstanding job of controlling cost.

Next is net third-party revenue, up $0.04. That’s primarily the first installment of the leasing success fee for IFC center in Seoul, that Bobby just talked about. Lease cancellation income was down $0.15. Our share of lease cancellation was only 200,000 for the quarter, a small amount compared to 12.8 million collected last year. Lease cancellation in the fourth quarter of 2010 included a large payment from a department store at one of our centers.

Other operating expense, unfavorable by $0.03. That’s primarily predevelopment expenses related to increased activity in the U.S. and Asia. Non-operating income was unfavorable by $0.01 as there were no land sale gains this quarter.

And finally, dilution for the equity offering in June, net of the interest expense reduction, impacted our results unfavorably by about $0.01.5.

You’ll note that there was no variance for the Peir and Regency operations for the quarter, as their combined FFO impact, excluding the gains, was the same in both years. With the dispositions of these assets fully resolved, we have recorded their results in discontinued ops and stated – restated prior periods. They were removed from our operating statistics in 2010.

In early December, we completed our acquisition of Taubman TCBL. Nearly all the $24 million purchase price was allocated to goodwill, which is now part of deferred charges and other assets on our balance sheet. We were pleased to secure lender approvals that enabled us to close on Green Hills, The Gardens, and Village at El Paso in 2011. Since we owned these assets for only a few days in 2011, we’ve excluded these centers from all our statistics except for occupancy and lease spaced as of year-end.

The terms of the purchase require that $281 million of installment notes be fully collateralized with cash. You’ll see this amount included in restricted cash on our balance sheet funded by our line of credit. This cash will be used to pay off the installment notes this month.

Now moving to our balance sheet, since our last call, we’ve refinanced the international plaza loan. The new $325 million loan locks in an attractive all in rate of 4.89% for 10 years. We’ve received 25.2 million as our share of excess proceeds on this 50% owned asset. Note, that this will increase our interest expense in 2012 as we move from floating to fixed rates.

Up for refinancing in 2012 will be West Farms and Sun Valley. We expect rates under 5% and our share of excess proceeds to be over $100 million. Given our equity offering in June, we were well prepared to take on the Green Hills and El Paso acquisitions. At year-end, our net debt to total market capitalization stood at a healthy 38.5%.

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

Robert Taubman

Thanks, Lisa. As we said in the release, for the full-year 2012, we’re introducing FFO guidance in the range of $3.14 to $3.24. Here are the assumptions. Notwithstanding momentum of sales growth in both 2010 and 2011, we are compelled to be more cautious in our expectations for 2012. So we are planning sales growth of 4 to 6%.

Occupancy is expected to increase on average about 100 basis points through the year. Average rent per square foot is expected to be up about 3%. Comp center NOI growth, excluding lease cancelation, is expected to be in the range of 3 to 3.5%. As always, lease cancellation income is difficult to predict and can be wildly variable.

We’re estimating three to five million compared to 2.5 million in 2011. Net third-party revenues are expected to be 5.5 to 7 million for the year, down from 13.6 million in 2011. With the opening of City Creek in Salt Lake, we expect a reduction in U.S. revenue. And in Asia, while we are anticipating another leasing success to be related to the IFC Center, net third-party income will be reduced to the opening of the center, and the anticipated impact of Taubman TCBL.

Predevelopment expense, including both U.S. and Asia, is expected to be about $21 million versus 23 million in 2011. We do not anticipate any land sale gains. In Green Hills and El Paso are expected to be neutral to FFO per-share, excluding the purchase price adjustments of positive $4.5 million.

In conclusion, we’ve had a great year. We attributed our strong performance to the quality of our assets, the hard work of our talented people, and our focused strategy. High quality regional malls continue to be alive and well.

In 2011 our shareholders were rewarded with a 27% total return. In the last decade, our total shareholder return has been over 20% compounded. We appreciate your continued faith in our management team.

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

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from the line of Christy McElroy from UBS. Your line is open.

Christy McElroy – UBS

Hi. Good afternoon, guys. Lisa, I just wanted to follow up on your comment about lower rent relief impacting minimum rents. What was the total impact of the lower rent relief in 2011 and is that primarily the reversal of the abatements you gave in 2009?

Lisa Payne

Yes. We don’t break down specifically to rent relief. It was a part of our growth. I would still say that our rent per square foot and our opening rents clearly drove our results, but we are seeing, as we actually had mentioned in many calls, that we expected to see rent relief gradually reduced over the period of time that, you know, over a couple of years, and we continue to see that happen this year.

And yes, this is all abating from the peak of the rent relief that was in 2000, probably ’09.

Christy McElroy – UBS

Are you expecting more of that in 2012?

Lisa Payne

I would say we probably have some more, modestly more to go to get down to – I mean, we always have rent relief. I mean, we push rents very hard and as part of that, some people don’t make it and we have a sum. I mean, it’s not a significant part of the business, but I think we probably have a modest amount more to get down to our store average.

Robert Taubman

What you’re really looking at is sort of the elevation that was due to that prodding of the great recession that we went through. And I think Lisa said it perfectly, in 2012, there will be a little bit more that burns off. We did have some in 2011. We had contacted rent, rent relief for two to three years in many cases. In most cases, the rest relief stops because the tenant goes out of business and a new tenant goes in there. So we’ve had very good acceleration and as you would expect when you had 25%-plus increases in sales in the last two years.

Christy McElroy – UBS

And then just given some of the redeals that we’ve seen in the market recently, any thoughts of issuing any preferred to replace what you were deemed knocked over?

Lisa Payne

You know, it’s interesting, the perpetual preferred market really, for us, has not come down significantly in order to do any refinancings. I mean, as we look to our external growth, I mean, the pricing for us, you know, probably is in the 7 ¼, 7 ½ range and it’s not that attractive to refinance existing. But as we look to fund our development pipeline and keep our balance sheet in a very conservative posture, we will absolutely consider all kinds of capital including the preferred market. We feel our balance sheet’s great now but as we start looking at putting some of these in centers and getting under construction, we will be looking at alternatives.

Christy McElroy – UBS

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 afternoon. Following up on the occupancy comment, I think you mentioned occupancy forecast increased about 100 basis points for the year. As you think about that increase, and obviously you have some of those temporary tenants in place, are you looking to simply convert some of them to longer term leases or is that going to be a complete re-tenanting of those shorter-term leases?

Robert Taubman

Well, Jay, there’s always some temporary tenants that turn in to long-term retailers. But I would say it’s a minority. It’s a small minority. There is a whole industry that has developed of temporary tenants just like there has in the [inaudible] or the kiosk and cart business. And they really have developed from nothing over the last 10 years into a – an area that has some very good business practices and offers merchandise that isn’t otherwise typically found in our shopping centers.

So it is, you know, the bottom line is there will be a few that always turn into real tenants, but that isn’t the significant source.

Jay Habermann – Goldman Sachs

Okay, and maybe just turning to the balance sheet for a moment, I mean, you mentioned the pay down of the installment notes and transferring the balance to the line of credit, you know, obviously with the development pipeline picking up and you talked about 500 million or so in the U.S. and then clearly some sort of incremental project in Asia over time, can you give us some sense of funding I guess? Number what, what you plan to do with the line of credit, and number two, just funding from the development adventures that you plan over the next couple of years?

Lisa Payne

Sure. You know, we do have still a significant availability under our line of credit. We want to continue to always have that because for us it’s a good source of kind of bridge capital, if we call it that. What we’re planning to do is clearly do what we’ve historically done, do construction loans on a project-specific basis. I believe the terms of those probably are obviously a little more conservative than they were in the early, you know, 2000 time when we were financing a lot of our construction loans. But they’re still available. The U.S. banks are, you know, it’s where they make their money, construction loans are a good profitable business for them and we are a great partner for them and client for them on that front.

But I think what we’ll likely do is use our line to fund the equity portion that’s required for each of these projects and we’ve done, as planned, for the next five years, that we have sufficient capital to get us through this construction period. I think in order to keep our balance sheet very conservative, we may have to, over that period, look at either the preferred market, the convert market or the equity market to keep our balance sheet conservative.

So it’s a combination of our line, construction loans and some form of equity or quasi equity that we’re going to be doing to find these very attractive developments.

Robert Taubman

We could also, Jay, you know, find a joint venture partner in one of them. There are other things that we could do but the message that you should all hear is that we’re very committed to maintain a conservative balance sheet, notwithstanding the tremendous external growth we anticipate over the coming years.

Jay Habermann – Goldman Sachs

Thank you.

Operator

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

Quentin Zilli - Citi

Good afternoon. I'm here with Michael Bilerman as well. Just in terms of the expenses in the quarter, which came in a little bit lower than expected, I think you commented that some of it was property tax related in some of your savings. I’m just curious as to whether how much of that is permanent expense citings or maybe some of it was just temporary for the quarter?

And then with that context, sort of as you look at your recovery rate, which is sort of creeping up a little bit given you’ve got most of your leases on fixed CAM, how do you view that recovery rate as changing over time and what sort of sustainable rate would you say it moved to?

Lisa Payne

Well, first of all, I would say that a good part of the recovery savings – I’m sorry, the expenses are going to continue; not all, but we are on a mission and I think we said it, of controlling CAM costs. We have a lot of our tenants are on fixed CAM, it does drop to the bottom line. And so we are really trying to control those costs. On the real estate tax side, you know, we got refunds back on some work that we were doing on keeping our real estate taxes in line with frankly values and I believe those will continue going forward. So those will, you know, we would see the impact of those next year as well.

In terms of the expense ratio, I think we would hope overtime to really continue to keep that, at least where it is, and if not, really try to improve it. But today, I wouldn’t say I can say you’re going to see a dramatic change next year. It is a constant continual fight to keep operating expenses controlled and bring it to the bottom line.

But that’s a long-term effort and I see us at probably keeping it at least at the level and modestly moving it down, but not seeing any dramatic change year over year.

Robert Taubman

And the focus on managing expenses at the center level especially, you always have to find the right balance, strike that balance between the retailer and the customer experience and the financial results because you can steal from the short-term and not gain in the long terms. So we’re very focused on finding the right customer experience.

Quentin Zilli - Citi

That’s great. Thanks. And then just in terms of Asia, the IFC Leasing phase, I think you said were about $0.04 in the fourth quarter. Is that a fair run rate for the first three quarters of the year? And then in terms of TCBL, I know it’s going to be initially negative to earnings, so I'm just curious as to what sort of negative run rate that would be? Does that fully offset the IFC?

Lisa Payne

Well, let’s start – we did give guidance that it was of the majority of the $0.04 in the fourth quarter. We also said that next year, we gave you pretty specific guidance of 5 ½ to 7 million for third party. So we’re going to see a decrease from the roughly 14 million we’ve had this year, but still a pretty healthy year next year, partially because of fees in Asia, including the IFC. So we are seeing continual fees from there into next year.

Your other comment on TCBL, I think we mentioned when we bought TCBL that we expected a 3 to $5 million hit in this year as we integrate that business, really understand the third-party business in China and hopefully move to a breakeven in the following year. That 3 to 5 million is in the guidance that we gave you on what we call the – it is in guidance on both predevelopment expenses as well as the net third party business I just said. So that’s 5.5 to 7 includes the amount for TCBL.

Quentin Zilli - Citi

That’s great. Thank you.

Robert Taubman

And the only thing I would add is that we do expect other leasing success fees and IFC in 2013 as well. And then we move into a pure management role for a period of years at IFC that won’t have the same level at all of leasing fees that we’re experiencing in ’11, ’12 and ’13.

Quentin Zilli - Citi

Thank you.

Operator

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

Craig Schmidt – Bank of America

Yes, great. Bobby, I was just wondering if you’re pursuing any specific effort to win the new upscale international tenants that are not currently represented in regional malls?

Robert Taubman

Good morning, Craig. Yes, we are constantly. I mean, you know, it’s – we’re always – always on the luxury side for sure, but you know, we mentioned just the opposite, with IFC we actually brought the first Hollister store to the South Korea. We’ve also been very engaged in bringing a number of significant tenants into the market as they’re going in other locations simultaneously, we may be the first or second in South Korea. So we’re doing it there and likewise, that experience is going to allow us to consider bringing others here. But you know, there’s a lot of new tenants out there right now. There are a lot of people that are trying to expand their brand and I mean, you heard it on the [inaudible] call, you heard it on the Mayfords call. There are a lot of new tenant ideas out there, some very aggressive tenants looking for space. Business is good right now and in that kind of environment, retailer expectations are up, and they want new leases. So you know, they sure want them in Class A regional malls.

Lisa Payne

And you might mention, Bobby, we have the individual in Europe that we have that – and the effort that David [inaudible] and one of his leasing VPs has in making really kind of initial contracts with retailers there and we’ve been doing that for five to seven years.

Robert Taubman

No, more like ten years.

Lisa Payne

Right.

Robert Taubman

Over ten years. And you know, we also have incentives in the leasing area that are new tenants into the shopping centers, you know, at various levels that have never been in our shopping centers. So there’s lots of things we do to create new merchants.

Craig Schmidt – Bank of America

Okay. And then given the traction on Puerto Rico, is this showing a willingness of the department stores to support a ground-up development or is it sort of a one-off?

Robert Taubman

Well, I’ve been saying for a long time, Craig, that our view is there’s only going to be 15 to 20 shopping centers built in the United States over the next ten years. And we think that maybe half of those, we’d want to build and maybe half of those, four to five, we will build. So there isn’t a huge amount of demand for new supply for centers that we believe would stabilize in the top half of our portfolio. And those are the kinds of locations and opportunities that we’re looking for. So you know, yes, when you talk about a Nordstrom’s and a Saks in San Juan, they are looking selectively for great locations. But this is, you know, we have a generally mature development cycle that is already occurred in the United States. You’re seeing an emerging one in places like China.

So you know, you’re not going to get lots, but selectively, they’re looking for new supply and I think you would expect that out of all the good fashion department stores.

Craig Schmidt – Bank of America

Thank you.

Operator

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

Alex Goldfarb – Sandler O’Neill

Hi. Good afternoon. Lisa, on the city center, the 75 million, is that just going to come from sort of the excess proceeds that you’ve raised or is that property mortgageable?

Lisa Payne

The property is – we believe, at least today, definitely mortgageable. We think it’s going to be a fabulous property and open very strong, the merchandising is terrific. We do have it in our plant to approach lenders later this year but we will fund the 75 initially under our line of credit. But as we said, we’re expecting about 100 million of excess proceeds through 2012 financings at Westfarb and Sun Valley, so we’ll probably fund it and then term it out sometimes either later this year or early next.

Robert Taubman

And I would add, Alex, that we have 25 million already on our balance sheet in the line of credit, so it’s already a liability as it were if you were really counting it out of our line of credit. Letter of credit.

Lisa Payne

Yes, we put a $25 million letter of credit down as a deposit so it’s only $50 million increments.

Alex Goldfarb – Sandler O’Neill

Right. And Lisa, I didn’t mean to suggest the center wouldn’t do well. I was more referring that it would be, you know, as far as just the ground lease situation.

Lisa Payne

But we’ve structure the ground lease where we do think, I mean, you’re right, there is one and the markets are different than we structured the ground when we structured them, but we do think it was structured in a way that we should be able to get at a level of financing.

Alex Goldfarb – Sandler O’Neill

Okay. And second question is, the local papers here on Long Island have had a lot of articles about Oyster Bay; one highlighting the need for especially the construction unions to get jobs. This thing is shovel-ready. But then the flip side is that the town supervisor seems quite adamant, it seems that he is the one that makes – who would have to make the ultimate say so. Just sort of curious, is this more like a keystone issue where there’s a shovel-ready project but just because of politics, it may not happen, or is there something reasonable that because of the amount of jobs it could bring and local union involvement, maybe there is change that we see something in the near-term?

Robert Taubman

I think yes to everything you just said.

Alex Goldfarb – Sandler O’Neill

Thanks, Bobby. Is there something else that you can – some additional color on it?

Robert Taubman

I think it’s a very competitive situation. There are a lot of politics involved and there’s been a lot written about the project recently. We are analysing our options there. For those of you that haven’t followed it well, we expense all our costs there. I think that it’s – you are right, there’s 3,500 construction jobs, there’s 2,000 permanent jobs, there’s more than $50 million a year in taxes that would flow to the state and county and others. There has been a recommendation by the local Economic Development Council that the state should get involved here in the zoning process. This is a project that’s been noted as a project of regional significance. It is shovel-ready so that all the things you said are correct and we’ll see what happens.

Alex Goldfarb – Sandler O’Neill

But does the local supervisor – is there a center that he would be willing to say if it was X, you could start digging tomorrow, or is it no center?

Robert Taubman

I don’t think I can really answer that question at this point. And…

Lisa Payne

It’s hard to speak for him.

Robert Taubman

It’s very hard to speak for him and we wouldn’t suggest it. But we think that Long Island is – there’s demand out there in Long Island for new supply and this is likely the best opportunity, this piece of land, to build a shopping center on in the United States. And we have plenty of retailers who feel that way and tell us all the time.

We’ve said all along that we’re going to continue to work very hard and analyze all our options here and that’s exactly what we’re doing.

Alex Goldfarb – Sandler O’Neill

Thank you.

Operator

Your next question comes from the line of Todd Thomas From Keybanc Capital Markets. Your line is open.

Todd Thomas – KeyBanc Capital Markets

Hi, good afternoon. I’m on with Jordan Sadler as well. Bobby, I just wanted to get your thoughts on the acquisition environment today. First, is there anything out there that’s of interest to you? And then second, we’ve heard from some others that the deal flow is picking up a bit and that OP unit deals are increasing. I was just wondering if you could share your thoughts about Taubman using shares as currency?

Robert Taubman

Well, as we demonstrated with Davis Street, the opportunity of those units can create a deal. I don’t think there’s any question that one of the reasons that Davis Street was available to us was the attractiveness of our units. I would say that there are things that we would love to buy that are not already located or housed within a REIT. But as we said when we announced the Davis Street acquisition, we think there’re only about 60 assets in America that are doing about $700 a square foot or more. And about 15 of those –before the Davis Street acquisition were in private hands.

They’re very, very rare and a high productivity asset is an extremely rare commodity that is extremely sought after by a lot of people. Not just our peers, but also major pension funds from around the world and wealth funds would love to own these very predictable income streams. If we can find another one that finds attractive our units, that we believe that we have tremendous added value that we can bring as we did with Davis Street, then we would jump all over it again. They’re hard to find. We only want good assets that can be truly strategic within our portfolio as Davis Street was.

Todd Thomas – KeyBanc Capital Markets

That’s helpful. And then with regard to managing expenses, can you just talk about some of the programs that you’re implementing to cut costs and keep expenses down? Is there anything portfolio wide that’s making a difference?

Lisa Payne

I would say that Denise Antoine who leads our center management team has – and the whole team, has really done a ground-up look at every single major line item of our expenses. And it’s very much a blocking and tackling. It’s a lot of best practices. We’ve learned a lot about how to keep – maintain the quality of our security efforts at malls. Security is a big line item, but we’re learning how to do it even more efficiently, taking out overhead of that component. We’re doing – dealing with our cleaning contractors and figuring out from how often do we have to clean, what levels, we’re doing lots of work on that front. We’re looking at utilities and how to be very efficient in lighting and heating and HVAC. It is a full-broad, all ground-up look line by line, asset by asset. And we’ve really seen, if you look – as we look at it, and we look over the last three years, we’ve actually had a drop in our overall operating expenses by this effort kind of in the 1.5 to 2% range. And it’s very, very strong, a very, very – a lot of work to get there and we’ve seen the results in our earnings.

Todd Thomas – KeyBanc Capital Markets

Thank you.

Operator

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

Ross Nussbaum – UBS

Hi, good afternoon. Can you give us sense of what the EBITDA to rent coverage ratio is going to look like at opening or maybe it’s stabilization on City Creek?

Lisa Payne

I’m sorry, EBITDA to rent?

Ross Nussbaum – UBS

Well, I’m trying to get a sense of LVS Church is the lessor paying you directly the rent, correct?

Robert Taubman

Well…

Lisa Payne

I’m sorry, we’re paying out …

Robert Taubman

Let me say this. The best way to do it is to look at our unlevered return, which we’ve said is 11 to 12% on 76 million, that’s after the payments. So if you think about 11% on 76 million, it’s roughly 9 million of EBIDTA and then you have your expense, your $76 million that you have to pay interest on. So it’s been a very good arrangement for us and there is – obviously it’s a participating ground lease, which we’ve said for a long time . We own 100% of the shopping center, but the participating ground lease does participate in the upside.

Lisa Payne

But only over that 12% return.

Robert Taubman

Right. And then we’ve said that, and you can look in our Qs and it’s all detailed in there.

Ross Nussbaum – UBS

Okay. I’ll follow up with you afterwards on that one . So the construction loan gets repaid effectively at opening with your 75 million payment?

Lisa Payne

You know, we don’t really know how the church funded it. I think maybe they just funded it out of cash. So we are giving them – we’re kind of – you can think of it as we’re buying it at completion for the $75 million subject to a ground lease to them that they participate in above the 12%.

Ross Nussbaum – UBS

Okay. I’ll follow up on the other. Thanks.

Operator

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

Paul Morgan – Morgan Stanley

Hi. Just on occupancy guidance, sort of up 100 basis points. That would put you I guess around where you’re peak occupancy has been kind of prerecession. I wanted to, you know, you were sort of in remission before the recession to boost occupance. I want to see kind of where you think from kind of your optimal leasing perspective, kind of a max occupancy would be if you sort of end north of 91, 91.5 and then kind of the balance between trading off that and the flexibility for merchandising and then just pushing rents?

Robert Taubman

Paul, we talked in the past and it was some time ago, back in ’07, and that we talked about what was the peak occupancy that we could push to. And you’re memory is good. When you get above 92% we think it’s not easy to get north of that with permit leases. So I think 92 to 93% is the likely range and I think you have to remember, we are, today, very much managing for NOI. We’ve been doing that for a while but these temporary tenants can be very meaningful in terms of their income. You’re always going to have some personal vacancy and some of our peers actually report with the tils in there. So at period end, they include everything that’s there, even in our case, where it’s 4.8% of additional space.

So some of our peers would only report the number 95.5. They wouldn’t report both numbers. So you could say that we are managing the income and also managing that personal vacancy down to the point where we’re over 95% today. So I do think there’s going to be some mix trade off as we move up to the 92 possibly even higher percent. We’re not going to have as much temporary tenant opportunity, the inventory won’t be there to least to. So when you look at the sort of combined number of 95 to 96%, I’m not sure how much higher we can push than that. That doesn’t mean we’re going to stop trying to encourage our leasing teams to be able to do so, but I’m not sure how practical t would be on a combined basis to be much better than we are right now.

Paul Morgan – Morgan Stanley

Are the rents much different for the in-line attempts?

Robert Taubman

Yes, of course you get better rents…

Lisa Payne

And then it would continue throughout the year because the temps really peak at the fourth quarter, so it is better to have a permanent tenant in all year.

Robert Taubman

Yes, but many of these temporary tenants pay very significant rents in order to be there for two, three months. You would be very surprised at the level. So it’s not an absolutely statement, but it is a correct statement generally.

Paul Morgan – Morgan Stanley

And on lease spreads, you didn’t really kind of provide, you said kind of 3% rent growth I guess at the kind of portfolio level, but should we expect given the kind of impressive velocity of the sales growth that rent spreads will also increase or is it more of a kind of staying in this kind of high teens range?

Lisa Payne

Yes, we – our rent spreads were up very, very strongly this year. And when we really look out ahead, we believe they will be consistent with this year but not necessarily expecting a big increase, it’s still a great number, it’s over $56 and we’re really thinking it’s going to be along that line. When we look at the mix of what we’re doing next year, because it’s very mix related, we do think it will be, you know, at about that number of opening rents.

Paul Morgan – Morgan Stanley

Okay, and then just last real quick, on the short term leases, do you have a percent that you – could you give a percent of deals that you’re doing there short terms?

Lisa Payne

We’re not really doing…

Robert Taubman

We either do the tils which really are less than one year and can be month to month, or we do the permanent leases.

Paul Morgan – Morgan Stanley

Yes, so like, you know, we were just on a call where Paxton was doing 25 kind of short-term renewals with – so that’s kind of the type of thing I’m asking about.

Lisa Payne

We don’t do – I mean, I probably can’t say we never do a holdover if it’s a renewal for a year until like if we can’t get what we – I mean, I can’t say we never do it, but the level of doing that versus what we were doing in 2009, I mean, it’s just not really – not a big deal.

Paul Morgan – Morgan Stanley

It’s not part of the leasing strategy at all. The only reasons that we would so a short term renewal with someone today, you know, you mentioned Paxton, is because we can’t come to terms and if we can’t come to terms, then okay, maybe we’ll agree to a year, but we’re leasing their space to another tenant who’s going to pay higher rent.

Lisa Payne

Right. We take – we make sure we can get control of the space and bring somebody in as quickly as we can that’s a better tenant, better rent.

Paul Morgan – Morgan Stanley

Thank you.

Operator

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

Michael Mueller – JPMorgan

Hi. Paul just actually got the question, but actually, while I have you on, one other question. The 100 basis point occupancy increase, is that – are you thinking a little bit year end or throughout the year?

Robert Taubman

It’s throughout the year where you look quarter to quarter. There’s going to be volitility along the way, but on average, as I said in my comments, we expect to be about 100 basis points year-over-year quarter-to-quarter, period-to-period.

Michael Mueller – JPMorgan

Got it. Okay. That was it. Thanks.

Operator

Your next question comes from the line of Ben Yang from KBW. Your line is open.

Ben Yang – Keefe, Bruyette & Woods

Hi, good morning. Bobby, a question on the 13% occupancy costs. It looks like this is the lowest you’ve ever reported as a public company, obviously based on the sales and is that all because of the Davis Street assets, which I think had sub 10% occupancy costs when you bought that?

So given the new additions, is 16 or 17% still the right target on new leases for the same type portfolio including the Davis Assets? Just trying to figure out how much upside there might be on a portfolio-wide basis for you guys at this point.

Robert Taubman

Well, Davis Street assets only modified this number about 10 day …

Lisa Payne

They’re not in it.

Robert Taubman

Oh, they’re not in on the occupance. So they’re not in this. There’s no question that we believe that we have significant rent built in as we take this high sales number or this high sales growth and start to convert new leases. And it is that number surrounding 15% in the portfolio. It has been historically at various times of sales growth over decline it goes up or goes down. It’s not surprising to us that it’s down at 13% at this point in time. It’s been as high as almost 17%, you know, 16.6 or 16.7% on an annualized basis I think in 2009 or 2010. So all this growth has produced us. So we believe that the number will continue to be in the portfolio around 15%. We are, once again, our leasing team is out there trying to lease at about 17% of trailing sales. So we believe that we’re going to be able to continue to grow our rents and that we have good spreads that are there built in against this sales productivity.

Ben Yang – Keefe, Bruyette & Woods

But you said 15% on a more steady state basis is kind of your expectation?

Robert Taubman

Yes, but again, when you say steady state, you – it’s all about how the sales – I mean, if sales decline quickly then obviously this number is going to go up. If sales continue to move up, it’s going to be very hard for us to get 15%. If we make the 4 to 6% sales growth that we’re talking about, it’s going to be hard to make a lot of progress against the 13% getting up to 15. It’s not going to happen quickly.

Lisa Payne

The key is to think about new leases at the 16 – the 17%. That’s really what the numbers that drive the business.

Robert Taubman

Right. That’s the increment as we turn each year.

Operator

There are no further questions in the queue. I turn the call back over to the presenters.

Robert Taubman

Well, we appreciate all your questions today and we’re, again, we’re delighted with our results and thank you for your interest in our company. We’ll say goodbye then. Thank you, Martina.

Operator

Your welcome, sir. This concludes today’s conference call. You may now disconnect.

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