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Taubman Centers, Inc. (NYSE:TCO)

Q1 FY08 Earnings Call

April 23, 2008, 11:00 AM ET

Executives

Barbara Baker - VP, IR

Robert S. Taubman - Chairman, President and CEO

Lisa A. Payne - Vice Chairman, CFO

Analysts

Craig Schmidt - Merrill Lynch

Christeen Kim - Deutsche Bank

Michael W. Mueller - JPMorgan

Benjamin Yang - Green Street Advisors

Ambika Goel - Citigroup

Michael Bilerman - Citigroup

Jonathan Habermann - Goldman Sachs

Christine McElroy - Banc Of America

Operator

Welcome to the Taubman Centers Fourth Quarter Earnings Conference call. The call will begin with prepared remarks and then we will open up the lines to questions. [Operator Instructions]. On the call today will be Robert Taubman, Taubman Centers’ Chairman, President, and 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 - Vice President, Investor Relations

Thank you, and good morning, everyone. Welcome to our first quarter conference call. Joining me on the call today are Robert Taubman, our Chairman, President and CEO, and Lisa Payne, our Vice Chairman and Chief Financial Officer. Yesterday, we released our first quarter results, 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 latest 10-K and subsequent reports 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. Reconciliation of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release and in our supplemental information. In addition, a replay of the call is provided through a link on the Investor Relations section of our website.

For our agenda today, first Bobby will be providing an overview of the quarter, then 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 question.

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

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

Thanks, Barbara, and welcome, everyone.

We are pleased with our results this quarter. FFO per share was up a solid 4.6%. Sales per square foot increased 3%. Comp center NOI was up 6.9% and we're making good progress on developments, both in the US and in Asia. As you know, we typically comment on our results versus consensus even though we don't provide quarterly guidance. Our first quarter results are modestly lower than consensus. However, we reviewed the year and feel comfortable with our annual guidance. The variances are largely related to timing.

Now, let's talk about the fundamentals. After a slow December and January, January being impacted by the four versus five-week reporting period for many retailers, sales began to pick up. We were delighted that both February and March were relatively strong. This resulted in an increase of 3% for the quarter. Given the uncertainties in the economy, we were very pleased with these results. Food, electronics and junior apparel posted strong numbers for the quarter. Jewelry, home and women's apparel were weak. While sales are critical over the long term, the diverse structure of leases and a strong regional mall portfolio resulted in steady, predictable, almost time-like [ph] earnings stream that are generally resistant to economic cycles.

We have hundreds of retailer credits and about 3,000 leases in a laddered maturity schedule over a ten-year time horizon. Therefore, despite the present uncertain economy, we continue to be confident in our comp center NOI assumption of 4.5% to 5% growth for the year. For the first quarter, NOI growth was 6.9%, excluding lease cancellation fees and including the expansion for Twelve Oaks and Stamford. Without these two centers, NOI growth would have been 5.8%. Rent per square foot growth across the portfolio was 2.9% or 2.2% adjusting 2007 rents for the prior period adjustment related to Arizona Mills.

Percentage rents, income from RMUs, parking and sponsorship were all up. NOI was also positively impacted by the timing of recoveries. Comp store occupancy at 90% was up 30 basis points over last year. That's a great number for the first quarter when many leases expired and there tends to be higher seasonal vacancy. We are forecasting occupancy be flat to slightly down in the second quarter versus the prior year and up slightly for the second half of the year.

We are watching bankruptcy trends closely as the numbers are beginning to increase. For the quarter, 0.9% of our leases went into bankruptcy, the highest first quarter level since 2004. I should remind everyone that just because a lease goes into bankruptcy does not mean that a specific store will close. In fact, about 30% of those stores that went into bankruptcy in 2007 remain open today in our centers. In summary, even if the economy continues to weaken, we feel very comfortable with the performance of our centers.

Before I move to our development activity, I want to comment on Stamford Town Center. As many of you may have seen in local press, this center is being marketed for sale. The primary impetus for the sale is from our partner, a fund manager by an arm of UBS. This is a normal execution of their portfolio strategy. We both agreed this is a good time to capitalize on the value that is being added to this asset with its recent renovation.

Customer and retail response to the recent renovation has been fabulous. Center-wise sales are dramatically up as our sales per square foot which grew at the highest rate of any center in our portfolio. We are clearly reconnecting with customer bases that have not been shopping at the center regularly for many years. This is easily seen in both the lunch and dinner business that our restaurants are experiencing.

Asset sales are consistent with our strategy to recycle capital. This certainly is part of history. We went public in 1992 with 19 centers and now own 23. On the way, we developed 12, bought eight and sold 16. Further as we’ve discussed with many of you, we have been structuring our development projects including Partridge Creek as 1031 build-to-suits, which provide a tax efficient structure for asset sales. So, the marketing in Stamford is fully consistent with our history and our strategies.

Now, I would like to provide a little color on our development projects. We're very pleased with the performance of Partridge Creek here in Michigan which opened last October. The community has truly embraced the design, merchandising and amenities offered by this unique center. With the recent opening of Nordstrom’s several new stores, the center is over 90% occupied. We continue to expect to achieve a 10% return on our $155 million investment in 2009.

Turning to our other developments, we continue to be positive about our plans to build a Mall in Oyster Bay at Long Island. All the motions were filed last year, we continue to expect the ruling at any time. For those of you who may have forgotten, I can assure you we haven't. This will be our tenth court ruling. We are very confident that we will ultimately prevail. Once litigation is fully resolved and permits are issued, we are ready to begin construction. As of March 31, we had $146 million invested in the mall at Oyster Bay, up $3 million from December 31.

We continue to make progress in our City Creek Center in Salt Lake City. In early April, we received a six to one approval from the City Council on the important pedestrian bridge that links the retail components and encourages circulation throughout the project. This was a big step forward towards final design approval. Anchored by Nordstrom and Macy’s, the center will provide a unique shopping environment that will build on Salt Lake’s reputation as a top tourist attraction.

It's exciting to be involved in this ambitious and creatively designed project that will completely redevelop a 20-acre site covering two square block of downtown Salt Lake city. The center is scheduled to open in Spring 2012. We are in the process of finalizing documentation on the project, at which point we would be able to share costs and returns with you.

As many of you may have read in the local press, we are making progress in North Atlanta on a significant mixed used project in South Forsyth County off the Georgia 400 and McLaughlin Road [ph]. This is an area with tremendous demographics. Within 12 miles of the site, there are over 600,000 people with average household incomes of $111,000. Clearly this is a classic Taubman high-end market.

We recently received approval for an overlay district which entitles a property for a density of nearly 4 million square feet. This would include about 1.4 million square feet of retail, 900,000 square feet of office, 875 residential units and 500 hotel rooms. We're working closely with the department stores in hopes of achieving a 2011 opening.

In Asia, eSun Holdings has now received the required shareholder approval for our involvement in Macao Studio City. eSun is the original land rights holder, one of our partners and a company listed on the Hong Kong exchange. We are in the process of finalizing the necessary changes to design the project to accommodate the special requirements of the many flagship luxury retail stores that will be joining us.

In parallel, our partners are finalizing their agreements with general contractors. It is anticipated the award will be made very soon. While we don't control the construction schedule, we believe the project is not likely to open in Spring 2010.

Early this year, our partners moved their financing effects from the US to Asia where banks are less constrained. They recently went on a road show and are now working with several major Asian banks on the due diligence related to the financing. We expect a $1.3 billion financing to be fully subscribed and completed over the next two to three months. Once this occurs, our $54 million equity investment will come out of escrow.

At Songdo in South Korea, we continue to execute under the development and leasing agreements as we move forward with the regional mall. The center is scheduled to go under construction in mid 2008. We continue to negotiate in investment with the master developers and hope to reach an agreement this year. Meanwhile, we are building a platform in Korea, and given the visibility of the Songdo project, are beginning to see a significant flow of opportunities.

Now, I'll turn the call over to Lisa, then as always return for some final remarks.

Lisa A. Payne - Vice Chairman, Chief Financial Officer

Thank you, Bobby.

This quarter, we reported FFO per share of $0.68. This was an increase of 4.6% over the first quarter of 2007. As always, I'd like to add some color to the first quarter variances highlighted on page seven of our supplemental. The number of items that make up the variance was unusually long this quarter, so please bear with me.

First let's begin with rents. Rents were very strong, up $0.45 from last year. This is primarily due to an increase in mall tenant minimum rent per square foot and strong occupancy. Net recoveries where $0.015 favorable due to timing of certain recoverable expenses. The Pier Shops at Caesars was off $0.01 from last year. Keep in mind we are comparing the FO effect of a small investment last year with 77.5% ownership this year. Despite this negative variance, center NOI was up last year.

The mall at Partridge Creek which opened in October contributed $0.015 to our results. As Bobby mentioned, this property is very well leased and will contribute to our growth all year. Net revenue from management leasing and development services was down about $0.01 from 2007. We had a difficult year-over-year comparison for this line item as income from Asia last year included a catch-up billing related to prior year services.

Lease cancellation revenue was down nearly $2 million from last year’s very strong first quarter. As we discussed many times, this line item is difficult to predict and this was the lowest first quarter since 2000. Other income was up $0.01 primarily due to sponsorships and parking revenues. Offsetting this, other operating expense was unfavorable about $0.01 from last year. This is primarily due to an increase in pre-development expense.

General and administrative expense was also $0.01 unfavorable due to an increase in professional fees and travel expenses. This quarter was slightly favorable to the fourth quarter of 2007 and in line with our guidance. Land sale gains in the quarter were approximately $0.015 over last year as we had no land sale gains in the first quarter of 2007.

Interest expense was $0.01 negative to last year's first quarter. This variance is primarily due to additional interest related to the Twelve Oaks and Stamford expansions. Keep in mind, it excludes the impact of the Pier and Partridge which we're showing as separate line items. In addition, we are impacted by the incremental interest expense of the $54 million equity contribution for Macao where interest will not be capitalized until the money is released from escrow.

In light of the financial markets, we are very pleased our balance is as strong as it’s ever been. With over $300 million available under our credit lines at the end of the quarter, two unencumbered assets, and proceeds from refinancing Fair Oaks in April, we have a significant amount of liquidity. We are especially pleased with the breadth of our financial relationships. We have five different CMBS underwriters, an insurance company and 16 banks currently in our credit. Of the 16 commercial banks, seven are based in the US and nine are international institutions, primarily European. Ten banks participated in our International Plaza financing and four were based in the US. Nine participated in the Fair Oaks financing of which only two were based in the US.

We can see that our size works very much to our advantage in this market as we have not exhausted the lending capacity available with the banks. We are pleased with the pricing in the facilities which we’ve negotiated which we believe are some of the most attractive deals done since August. Nonetheless, we are also pleased that we have no more significant maturities to refinance until 2010.

Now, I have a few additional comments on our 2008 guidance assumptions. There is always some risk to percentage rent in an uncertain business environment and remember percentage rent is very tenant-specific. We also continue to forecast $7 million to $8 million in lease cancellation revenue for the year, even though we only reported $1 million in the quarter. As you know, it is always difficult to budget this income, and it is still very clearly in the year. Although we have not modified our land sale assumptions, land sales are often impacted by the availability of financing. And finally, we have not included any impact for the sale of Stamford as we don't know the price, the timing or whether in fact the center will be sold.

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

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

Thanks, Lisa.

As we mentioned earlier, we are maintaining our 2008 FFO per share guidance in the range of $3.05 to $3.12.

In summary, we had a very good quarter. FFO was increasing and our core continues to be strong. Partridge Creek is doing well and our balance sheet is in great shape. We are looking forward to seeing many of you at the ICSC next month. As always, we are packed with meetings, over 500 of them, and as we mentioned in the past, we will only allow these engagements to schedule a minimum of one-hour meeting based on a pre-approved agenda. We expect this to be a very productive convention.

So with that, we are happy to open the call up to questions. Operator?

Question and Answer

Operator

[Operator Instructions]. The first question comes from the line of Craig Schmidt with Merrill Lynch.

Craig Schmidt - Merrill Lynch

Good morning.

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

Hi, Craig.

Craig Schmidt - Merrill Lynch

On the North Atlanta project, would you have JV partners to help you with the office, resi and hotel portions of that project?

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

Yes, Craig. Our plan would either be to sell off the rights or find JV partners, and we've already begun that process as we are working with the residential operator on a significant chunk of the residential units.

Craig Schmidt - Merrill Lynch

And the retail is going to be 1.4 million square feet?

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

That is the size of the project that has been entitled. The initial Phase I might be something less than that.

Craig Schmidt - Merrill Lynch

Okay. Thank you.

Operator

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

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

Jonathan? Operator?

Operator

That question has been withdrawn. Your next question comes from the line of Christeen Kim with Deutsche Bank.

Christeen Kim - Deutsche Bank

-- get underway.

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

Christeen, I am sorry. We couldn't hear anything you said at the beginning.

Christeen Kim - Deutsche Bank

In terms of City Creek in North Atlanta, how early realistically could those get underway?

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

Well, City Creek as we told you is… actually, I don't know if we said at this call, but we... it's actually under demolition right now. So, it is actually in a process of beginning construction. The plans are being finalized. We do have some final approvals to go through in terms of the entitlements, but as you can hear from the steady advancement through the entitlement process, we are increasingly confident of those approvals.

So, I think that we talked about 2012 is when Salt Lake will be opening. Again it's a very complex project, and that's why it is taking that long to build. In the case of Atlanta, as we said, we would hopefully we are pushing for as early as a 2011 opening, but we need to finish with the anchor stores, and sometimes the anchor stores takes longer than you expect, so that if you assume a two-year construction process, then we would need to be underway, under construction sometime by late 2009. Christeen? Operator?

Operator

Yes, Christeen's line is open.

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

Okay, I guess that answers her question. Unless she has another question, we could go to the next one.

Operator

Your next question comes from the line of Michael Mueller.

Michael W. Mueller - JPMorgan

Yes, hi. Couple of questions for you Lisa. First of all I know you mentioned before that the fee income is going to be most significant in 2010. But seeing how estimates for '09 are really all over the board at this point, can you give us any more clarity on what the ramp up from '08 to '09 could look like in terms of the fee income?

Lisa A. Payne - Vice Chairman, Chief Financial Officer

Well, as… Mike, as I think we talked about, it really depends on when we get the projects under construction namely both Macao and Songdo. And assuming that happens, we will have a fairly decent ramp up in 2009 with a peak in 2010 and spill over in 2011, but it's very difficult. I frankly haven't even looked at 2009 estimates to see where they are because we will be doing more budgeting as we get further this year. But I think from your point of view when you hear us say, our $54 million is released from escrow and we are moving forward on Macao, and you hear more on the same thing on New Songdo is when we can really start seeing more income coming from the fees.

Michael W. Mueller – JPMorgan

Okay. In terms of the lease termination guidance and land sale gain guidance, is there anything significant known that's going to hit in Q2 at this time?

Lisa A. Payne - Vice Chairman, Chief Financial Officer

We don't have anything that I would say… we see… I can't say we see a trend on lease cancellation; obviously, that’s improving. Funny to say that, you have an improving in lease termination. But we clearly see a trend of greater through the second quarter or we wouldn't feel comfortable with our maintaining guidance. There is not like any significant event, but we have had some collection post the end of the first quarter and we see more things being negotiated.

Having said that, it is very unpredictable, but we do feel enough is happening that we’ll maintain guidance at this point. On land sales, as we said, that one is very challenging because we have a lot of things in the pipeline. Some things we have to look at the financing market, but at least today when we again look at that pipeline, that tends to be more chunky, because if we get one done, we can get $1 million, or we can even get $2 million. We still feel that we are within the range of that guidance for the year.

Michael W. Mueller - JPMorgan

Okay. And last question, considering we are heading toward the summer here, any updates or changes with respect to the peer?

Lisa A. Payne - Vice Chairman, Chief Financial Officer

I was looking at Bobby whether he wanted to comment. But no, we feel NOI has improved. We think this summer is going to be an important one. Obviously, we are entering this summer much stronger than with did last summer with our fully leased program. We have not made any deals yet on the... I'd say third… fourth… third –

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

Third level.

Lisa A. Payne - Vice Chairman, Chief Financial Officer

Right, third level, but there is a lot of things we're looking at. But at least with regard to the two primary retail levels, we think this summer is going to be very, very strong. Having said that, the economy is the economy, but things look to be growing in Atlantic City. There is still 10.5 million of investment assumed to happen and it's happening over the next five years. So, we are expecting a very strong summer.

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

We are long term optimistic in Atlantic City and the center sales continue to grow. As Lisa said, we are pretty much leased. I mean the first and second levels are nearly totally occupied and there’s about 90 stores in the center today. So again, we are long term optimistic about Atlantic City and the project.

Michael W. Mueller - JPMorgan

Okay, thanks.

Operator

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

Benjamin Yang - Green Street Advisors

The opening of Partridge Creek, it look likes you now own a pretty sizeable concentration of properties in Detroit and our prior estimates about maybe 20% of your NOI comes from this region. Yet you clearly had very good sales and NOI growth through your portfolio this past quarter and really all of last year, can you tell us how? Is it that Detroit and the tough economy there is not dragging down your overall property results?

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

Well, I mean, number one, to be exact, our run rate, assuming the full run rate at Partridge Creek, we expect the NOI to be about 19% in 2008. We clearly feel we are weathering the storm well. It is a weak economic year and we think that the rest of the country is now catching up to Michigan and that makes us feel better. We do feel that the restructuring that has occurred in the auto industry, which is really well underway, the auto industry today in terms of total employment of the state of Michigan is only about 4%, that’s direct employment and first tier suppliers to those companies. That is down from 7% as recently as about four or five years ago.

And so there is a restructuring that has occurred. It has maybe kind of weakened over the last several years and it will continue to make it weak over the next coming years. But we do believe that there is going to be a gradual upturn in this economy over the next 12 to 18 months here in Michigan. You can see in the leasing of Partridge Creek and at Twelve Oaks that we did very well. The returns are strong at both places and we believe the retailers are looking out past period and looking at the strength of those assets, the strength of the markets that they are in and the sustainability of those markets longer term. But it's not… there is… we're clearly getting more than our market share here. And we have weathered the storm well so far and we remain cautiously optimistic that we will be able to in the coming 12 to 18 months as we hope for this gradual upturn.

Lisa A. Payne - Vice Chairman, Chief Financial Officer

One comment I'd make and ask Bobby to comment as well, I think Michigan entered or Detroit entered this with not as much per capita amount of retail as you may have seen in example of North Dallas when it went through its major issues. And that is because we had a major department store here that really controlled the market for a long time. So, it's not to say, we don't have our fair share, but I don't think we entered it with an oversupply of what I'd call regional mall retail supply.

So, I think that's tended to help and then of course we have very strong assets. I'd say that particularly in the Twelve Oak. And even Fairlane given its position there in its marketplace has really performed quite well in Dearborn as we have actually ended up bringing in very good merchandise to that center over the last two years. So, I think that's added to it

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

At Fairlane, we also announced the restaurant pads or the restaurant program that we are doing there, and we announced P. F. Chang's, now we have announced Bravo!, which is the sister restaurant to Brio, and we have a third restaurant which would complete the restaurant program that we have there that's under negotiation. So, we’ve made good progress here in the face of the economy that we have and we feel pretty good. Again, we are cautiously optimistic about the future.

Benjamin Yang - Green Street Advisors

That makes sense. But is it fair to say that your operating results would be higher if you took out those Detroit properties? Trying to figure out where they fall in the spectrum of your portfolio.

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

Well, actually as we said with a very positive expansion in Twelve Oaks, plus the growth of Partridge Creek, our growth would be diminished were we not have accomplished those in 2007 throughout 2008. If we try to really focus just on sales, sales across the country, there was no specific trend. Some centers were up strongly, others were down, it was very, very inconsistent. I mean Florida is an example, you have five centers, two were up and three were down. And Michigan was down, but they were no worse than some other centers in other states. Now last year, Michigan across-the-board I think was up in each center. But I think in the environment that we are in right now, especially nationally, we are very pleased with that 3% growth in sales overall. And while the sales metric as it were might be somewhat positive, more positive, were it not for Michigan, overall our fundamental, our core statistics, I think would be about the same.

Benjamin Yang - Green Street Advisors

Okay, thank you.

Operator

[Operator Instructions]. Your next question comes from the line of Michael Bilerman with Citi.

Ambika Goel - Citigroup

Ambika with Michael. Could you give some color on the lease termination fees and the closures? What percentage of space did you receive back, and of that space, if you could give some color on, if it is… the majority if it is already leased, and then also any specific sectors that these tenants are in?

Lisa A. Payne - Vice Chairman, Chief Financial Officer

Well, we… I would say, I don't think I clearly understand the question. Lease termination fees by the way were extremely low. So, and the amount we get from lease termination does not directly correlate to when the tenants close, and so closings, unexpected closings are not linked really at all to lease terminations, because… from a timing perspective. In addition, unexpected closings, depending on what they are from, we won't always get a termination fee. If it's a bankruptcy, we don't get a lease termination fee, because the tenant is in bankruptcy and that's when they frankly don't pay us.

So, given the little amount of lease termination fees we had, there was no big chunks or any trends in lease termination, it was frankly just unusually small and unusually few and from unexpected or expected terminations. I don't believe there is any trends. And the fact that our occupancy stayed so strong indicates that there was really kind of no story here. I will say that from a leasing perspective, when you look at leased space, again that's extremely high. So, yes, I think we're doing an excellent job on anything we get back in terms of getting it leased as quickly as possible.

Ambika Goel - Citigroup

How about the expected lease term fees in the second quarter and the space that you're going to get back?

Lisa A. Payne - Vice Chairman, Chief Financial Officer

Again, we do see, we are going to be trending up. We have to, to make our consensus on least termination fees, we expect to over the second quarter. It’s not any big significant thing, there is no trends there. It’s just a little back to more normal in terms of tenant negotiations of people who may want to leave the space. And I would say that, on all the space we get back, we have an intensive process led by David Weinert to get that space leased. We metric it, we follow it, we judge it, and if we see that for whatever reason, we're not going to release that, we put in a temporary in line, we call it TIL, to fill in for NOI gap which is another reason why we can maintain our NOI growth.

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

And Ambika, I would also comment for a minute about bankruptcies, because when you look at what bankruptcies have occurred, you’ve had [inaudible] these are all from a variety of.. I am sorry Talbots is not a bankruptcy, Talbots is… there are some closings. But we've had a variety of tenants in different categories that are experiencing difficulty. I should point out bankruptcy, this was the highest as we said in the first quarter in some years which was at 90 basis points. Over the last six years, the first quarter has represented 50% to 75% of the bankruptcies of that year, and in that six year period of time, we've been at historic lows in the last couple of years at 40 basis points,

I think a year or two ago, up to 1.7%. Now ever since we have been public which is now 15 years, we have been anywhere from 40 basis points up to 4.5%. Tenants that go into bankruptcy, as I said earlier, doesn't mean they necessarily close. The majority close, but not all of them do. But if you just look at the first quarter as a trend, and you say it's 90 basis points, is it 50%, is it 75% of the year, then that would suggest that even in this economy that we're dealing with, even with some of the struggling tenants that we have, that this is not going to be an off the charts record year for bankruptcies. So that again when you talk about unscheduled terminations, it's another way that they emerge, so that you actually have some optimism that even in all this conversation that you're not going to have record bankruptcies this year, although we're watching it very closely.

Michael Bilerman - Citigroup

When did most of those conversations start for what you anticipate to happen in the second quarter, when were most of those sort of lease negotiations, termination negotiations beginning? Was it more last year than beginning of this year, just give us a flavor of when some of these tenants started coming to you about trying to get back their space?

Lisa A. Payne - Vice Chairman, Chief Financial Officer

I think… I don't have any specifics, but I know as I have sat in on some of these… on our meetings where we look at leasing, LIC, we call it leasing issues. These conversations can start six months before, can even start a year before, and when we kind of say, look, do you want to get your space back, it’s going to be X, and they say no, no, no. And then they came back four months later, they're really… and it can be as much as, we want to do it, and let’s negotiate it and it’d be done in a month.

So, I don't really see that there are… it was anything that happened, let’s say, right now. It varies all over the map, and it depends on what the tenants needed, because they're closing out the line, they make the decision to close. Ann Taylor, let's say, makes a decision to close X number of stores, They're going to start having conversations with us, but that could take six months to reach a decision. Not that Ann Taylor has made any discussion with us, we expect I think that if Ann Taylor keeps doors, they're going to keep the ones in our centers since we're doing the best.

Ambika Goel - Citigroup

I think Bobby mentioned that last year only 30% of the bankrupt tenants actually close their locations. Do you have an outlook for what that percentage would be this year?

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

Ambika, we don't… we really don't at this point. We're talking to each one of them and some of them have indicated that they want to… when a tenant goes into bankruptcy, they have to either reject the lease or maintain the lease. And as they maintain the lease, they have to keep paying the rent forward. Once they start not paying the rent, then they have to reject it. So, they work through a process, and they look at the stores that are obviously not profitable for them, and those they reject. The ones that are profitable, they try to figure out and they turn in the business around, can they sell it, can they bring capital in, how can they emerge from bankruptcy. So, it becomes an extended period, all right, and with some of our stores, some of them will close, about most of them, some of them won't. So, it’s each tenant is very specific.

Ambika Goel - Citigroup

Okay. And then just my last question on percentage rents. Lisa, you had mentioned that there is a significant amount of variability and are tied to specific tenants, could you give some color, if there any, industries that we should be watching out for that we can see what the variability of percentage rents will be?

Lisa A. Payne - Vice Chairman, Chief Financial Officer

I wish I could. I wish I could for myself as well. It really is, as we said, very much based on the negotiations at the start of the lease. And we are a company that goes for as high a base rent as possible. We have achieved that very well, but to the extent we can, we like to get a percentage rent over a break point. But, all that really happens with David Weinert and his team as he is negotiating individual deals. And I would say it is not… I would not say there is any specifics. Probably, I guess, generally we get break points, Bobby, on restaurants and try to get percent rents. But to be frank, I'm not sure. It depends on what level the break point is and whether it will be in the percentage rents. So, it's really all over the map.

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

Yes, and I want to remind everyone that percentage rents are only about 4% of our total income. So that when we talk about impacting results, it is at the margin, and I mean it's always important, but it's at the margins.

Ambika Goel - Citigroup

Okay, thank you.

Operator

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

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

Jon?

Jonathan Habermann - Goldman Sachs

… on the call. My first question relates to Stamford Town Center. I am just curious given the nature of the economic environment right now, is this a decision you would have made had it not been for the involvement... had it not been for the involvement of your partner on the project in terms of deciding to market the asset right now?

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

As we said the impetus for this decision came from our partner. It clearly is consistent with our strategies and our history. It's a very good asset and we think that there are a number of parties that will be interested in this asset and we’ll see what happens. They have been a partner of ours, I want to say, for eight or ten years, and they have been a good partner of ours. So, it's... this is the normal turning over of their portfolio, which would happen in any kind of a pool of capital like this.

Jonathan Habermann - Goldman Sachs

But it's not necessarily something you would have done if the asset were wholly owned, just to clarify?

Lisa A. Payne - Vice Chairman, Chief Financial Officer

Well, I would add one thing. From our perspective and our timing, we do have a very good structure built into Partridge Creek that enables us to sell an asset today on a tax efficient basis which is not always easy to do. Having said that, there is not so much incentive in that, because we don't have to use that structure, and we can just let it go and we’ll be fine. So, it kind of works well because UBS was interested and we have the structure in place. So I think even it's a good thing to test the market. Having said that, and we are very happy to do this with UBS. But we are not... none of us are here saying we are in a fire sale position. We think this is a terrific asset. Sales are improving and really dramatically growing with this new expansion and therefore we want to make sure we get value for the assets.

Jonathan Habermann - Goldman Sachs

Yes. I am just curious because it's sounds like you have got a lot of momentum there with the expansion, and the environment right now, I don't think is ideal for selling a high-quality regional mall. But I guess the process is in part driven by the thought process of your partner.

Lisa A. Payne - Vice Chairman, Chief Financial Officer

Yes. But, Jay, also if you listen to [inaudible] there is literally zero product of this kind out there. So there is not a lot supply. It will be a very interesting situation as we see the market and the response to the market.

Jonathan Habermann - Goldman Sachs

Okay, thanks a lot. And then one follow up question. There has been a couple of articles in the press, the Asian press in specific, regarding Yongsan Center [ph] in Central Seoul, South Korea, and you guys were mentioned as having some involvement in that project. I know it is not slated to even start construction until 2010, but I was wondering if you could provide any initial details regarding your involvement there?

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

We have been mentioned in the press. Samsung is the one that after a very elongated process like ten years ended up being the lead master developer appointed as part of this process to be the master developer of this very, very significant site in downtown Seoul. It really is the equivalent of when the Vanderbilts took Grand… created Grand Central Station above ground, and put all the railroads underground. So if you think about that kind of a location in the center of Seoul, that enormous site, I think the Grand Central was like 130 acres or more at the time with all the railroad yard.

This thing is that kind of an opportunity, and we’ve had lots of discussions with them. We have been announced with them as we have a general understanding, but there is... it’s very, very early, and there is much that needs be thought through before there really is any firm understanding as to whether or not we will be involved in this project and on what basis. But we are very excited that Samsung has chosen us to work with them on this, and we think it could be an amazing project if it comes to fruition as planned.

Jonathan Habermann - Goldman Sachs

Okay. So, is it too early to say whether your involvement would take the form of a fee based type involvement or whether you'd have an ownership stake in the eventual project?

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

Well, as I think we have said many times, we strongly, strongly prefer to be an investor in anything we are working on. It is rare that we are satisfied with a fee arrangement, and we would certainly seek in this circumstance, as we are seeking in Songdo and negotiating today for an investment in that asset, we would seek to do so in anything that we are involved in.

Jonathan Habermann - Goldman Sachs

Okay, thanks a lot for that color.

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

Thank you.

Operator

[Operator Instructions]. Your next question comes from the line of Christine McElroy.

Christine McElroy - Banc Of America

Can you hear me?

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

Yes, Christy.

Christine McElroy - Banc Of America

Okay, great. Just following upon Macao, a couple of days ago the government there apparently made some comments regarding limiting new supply growth in the gaming industry. Are you familiar with the types of provisions you are looking to put in place, how if at all this would impact your project there, and would this have any impact on your view of that market?

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

Well, first, I am only generally familiar with it. It will not impact our project, because we have an agreement that we've executed with... now again, it is not us, because we're not actually partners in the casino specifically; we're only partners in the retail space if you think of it almost like a condominium although their is no condominium law in Macao. There is a royalty management agreement that has been signed with PBL Melco to operate the casino, and that is something that is fully appropriate and correct under all the laws there and we are very confident that the property is… that that casino will in fact be operating there.

To the extent that the government has made a determination to limit the number of casinos, really I can't comment on all of the reasons why. I did notice that the Venetian [ph] stock popped up, so at least in the short term investors [inaudible] investors believe that that it is a good thing for those already there, the gates closing in theory. But I'm of the view that the greater the destination, the greater the synergy, the greater reach, generally increased critical mass whether in retail or in gaming is a good thing.

Christine McElroy - Banc Of America

Okay. And then as many corporations are pulling back on spending, I'm wondering if you have seen any impact on sponsorship income specifically, are there any added difficulties to carrying or renewing sponsors such that we may see an impact going forward?

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

think, just generally, he retailer mood and the sponsorship mood, we remain cautiously optimistic. On the leasing front, it continues to be very good, especially at the high end. Those tend to be longer term decisions anyway as we've talked about that in the past. We have all our leasing… I mean it’s nearly complete for 2008, and we have… we executed as many leases on a comp basis in the first quarters as we did last year. On the sponsorship front, similarly we remain cautiously optimistic. I think that in some industries, you’d see some pull back and the sponsorships is very broad based at this point, with very granular and diversified income streams, but there is some pull back perhaps.

But in our centers, again, people want to be in our centers, there’s lots of eyeballs, it's a very steady stream of traffic. You can, even with the... as I said, women's apparel or you have food doing very well. When food is doing well, that's an indication of traffic levels. So, even in the context of sales that may be pulling back in certain categories, you're still seeing very high levels of traffic and sponsors understand that as well as retailers.

Christine McElroy - Banc Of America

Okay. And then just lastly, following up on Stamford Town Center, I know it’s only been a couple of weeks, but have you still seen any interest from potential buyers so far?

Lisa A. Payne - Vice Chairman, Chief Financial Officer

We… actually, we made the announcement because of our partner wanted to talk with their institutional clients. We do not even have a brochure out into the market yet. So, really it's far too early, and probably won't really do the full-blown marketing until we're kind of close to the ICSC.

Christine McElroy - Banc Of America

Got it. Thanks.

Operator

[Operator Instructions]. And there are no further questions at this time.

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

Well, thanks guys. Thank you everybody for joining the call. As I said, we're very pleased with our fundamentals really in all areas, the comps center NOI, our rents, our sales, our occupancy levels, leased space, they were all up, and our balance sheet, we're very proud of right now. And the fact we no maturities until 2010 is something that we think will bode well. So, we appreciate your interest in us and we look forward to talking to you and seeing many of you at the ICSC. Thank you.

Operator

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

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Source: Taubman Centers, Inc. Q1 2008 Earnings Call Transcript
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