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Taubman Centers, Inc. (NYSE:TCO)

Earnings call

February 12, 2007, 02:00 PM ET

Executives

Barbara K. Baker - VP, IR

Robert S. Taubman - Chairman, President and CEO

Lisa A. Payne - Vice Chairman, CFO

Analysts

Craig Schmidt - Merrill Lynch

Louis Taylor - Deutsche Bank Securities

Michael Mueller - J.P. Morgan

Jeffrey Spector - UBS

Jim Sullivan - Green Street Advisors

Operator

Welcome to the Taubman Centers Fourth Quarter Earnings Conference Call. The call will begin with prepared remarks and then we will open the line up for questions. [Operator Instructions]. 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 would turn the call over to Barbara for opening remarks.

Barbara K. Baker - Vice President, Investor Relations

Thank you, Valarie. Good afternoon and welcome to our fourth quarter earnings conference call. I am Barbara Baker, Vice President of Investor Relations. Joining me on the call today are Robert Taubman, our Chairman, President and CEO; and Lisa Payne, our Vice President and Chief Financial Officer.

This morning, we released our fourth quarter results in our supplemental information package. Both are available on our website www.taubman.com. As you know, during this conference call, we will be making forward-looking statements within the meaning of the Federal Securities Laws. These statements reflect our current views with respect to future events and financial performance although actual results may differ materially. Please see our SEC reports including our latest10-K for a discussion of various risks and uncertainties underlying our forward-looking statements.

During this call, we will also discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release and 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 as a year. He will be discussing the company's operating statistics and our development projects. Then Lisa will be discussing our financial performance and balance sheet. Bobby will return with closing remarks 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, Barbara. Good afternoon everyone, and welcome to our year-end call. We've had another outstanding year. FFO per share was up 12.5%, a penny over consensus. We reached a record tenant sales levels of $555 per square foot. We've made great progress in Asia, and we are delighted with the terrific response to Partridge Creek.

First, let's talk about sales. As I have said many times, sales are the most important drivers of the long-term success of our business. Once again we are very pleased to lead the industry in sales productivity at $555 per square foot. We have also led the industry in growth at 4.9%. Nonetheless, sales did slow in the fourth quarter. As of the third quarter, our sales per square foot were up 6.1%. October and November, we are even stronger, but December, the most important month of the year was flat as retail in general show a downturn. For the quarter, we were up 4.0%.

So what does this mean when the economic slows? It means asset quality really matters. If a retailer cuts 100 store expansion plans down to 50, what yields will they continue to pursue, those in the strongest, most productive centers, where they will be the most profitable. Further, the best retailers always need to be thinking about the long-term, while luxury retailers had a challenging holiday this year, they tend to have a much smaller expansion program than mainstream retailers.

They were talking to us today about 2009 and 2010 deals. It is where a luxury tenant is willing to pass a great location just because of a current different sale and when retailers are in trouble, the size and consistency of our portfolio, coupled with our intensive management style and relatively high rents of our portfolio allows us to anticipate problems and deal quickly with unproductive tenants.

For example, Bombay at one time had 11 locations in our centers; by the time they declared bankruptcy, they had 6. Two years ago, we had 10 demo stores, by the time of abandonment concept, there were only 4. Every year we plan for unscheduled closings. The past several years have been unusual and that there have been very few bankruptcies. Bankruptcies were only 0.2% of leases for the quarter and only 0.5% for the year continuing to be at record low levels.

Historically as the economy slows, bankruptcies inevitably increase. But we believe we are well positioned for any likely scenario. Comp center occupancy ended the year at 91.4%, that's 10 basis points over the last year. Lease space was stronger at 93.7%, up 130 basis points from year end 2006. These are the best numbers we have reported in years.

For 2008, we are forecasting occupancy to be flat to modestly down in the first half of the year. This is primarily due to the timing of store openings relating to our expansion of the Twelve Oaks in Stamford. For the second half of the year, we anticipate occupancy will be up slightly. Rents were impacted by a prior period adjustment of Arizona Mills that affected not only rent, but FFO, NOI and occupancy costs. Excluding this adjustment, average rents for the quarter for the full portfolio were up 3.1%. This will explain our Arizona Mills adjustments further in retirements. All this resulted in 5% core NOI growth for the year and 2% growth for the quarter.

For 2008, we continue to expect rent per square foot increases of about 3% and comp NOI growth of 4.5% to 5% excluding lease cancellation. In summary, even as the economy continues to weaken, we feel very comfortable that we will deliver at our recent plan for 2008 now over 80% complete.

Now I would like to provide a little color on our development projects. Partridge Creek continues to perform very well. The community is truly embraced the design, merchandizing and amenities offered by this unique center. The mall opened on October 18th was 70 stores and restaurants and an additional nine have opened and six more under construction for a total of about 85 tenants of an eventual 90 stores. Most of the remaining stores are now committed as well. We are looking forward to the opening of Nordstrom in April. We continue to expect to achieve a 10% return on our $155 million investment and stabilization in 2009.

Moving to Twelve Oaks, the Nordstrom in 97,000 square feet of mall shops opened in September 28. They were great addition to our holiday season. Macy's is also expanded from 240,000 to 300,000 square feet and its remodel would be fully complete this fall. The project is on track to achieve a 10% return on the total investment of $63 million upon stabilization in 2009.

In Connecticut, Stamford Town Center opened its new life style wing in November; and it's opening its seventh level food court this quarter. The seven new restaurants are terrific, in weeks and throughout the holidays, even more significant, the new addition has full... has truly transformed to center. The new Apple store is doing outstanding business. A 12,000 square feet store is under construction; Coach is relocating or nearly doubling the size of its store. A new raw Simon's Store with high end jewelry will open in May; and a 26,000 square feet flagship 21 Forever Store is opening for holiday 2008. The total cost for the Stamford projects will be about $64 million, our share being $32 million was stabilized 7.5% return.

Turning to our other developments, we continue to be positive about our plans to build a mall in Oyster Bay, Long Island. All the motions were filed last year and we expect the ruling literally at any time. This is the tenth court ruling we are waiting at. We continue to be very confident that we will ultimately prevail. Once litigation is fully resolved and permits are issued, we are ready to begin construction. As of December 31st, we had $143 million invested in the mall at Oyster Bay, up $4 million from the September 30th.

We continue to make progress in Salt Lake City after a long, intensive, but collaborated and productive process. We recently got approval from planning commission for our site plan. The plan includes the critical pedestrian bridge and links to retail components and encourages circulation throughout the City Creek project. We are glad to have cleared this important hurdle. The next step is to go before the City Council, which is likely to occur in the next month or so.

In Asia, we are delighted that recently announced the terms of our investment in Macao Studio City. Retailers, especially the highest and luxury ones are clearly focused on Macao. They consistently tell us it has become one of the most important luxury retail locations in the entire world. They are also responding to our program, our plan, and sponsorship. We are very pleased with our leasing today. As we said in our recently release, we expect to invest $200 million for 25% interest in the retail area approximately 600,000 square feet at a 10% return after Macanese taxes.

Our initial payment of $54 million is primarily to escrow into our partner, eSun received a required shareholder approval and the financing for the overall project is finalized. The eSun principals are controlled nearly 40% and above have agreed to support the proposal. On the financing side, eSun disclosed in a public filing in November they had reached agreement with their other partners in the overall development to supply up to $500 million of equity if needed for the project.

In addition eSun and its partners have agreed to fully subordinate the entirety of the 68 acre land parcel, which has been valued at over $900 million. The financing itself is a $1.3 billion loan that expected to begin funding sometime in the first half of 2008. Meanwhile the general contractors expected to be awarded shortly. Substantial completion of the foundation package has already occurred. Full construction will begin after the general contract reward with funds from the equity contributions. With Macao, our South Korea project Songdo, our Asia strategy is taking hold.

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

Lisa A. Payne - Vice Chairman, Chief Financial Officer

Thank you, Bobby. As Bobby said, we were very pleased with our results this quarter, which top off a great year of performance for Taubman Centers. This quarter, we reported FFO per share of $0.87. This is an increase of 4.8% over the prior year. I would like to add some color to the fourth quarter variances highlighted on page 8 of our supplemental.

Now let's begin with rents. In the schedule, rents are up $0.02. This variance is made up from two offsetting components. First, our portfolio was up $0.35 over the fourth quarter of 2006. This is primarily due to an increase in rent per square foot, as well as Twelve Oaks and Stamford expansion. However, offsetting the $0.35 was a penny and a half negative variance due to Arizona Mills.

We unexpectedly received from Simon Property Group in mid January adjustments related to Arizona Mills for the year's prior to 2007. This adjustment was due to errors relating to accounting policies and procedures on tenant inducements at the Mill. I am sure we all hope that this will be the end of negative surprises relating to Mills accounting. Net recovery from tenants contributed a half penny to our results.

The peer as expected was $0.02 negative for the quarter, ending the year of $0.45 negative, that's above what we disclosed when we bought the assets. Our sales at the center continue to be very good. The timing of final lease up is at a slower than we anticipated last spring. A major factor is the lease up of the few remaining large spaces on the third and fourth levels of center intended to be restaurants, night clubs, and entertainment uses. Because of their size, complicated build out and extended permitting processes, these tenants often require as much as 12 months to open.

Consequently, the growth in NOI that we anticipated for 2008 were likely be delayed at least a year. Continue to believe as the assets stabilize that we will see significant growth in income. The Mall at Partridge Creek, which open on October 18, contributed a penny to our results. As Bobby mentioned, this property is very well leased and will contribute to our growth all year.

Our share of lease cancellation revenue was up a half penny compared to the fourth quarter of last year. For the full year, we came in at nearly 13 million, just under last year's high of 13.3 million. Other income was up a half penny due to a variety of factors such as sponsorship income, parking revenue and gift card income.

Moving down the income statement, land sale gains in the quarter were approximately a penny over last year. Interest expense we a penny negative to last year's fourth quarter. Keep in mind this variance excludes the impact of the Pier and Partridge Creek, which we discussed earlier and our separate line items on the variance schedule you are looking at. This variance is primarily the result of the expansions of Twelve Oaks and Stamford, where interest is no longer being capitalized.

Given these markets, we are very pleased their balance sheet is as strong as it's ever been. In November, we increased our credit line by $200 million to a total amount of $550 million, while extending the maturity two years to 2011 with a one year extension option. We were able to maintain our previous credit spread of 70 basis points over LIBOR. We believe our ability to achieve this result is somewhat unique in the market today and is attribute to our strong banking relationship.

With nearly 300 million available under the line, two unencumbered assets and proceeds from refinancing Fair Oaks in 2008, we have a significant amount of liquidity. In January, we close on $325 million refinancing of International Plaza in Tampa. With the CMBS markets effectively closed, we refinanced floating for three years with two one year extensions; once again, this was done with our bank group. We then entered into a three year swap to fixed loan at an all-in rate of 5% and 3.8%.

The proceeds were used to pay off the existing $175 million, 4.37% loan on the asset and the company's $33.5 million of preferred equity. The remaining amount was split roughly equally with our partner. We are expecting significant growth in this high performing asset as we approaches tenth anniversary in 2011 and leases begin to roll. Therefore three to five years from now will be an ideal time to refinance into a fixed-rate loan and increase the proceeds.

Our only other maturity this year is Fair Oaks in Virginia. We are currently working with our bank group to finance on a floating rate basis and take advantage of the currently attractive floating rates. We expect to raise approximately $250 million on this asset and pay off the $140 million loan. At December 31st, $369 million of our debt or 12.6% is floating. This will increase throughout the year. We are pleased to have some floating rates debt in this market.

We currently have the following updates to the 2008 line item guidance that we issued in December. Given the current construction schedule for Songdo and Macao and the impact on development fees, we now expect to be at about $6 million to $7 million for net third party revenue, down from the previous guidance of $7 million to $8 million. Over to the 2008 to 2010 timeframe, we do continue to expect third party net revenue to produce profits in the range of $35 million to $40 million and possibly depending on opening dates into 2011.

It now appears that the peak year for this revenue will be 2010 rather than 2009. These estimates continue to be subject to many, many assumptions regarding the timing of work performed and revenue recognition. We are now forecasting $7 million to $8 million of lease cancellation in 2008. As always, we never know at the beginning of the year where this income will come from, therefore we like to budget at an announced in the range of historical averages. The remainder of our line item assumptions are unchanged from our December guidance release.

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

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

Thanks Lisa. As we said in our release, we are increasing our 2008 FFO per share guidance to the range of $3.05 to $3.12. In summary, we had another terrific year, FFO is increasing and our quarter is in great shape. Partridge is doing very well, and we are moving forward in Asia.

Now, we will be happy to open the call for questions. Valerie?

Question And Answer

Operator

[Operator Instructions]. Your first question comes from the line of Craig Schmidt.

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

Craig?

Craig Schmidt - Merrill Lynch

...leasing spread on the unconsolidated?

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

Craig, we didn't hear your question at all. This is the very end of it. Could you repeat it please?

Craig Schmidt - Merrill Lynch

Why is there a negatively leasing spread on the unconsolidated properties?

Lisa A. Payne - Vice Chairman, Chief Financial Officer

As we said in, I think most of our discussions on rental spread, because of the size of our portfolio, leasing spreads are really not a strong indication of any kind of trend line because it can be very... it dependent on what opens or what closes, which by the way are not linked with any quarter. In this case, there was a very, very large space in one center that closed there by... no I am sorry that opened thereby driving down that spread, because the opening rent of that large space is much lower than on what you would think of is an average space.

Craig Schmidt - Merrill Lynch

Okay. And the increases...

Lisa A. Payne - Vice Chairman, Chief Financial Officer

I am sorry, Craig, one other thing in, that's why we always obviously focus on the gross in total portfolio rent, which in this case was excluding the Arizona Mills thing, it was about 3% as I discussed in our... in the script, which is obviously very, very high. In 05, we had growth in our portfolio rents of only 0.6%, then it was 1.7% in 06 and in 08... I mean in 07, we are seeing it being about 3%. So, it's very strong for the quarter.

Craig Schmidt - Merrill Lynch

Okay. And the higher lease base relative to the occupancy; is that something that trails and the occupancy may pick up as well closer to the 93.7?

Lisa A. Payne - Vice Chairman, Chief Financial Officer

Yeah. We said that due to the Twelve Oaks and coming online as well as Stamford... thanks, Bobby... we may not see that happen. We won't see that in the first part of the year, but we expect the end of the year to be somewhat higher in occupancy; and obviously our lease based statistic is a forward-looking view of that.

Craig Schmidt - Merrill Lynch

And finally, you mentioned the... somewhat challenging Christmas or looks of holiday season. What is their opinion about 08... heading into 08?

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

Well, we feel very good Craig about how much we've already leased at this point. So, we are over 80% complete for our budget for 08 in terms of leasing. And we have very little at risk at this point; it isn't really under the negotiation. And frankly, we haven't seen any push backs from retailers for sure in 08 and 09 us leasing very well. So, as I earlier in my comments, when you have got strong assets, retailers want to be there. And we have very, very solid demand. Now, we do know that there are programs that are being cut back not especially retailers are starting to cut back some of their more robust expansion plans. But we are not seeing at all in our centers.

Craig Schmidt - Merrill Lynch

Okay. Thank you.

Operator

Your next comes from the line of Christy Mcelroy with Banc of America.

Unidentified Analyst

Hi, good afternoon, guys. Lisa, can you just walk through specifically what changed in your assumptions to cause you to raise 08 guidance having just provided two months ago? I thought you feel back your the first half occupancy assumptions and then you lowered your development fees for cash. What's the offset there?

Lisa A. Payne - Vice Chairman, Chief Financial Officer

The main... I think there is two primary... primary drivers of the increase. First we do have strong leasing results as we said 80% is complete. We feel very, very good about our projections now on our rent. And then secondly with favorable interest rate declined from floating rates, clearly we will be benefiting from the decline in rates that have occurred year-to-date. So it's really interest and leasing, offset by the two negatives you mentioned.

Unidentified Analyst

: Okay got it. And then has your willingness to source new development projects change, given what's happened in the credit market and the slow down in consumer spending, specifically in Asia?

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

No, I mean we are... when we work on a projects, the average for a project life is, we have said this before is something like nine or ten years from inception till completion. And you never know what you are going to run into. You have all kinds of issues from competition, entitlements. And litigation is common, look at Oyster Bay, so you have got to use some times through two or three economic cycles. So you have to feel confident that eventually you are going to come through that economic cycle and if you believe in the marketplace that you are trying to build in, then you look past any one cycle. The debt markets as Lisa said, we are in very... our balance sheets in excellent shape and we are really sitting with all the equity that we need for whatever development opportunities or other opportunities frankly that we are seeing in front of those.

Unidentified Analyst

: You haven't really seen any kind of pull back at all on new development leasing?

Lisa A. Payne - Vice Chairman, Chief Financial Officer

Well, remember, we are actually in a position today where and whether you say it was fortuitous. I think my friend across the table here would say he wishes we were doing new leasing today of development, because it is a very key part of our external growth. Having said that, today we really are not domestically leasing new space with the exception of the MGM project, which obviously is just doing gain busters and continues to do great and then that is still a fee income. And so we don't really have a lot of new leasing risk of new development at the present time and that's why we actually also looking for new development, because anything we would be working on now wouldn't have an opening really to 10 or 11.

Unidentified Analyst

Right, thank you.

Operator

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

Unidentified Analyst

Hi how are you? Question on the development, just following-up in the last question; can you comment, I guess in terms of buyers, in terms of development the North Atlanta site and obviously versus Oyster Bay, it seems like at this point obviously Oyster Bay would be the focus?

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

Well, Jay, we are not focused any one project. I mean you need to be working on literally 20 projects at any one time in various ways some are little, some are a lot in order to produce the kind of investment that we want, we want to produce $150 million to $200 million a year of development, investment somehow here domestically. We would like to do it internationally as well. And in order to do that, it kinds of returns that we have been enjoyed historically, you need to work on a lot of things just for reasons we don't see things don't happen sometimes. And that's part of the risk capital every year that we are investing. And when we talk about our development expense, we expect everything; and where we don't, we are very specific with you in our filings as well as on our calls as to when we are capitalizing. So you need to work on a lot end up with one or two projects a year.

Lisa A. Payne - Vice Chairman, Chief Financial Officer

Yes, the $6 million plus we spend domestically we are using to fund a lot of projects that we are looking at it any one time.

Unidentified Analyst

Okay, and you mentioned obviously softer economy, you expect bankruptcies to increase, but in terms of lease term fees you are expecting sort of a normalized pace for the year that 7 to 8 million. Do you feel that's being too conservative?

Lisa A. Payne - Vice Chairman, Chief Financial Officer

Well, we struggle with this every year, because when we start the year, I want to emphasize, we do not have in the bag one... literally day one any specific knowledge of what it's going to be comprised of, what tenants will be in this bucket, so we start with zero. So therefore what we do is we tend to look at historical averages, three to five years in that range and kind of look at the average. We have had two year running of a number in the 13 million range, but really don't feel that it's prudent for us to put that in as a guidance number when we don't have really anything in it, and that's why we updated as the year progresses quarter-by-quarter.

Unidentified Analyst

Okay, and then just a couple more questions with regard to 08. In terms of the Pier Shops, what impact are you expecting to full year?

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

What impact? I don't understand you question.

Unidentified Analyst

You said negative $0.04 last year, $0.045 if I heard correctly.

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

I think what Lisa said is that we expect it to improve, but not at the level that we originally expected it to improve, that would be delayed roughly 12 months.

Lisa A. Payne - Vice Chairman, Chief Financial Officer

It will be delayed at a minimum of 12 months.

Unidentified Analyst

Okay. And what sort of land sale gains you are building into 2008?

Lisa A. Payne - Vice Chairman, Chief Financial Officer

We... that hasn't changed that $3 million to $4 million. We continue to see all that that's a reasonable number. That number also is something we start the beginning of the year without full knowledge of, but we still feel that's the good number and we had very little in 07. We had less than $1 million in 07, so that is an increase, but that was in the guidance we issued at December.

Unidentified Analyst

And G&A lastly, are you still expecting that to be flat as it was last year?

Lisa A. Payne - Vice Chairman, Chief Financial Officer

Yes. I would say, I am just thinking, a modestly up, but very modestly.

Unidentified Analyst

Hey guys, it's Tom here with Jay. Just a quick question; looking for a little more color on the $325 million refinancing of International Plaza, what was the cap rate that the lender used in arriving at the fair market value of that asset and also if you happen to have a handy the loan to value there as well?

Lisa A. Payne - Vice Chairman, Chief Financial Officer

We do absolutely do not disclose how the valuations work on the financing. We don't drive that process, that's independent of the bank. We do feel it was a very reasonable number for the banks in the current market. It was the terrific asset. We... so, I mean I think that's all I can really say. I think the rate as you can see at the 5% and 3.8% was very attractive to us. We were able to get it done in a very, very choppy market. We feel very, very good about this financing.

Unidentified Analyst

And then can you provide us with the launch of value there or you don't have that either?

Lisa A. Payne - Vice Chairman, Chief Financial Officer

No, but let me... no, I don't have it. But typically as you know, things can be anywhere... well, it's very asset dependant, and no we are not going to get loan to value numbers out on individual loan.

Unidentified Analyst

Okay, thank you.

Operator

Your next question comes from the line of Ambika Goel with Citi.

Unidentified Analyst

On the store closure expectation; based upon what you gave in guidance for lease term fees? Would it be fair to assume that you are expecting minimal store closures in your portfolio in 2008?

Lisa A. Payne - Vice Chairman, Chief Financial Officer

It's interesting that... I would say that we don't always... the lease term fees, I wouldn't say is always totally linked to exactly when the store closes, number one. So we are really looking as you think at lease term fees, kind of looking at tenants that we think could potentially negotiate a deal and then they leave at a point in time. I would say today, we are clearly thinking as we have seen already there will be likely some uptick in bankruptcy, but not significant in our portfolio. We also find that the ones that has happened. They are in terrific locations that we feel we are going to be very easy to lease. And that's why today as we are looking out we are still projecting a modest increase in occupancy between now and the end of the year.

Unidentified Analyst

Okay, great. And then can you give me your full year gross numbers for 2007? And then also for 2008, where you stand given that you have already leased about 80% of 08 expiration?

Lisa A. Payne - Vice Chairman, Chief Financial Officer

Yes, as we said, it was... for the quarter, it was 3%. For the year, it was 2.4% in 07. We see this, we see it picking up in 08 just like we have kind of described to all of you and see it approaching 3% in 08.

Unidentified Analyst

Okay. And then how should we think about the impact of fixed term on that 3% number?

Lisa A. Payne - Vice Chairman, Chief Financial Officer

That's an interesting... I don't... CAM is totally separate from this. So we are... I don't really see it linked per se. We do negotiate our rate rents... we are negotiating fixed CAM. Our tenants are being given an option of whether they go fixed or floating or net CAM and there is continued to be room in our occupancy cost numbers as you can see in the schedules. And so we continue to see the ability to push rents in this environment given how low occupancy is versus our historical average, given how great our sales performance has been over the last three to four years.

Unidentified Analyst

I guess rephrasing my question just so we are speaking apples-to-apples. If you think about rents plus the CAM component, would that number be higher than 3% because of the fixed CAM component?

Lisa A. Payne - Vice Chairman, Chief Financial Officer

No, we aren't... we are not here trying... fixed CAM although it's been I think we feel a very positive decision for us as it relates to our relationship with our retailers and being able to give them the security they'd like to have about CAM costs, we are not sitting here kind of... it sounds like you are saying well, are you making a huge profit on fixed CAM, on CAM and therefore not increasing your rents as much as you are, as much as you could be? Is that kind of a question?

Unidentified Analyst

Yes, basically, are we seeing synergies more on the expense side, which is driving the NOI growth number?

Lisa A. Payne - Vice Chairman, Chief Financial Officer

Well, wait, but I guess I am saying rents per square foot excluding CAM or any profit on CAM is going to be growing 3%.

Lisa A. Payne - Vice Chairman, Chief Financial Officer

What happens in CAM will potentially be good depending on what does happen to expenses. Now if you remember, we only have 20% to 25% of our tenants in fixed CAM unlike some of our peers. We are really doing it as the... we are negotiating fixed CAM on new deals, really not doing it on the historical deals, because retailers... They are really focusing on new business and not spending a lot of time on the past and neither are we. So, it is... fixed CAM is rolling into our portfolio on a very methodical slow basis over the next five years.

Unidentified Analyst

: Okay, great. Thank you.

Operator

: Your next question comes from the line of the Louis Taylor of Deutsche Bank.

Louis Taylor - Deutsche Bank Securities

Hi, Lisa; on the Fair Oaks loan that you referenced in terms of going to floating rates. What's the likely profile of the provider of the new loan, bank or insurance company? What's the likely profile?

Lisa A. Payne - Vice Chairman, Chief Financial Officer

We are going to... we actually are working right now, because this is coming up with the same... basically our same bank group. We have a pull of... I don't know maybe probably 15 or 20, but we did do the revolver with the bank group, we did IP with the bank group, and we are going to do Fair Oaks with the bank group. Now, it's not consistently 100% of same banks in all groups and in each one of those loans, but there is a lot of overlap. We have an extraordinarily broad and deep banking group because of all the construction lending we have done, which has been terrific business for both them and for us. And through that we have a very stable, loyal group of banks that are frankly find this business attractive and are being very supportive of us.

Louis Taylor - Deutsche Bank Securities

Okay. And then second question, in terms of as the yield curve possibly gets steeper from here, how high would you take the floating rate debt this year or whether through swaps or other mechanisms?

Lisa A. Payne - Vice Chairman, Chief Financial Officer

My view have been a conservative CFO, I guess, and really enjoy ten year fixed rate debt as much as possible. Having said that, as we can see when you have a drop in interest rates like we have had, it's good to have a modest amount of floating rate debt. We have historically said, we peeked at one time at 40% to 50% and did not feel comfortable there. That was because we had all those loans floating with our 2001 opening. I think we feel if we are below... in the 20, plus 20 range, don't hold me to that exact number, that's kind of okay. But frankly given where we are today, I think we are going to probably be in the 13% to 15% range unless Oyster Bay starts; and if Oyster Bay starts, we'll kick up from there. We are not going to do... in my view, today we are not going to do something where we swap in fixed rate into floating on a kind of the play the interest rate game. We are financing this loan, we decided because it's great and uploading. In the floating rate growth world, we would like to have a little more floating rates, we are going to leave it floating for a while. But that's about the extent of our play in interest rates.

Louis Taylor - Deutsche Bank Securities

Okay.

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

Our business, Louis, is not playing the financial markets. And if you can... I think our average cost to debt on our balance sheet is about 5.6% or 5.7%. If we can't make money in that range, there was something else to do. And so right now you have a down interest rate environment and that's good news on one end. There is a reason for it that's a bad news the economy and the consumer. So, it's... one is offsetting the other, but we are not about playing the interest rate game. We will do the best we can in managing our balance sheet, but we like long-term debt.

Lisa A. Payne - Vice Chairman, Chief Financial Officer

Yes, after Fair Oaks, the next amount of floating rate we could take on would be a new construction loan of a new center, which would be potentially Atlanta, Oyster Bay, one of those. But that's not going to be... we would like to have Oyster Bay happen this year, but it's not going to... it will be one of those kinds of projects.

Louis Taylor - Deutsche Bank Securities

Great. Thank you.

Operator

Your next question comes from the line of Michael Mueller with J.P. Morgan.

Michael Mueller - J.P. Morgan

Hi. With respect to Macao, what sort of cost you are thinking about when you think about the loan cost there, and financing cost?

Lisa A. Payne - Vice Chairman, Chief Financial Officer

We are not in charge of the financing of this project, our partners are. And it's really part of the entire as we said $1.3 billion. Am I right?

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

$1.3 billion.

Lisa A. Payne - Vice Chairman, Chief Financial Officer

$1.3 billion financing. And so, I really can't... I hesitate to even put a number out there. I think the financing markets over there are frankly kind of similar to here; they are in a lot of turmoil. This has great sponsorship; there is a great amount of equity going into this project. We feel very confident; they are going to get it done. And as soon as we know more than that, we will obviously... it will be public as to what rate they are going to finance that.

Michael Mueller - J.P. Morgan

Okay. Shifting gears for a second, looking at the fee income; you mentioned 2010 being the peak. I know you haven't put any thing out on 09 yet, but should we think about this as a ramp up to 10 or a spike in 10? How should we think about 09 in the context or where we are in 08 versus 10?

Lisa A. Payne - Vice Chairman, Chief Financial Officer

I would say it's a... I would define it more towards the spike end versus the ramp up end. There are some fees in these projects that come in at opening dates because of... for example, certain lease... obviously leasing fees tend to be more paid when the tenant opens or at least a big chunk of them. Development fees tend to get spread over the development period. So... but there are significant leasing fees here that get paid when the projects are opened which would be towards the end of 09 or into 10.

Michael Mueller - J.P. Morgan

Okay. And last question; Bob, you mentioned potential rolling on Oyster Bay, I think term was anytime. I mean should we think of anytime as... is there something, where you think it could be literally any day or just anytime over the next few quarters?

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

No, no, any day not... I mean...

Lisa A. Payne - Vice Chairman, Chief Financial Officer

Any week.

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

We surely hope any day or week, maybe it's a month, I mean they be... our expectation is very soon. And this is not necessarily the final ruling, likely it will then be appealed. And after the settlement litigation easily could go to the end of this year, and anything can happen if you go beyond that too. But we are very confident that we are going to build this center. And but it's now been I think this is the 10th ruling that we are going... it's going to be happen, and many of the rulings have been very clear that tenant reacted in a very capricious manner. So we'll... we certainly are looking forward to the next ruling.

Michael Mueller - J.P. Morgan

Okay, thanks.

Operator

[Operator Instructions]. Your next question comes from the line of Jeffrey Spector with UBS.

Jeffrey Spector - UBS

Bob, you addressed the many of the concerns people have about mall REITs and with all the headlines about the consumer slowdown. Can you just discuss a little further about what it would take for you to become a little more cautious for tenants start to pull back, I guess based on your prior experience?

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

Well, I think that there is some separation in this answer for various companies. I think that companies that have portfolios that are filled with good assets, it's a different question and different answer to that than the other companies with lesser quality assets. And I talked about some of the reasons in my prepared comments. But it would take a what I would call sustained period of flat to down sales for at least several quarters if not for a year or two.

The last time that we had any pullback at all and we did not... if you go back over the gross and occupancy that really began at that time. We didn't really feel it hard, but when we had... about five years ago, we had 27 months in a row of flat to down sales. And that did impact retailers' expectations and their willingness to make new lease commitments. And even in some of the best centers, there would be a retailer, who would want that center for a long period of time and they maybe... have made a different decision. And... but nonetheless, if you look at the growth in our lease up and occupancy over that... the ensuing five year period of time has been very good and very consistently moving in one direction. So I would really say that was the last time there was any pullback at all. But assets in good centers specially ones that are well leased do not enter new development program or new leasing program. There is very little pullback, because if retail is going to be a business and look back this cycle, they need to be in places that they think their are going to make money.

Lisa A. Payne - Vice Chairman, Chief Financial Officer

And what happens to our NOI in that period of time?

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

Kept going up. Every year, they kept going up. And we've said publicly before that I don't believe our portfolio has ever had a down year, when we in NOI, when we've been private or public. The granularity of income, the lease structures, all of these things that you fact that tenants make huge investment in their resold improvement, and training at their people and inventories, all of these things are reasons that really make it very unlikely that there will be pullback especially across thousands of tenants. And when you have 3000 or 4000 tenants, it's huge granularly income, and I should say that the balance sheets of retailer today are really in the best shape they have been in, maybe ever that I have experienced.

There has been a lot of consolidation. There has been a lot of both horizontal and vertical integrations of these large businesses and you've got companies of size with very good balance sheets addressing more perhaps a difficult time. So I... I am very... we are certainly cautiously optimistic, maybe we are not bullish, but we are cautiously optimistic and as far as 08 goes, we have said it already we are very confident about 08 given how much leasing has already been done.

Jeffrey Spector - UBS

Great, thank you.

Operator

Your next question comes from the line of Ben Yang with Green Street Advisors.

Jim Sullivan - Green Street Advisors

Hey guys, it's actually Jim Sullivan. You say you guys were more active than your peers relative to your size in terms of share repurchases. In the second quarter and third quarter and the fourth quarter you didn't buyback any... it was our view that your stock traded at a substantial discount NAV during the fourth quarter and share repurchase activity?

Lisa A. Payne - Vice Chairman, Chief Financial Officer

Hello Jim. As I think it's obvious, there is three things we can do with our capital: we can develop, we can acquire or we can buyback stock. We have been for our size, a big proponent of share repurchase. We are though entered... we have entered and we think could be a protracted period of time of capital availability uncertainty. And when I say that, it's just where we think around the globe liquidity is going to be at a premium, and we really want to take what I would call it conservative stance on our capital. And frankly felt that although we could do in another 25 or another 50. It's just not going to move the needle at this company and is that worth the... worth the expense of that capital that or the missed opportunities at some point of where we might use that capital in our growth business and the development or acquisition area. So, we looked at it... we thought very carefully and just made this decision at this point to hold on to our capital.

Jim Sullivan - Green Street Advisors

Okay, that's helpful. And with respect to Atlantic City, the delayed receipt of some of the NOI related to the lease up over the balance of the space to the extent that the NOIs delayed over the timeframe that you referred to, what are the implications for the ownership structure there?

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

Well, the way it's structured Jim, is that we get 100% of the cash flow until we get 7% look back on our entire investment and that includes the finance portion of our investment. So, I think our beneficial interest in the debt and the equities about 130 somewhat million dollars. So, until that plus whatever additional capital we've put in actually, the capital we've put in I think gets an 8% return accumulating with that interest rate. So, until all of that capital gets 7% including the accumulated interest, we get 100% of cash flow. So, we structured our downside, we believe on the asset well. And we believe that will be... that this asset is going to be very strong asset overtime. That the market... that the announcement of capital going into that market with projects that are funded, most of which have... are getting ready to start if they haven't started, is over $10 billion today in Atlantic City. And even if you add up the stuff that we really expect to happen, it could be $15 billion. So, that market is going to grow as the East Coast destination for gaining in entertainment. And we believe we are on the 50-yard line in our location. So, we think this asset will just get better and better overtime.

Jim Sullivan - Green Street Advisors

Thank you.

Operator

There are no further questions at this time.

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

Well, Valerie, thank you. We really are delighted with our year as you can hear. We think we had very strong sales and NOI growth. We are delighted with where we are in our leasing and occupancy. And we are really pleased with the progress that we have made in Asia. And all of you in the markets continue to recognize our performance. So, we want to thank you for another strong year with us, and we look forward to many more together. So enjoy the rest of your days wherever you are. Thank you very much. Bye, bye.

Operator

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

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Source: Taubman Centers, Inc. Q4 2007 Earnings Call Transcript
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