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Taubman Centers Inc. (NYSE:TCO)

Q3 2007 Earnings Call

October 23, 2007, 11:00 AM ET

Executives

Barbara K Baker - VP, Investor Relation

Robert S. Taubman - Chairman, President, and CEO

Lisa A Payne - VP and CFO

Analysts

Christine McElroy - Banc of America Securities

Craig Schmidt - Merrill Lynch

Jonathan Habermann - Goldman Sachs

Louis Taylor - Deutsche Bank

Ambika Goel - Citigroup

Michael Mueller - J.P Morgan

Matthew Ostrower - Morgan Stanley

Presentation

Operator

Welcome to the Taubman Centers Third Quarter Earnings Conference Call. This call will begin with prepared remarks and then we will open up the lines to questions. [Operator Instructions].

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

I will now turn the call to Barbara for opening remark.

Barbara K Baker - Vice President, Investor Relation

Good morning everyone and welcome to our third quarter conference call. Joining me on the call today are Robert Taubman, our Chairman, President, and CEO; and Lisa Payne, our Vice Chairman and Chief Financial Officer.

Yesterday, we released our third quarter 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 meaning of the Federal Securities Laws. These statements will reflect our current view to reflect the future events and financial performance. Of course, actual results may differ materially because the various risks and uncertainties, including changes in general and economic and real estate conditions, changes in the availability of financing or interest rates, and adverse changes in the retail industry, including adverse changes in the leasing environment. Other risks and uncertainties are discussed in our filings with the SEC, including our most recent Annual Report on Form 10-K and our press release issued yesterday.

During this call, the Company will discuss non-GAAP financial measures as defined by SEC Reg G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release and 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. Then, he will be discussing the Company's operating statistics and our development projects. Then, Lisa will discuss our financial performance and balance sheet. Bobby will return with closing comments and then we will be available for your questions.

With that, let me turn over the call to Bobby.

Robert S. Taubman - Chairman, President, and Chief Executive Officer

Thanks Barb and good morning everybody and welcome to our call. We’ve had another outstanding quarter. FFO per share was up 19.3%, 15.3% excluding 2006 financing charges. Occupancy and lease space were solidly up. Core annual NOI was exceptional at 9.8% with or without lease cancellation fees, and the Twelve Oaks expansion and the Mall at Partridge Creek, both projects here in Michigan opened very strongly.

First, let’s talk about NOI. We are very pleased to report 9.8% core NOI growth. All fundamentals were working in our favor. Year-to-date core NOI growth stands at 6.2%, including lease cancellation fees and 6.9% excluding them. While some likely we will sustain this pace, we are forecasting for the full year a core NOI growth of 5.5%, excluding lease cancellation fees. So, what’s driving these great numbers this quarter? First, occupancy and leasing continued to be strong. Comparable center occupancy was at 90% at September 30, up 70 basis points from last year. Comparable center leased space was at 93.3% up a 400 basis points from last year. We believe the strong leasing performance is due to the exceptional retail environment and the processes, systems, and incentives, we worked so hard to implement over the past few years. We expect year-end occupancy will be modestly at a last year’s level and continue to believe there’s room to improve occupancy in the future.

Second, bankruptcies were only 0.2% of leases during the quarter, with now stand-to-date at 0.3% with very few tenant risk of bankruptcy through year-end. This continues to track at record low levels. Third, average rents for the portfolio continued to climb steadily and were up 2.6% for the quarter. Year-to-date, we are up 1.9%, and we believe we will end the year up at least 2%. Our strong sales growth over past four and a half years has had the effect of lowering total occupancy costs to a level which should allow us to increase rent growth as we roll leases. This is particularly true to Florida, where sales growth at our centers is outpaced other markets. As this the case with new centers; there are limited rollover opportunities until the 10 years anniversary to those centers. That will be in 2011 to 2012 range for our Florida centers. Meanwhile, the strong sales performance is contributing to increases in percentage rent.

Finally, core NOI impacted favorably by other line items such as recoveries and operating expenses. Lisa will provide more detail on these items later. Tenant sales per square continued to be very strong, up 6% for the quarter and 6.1% year-to-date. Consistent with retailer reports, July and August were better than September, where all three months were up solidly. Based on what we are seeing, we are cautiously optimistic that we will have a good holiday sales performance, again, well above the inflation. All of this is contributing continued momentum for leasing. In the third quarter, we signed 13% more leases than the prior year.

Now, I would like to provide a little color on our recent projects. First, the grand opening at Partridge Creek last Thursday. It was simply terrific. Traffic and sales throughout opening week were very strong. I was there personally for extended period on both Saturday and Sunday when we estimate the rollover of 50,000 people per day. The community had truly embraced the design, merchandizing in many offered by this unique center. Currently 70 stores in restaurants of about 90 in total are open for business. We have 86 stores committed. Stores will continue to open leading up to the holiday season and then around the time of the Nordstrom opening next April. We expect to achieve about a 9.5% return on our $155 million investment during 2008 and stabilize at 10% in 2009.

Moving to Twelve Oaks, the new Nordstrom in 97,000 square feet of Mall shops opened September 28th and are also performing very well. We opened over 40 stores in the wing and throughout the existing center. Crowds every weekend since opening have just… they like the holiday. There is clearly momentum as we move into the season. The project is on track to achieve a 10% return on the total investment of $63 million.

In Florida, the new Bass Pro store opened at Dolphin Mall on October 4, the only Bass Pro location at Miami Day County. Over 7,000 people attended the grand opening event and the new store is reportedly doing exceedingly well. It is also bringing new customers to Center and has been very positive for leasing. During 2007, 25 new stores and restaurants have opened or will open at Dolphin; including Banana Republic factory store, Coach factory store, Polo Ralph Lauren children’s factory, and Sony Outlet.

This past weekend also marked the debut of the new Nordstrom Cherry Creek in Denver. This centre is now one of only six in the nation to offer unique combination of Nordstrom, Saks, Neiman, and Macy's. The addition of Nordstrom reinforces Cherry Creek’s position the dominant fashion destination for the entire Rocky Mountain region.

In Connecticut, Stamford Town Center will be opening its new lifestyle wing and seventh level food court in November. Six of the seven sit-own restaurants are under construction and nearly all of them will be opening in November, long with Barnes & Noble and H&M. The total cost to this project will be about $64 million, our share being $32 million with a 7.5% return in 2008.

Turning to our other development, we continue to be positive about plans our pans to build a mall in Oyster Bay, Long Island. This center will be anchored by Neiman Marcus Nordstrom’s and Barneys New York. On September 17, we had another court victory, our ninth straight one. The New York State of Public Court rejected the town’s request to appeal the June ruling of the Supreme Court which is New York State lower court. Remember, in June, the lower court ordered the town to specifically identify certain documents and evidence on which the town had allegedly relied in denying our application to build the mall. On September 25, the town adopted resolutions citing its reasons for denying our application for special used permit and submitted it to the court. As expected, they identified no new evidence. Today, we plan to respond with our motion asking the lower court judge to order the town to issue the permit. Each party will have another opportunity, this may brief to the court before the judge rules.

We continue to be confident that we will ultimately prevail. Clearly, the town's options are narrowing. As September 30, we have $139 million invested in the mall at Oyster Bay, up $4 million from June 30. We continue to make progress in our new development activity in the U.S. as well in… franchise in Asia. Given the high probability of moving forward in Salt Lake in Macau, we are capitalizing our cost. Those projects are well under construction, although, maybe some time before final agreements are executed because of the complexity. As of September 30, the combined costs were $1.6 million, until these agreement are fully executed, these capitalized costs will continue to be relatively modest.

Now, I would like to turn the call over to Lisa, then as always, I will return for some final remarks.

Lisa A Payne - Vice President and Chief Financial Officer

Thank you, Bobby. As Bobby said, we were… we are very pleased with our strong results this quarter. This quarter, we reported FFO per share of $0.68. This is an increase at 19.3% over the prior year excluding financing charges in 2006, the increase is 15.3%. There were no financing charges this year.

I would like to add some color to the third quarter variances highlighted on page eight of our supplementals. As Bobby said, the strong performance was largely driven by the NOI from our centers. Rents were positive, $0.03 over the third quarter of 2006. All core fundamentals were up, rent, occupancy, and percentage rent. Net-net recoveries added $0.03 to our results. Our overall recovery ratio was 104% this quarter, positively impacted by true up at one of our centers. We continue to expect our overall recovery ratio for 2007 to be slightly better than 2006 on a combined basis because of the strong sales environment. We do anticipate quarter-to-quarter volatility due to timing of capital spending and the increased numbers of tenants on fixed CAM.

As expected, the Pier Shops beginning to generate NOI and impacted our FFO negatively by only $0.005 during the quarter, a significant improvement from earlier in the year. Net revenue from management leasing and development services was about half a penny favorable to last year, with $5.7 million recorded today we believe that we will generate about $7.5 million progress for the full year.

Moving down to the income statement. Our share lease cancellation revenue was flat with third quarter of last year. To-date, we have collected $10.5 million of lease reconciliation income, which was higher than our previous guidance for the entire year. We are now raising our guidance for this line item to about $11 million.

Other operating expenses impacted our results positively by $0.02 for the quarter. Nearly all of this was due to a reduction in bad debt and other center related expenses. Pre-development costs were about a half penny. Given the current level of activity, we expect to spend $11 million to $12 million on the pre-development for the U.S. and Asia this year.

There were no land sale gains during the third quarter of 2007 or 2006. Therefore, we are bringing down our full year forecast to $1 million to $2 million. Interest expense was $0.01 positive to last year’s third quarter. Keep in mind, this variance excluding the impact of the share buyback and the peer, which we discussed earlier at our separate line items on variance schedule.

This positive variance is primarily the result of last year’s attractive refinancing of the Dolphin. Nearly all of our debt is currently fixed at an average interest rate of 5.7% at an average maturity of six years. During a period of time when the credit markets are so unsettled, we are specially leased to have such a strong balance sheet and the great banking relationships that we have built over many years.

The CNBF market has been affectively shutdown since early summer, and while we are beginning to see a little activity, it is unclear when it will be back to normal. We have no loan maturities during the rest of 2007 and only won in 2008.

The first is International Plaza in Tampa with a $176 million of debt maturing in January. This was originally a five year loan taken down shortly after the center opened and carried an effective interest rate of about 4.4%. Our bank group has stepped up and we are finalizing a floating rate pre-payable loan to pay off the existing debt and give us flexibility until the fixed rate markets settle.

Given the LIBOR has been around 5%, we would expect that it in all in rate would likely be at least 200 basis point higher than the existing financing rate. You may recall that we had previously hedged $150 million in anticipation of fixed rate in long-term refinancing on International Plaza. Given our change of plan, we were able to close out the hedge and take a small profit into earnings into the third quarter.

The second 2008 maturity is Fair Oaks with $140 million, fixed rate loan maturing in April 2008 at an interest rate of 6.6%. We are currently discussing our options with several financial institutions. At Fair Oaks and International Plaza, we expect to generate significant proceeds beyond the amounts we need to pay off the existing loans. Although, there was a change in the credit market they would not generate the amount of proceeds that they could have a year ago.

Meanwhile, we are increasing the sides of our revolver by $200 million to a total facility of $550 million. We are also extending it by two years at the current pricing of LIBOR plus 70 basis points. This credit facility will continue to be secured by three properties, Dolphin, Twelve Oaks, and Fairlane.

We appreciate the continued royalty of our bank group and are also pleased to welcome several new banks into our facility bringing the total bank group up to 12. The increase in our line which we expect to close in early November will provide us with plenty of flexibility and dry powder to pursue all future opportunities.

Other balance sheet activities during the quarter included the repurchase of another $50 million common stock. To-date, we have now purchased 1.9 million shares at an average share price of $52.34 per share for a total of $100 million. We believe that these purchases are very NAV creating. We have an additional 50 million under our current authorization.

And with that I would like to turn the call back to Bobby.

Robert S. Taubman - Chairman, President, and Chief Executive Officer

Thanks, Lisa.

Now, I want to comment on our 2007 outlook. Due to these strong results and our favorable outlook, we are increasing our 2007 FFO per share guide to $2.83 to $2.87.

In summary, we had a terrific quarter. FFO is increasing and our quarters are in great shape. Sales continue to be strong in a number of projects, including Partridge, Cherry Creek Nordstrom, Bass Pro with Dolphin, Twelve Oaks Nordstrom and expansion, and now Stamford.

After many years of planning have all come to fruition and are adding great value to our portfolio. I one more comment, I am very pleased to say as the September 30, our Company’s total shareholder returns to one, three, five, and ten year period led the Mall sector.

Further more, of the roughly 130 U.S. REITs, our performance was in the top six for all of those periods. In fact, we were number three for the 10 year period. We are very proud of this consistent performance and wish to thank our many employees for their hard work, dedication, and loyalty to this business. We would also like to thank you our shareholders who have supported us for so long.

So, with that, we would be happy to open the call up to questions.

Question and Answer

Operator

[Operator Instructions].

Your first question is from Christine McElroy with Banc of America.

Christine McElroy - Banc of America Securities

Hi, good morning. Obviously your tenant sales growth numbers were very strong. Can you give us some color on how that growth trended towards the back half of the quarter, especially as we started to get an increasing number of data points suggesting further softening in consumer spending? And if you could give us some sense for how that growth deferred between your high-end malls and malls with a more moderate tenant mixes?

Robert S. Taubman - Chairman, President, and Chief Executive Officer

Good morning, Christine. Well, first of all, as we said in our comment, like most of the special retailers say we're reporting that that occupied centers are July and August were somewhat better than September, but all three months were pretty solid. We don’t… did not see any real change in consumer spending across our centers and with respect to sort of high-end versus other, I’m just sort of glancing across the same and I don’t think there’s any one clear pattern that emerges. I made comment Dolphin malls, as an example was one of our strongest performers and should be a moderate center at the higher end the MacArthur was very strongly performing. Short Hills at the other end was more flat. Remember it was little baby was up, but Willow Bend was up strongly and just I think that there’s no clear pattern that I can say to you. Obviously, we also heard that Coaches timing it this morning. We have experienced very strong double digit growth in our centers from Coach all throughout the year, right through September. So, some were more up than others, but basically, we don’t see a flattening at this moment in time. It’s been very solid and as I said we're very cautiously optimistic coming into the holiday season.

Christine McElroy - Banc of America Securities

And as you look forward regarding your overall economic outlook, I mean, are you factoring in any chance for an economic recession at all?

Robert S. Taubman - Chairman, President, and Chief Executive Officer

Well, Christine, when we built the project, on an average it takes nine to ten years to do. Partridge Creek was one of the shortest ones. It took us five and a half years. When you go through a nine to ten year timeframe, you can't focus on any one cycle. And so, as we think about new development, we clearly are not focused on any one cycle. As you think about planning in our core business every part of our core business seems to be firing on all cylinders. So, from the standpoint of occupancy of least space of tenant negotiations that we're having right now, bankruptcies at low, when you look at all of these data points that we really are firing on all cylinders. So, it’s hard for us to say should we be planning a downturn when we don’t really see it. We are cautiously optimistic though and we're always prudent in things we say to you.

Lisa A Payne - Vice President and Chief Financial Officer

I would make one other comment, which I know we talked to many investors about better occupancy costs today is at a historical low level. So that, we have built in growth in brands, even if we see plateauing of sales growth and that’s already kind of in the cost today. Again, you could have… if you have a recession still modest modification of retailer sentiment, but the economics of what they are doing in our centers today with that occupancy costs pretty powerful as we go into negotiations for them on new deals… or renewals I should say.

Christine McElroy - Banc of America Securities

It sounds great quarter I think.

Robert S. Taubman - Chairman, President, and Chief Executive Officer

Thank you.

Operator

Your next question is from Craig Schmidt with Merrill Lynch.

Craig Schmidt - Merrill Lynch

Good morning.

Robert S. Taubman - Chairman, President, and Chief Executive Officer

Good morning Craig and thank you for your recent upgrade.

Craig Schmidt - Merrill Lynch

Good quarter. I was just wondering. I am hearing that Lakeside mall is attempting to do renovation. Are you aware what the scope is of that and if it’s going to have any impact on Partridge?

Robert S. Taubman - Chairman, President, and Chief Executive Officer

Well, Craig we said publicly some… many times that we think that these two assets, Partridge Creek and Lakeside would be very complementary to one another. Lakeside is more focused on the junior to moderate customer where they have been very successful and us really creating at Partridge Creek a new venue for that Northeast side of metropolitan trade. It’s really never existed before. When we announced the 86 stores of the 90 or so that are going to be there, about 70% of them are about new to Macomb County, which is where we're in the middle of. So, we think we're going to be very complementary to them. Now having said that, we understand that general growth has been working with City of Sterling Height and the whole sort of area of commercial activity that that represents. It’s really a huge corridor M59 that we and Lakeside sit on… of commercial activity and we do understand that they are looking to enhance that total commercial quarter in some fashion. I would assume as part of that, that general growth may also look to upgrade the asset as well. But they haven’t made any public announcements that I’m aware of yet that show us substantial redevelopment effort.

Craig Schmidt - Merrill Lynch

Okay. And then on the Stamford Center I guess it starts opening next month. The stabilization yearly gets to around 7.5% relative to the 10% you achieved at Twelve Oaks in Partridge. Is that because of there’s more restaurants involvement there or is there any other reason there that the yield was a little bit lower?

Robert S. Taubman - Chairman, President, and Chief Executive Officer

Well, I think there are a number of reasons. One is that we had to buyback the location from the department store. We have some unique tenants in there in the Barnes & Noble and the H&M as well as very much on point the restaurants… the sit-down restaurants they do require significant construction help our tenant allowances with their construction work. So, we're very pleased to have been able to bring that lifestyle wing with those restaurants and those destination restaurants into the center. We think it’s going to be a dramatic help to that shopping center which we have already seen in the tariff response a number of stores have been excited to go into that property based on redevelopment efforts that we're making there. So, we believe that we are reestablishing ourselves and drawing from an extended trade area with the new destination restaurants that we're putting in there.

Craig Schmidt - Merrill Lynch

Thanks.

Operator

Your next question is from with J. Habermann with Goldman Sachs.

Jonathan Habermann - Goldman Sachs

Good morning. Bobby back to your sort of you and your outlook. Sounds like you're calling for NOI growth of 5.5% for full year. I know you said you're trying to get around 6.9 but I guess back to the question regarding the outlook and the economy are you seeing any sort of cause for concern with the holiday shopping season and perhaps which segments might give you concern or where you see opportunities?

Robert S. Taubman - Chairman, President, and Chief Executive Officer

No, I think again. We're… NRF, National Retail Federation has been pretty accurate on the overall projection… predictions and they’ve come out in a high three’s. I think 3.7 % this year. And we believe that in something in the 4% north range is a likely outcome for the fourth quarter. It’s a pure guessimate we don’t have any hard numbers in for October at this point in time. We just have a sense of the momentum and that we are looking at right now. So, we're not concerned as I said we're cautiously optimistic. The year-over-year comparison I think has more to do with the fourth quarter shift NOI, but in total, we think that 5.5% for the year is a wonderful number for core NOI growth.

Jonathan Habermann - Goldman Sachs

Thanks. And in terms of cancellation income, are there any particular segments that have driven that result and obvious increase there for full year? Or you concerned I guess also buy department store sort of heading in to next year.

Robert S. Taubman - Chairman, President, and Chief Executive Officer

Well, on lease cancellation though it’s lumpy. And it’s very, very hard to predict and we say that all the time and we try that provide you each quarter with the best estimates we have based on what we know was in the pipeline. And so, I don’t there is anyone category of merchandise that has produce this lease cancellation result.

Lisa A Payne - Vice President and Chief Financial Officer

Very spread between apparel, specialty stores, restaurants. It’s very mix, very spread out.

Robert S. Taubman - Chairman, President, and Chief Executive Officer

And as far as department store go, we are generally very happy with how the storage were operating. And there has been a lot of consolidation obviously. They will continue to be some, but the survivors that are out there, are pretty strong and we are finding that our customers continue focus on those acreage stores and we are very exciting to have all the announcements in the storage that we have made now, and that have now opened centers this year.

Jonathan Habermann - Goldman Sachs

Great. And just last question. Can you give any sense of cap rates? Have you seen any movement upward? I know we don’t have a lot of data point, just given the change in sort of debt cost per day.

Robert S. Taubman - Chairman, President, and Chief Executive Officer

I directed a bunch of time talking about cap rates and I really do not believe that the mall sectors especially for high quality asset is going to see any movement at all in cap rates. If you got a great shopping center, it’s going to sell good cap rate. I noticed Westfield brought… I think was selling I forgot exactly who they brought in resale and one of the assets in Australia the 4.7 cap rate based on a finished redevelopment. Now, it’s good shopping center, but they got finished the redevelopment then on that basis it give to 4.7 was the announcement. So, there is theoretic limited activity. There was a outlet center that was sold down in Southern California near the boarder and we believed that cap rate for the outlet center was good one. It was…. I would call it eight plus, it has very good opportunity, but it’s a very good asset. It was sold at that it was on five cap rate and they have been below five. So, I think that you see evidence out there that suggest the cap rate as for mall assets are going to continue to remain very strong.

Jonathan Habermann - Goldman Sachs

Great. Thanks. And just one last one. In terms of any updates on the Florida and Atlanta, future developments, are too soon there?

Robert S. Taubman - Chairman, President, and Chief Executive Officer

I think it was too soon to comment. We work on these things, and some of them get announced and some of them don’t. We hope to be it able make announcement on something you never heard of, some time in the near-term. So, when we do some thing more to say we will though.

Jonathan Habermann - Goldman Sachs

Thank you very much.

Robert S. Taubman - Chairman, President, and Chief Executive Officer

Thank you. And that for your position on us as well.

Operator

You next question is from Louis Taylor with Deutsche Bank.

Louis Taylor - Deutsche Bank

Hi, thanks, good morning. Lisa, some… couple of expense questions for you. In your other operating expenses you mentioned that it was reduction of bad debt. Is that… you just curing last or did you have a recovery there?

Lisa A Payne - Vice President and Chief Financial Officer

We adjust bad debt every quarter based on… I call the mathematical calculation really a percentage of what our receivables passed the certain days, and so, that’s an accrual not any kind of a charge-off or recovery.

Louis Taylor - Deutsche Bank

Okay great.

Lisa A Payne - Vice President and Chief Financial Officer

This is an estimate that mathematically… and it is quite volatile and is one of the reasons that shopping center related expenses that somebody ask on one of there report is low this quarter.

Louis Taylor - Deutsche Bank

Okay. And as I think with the operating expense there in terms of the true up, I mean, was it one single true up which accounted for large positive variance in Q3 or were there the several?

Lisa A Payne - Vice President and Chief Financial Officer

There are other lower costs, but the true up was in one center for electricity. And it was just the true up from quarter… the last year.

Louis Taylor - Deutsche Bank

Okay. And was it big enough to be worst of couple of pennies?

Lisa A Payne - Vice President and Chief Financial Officer

Not that big, but it was more than a penny.

Louis Taylor - Deutsche Bank

Okay. And then lastly, on your cap… capital spending schedule on page 15, do you have a line… after replacement cost recoverable from tenants and they had a big jump on the consolidated side about $18 billion some kind of what’s in there and how is that being… has that recovery worked? Is it falling regular expense recoveries? How does that recovery works and what are the cost?

Lisa A Payne - Vice President and Chief Financial Officer

The asset… these are kind of same repaired roof parking lots all those thing that we get recovered from tenants and we disclosed it there. This is… these line items here are place by little because it is based on capital project that we are going to do on certain centers. As it relates the accounting I guess what I prefer do is talk to you offline and we can walk through because the fixed CAM and how things are now depreciated I think it’s best to do it offline.

Louis Taylor - Deutsche Bank

Okay, fair enough, thank you.

Robert S. Taubman - Chairman, President, and Chief Executive Officer

Thanks Lou.

Operator

Your next question is from Jonathan Litt with Citi.

Ambika Goel - Citigroup

Hi, this is Ambika with John. Given that you are largely competed with working through year 2,000 leases. Can you give us some color on what you are saying on tenant demand and also how far you are completed with those leases and also what kind of spread do you seeing?

Robert S. Taubman - Chairman, President, and Chief Executive Officer

Ambika, I don’t think I understood the question. With our 2,000 leasing, did you said?

Ambika Goel - Citigroup

2008 lease rollovers.

Robert S. Taubman - Chairman, President, and Chief Executive Officer

Okay. I don’t know if we are largely complete, but we certainly made very good progress against our 2008 budget and when we actually do… finish our budget and are able to give guidance above budget then we would be in a better position say exactly how far we are along as in the lease process. But typically this time in the year, we have signed a good majority of the overall leases that would under wise the opening in 2008. And there is… actually nothing has implied for my earlier comments there is absolutely nothing that we are saying that is changing our outlook either from the retailers response or from any data points that we are seeing right now. So, I don’t know if I am giving you a strong… good enough answer, but I don’t have the specifics to give you on… our ’08 leasing at this point.

Ambika Goel - Citigroup

Okay. And giving you previous commentary that there’s significant embedded rent growth and the portfolio given the historical low occupancy cost. Do have any… can you give some color on where currently you are signing new leases at what occupancy cost? And what occupancy cost do you think your portfolio can support?

Robert S. Taubman - Chairman, President, and Chief Executive Officer

Well, we said for some time that the average occupancy cost… we have been able to achieve is our in 15% plus range. We have been in the lower 13% range when you look at consolidated, unconsolidated as well. We target our occupancy cost when we signing new leases and we said this before at 18% plus of trailing two years sale. So, when you look at our rent and look at opening rent, which is not a perfect measure, but if you look at opening rents, you will see that we are moving in a right direction, if you look it at on 12 months trailing basis, I think that you will see that but…

Lisa A Payne - Vice President and Chief Financial Officer

Yes, I will just add as you just talked about next year’s leases and we are not through with our budget. But the target occupancy cost naturally what we look at what sort of closing versus opening which is really impact spreads and it could be quite chunky and variable to pay from the sides of the store use etc. But when we look in our budget and measure is this is stretch budget, is this a good budget. We focus on what occupancy cost is leasing targeting on new leases and that cost for the next year is the same as it has been for this year. So, I don’t think we are seeing any kind of any diminution in our view of what we think we can get in rent for the quality of our space.

Ambika Goel - Citigroup

Okay. And then my last question. On the Asian free agreements that you are working to, is there any progress from last quarter? And is there anything that’s holding up just taking it to the next level?

Robert S. Taubman - Chairman, President, and Chief Executive Officer

Yes, they are just very complicated agreement, very large, massive projects both in Macau as well as in Songdo. We are making progress in all kinds of fronts and both Macau and Songdo. Construction has started very significantly at Macau. At Songdo we expect to start construction but the end of November. We are continuing… planned our opening at middle of ’09 in Macau and we are opening the first half of 2010 in Songdo and I mean I can spend a lot of time on both of those projects, but we have not yes finalized the documentation and when we will do, we will announce our involvements there. The one other comment that I would add the Songdo we have been evaluating an investment and in portion of the broader project. Our significant part of our investment would be in shopping center and when we do make that decision, which will likely be in the first of second quarter, we will, of course, discuss that with you probably as well.

Ambika Goel - Citigroup

Okay, great, thank you.

Operator

Your next question is from Michael Mueller with JP Morgan

Lisa A Payne - Vice President and Chief Financial Officer

Hi Michael.

Michael Mueller - -J.P Morgan

Hi. Couple of questions. I know you don’t give out centers specific sales, but can share anecdotal evidence about the summer at the Piers?

Robert S. Taubman - Chairman, President, and Chief Executive Officer

Good morning, Mike. We have a good summer season, and we have 87 stores open there now and this is the first summer that we had the mall open. And substantially all of the first and second level are open at this point. But we’re generally pleased with the response from the public and we think that we’re, you know, we’re eventually going to create very significant NAD in that asset. If you recall we acquired it based on a 7% percent return to us. So we think it’s going to be a very good asset over return.

Michael Mueller - -J.P Morgan

Okay. As what you hear our voice debate. Can you lay out a time frame for the next round of items that you were talking about?

Robert S. Taubman - Chairman, President, and Chief Executive Officer

Well, on our last call we talked about sometime in future I was in Aides that we would expect the litigations have finally come to a logical ending. We have another very favorable court ruling here. We expect the final ruling from the lower court no later than the first quarter. It’s rightfully that the, you know, it will then be appeal. And after the settlement, as I said, the litigation will likely conclude by the end of 2008. You know, anything can happen but at the end of the day we’re going to build this shopping centre, my sets our planned.

Michael Mueller - -J.P Morgan

Okay. In the last question you were talking a little bit about how they sales and expectation. Can you give us a sense as to how sensitive the percentage of rent line can be say to a 100 bases points better or worse from which you’re expecting in terms of sales levels?

Lisa A Payne - Vice President and Chief Financial Officer

You know the issue is, you have to really go tenant by tenant and where their breakpoints are, you know, what percent there they have. And I can say that I think it’s really not material to what’s going to be. I mean I am going to throw out a penny or so but honestly it’s very tenant specific and asset specific as you think about it. We literally go tenant by tenant when we do an estimation of percentage rent which we really do an update in kind of June, July, tenant by tenant and we don’t go through that exercise again. So I really can’t give any more guidance than that Mike.

Michael Mueller - -J.P Morgan

Okay, that’s fine. Great Thanks.

Operator

Your next question is from Jeffrey Spector with UBS.

Jeffrey Spector - UBS

Good morning. Question on the outlook center in California sounds it like you knew the details. Were you looking at that property?

Robert S. Taubman - Chairman, President, and Chief Executive Officer

Well, Jeff. We don’t want to comment on that, you know, things like possible acquisitions and things like that. But, you know, we look at a lot of things that and we like highly productive retails space, especially those spaces that we think that we can add value to.

Jeffrey Spector - UBS

Okay, and then a follow question on your latest tenant negotiations. If you can talk about our tenants with their future sale estimates. Are any of them lowering those estimates? Are you seeing any pull back there on expansion plans?

Robert S. Taubman - Chairman, President, and Chief Executive Officer

We really not. I think you can hear all our comments. It’s a very good retail environment because the consumer is there during much evident in our shopping centers. If you have been to Partridge Creak this weekend and watched it on Saturday and Sunday and watched the number of bags in people’s hands and we’re sitting in Michigan. You would not have believed, I mean this place, this is where people wanted to be, it was happening. And people wanted to be in that environment and the same thing was true with 12 oaks when we opened Nordstrom. And from what I understand that the early reports that Sherry Creek said it’s the same thing. People like being in these shopping centers and the consumer like spending in them. And we’ve been very fortunate to get our share of it and I really do not, you know, a year from now I could be saying something different. But all I can tell you is that right now we’re very optimistic and as I said earlier I feel like we’re firing on all cylinders.

Jeffrey Spector - UBS

Final question. Can you discuss your latest thoughts and your dividend growth rate?

Lisa A Payne - Vice President and Chief Financial Officer

Yes, actually, you know what I think we kind of said and you’ve seen in the past is that we have grown, we have increased our growth rate, given that we increased our [inaudible] at the fall for share growth rate. Having said that I really don’t have any more comments since a board decision, we think very thoroughly and we look it at our projections over the next few years. A lot of factors go into it. And we’ll be dealing with that in the normal court. We just typically, in our fourth quarter board meeting.

Jeffrey Spector - UBS

Okay. Thank you.

Operator

[Operator instructions]. Your next question is from Matt Ostrower with Morgan Stanley.

Matthew Ostrower - Morgan Stanley

I think the last call, the call before you talked about the possibility of the development getting into. I guess an ongoing development project that might open in 09. Can you sort of refresh your thinking on that?

Robert S. Taubman - Chairman, President, and Chief Executive Officer

Good morning, Matt. Yes, we are working hard on a number of projects that we hope as I suggest in my comments to be able to announce some involvement in. And when we can, you know, something we do. Yes, when we can, we would-we will be making an announcement as such.

Matthew Ostrower - Morgan Stanley

Do you feel any better or worse about that now versus when you first talked about it?

Robert S. Taubman - Chairman, President, and Chief Executive Officer

I feel very good about it but you know, it may be instead of 09, you know, instead of 09; it may be 10.

Matthew Ostrower - Morgan Stanley

Okay. And then also on Partridge Creek. Did you sort compare; I don’t remember doing the nine and a half before for your first year there. And incase I compare the initial yield there and ramp up in the yield after that one compared to what you just did in North Lake.

Robert S. Taubman - Chairman, President, and Chief Executive Officer

North Lake, I believe was in 11 per cent 11 return at stabilization. I believe that we still do, correct me here if I’m wrong but I believe that the first calendar year after we opened which was like in September or October a year ago. was meant to be a ten and a half per cent. And then full stabilization year with the 08 at 11. You know typically, the first calendar year after the opening, if the especially opening is in fall you still have some stores that are opening so you don’t get a full annualization on those [inaudible] on those rents. So that the difference in the nine and half and ten we announced in our last call that at stabilization we would be, we had increased our guidance and taken it from nine and half up to ten. And now we’re being very specific thing that in 08 we expect it to be at nine and a half and in 09 we expect it to be at 10. So the biggest reason is frankly that we’re opening Nordstrom in April of next year. And there are group of stores around Nordstrom that will be opening. So that really largely the difference because otherwise the as you heard in the comment there’s about 90 total stores. And we have 86 seven committed and 70 of them are already opened and I think another 10 are going to open before the holiday. So you don’t have that much more that is going to be opening.

Lisa A Payne - Vice President and Chief Financial Officer

But Matt, I think you’re question is also why 11 stabilized at Charlotte and 10 at Partridge Creek. And I will say that when amplified for five we mentioned. We announced the project, you know, two years ago or three years ago at a nine and a half. So the ten is a step up and that’s due to good cost controls at the project level cost as well as that are income. We think it’s actually kind of amazing that we were able to, you know, it’s just an evasive point to be able to bring that project in at a higher return than what we have told the investors earlier on. Now, why is it and by the way in the world we live in when you look at others have appeared in development getting a ten in this environment is outstanding. With the commodity price increases, the price, the cost increases that have happened since Charlotte. To get a deal at ten is very very hard. I think most total rates are right for now at a nine level and I believe some are even lower.

Matthew Ostrower - Morgan Stanley

Is that the kind of hurdle rate you will be using going forward for, say your Florida, Atlanta projects?

Lisa A Payne - Vice President and Chief Financial Officer

I think today, we looked at it very much page by page. But if we can get a very good market, with good anchors and I’ll speak of tenants I know Bobby Green we would definitely end where there’s evaluation in Cap-rate where we see them today, um, your name is slightly. There is clearly a good spread if you’re building at a nine. And your building the kind of assets we build. Obviously, if you are going to build something that’s left dominant maybe you would want to ease it up. But we are very pleased to build a dominant asset as a nine per cent today.

Robert S. Taubman - Chairman, President, and Chief Executive Officer

Yes I mean Matt, we’ve always talked about it a 300 basis point model and both on [inaudible] as well as Cap-rate. And today, you know, six per cent is not there on the debt side but clearly lower than six per cent is there on the cap-rate side. So you’re building very significant NAD to get into the company and you are also getting very good increase from DED 1. So we’ll be very happy to build at a nine and as long as we have felt like the growth of the asset and all that was there.

Matthew Ostrower - Morgan Stanley

Okay and then just finally you disclose your 18 million dollars outstanding on Atlanta looks like, it’s sounds like it’s merely a attributable to land. I’m not a moral developer but that seems like a decent amount of money that’s spend early on the project. Why is that-why are you closing versus optioning if that assignment you really feel optimistic that this thing’s going to go forward and are those land cost materially different than other land cost on like say, North Lake or Partridge Creek. And especially in terms of the spending in this stage of process?

Robert S. Taubman - Chairman, President, and Chief Executive Officer

For every site is specific to a number of factors. This site is zoned. It’s zoned for regional malls significant site and that obviously is very mature in terms of the pricing. It’s also very important with outside road improvement cost are. Any other infrastructure cost like drain and utility sewer and to like to it’s site. We have also taken into account what the topography of the site is are there lot abatement, are there giving grading recorded on that site? All of that factors into what the individual site are of a piece of land as well as, of course, boarder market and what the other property types are paying in that market for the growth they expect to have. So, there all those factors. When we buy a piece of land, we like to give very confidence that if in fact something happened, we can get out of that these lands at nearer cost. Now that doesn’t always happened, but more often then not we have been able to do that when we require piece of land. We are very confident of our ability to create something there. But we currently have a backdoor strategy if something didn’t happen.

Lisa A Payne - Vice President and Chief Financial Officer

We will be selling some of the part that we won’t be using for the mall, we will be selling.

Robert S. Taubman - Chairman, President, and Chief Executive Officer

Our plan is actually sell some of that land. There is actually more land that we requiring for the mall as well. So, it’s… you try to look at every situation in great detail to really understand that.

Matthew Ostrower - Morgan Stanley

Is that the situation we are looking to approval sort of that you need to get approvals to go forward or just a matter of getting the anchors and all of the return to wind up [ph].

Robert S. Taubman - Chairman, President, and Chief Executive Officer

In that case, it’s mainly about the anchor store.

Lisa A Payne - Vice President and Chief Financial Officer

And I must say from the capitalization standpoint, we’re only the capitalizing cost associated with land improvement on this land that we’re selling. So, it’s not that we’re I think somebody said something like that there is another Oyster Bay. We are not this point because it is not a probable… we don’t have as higher possibility as we usually meaning board approved anchors all that wind up. It’s being due to the capitalization for the mall. So, I want to be clear about that.

Matthew Ostrower - Morgan Stanley

Okay. Thank you.

Operator

There are no further questions at this time.

Robert S. Taubman - Chairman, President, and Chief Executive Officer

Okay. Allison, thank you very much and I and again thank every body for being on the call. We are very proud of the quarter and we are very proud of our 10 year record, and thank you for supporting us. We look forward to seeing… maybe coming up soon. Thank you.

Operator

Ladies and gentlemen, thank you all for participating in today’s conference. You may now disconnect.

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Source: Taubman Centers Q3 2007 Earnings Call Transcript
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