Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Taubman Centers (NYSE:TCO)

Q1 2012 Earnings Call

April 27, 2012 10:00 AM ET

Executives

Barbara Baker - VP, IR

Bobby Taubman - CEO & Chairman

Lisa Payne - Vice Chairman & CFO

Analysts

Craig Smith - Bank of America

Christy McElroy - UBS

Alexander Goldfarb - Sandler O' Neill

Paul Morgan - Morgan Stanley

Steve Sakwa - ISI Group

Todd Thomas - KeyBanc Capital

Michael Mueller - JPMorgan

Ben Yang - KBW

Ross Nussbaum - UBS

Cedrik La Chance - Green Street Advisors

Quentin Velleley - Citigroup Global Markets

Tayo Okusanya - Jefferies

Operator

Thank you for holding and welcome to the Taubman Centers’ First Quarter Earnings conference call. The call will begin with prepared remarks and then we will open up the line for questions.

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

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

Barbara Baker

Thank you, Martina and welcome everyone to our first quarter conference call. Yesterday we released our first 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 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 this 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 will have the opportunity to ask a question. Now, let me turn the call over to Bobby.

Bobby Taubman

Thanks Barbara and welcome everyone to our call. This was another excellent quarter with outstanding fundamentals. NOI up 9.3%, sales per square foot up 13.3%. Now nine quarters of double digit sales increase and trailing 12 months sales at $659 per square foot. Net income, FFO, average rents per square foot and occupancy all up and we made significant progress on our external growth initiatives.

On March 22nd, we were delighted to celebrate the grand opening of City Creek Center in Salt Lake City, Utah. It was truly a fantastic event with thousands and thousands of people present. We handed out over a 100,000 directories just in the first day and the entire community embraced this project enthusiastically. With 92 eventually a 100 tenants opening and the rest of the space either leased or committed, the center is open beyond our wildest expectations. We have invested $75 million. In 2012 the center will be accretive and will likely add about $0.05 to the year which was in our guidance. For 2013 our first full 12 months we're expecting a 12% return.

City Creek Center has captured the shopper's imagination. It's much more than just a shopping experience. People have commented, they feel like they are on a vacation at the center. The design is as much an attraction as the outstanding line up of retailers. The roof that opens, that enables an outdoor experience in Utah's amazing arid climate. The streams (inaudible) through the entire shopping center. The two 18 foot waterfalls and the (inaudible) as the center has been designed to the BMDM umbilical cord to the greater downtown. Almost universally, we are hearing from our tenants that initial sales performances well exceeded preopening expectations. Five weeks after opening, traffic continues unabated. We are really proud of this asset and speak volumes about our team and our sponsorship of similar developments around the world. We welcome all of you on this call to come to Salt Lake City and see it as we believe you will be very impressed with this product.

Our US projects continue to move forward. With construction underway in Chesterfield and imminent in Sarasota and San Juan we have now begun to capitalize our investments in these three projects. Together they represent over $600 million of capital at our share that will create NAV.

Let's talk for a moment about each project individually. In Sarasota, the zoning is complete for the mall at University Town Center. We finalized our agreements with the landowner (inaudible) Development and will each own and fund 50% of the project. We'll be responsible for development, management and leasing of the center. The $350 million two level enclosed shopping center will be anchored by Saks, Macy's and Dillard's. The site has terrific visibility and regional access as its right on interstate 75 at the interchange of university parkway. The greater Sarasota market has over 1.2 million people and nearly five million tourists a year with limited upscale shopping opportunities. We think this is a tremendously underserved market, so much so that more than half the small shop space will be new to Sarasota.

The nearly 900,000 square foot center will begin construction later this year and is expected to open in the fall of 2014. We anticipate an 18.5% unlevered return on our investment.

In San Juan we will soon begin construction on Plaza Internacional. This $405 million, 640,000 square foot center will be the first upscale mall in Puerto Rico and the first location for both Nordstrom and Saks on the island. We are expected to be in site work this summer and are targeting a late 2014 opening. We will own at least 80% and up to a 100% of this center depending on the election of the landowner later this year. The landowners developing the casino hotel that will connect to and is expected to open with the center. The anticipated unlevered return is 8.5%. For both Sarasota and San Juan, we expect tenant sales performance in the top half of our portfolio.

Taubman Prestige Outlets Chesterfield, our project in the same St. Louis market is on schedule. We have secured all of our necessary local, state and federal approvals including from the army corp. engineers and department of transportation which allowed us to begin grading the site in early April. We expect to secure our final site improvement plan approval in June, the combination of a year-long intensive process which includes receiving many sequential approvals. This will allow us to complete grading and begin full construction in early July. The response to our site from tenants has been tremendous. We have nearly a mile of visibility on interstate 64, route 40, and a full diamond interchange boon's crossing right in front of our site. The open air center will be about 450,000 square feet and feature more than 100 stores. We are expecting to open in fall 2013. We'll own 90% of the $150 million center and expect to achieve an unlevered 8 to 8.5% return.

Now moving to Asia, the integration of Taubman TCBO is going well. We continue to be very pleased with their capability, knowledge and reach. We're working on several significant investment opportunities and hope to be in a position and have an announcement this summer. IFC center in Seoul South Korea is nearly a 100% leased and on track for its third quarter 2012 opening. IFC is a 5 million square foot mixed use project which includes three class A office towers, ranging from 29 to 55 stories, a Conrad International Hotel of 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 polyester store in Korea.

We expect to receive the second installment of the leasing success fee in late 2012. In the meantime, while all this development activity is underway, the core is continuing to perform extremely well. NOI excluding lease cancellation income was up 9.3% for the quarter, one of the largest quarter-over-quarter increases we've ever seen. This was driven by rents, recoveries and percentage rent. Sponsorship income and lower bad debt expense also contributed positively. Sales per square foot climbed 13.3% for the quarter and as I said, now an unprecedented nine quarters of double digit increases.

Once again, even excluding Apple, sales per square foot was up double digits. Electronics and shoes performed especially well with Apple and Footlocker leading the way. Abercrombie, Airplus Style, American Eagle, H&M and Paxton are all posting exceptional results in this category. All the LVMH brands, Louis Vuitton, Sandy, Burberry, Christian Dior have seen remarkable starts to the year in the luxury category. (inaudible) in home furnishings, Zales in jewelry, all of the limited brand concepts. All of these stores have seen outstanding results thus far. As a result, we continue to build momentum in our centers and leasing is going very, very well. Occupancy on March 31st, was 89.5% up a 160 basis points for March 31st, last year and better than anticipated this quarter. This is largely due to an unprecedented low level of unscheduled closings we had to date in 2012. It also suggests that our occupancy through the year which we expected to be up on average about a 100 basis points could now be up as much as 150 basis points. We also had 4% occupancy in (inaudible). Our highest level in the first quarter since we began tracking this statistic. This brings our total occupied space to 93.5% at March 31st.

Average rent per square foot of $46.14 was up 2.1% from last year and 2.6% sequentially from the fourth quarter of 2011. We continue to believe that average rent will be up about 3% for the year. Finally, we had only one tenant to clear bankruptcy during the first quarter. So our bankruptcy statistic was essentially 0%.

Now I'd like to turn the call over to Lisa and then I'll return at the end of the call with a discussion of our guidance and closing comments. Lisa?

Lisa Payne

Thank you Bobby. This quarter our FFO per share was $0.75, a 19% increase over our first quarter 2011 FFO per share of $0.63. here are the items that changed year-over-year and they are listed on page eight of the supplemental. First, minimum rents, about $0.05 from the prior year primarily due to higher occupancy and increased rents per square foot supplemented by revenue from temporary tenants. Next, percentage rents, up $0.015 due increased sales. Net recoveries, favorable by $0.045. this unusually large variance was due to higher occupancy and lower expenses in the quarter than the prior year. we benefited from reduced net removal costs because of the mild winter.

While net recoveries were a very positive impact to NOI growth this quarter, we expect net recoveries for the year to be very close till last year. obviously, this means you will have volatility quarter-over-quarter due to the mismatch between fixed cam revenues and cam expenses.

Net revenue for management leasing and development services down $0.03 in the quarter. This is primarily due to a one time collection of pass to due development fees in South Korea last year. we now expect our share of net third party income for the full year to be between $5 to $6 million.

Next lease cancellation revenue down $0.01 from 2011. As we have said, lease cancellation income is difficult to predict and can be wildly variable. We are maintaining our estimate of 3 million to 5 million for the year even though there could be some risk in this forecast. Other income, favorable by $0.01. This is primarily due to an increase in national sponsorship revenue. Other operating expense, favorable by $0.025. this was primarily due to a reduction in bad debt and predevelopment expense compared to last year.

General and administrative expense was favorable by $0.015. Primarily due to an increase in compensation. And interest expense excluding the impact of the debt assumed on the Greenhill and All for Sale acquisition was unfavorable by $0.025. this is primarily due to our loan on international plaza which was refinanced in November of 2011. The new loan is fixed and had previously been floating at very favorable rates. In addition, we had an increase in the spread on our revolving credit facility which was refinanced in July of 2011.

Operations of the Pier shops in Regency square which were transferred in the fourth quarter of 2011 were favorable by $0.05. The variance was due to both the decline in NOI and compounding default interest at the centers during 2011.

Now turning to our balance sheet. We paid off the 281 million of installment notes that were part of the Greenhills, Gardens and Village at All for Sale acquisitions. Due to our stock price, our debt to market capitalization stands at 33.3%, our interest coverage is 2.7 times and our fixed charge coverage is at 2.2 times.

The execution of our 2012 financing plan is going very well. We are close to a commitment from two insurance companies to refinance web farms, our 79% consolidated JV. The current $180 million loan matures in July and is pre-payable without penalty. Our share of this loan is 142 million. The new 10 year $320 million loan is expected to generate approximately 137 million of excess proceeds. Our share of the proceeds is expected to be approximately 110 million and is a strong tribute to the NOI growth that we've had in this asset. At the current treasury rate, the loan would be at an interest rate of about 4.5% which is the anticipated floor. This is a 180 basis point reduction in the effective interest rate from the current loan.

Later this year, we expect to refinance on Valley, our 50% owned center in Concord, California. Several lenders have expressed interest in refinancing this asset both the current $160 million Sun Valley loan and the $30 million loan on the land, mature on November 1. We do believe we will secure excess proceeds from these loans as well. Also, in April, we extended our smaller revolving credit facility for a two year term and increased stability to 65 million. The new rate is 140 basis points over LIBOR.

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

Bobby Taubman

Thanks Lisa. As we said in the release, for the full year 2012, we are increasing FFO guidance to a range of $3.18 to $3.25. we have one quarter behind us and it was a great one. Our cops center NOI is now expected to be up about 4%. Offsetting this is dilution related to our strong stock price performance.

In conclusion, our nine quarters of double digit sales growth have created a halo over our business which is impacting all fundamentals in a very positive way and likely will for some period of time. We're also delighted with City Creek's very successful opening and the hard work and perseverance that have enabled us to launch three new development projects.

One final comment, according to Morning Star as reported by Barry Benocker (ph) in his column, common rate number one in total return to REIT and real estate operating company shareholders over the 15 year period ending March 31st with an 18.4% compound annual total return. We also ranked number four over 10 years with a 22.2% compound annual total return. We thank all of you on the call for those numbers.

Now we'd like to open up the call for questions. As Barbara said, please limit your questions to two. Martina?

Question-and-Answer Session

Operator

Certainly. (Operator Instructions). Your first question comes from the line of Craig Smith from Bank of America. Your line is open.

Craig Smith - Bank of America

In the Sarasota project, would you be collecting fees for the responsibilities you have in terms of management and leasing?

Bobby Taubman

Yes Craig.

Craig Smith - Bank of America

Great. And then the second thing. You touched on this but maybe a little bit more about your caution to guide into the 4%. I mean given your 9% in the first quarter, that's just about a 3% same store NOI for the next three?

Lisa Payne

Yes, Craig. What I said on the call I want to emphasize that this is very much driven to 9 by the recoveries and we were significantly in the first quarter than frankly we expected. There is a lot of volatility in cam expenses and we would say that when you look at the fact that we're expecting cam recoveries to be flat for the year, I think it will show you why we are really at a 4% level.

Operator

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

Christy McElroy - UBS

Just on large percentage rents, could you talk about what's been driving the meaningful year-over-year increases that you continue to see in that line? Can it be attributed to any specific tenant segments and do you have any percentage rent deals with Apple?

Bobby Taubman

I don't think we can comment on one tenant and what our deal is with them. I would say that historically all of our small tenant shops pay percentage rent. Percentage rent typically is always a small group of tenants that end up making up the balance or the majority of that percentage rent line item. Our sales have been unbelievable and that group of tenants is doing very, very well and I would say that over half of our categories of merchandise continue to perform at double digits and we have been saying that sort of quarter-by-quarter that we have a lot of categories merchandise, not just one, is performing well. So you're getting different tenants beginning to pop their head up above the six grant lines and get into percentage rent. But percentage rent has a whole line item. Has always been modest. It's always been about 4% between say 3, 4, 5% at most over in our history all percentage rent. So one of the things we always try to do is especially with our shorter lease term is to try to have the highest possible base rent so that in essence that guaranteed puts the pressure on the tenant and puts less risk on the landlord given volatility over time over the economy and individual retailer performances.

Christy McElroy - UBS

And then just with regards to Puerto Rico. Just wondering if you could provide a little additional color on how the economics get potentially work with the landowner. If they elect to own up to 20% of the project, how would that work in terms of equity contributions or the construction costs and ultimately the cash flow distribution from the center and will this be on a ground lease or does the 405 million cost include any expectations outlined?

Bobby Taubman

Now it's a CDO. We will own the land regardless if they are 100% and the election that any of their interest would be on a parry pursue basis, their ownership will have requirement for equity and they will take their beneficial interest in debt as well.

Lisa Payne

There is a provision that we may fund a portion of their investment which we do in many of our deals but if we do that we get a preference on that, a very good preference and get our capital back on a priority basis but that's yet to be determined.

Operator

Your next question comes from the line of Alexander Goldfarb from Sandler O' Neill. Your line is open.

Alexander Goldfarb - Sandler O' Neill

You guys in the past have spoken about doing construction lending on any developments. Just sort of curious what level of preleasing or what are the parameters that construction lenders are looking for as you guys roll out the next round of projects?

Lisa Payne

We will be going to the market I think for one of the first construction on a regional mall project at least in many, many years. So we have very, very preliminary, begun discussions and I think your question is when we're going to find and figure out. I will say that in the past what we did in prior developments is we would get construction loans without any pre-leasing but we would have a targeted level of leasing a year before opening that we would have to achieve and then if not we would have to stop borrowing or bring an extra collateral. We never had to. We always made those hurdles. So obviously that worked very well for the banks and that would be our expectation.

Having said that it is a different world, a different market but we do think these are exceptional projects with great market dynamics and we believe we'll be able to get somewhere in the range of 65% to 75% of cost on these loans. I do want to say that this kind of business is very good for banks. They are decent spreads. Obviously we want to get a very competitive deal but the banks make good money on these construction loans. We provide a complete re-payment guarantee. So we're pretty bullish and we think the bank groups that we have excellent relationships with will find this business attractive. I want to end though by saying we have a significant line of credit and are prepared to fund these period without doing construction loans for quite a while but don’t expect that to be what ends up happening.

Bobby Taubman

Yes, we've done an analysis Alex that if construction financing just simply wasn’t available our existing lines, the excess cash we get from other normal refinancing, the cash flow of the business, we can easily meet all of the obligations that we have for the needs of these new projects and frankly for others that we're contemplating. We can meet all of those obligations without construction financing. It is preferred to have construction financing but we'll see what we find as we get into the market, as Lisa has explained.

Lisa Payne

Or we could wait until we actually get leasing and put them on. So we have a lot of financial flexibility as the main message.

Alexander Goldfarb - Sandler O' Neill

And Lisa, just following up on that, as lenders look at Puerto Rico, just given the real estate issues down there, do they look at Puerto Rico as being different from the underwriting for mainland or they view it as you are the sponsor and therefore their underwriting Taubman sponsorship as opposed to Puerto Rico real estate.

Lisa Payne

I think it will be a combination but I think our sponsorship and our track record and the story in this asset which is truly a phenomenal story when you see the anchors and the lack of really high quality retail there but clearly Puerto Rico will be I think more complicated than Sarasota to get done. I will say though that a very significant insurance company, one of the big four is doing a big loan on a mall down there and so very clearly institutions have gotten comfortable with Puerto Rico and we believe that will be the case here as well.

Alexander Goldfarb - Sandler O' Neill

Okay, and then second question Lisa. Can you just give us what you expect capitalized interest overhead to be for the balance for this year and then also what the China success fee is that we should be modeling for the back half of the year?

Lisa Payne

Well first of all on the fee side, we've given guidance on management and leasing which is included in there and that's as far as what we're going to provide. With regard to capitalized expenses, we do give guidance on our development, our pre-development costs, which is what would be expense. We really are not giving separate dollar amount on capitalized interest on all these projects. Number one is very dependent on timing, on when we start, and we've run lots of scenarios but that's not a number that I think frankly what matters to you is what we're expensing and we have given you guidance on the amount we're expensing in pre-development in total which is $21 million for the year.

Alexander Goldfarb - Sandler O' Neill

But basically guidance could come up as you start capitalizing those items?

Lisa Payne

Well when we gave you the $21 million number for pre-development expense that we expensed we had in our model what we thought we were going to capitalize. We gave you our best judgment in the $21 million.

Operator

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

Paul Morgan - Morgan Stanley

Can you talk about any regional variations in the sales trends that you in particular maybe Detroit relative to the portfolio of the markets?

Bobby Taubman

Well Detroit on average has been pretty much equal to the portfolio over the whole nine quarters that we're talking about here. We've also said in previous calls its still consistent now that Florida Luxury Centers and Tourism Oriented Centers have been sort of at the better end and beyond that I would say that our two value centers in Dolphin and in Great Lakes have also had a very good run.

Paul Morgan - Morgan Stanley

Okay. And then on the development side, you've had such a strong sales and generally speaking, all the properties have echoed that and apart from Sarasota we're not seeing that much in the way of development yet. You obviously have been working on Sarasota for a long time beforehand but is there a reason to think that we might see more near term given the strength or are the anchors still not that focused on new stores and we may not see the type of growth of new developments that you might expect given the type of performance of the portfolios posting?

Bobby Taubman

First of all sales helps everything and when you see sales like you're experiencing not just with us but with others in our industry, especially at the upper moderate to luxury end, that encourages expansion thinking. There is growth in the United States. Every year there is about 1% growth in the United States. So $3 million people a year are being added into our economy. There I a wide view that there is significant supply of retail space out there and that generally demand is sufficient to meet the existing supply and we have said publicly that while there were 40 shopping centers built in the last decade, in this decade we think maybe 15 to 20 are going to get built.

Now I may be the only guy out there that thinks there's going to be that many built. There is a lot of people who think that if we get to 10 it will be a lot of shopping centers but I think the combination of growth of people in America, sales increases that are really extraordinary and improving economy will lead to more expansion sought and more supply of space being built. Now what we've said is over this decade we hope to build four or five projects and of those 15 to 20 that I estimate only about half of those, seven to 10 are projects that we would want to build.

So we're hopeful to build at least half of the projects that we would want to build and we've started out strong with Salt Lake City which is a sensational asset and when you look at Sarasota and San Juan we said very clearly we expect these two assets to be in the top half of our portfolio and by the way our portfolio is $659 a square foot. So that's a heck of a strong statement.

So we think we're going to find that fourth and fifth project in the existing pipeline that we have and certainly sales of the kind that we've had, that momentum will encourage the thinking of the anchor stores that you mentioned.

Operator

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

Steve Sakwa - ISI Group

I guess two questions. You guys never mentioned the word equity I guess Lisa when you were talking about financing the $600 million of capital cost for the development projects and I'm just wondering how you are thinking about layering an equity over the next couple of years to help fund that.

Lisa Payne

Well I think based on the ones that we just announced we feel that the proceeds from refinancing in our pipeline from our existing assets, the equity we raised last year, we're really in a very, very good position right now for these. I think the real question is what happens in Asia, what happens on other outlets, potential centers, the next round of pipeline, clearly if we really take off in Asia, there is more equity required in Asia projects. They do not have as much debt. They actually are a much more conservatively industry over there than they are in the U.S. and we will likely then have to consider preferred stock or equity at an appropriate time. I will say, Bobby will agree with me that we are very committed to a conservative balance sheet as we enter a very big development pipeline.

Bobby Taubman

I'll agree publically on the phone.

Steve Sakwa - ISI Group

And then secondly, I don’t know if you can talk about the Chesterfield project and the competition assignment but obviously both projects are sort of heading to the finish line or at least maybe the starting line kind of at the same time and I'm just wondering how you guys think about the tenants and one, can the market support both projects and how do you sort of think about that competition there?

Bobby Taubman

Well there's no question, it's a very competitive environment in outlets generally across the United State. We've said publically I think, Simon has said publically that there is only going to be one project built in St. Louis. We are way ahead, on a much better side with much better access, much better visibility. As we outlined in our comments we spend a year getting very complicated approvals that are sequential in the way they come and we are under construction and we will be under full construction by the July 1st. So to us it’s very clear as to which project is going to be built and there can be a lot of conversation about it but it’s very clear to us.

Operator

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

Todd Thomas - KeyBanc Capital

Jordan Sadler (ph) is on with me as well. Question back onto percentage rent. Bobby, I think you mentioned that there is often a small bucket of trends that contribute to percentage rent. Is there any opportunity to revisit and renegotiate those leases and any way to extract more permanent rent or any of those leases expiring soon?

Bobby Taubman

Well as they roll that is the objective of the leasing group, is to try to get commitment at least at the level of percentage rent that's already being paid. Remember when you give somebody new term, they also have the opportunity now invest more capital in their store and remodel the store and typically with remodeling in a store, they then get a boost in a sales. So we will argue with the tenant that look how much business you are doing, you are paying us good percentage rent and when you have an opportunity to remodel and put in your best look and all the rest of it you will end up doing even more business and paying us even more rent and therefore you should guarantee at even a higher level than your percentage is already suggesting.

So as tenants roll we increase rents, the guaranteed rents and I think the long history of us being in the mid 90% of all rentals being guaranteed, I think that suggests that we do a pretty good job of securing those percentage rents in the guaranteed rent as they roll.

Todd Thomas - KeyBanc Capital

Okay, so would you expect to see a similar type of positive variance continue throughout the year?

Bobby Taubman

Positive variance in what?

Todd Thomas - KeyBanc Capital

In percentage rent.

Bobby Taubman

Yes.

Lisa Payne

Back ended. Yes. We would expect percentage rent to add to, one of the reasons we've increased guidance is we do expect percentage rent to be very good this year and it would be more back ended.

Bobby Taubman

We originally talked about budgeting sales increase this year. Remember coming out on the heels of eight quarters of double digit. As we are looking at 2012 we set a 4% to 6% comp increase year-over-year. While we start the first quarter at over 13% 4% to 6% looks pale but we don’t know it's going to pan. There's a lot of risks out there. You guys could talk endlessly as I could about Europe and all the things happening around the world right, in others an election going on right now. So I don’t know what really is going to happen so you may view 4% to 6% as conservative, we hope you are right. If it is conservative then percentage rent will be greater in the fourth quarter.

Todd Thomas - KeyBanc Capital

Okay, great. And then just lastly on Forever 21, this quarter jumped up. It’s just under 5% of your mall GLA. Where do you see that going long term and what level are you comfortable with?

Bobby Taubman

Well Forever 21 is a wonderful tenant and we love the fact that they have little or no debt and they have been expanding on a very careful pace and very successfully. Over the years we've had tenants as high as almost 10% of the space of our shopping center when you look at all their combined concepts.

So when you think about a shopping center of 400,000 to 500,000 square feet, a 5% number is 20,000 to 25,000 square feet of space. It's still a limited number in the context of the number of tenants, the number of store fronts, the number of separate income streams that are there and this particular tenant as I said is very, very well capitalized. I don’t think they have any debt. So we're very comfortable with the risk and very pleased with the tenant.

Operator

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

Michael Mueller - JPMorgan

I guess looking at the three development projects at 8% to 8.5% returns it’s still up pretty good spread relative to your cost but it's considerably below what you got on City Creek. Can you talk a little bit about, is there anything weighing on the returns or is this just where returns are penciling out these days.

Bobby Taubman

City Creek was a very unique situation that was really a structured deal that we negotiated over a period of time and I think it was wonderful for both parties to achieve the result that we did. With respect to the sort of traditional returns we have always said regardless of where cap rates have been, regardless of where debt cost had been, that we're looking to find about a 300 basis point spread on both value and yield. So if you think about today, those last nine projects that we built in the last decade on average are producing sales better than our portfolio. We've announced today with Sarasota and with San Juan two assets that we think will be in the top half of our portfolio.

Our portfolio today is trading at about 5 cap rate according to consensus. We just brought two high quality assets that was below what that consensus is in our company. So if we're able to achieve 8% to 8.5% we will meet that 300 basis point spread on value and on interest rates today, easily we will meet that number and hopefully we will do better but the range that we've talked about is 88.5 and we will produce significant net asset value for this company if we achieve those levels of return.

Michael Mueller - JPMorgan

And then second question, just given staffing, the organizational, how many projects do you think you can have underway in a given year at any one point in time?

Bobby Taubman

Well Mike, we spent a lot of time on the question of execution and we feel that our people, the processes that we have in place and really all of the thought we put into that question give us great comfort as we look throughout every single department from development, construction, leasing, all of the finance, calling areas, all the support areas, we've spent a lot of time looking individually at every individual department and we do have a great deal of confidence. There is risk obviously and we've tried to reduce that risk as much as humanly possible.

Lisa Payne

I would add, I think Bobby said it well. I also would add that as you compare, because I'm sure there is a look back in 2001 when we did, it turned out a lot of those projects have turned out fabulously for this company but we did bite off a lot. I think the difference here, if you look at the scale and the size of these assets and the amount of leasing required, significantly less than what we had taken on in 2001 and hopefully there is not going to be a 9/11 and we're going to have an improving economy but for sure the size of leasing that we're taking on, scale of it is significantly less.

Bobby Taubman

Yes, and the overall asset size that we're putting on versus our asset base today versus what we were doing in 2011 is dramatically different.

Operator

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

Ben Yang - KBW

Just going back to my question on development, I understand the 300 basis points spread but still kind of mention think to see that the you have the same return on all projects even though they are clearly very different. Is that just a coincidence or you basically telling us that 8% of the new development going forward?

Bobby Taubman

Well first of all its range and we don’t know where they are going to end up, it is coincidental, it's not manufactured I can assure you and we are hopeful that we will do better but these are the first projects being built the first two mall projects in many, many years, retailers have come off very difficult period of time. They are doing well now and we are delighted to have the wind at our backs as we are going into these leasing programs. We got two years to do it and we are very excited about these projects and we have gotten incredible retail response to them in preliminary discussions. So, you know we will see but it is coincidental it is not manufactured that all three 88.5%.

Ben Yang - KBW

Okay and then is there any reason you're expected return on St. Louis is so much lower than maybe what other outlet developers seem to be able to get on their project. Is that the finding competition that's pushing the rents down on your projects or is there anything else going on there?

Bobby Taubman

Well I can't speak for the others. I do know the announcements they make. It is a very competitive marketplace today and I think that that is reflected in our numbers.

Operator

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

Ross Nussbaum - UBS

I had the same question that Steve Sakwa had with respect to the funding for this next round of development and I guess my angle on it would be the Company is trading right now at an all-time high valuation whether one wants to define that as where the implied cap rate is or the AFFO multiple is. You could in theory issue equity here at a lower AFFO yield than where you could get permanent debt on those assets. Why not pre-fund them all with equity at the best valuation you've ever had in the history of the Company?

Lisa Payne

Obviously with equity, there is a long-term dilution that you are not taking into effect with that initial AFFO. You're right. The stock price today is – we issued stock what was – what was it..?

Bobby Taubman

56%.

Lisa Payne

And I thought I was brilliant at that movement and it looks like if I waited a year, I would have been more brilliant. Clearly we love where our stock price is, but there is the question of long term dilution because we think this company has a lot of great potential to it.

Bobby Taubman

I really think you have to think about the long term dilution. We absolutely believe in both our core growth as well our four prongs of external growth and I think as you look at that and look at what we believe our growth rate can be, even though our stock price is at an all-time high and we are very proud of the way that market has reacted to our business. We still think that they are finding ways to creatively manage our balance sheet and keep the kind of prudent balance sheet management that we have had, we think we can do both and at this moment in time issuing equity is not the right decision.

Ross Nussbaum - UBS

The second question I have is on your sales, I'm trying to get a handle on what percentage and I'm sure you don't have the exact number, but ballpark, what percentage of your tenants are now reporting sales above the levels that they had back in '07?

Bobby Taubman

I don't know that the percentage is but, our peak sales productivity in 2007 was $555 a foot, so we are now a $100 higher than that. My guess is that it's the vast majority of tenants and we said consistently this is not just about Apple, people have tried to say that, but each quarter we keep telling you that it's also double-digit without Apple. So, at some point that may shift a little or one way or another, but the fact is that this growth has been very strong across the board, across geographies and it's a very high percentage would be my guess.

Operator

Your next question comes from the line of Cedrik La Chance from Green Street Advisors. Your line is open.

Cedrik La Chance - Green Street Advisors

Just one question on market rent in relation to the sales growth, if you were going to lease space last year at the 50-yard line in one of your centers and you will have leased that space for $100. Given that sales are up 13% over the last year, can you now lease that same space for $113 today or are there any other issues at play in regards to how market rents are changing?

Bobby Taubman

I think there all kinds of reasons why an individual tenant deal is what it is. It can be the type of merchandise, the size of store, it can relate to the store front, it can be the absolute location, it can be the other competitors up there in the shopping center at that moment, it can be other locations that we're talking to them about. It can be any number of things. But on average as you look at the portfolio, we are consistently trying to lease around 17% of the trailing 2-year sales and that's what we try to do.

During the great recession, that was impacted. We were not able to lease at 17% and we talked quite a bit about the fact that that number had fallen probably to about 15% of trailing sales, because tenants were uncertain what was going to happen to their sales volumes and they were unable to commit that there would be a growing trend or positive momentum. Obviously now that has shifted more towards the landlord and we are seeing some advantage. We had good growth on top of a year that had 13% growth a year ago. So, we're very pleased with what our rentals are and how we're doing and we feel that generally the sale, that halo that we talk about is impacting all of our metrics including rent in a positive way.

Cedrik La Chance - Green Street Advisors

So our rents similarly growing by 13% over the last year in your portfolio or did it grow by more if we've gone from 15% of OCRs to potentially 17%?

Lisa Payne

Yes, well, I would say obviously we're guiding you on average rents on the whole portfolio to now be at about 3% when we had it at 3% for the year. The right answer to your question Cedrik is, as David Weinert goes out and set the target for his leasing agents on rents, a space, a comparable space with exact same tenant would absolutely target would be up based on sales performance of 13%. So, we set that target 13% higher. It is remember we do go two years effectively as a two year trailing number. If we change the merchandise maybe a different number, but apples-to-apples we're setting our targets based on sales at 17% of geo (ph) trailing. As it flows into our numbers, obviously it takes time for that store to open and you have the openings, the openings this year may have been done a year ago, you see what I'm saying, but we're targeting 13% higher based on these sales. Correct.

Bobby Taubman

Yes and the 13% Cedrik that I was focused on is the opening rent number was up 13% in 2011 over 2010 and our first quarter at $56 isn't showing a greater number, but it's still a very good number, especially when you compare it against the 13%. In essence, we're growing on top of that, and overall of the portfolio as Lisa said, is growing at 3%. So, I mean we think we're at very good place, and we think again that that was sales the nine quarters is impacting us very positively, and it will flow into our numbers overtime.

Lisa Payne

Yes, I think though to say that we target and David does a great job getting as much rent as we can. There is merchandising decisions, there is other things and I would say when sales grow as fast as they've grown, there's probably a little bit of delay; a sticker shock, but what we eventually get there.

Cedrik La Chance - Green Street Advisors

Maybe on a different topic, when I look at the construction costs in Puerto Rico and in Sarasota, and if I think about those costs per square foot and I understand it's not the greatest of the metric in the mall business, but nonetheless, in Puerto Rico you'll spend about $630 a foot to build that center, whereas in Sarasota it's going to be about $350 a foot. What explains the difference between the two? Is it land values or are there any differences in terms of expected levels of finishers in terms of construction practices?

Cedrik La Chance - Green Street Advisors

Well, I mean the market in Puerto Rico is an island. It's a more expensive market that's build in period. But there are also the big difference is that, we're at a very small site in Puerto Rico and we're on a much larger site in Sarasota. We have no parking deck at Sarasota. We're all parking deck in Puerto Rico. So, we're building much more of a dense vertical project in Puerto Rico than we are in Sarasota.

Operator

Your next question comes from the line of Quentin Velleley from Citigroup Global Markets. Your line is open.

Quentin Velleley - Citigroup Global Markets

Just firstly, with the Chesterfield project, can you just give us a sense for where the current percentage preleasing is and where you expect that to move over the year?

Bobby Taubman

Well, as we said, it's a very competitive market out there and we are not ready to discuss anything about individual retailers or how much we leased or any of the above. Suffice it to say, we are very confident or we would not have started construction in the retailer response that we have been getting.

Quentin Velleley - Citigroup Global Markets

Okay and then just in terms of Sarasota, can you just sort of remind us how the ownership change, I think Forbes had 50% and you had 25% and Benderson 25%. So whether or not there were any change in the economics because of that? And then secondly, with the change in the anchors, I think Neimans and Nordstrom were anchoring it, now you've got Dillard's and Saks, so how that evolved?

Bobby Taubman

Well, first of all it was originally a 50% Benderson originally owned 50%. He continues to own 50%. We owned 25% and Forbes owned 25%, and Forbes in the end decided not to participate for all kinds of reason. And to be clear, I mean we have a long and wonderful relationship with the Forbes family, both personally and professionally.

We have two terrific assets with them in the Millenia and Waterside. They are private family. Their investment profile and their criteria is very different than ours as a public company. So, in the end they decided not to participate. It was their decision and given their decision, we were pleased with the opportunity to own 50% of the project, so that's sort of the Forbes' question.

The department store question, it was an evolving discussion. And I don't know how much of this a lot of this is prevalence-based on individual company discussions. In the end, we are delighted to have the only Saks in Sarasota and have dealers and have Macy's. We believe that our location with the regional access and visibility of 575 that we have will serve the entire market. There was no other site in the market that could possibly create this kind of a regional platform and regional reach. As we said in our prepared comments over half of the tenants are going to be new to the market and unique to the market and all the better tenants want to be in this market. It's a terrific upscale market, about 5 million tourists a year that come to the market. It's good at every level. So, we're very pleased with the anchors that we have. We're very pleased to have 50%. And the overall economics from where we were previously was a completely different project, it's a very different program, very different plan. I mentioned a minute ago, there is no deck parking, there used to be deck parking previously, so it's two different programs, two different plans, two different moments in time.

Unidentified Analyst

Lisa it's Michael (inaudible). Can I ask just a quick question on reconciling guidance for a second? You've increased guidance for the year about 2.5% and one of the assumptions you called out was lifting same-store NOI by about 75 basis points, which probably adds about $0.04 to guidance and so, I guess, is there anything that's changing that guidance when lease go up by $0.04 just for the same-store putting aside that you would be beat by $0.06 in the first quarter and you have talked about some of these refinancing’s which are quite positive as well I don't know how much of that was baked into previous guidance or not, so I guess, at the end of the day, why isn't the guidance going up more?

Lisa Payne

Yes, we did have a great first quarter. I do think we need to highlight that. In our original guidance we had expected the shares. If you remember, we issued a bunch of shares to Davis Street or units I should say, for our Davis Street acquisition, and at the time we issued guidance, our stock price was significantly lower. There was a provision and we expected that a group of the owners that got those shares would have tendered them back to us, and in the deal that there is a tender price of $55. So, now with the share price up as high as it is, we're not expecting any or very little to be tendered, so those shares are going to be outstanding for the full year and that was not in our original guidance. In addition, with our treasury stock message, the higher stock price does impact dilution for the year and we did add at a little more share-based compensation in March that was not in the original guidance. So, in essence there is going to be more dilution then we had projected in our original guidance.

Bobby Taubman

Yes and I would say that when we agreed to the $55 guarantee the stock was trading at $47 and $48, so it felt like a good decision, and in the context of the stock being where it is today, obviously it doesn't look quite as good.

Unidentified Analyst

So that adds how much dilution you think to full year was it $0.05 or something?

Lisa Payne

Probably like $0.04 to $0.05. Correct. Fourish.

Operator

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

Tayo Okusanya - Jefferies

Bobby just when you start thinking about the next wave of developments, just kind of curious if you could make couple of comments on what areas you're looking at whether it could involve looking at Oyster Bay again or how are you doing in Atlanta and some of these other projects that you've kind of talked about peripherally in the past?

Bobby Taubman

Well you're right. The ones that we talked about publicly are Oyster Bay, Atlanta and Hawaii. There are a number of other projects that we've been working on that we haven't yet talked about publicly and then of course we have all of the efforts that we're making in Asia that we expect to yield. I said in my comments that we would be disappointed if we weren't able to announce sometime this summer our first investment in China.

So, I think that we certainly were very happy with what we have in front of us today. We do expect as I said at least another project or two in this decade, whether it comes from Hawaii, Oyster Bay, Atlanta or something that we haven't talked about. I am not sure at this point, although we do feel very good about where we are and why at this point. Obviously, we've been working hard on Oyster Bay for a long, long time, 22 years now and we are known for perseverance, we've been tested there clearly, but we think that it's Oyster Bay, it will be the best shopping center possible in United States, I mean it is just an outstanding site and one of these days' people will be shopping there.

Tayo Okusanya - Jefferies

What about Atlanta just kind of given everything else that's going on with CBL and Horizon in that market?

Bobby Taubman

I thought you are referring to the land that we own that's on our books in Atlanta. That is a site that we are very -- it's a great site in a great location, along Georgia Route 400. It's been the growth area of the market, obviously up until the downturn. There are number of new housing projects that are being thought about again along that corridor and over time we think it's a great site. We have the zoning, we have the entitlement, in fact its entitlement is for about 4 million square feet of combined space of both hotel, residential, office as well as retail and hopefully one day we will be able to put the project together.

Operator

At this time, I'd like to turn the call back to Mr. Taubman for closing remarks.

Bobby Taubman

Well we're delighted that all of you were able to join us this morning and we thank you for all your comments and we look forward to seeing you all at ICSC to the extent you are there. And we are delighted, obviously as I said with the state of our business. So, thank you very much. Thank you, Martina. Bye-bye

Operator

This concludes today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Taubman Centers CEO Discusses Q1 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts