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Taubman Centers, Inc. (NYSE:TCO)

Q2 2012 Earnings Call

July 27, 2012; 10:00 am ET

Executives

Robert Taubman - Chairman, President & Chief Executive Officer

Lisa Payne - Vice Chairman & Chief Financial Officer

Barbara Baker - Vice President, Investor Relations

Analysts

Christine McElroy - UBS

Quentin Velleley - Citi

Paul Morgan - Morgan Stanley Research

Todd Thomas - KeyBanc Capital Markets

Mike Mueller - J.P. Morgan

Alex Goldfarb - Sandler O'Neill

Vincent Chao - Deutsche Bank

Cedrik La Chance - Green Street Advisors

Samit Parikh - ISI Group

Operator

Thank you for holding and welcome to the Taubman Centers’ second quarter earnings conference call. The call will begin with prepared remarks and then we will open the line to questions.

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

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

Barbara Baker

Thank you Martina and welcome everyone to our second quarter conference call. Yesterday we released our second quarter results and our supplemental information package; both are available on our website.

As you know, during this conference call, we will make 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 filings, including our latest 10-K and subsequent reports for a discussion of various risks and uncertainties underlying our forward-looking statements.

During this call we 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 in our supplemental information.

In addition, a replay of the call is provided through a link on the Investor Relations section of our website. When we get to questions, we ask that you limit them to two and then if you have more, queue up again. That way everyone has the opportunity to ask a question.

Now, let me turn the call over to Bobby.

Robert Taubman

Thanks Barbara and welcome everyone to our call. This was another strong quarter with outstanding fundamentals. NOI, up 8.2%, now up 8.8% for the first six months of the year. Sales per square foot up 8.4% for the quarter and 12 month trailing sales up 12% to a record $672. FFO, average rents per square foot and occupancy, all substantially up and we continue to make significant progress on our external growth initiatives.

First lets talk about sales. Sales per square foot climbed 8.4% for the quarter, a solid result. As we said all along, trees don’t grow to the sky and our streak of nine quarters of double-digit sales increases has come to an end. Nonetheless, we’ve always felt that the sales momentum, absent a significant external event would not fall off a cliff; 8% growth, while less than our nine-quarter trend is still a terrific number. We wouldn’t be surprised if over the next several quarters sales growth would continue to moderate.

Unisex apparel, shoes, beauty, electronics, gifts and home furnishings were particularly strong in the quarter. Fast food is increasing nicely, an indication of foot traffic. Harvard (ph) junior apparel and Fine Jewelry were little softer. We are seeing great performance at Louis Vuitton, Bath & Body, Victoria's Secret, Pink, American Eagle, H&M, Foot Locker, Oakley, Apple, Restoration Hardware, Z Gallerie and Zales; all up in the double digits. This is very positive for our leasing efforts.

Retailers’ sentimental leasing activity remains strong. Comp Center NIO, excluding lease cancellation income was up a solid 8.2% for the quarter. NOI growth was driven by rents and recoveries. Sponsorship income also contributed.

As you’ll recall, we reported a 9.3% increase in the first quarter, so it’s been two periods of outstanding growth. With this performance, we are raising our guidance on NIO growth to a range of 5% to 6% for the year. That’s up significantly from the 4% outlook that we communicated last quarter. This means we continue to expect NOI growth to moderate in the second half of the year.

While rent is projected as consistently good quarter-over-quarter growth throughout the year, we expect volatility and seasonality of net recoveries to reduce comparable NOI growth in the next two quarters.

On June 30, occupancy at comp centers was 90.2%. In addition, we had 4.1% occupancy in temporary tenants at comp centers, our highest level in the second quarter we’ve seen since we began tracking the statistic. This raised our total occupied space to 94.3% at June 30.

Comp center occupancy was up 200 basis points from June 30 last year and better than anticipated for this quarter. This is largely due to an unprecedented low level of unscheduled closings we’ve had to-date in 2012. Only one tenant with four stores declared bankruptcy in the quarter. We continue to believe that occupancy will be up about 150 basis points over 2011 for the rest of the year. Of course, strong occupancy favorably impacted both rent and recoveries in the quarter.

Average rent per square foot of $47.07 was up a healthy 3.8% from last year. Year-to-date average rent was up 2.7%. We continue to believe we’ll achieve our guidance of 3% rent per square foot growth for the year.

As I said, the leasing momentum at our centers is continuing. Our head of leasing resigned in early July, with our strong senior bench, coveted locations and able leadership from my brother Billy, we made a smooth transition.

City Creek Center was opened on March 22. It continues to perform extremely well. We are delighted with the traffic, the sales performance and the feedback from both customers and retailers. We are nearly 100% leased. We are also very pleased with the level of merchandising we’ve achieved, including over 30% of stores that are unique to the market.

Our development projects are moving forward with a full head of steam. First, Chesterfield, our outlet center in suburban St. Louis. As you know, we’ve been grading this site for the past several months. A week ago we received our final approval from the City and we now have all of our federal, state, county and local approvals to build the shopping center.

This past Wednesday, two days ago, we closed on the land with the levy district and held our ceremonial groundbreaking. We will immediately begin constructing our store motored ranch and then installing our utilities. Our first building walls will be erected in October of this year. We are scheduled to open at 10 a.m. on Thursday, October 24, 2013 and we welcome you all to the opening.

Earlier this week we announced the first group of 40 tenants, including Gap, Banana Republic, J. Crew, Furla and Brooks Brothers. We are delighted with this strong retailer response. We have no idea if a second project will be built, but we’ve clearly made our decision. Our significant head start and superior location, give us a tremendous advantage.

In Puerto Rico we closed down the land last week for The Mall at San Juan. We’ll host a formal ground breaking this fall. This landowner has elected to be a 20% partner in the $405 million center, the maximum percentage allowed under our agreement. With site work set to begin the first week of August, we are currently targeting a late fall, 2014 opening. We expect to announce the exact opening date in the next few months.

In Sarasota, we’ve already begun moving dirt on the site. Full construction will commence the first week of November, the optimum time to begin work given the local climate and typically ranged summer season. Our official groundbreaking will be in mid-October with the center opening schedule for October 2014. As you recall, University Town Center is a 50% home project and partnership with Benderson Development, and we are responsible for developing, leasing and managing the $350 million center.

We kicked off leasing for both San Juan and Sarasota at the ICSA conference in May and tenant interest is extremely strong. Each is located in underserved markets with excellent demographics. We anticipate both centers will achieve sales productivity that will place them in the top half of our portfolio. We continue to expect 8% to 8.5% un-leveraged returns on our investments in these projects.

Moving now to Asia, where Lisa and I just returned from a Taubman DCVO Board meeting. We are waiting government approvals of our joint venture agreement for our first project in China. We are hopeful we will be in a position to announce the name and location of the center in the next month or so.

It’s located in a second tier city in Central China with over $8 million people, consistently high GDP growth and continuing to grow very quickly. We intend to partner with a leading Chinese department store and a local developer. Our role has primarily been in the programming and planning of the center and we will be leading the leasing effort.

This center will be part of a large mixed-use project with over five million square feet. We will be investing in the retail portion only, which will be over one million square feet with over half that in mall specialty stores. We expect to open this project in the third quarter of 2015.

I’m sure the investment will be somewhere over $100 million for a 30% equity interest in the retail portion of the project. We are expecting a 6% un-levered return at stabilization. Assuming growth rates in excess of 10%, the un-levered IRR is expected to be comparable to our projects in the US in the mid to high teens.

Later this year we are expecting to be in a position to announce a similar project in another second tier city in Central China; again, with over 8 million people and growing very quickly. This project would be with the same department store partner, a different local developer and similar roles for our company.

This is a stand-alone retail project of over one million square feet, with over half the space devoted to mall specialty stores. Our equity ownership, the size of the investment, the anticipated un-levered returns and growth rates will all be similar. We are very excited about these initial projects as they begin to grow our platform in China.

Meanwhile, IFC Center in Seoul, South Korea is 100% leased and are on track for it’s opening on August 30. IFC is a 5.4 million square foot mixed use project, which includes three Class A office towers ranging from 29 to 55 stories, a Conrad International Hotel and 430,000 square feet of retail space. We are not an investor in this project. We are the leasing agents and ongoing managers of the retail center.

There will be over 110 retailers, including H&M, ZARA, Uniqlo, Gap, Banana Republic, and the first Hollister store in Korea. The second installment of our leasing success fee will come this year and has been included in our guidance. We view the strong leasing and merchandizing results as a testament to the capabilities of our team in Korea. We continue to work on a number of projects in Korea and are hopeful to be in a position to announce one of them this year.

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

Lisa Payne

Thank you Bobby. This quarter our FFO per share was $0.73, almost a 20% increase over our second quarter 2011 FFO per share of $0.61. Here are the items that changed year-over-year and they are listed on page 10 of the supplemental.

First, rent; up $0.09 from the prior year. This is primarily minimum rent, which increased due to higher occupancy and rent per square foot. Next, net recovery; up $0.035 of resulted increased occupancy in fixed CAM tenants. Although net recoveries were positive this quarter, lower margins are expected in the second half of the year. It gives you the mismatch between fixed CAM revenues and CAM expenses. We expect volatility quarter-over-quarter. Specifically net recoveries are expected to be down in the second half of the year versus last year. This is why we are anticipating our NOI growth to moderate.

Other income, favorable by $0.015. We are having success in growing our national sponsorship revenue. Other operating expense, unfavorable by $0.025. This is primarily due to increased center related property management and maintenance costs. Some of this is from increased IT spending as we update our technology infrastructure.

General and administrative expense was unfavorable by $0.025 due to increased compensation and professional fees. Our company is growing and our quarterly average run rate for G&A is now just over $9 million. Such expenses are likely to continue to expand in line with our growth. Interest expense, excluding the impact of the funding of City Creek Center and of the debt related to the Green Hills and El Paseo acquisition was unfavorable by $0.035.

As you’ll recall, we successfully refinanced our loan on International Plaza in November 2011. The new loan is fixed, which have been previously, had been floating at favorable rates. In addition, we had an increase in the spread on our revolving credit facility, which was refinanced in July 2011 and finally, our loan on Fair Oaks, which was floating at favorable rates during the second half of 2011, was dropped to an all in fixed rate of 4.27%, July 2011.

Next is non-comparable centers, favorable by $0.03. This predominantly represents the very strong performance of City Creek Center, which opened in March 2012. About $0.001 of this is one time income associated with the opening. Operations of The Pier Shops and Regency Square, the centers which we no longer own as of the fourth quarter of 2011, were favorable by $0.055. And finally dilution from the company, June 2011 equity offering, net of the interest expense reduction impacted our results unfavorably by $0.01.

Now I’ll turn to our balance sheet. At June 30 our debt to market capitalization stood at 32.1%, a new all time low for the company. This can be attributed to our strong stock price performance and our ongoing conservative financing strategy.

In mid-June we completed the financing of Westfarms, our 79% unconsolidated joint venture in West Hartford, Connecticut. The new loan is 10 years, $320 million and is non-recourse and bears an all-in fixed interest rate of 4.53%. This represents a 160 basis point reduction in the stated interest rate from the previous loan. Our share of the $139 million of excess proceeds was $110 million and was used to pay down the company’s revolving credit facility. Our share of the new loan is approximately $253 million.

We expect to refinance Sunvalley, our 50% owned unconsolidated joint venture in Concord, California in the third quarter of this year. The current $115 million which is fixed at 5.67% matures in November and is pre-payable without penalty beginning this August. At current rates, the interest rate on the new loan would be about 4.5%.

Our $30 million loan on the land at Sunvalley, which is currently swapped to an effective rate of 5.95% matures on November 1. We expect to complete the refinancing of this loan in the fourth quarter. At current rate, the interest rate on the new loan would be about 4%. Collectively our share of excess proceeds from the refinancing of both these loans is expected to be approximately $36 million.

In October we also expect to refinance our $198 million, 5.46% fixed rate loan on The Mall at Millenia, a 50% owned unconsolidated joint venture. As the loan is not pre-payable before next January, we will need to decease the current loan in order to take advantage of this attractive financing. This will result in the season’s charges of approximately 1.6 million at our share. As we mentioned in the release, this charge is expected to negatively impact FFO by approximately $0.02.

The new 12-year non-recourse $350 million loan will bear interest at a fixed rate of 4%. Our share of the new loan will be $175 million and we expect our share of excess proceeds to be approximately $74 million.

Collectively these three assets have generated nearly $900 million of financing, more than 50% above the original financing, a tribute to the strong NOI growth these assets have experienced over the roughly 10 year term of the prior loan. Our share of the excess proceed is expected to total approximately $220 million. This will provide cash to fund equity for our current development projects and maintain our strong balance sheet. It’s really a wonderful business model.

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

Robert Taubman

Thanks Lisa. For the full year 2012 we are increasing FFO guidance to a range of $3.22 to $3.27. This includes the $0.02 charge for the defeasance cost related to the refinancing of The Mall at Millenia. Excluding this charge, adjusted FFO would be in the range of $3.24 to $3.29. The increased store guidance is primarily the results of our comp center NOI growth, excluding these cancellation income, which is now expected to be in the range of 5% to 6% for the year. Again, that’s up from about 4% previously.

In conclusion, we’ve just completed another quarter with very strong results. FFO and NOI were up, as were all of our key metrics, including sales, lease space, occupancy and rent. We are seeing organic growth in our core, our development projects are making good progress and once again we’ve increased guidance for 2012.

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

Question-and-Answer Session

Operator

Yes sir. (Operator Instructions). And your first question comes from the line of Christine McElroy from UBS; your line is open.

Christine McElroy - UBS

Hey, good morning guys. I understand the volatility around CAM in the first half versus the second half, but what was the primary factor that caused you to revise your NOI growth guidance range higher from the 4% to the 5% to 6%. Was that related more into your higher than expected revenues or was that related to CAM and do you still expect occupancy to be up about 100 to 150 basis points?

Lisa Payne

Yes, and the primary reason for increase is the NOI growth increase is absolutely rent. Percentage rent is up significantly and per square foot is also very strong and that’s really the main driver and good occupancy as well.

Robert Taubman

Right and then what we said originally in our guidance, you know back in at the end of the fourth quarter of last year, we talked about around 100 basis points ratably through the year. Then in the last call we talked about 150 basis points, again through the rest of the year and we are maintaining that guidance, not withstanding the fact that we were up 200 basis points in this quarter.

Christine McElroy – UBS

Okay, and then just with regards to the project in China that you expect to announce next month, what will be driving the 10% annual growth and how long do you expect that kind of growth to continue?

Robert Taubman

We’ve done a whole analysis Christine. When you look at GDP growth within a market, how that translates ultimately in NOI growth. Then we’ve looked at first, second, third tier cities, we’ve looking at their growth over a period of years and the GDP growth in the markets that we are talking about, in this year and in the last several years is well into the mid teens.

So when you see that kind of growth and the kind of turn that you get on leases, it does translate into NOI and directly into red, directly into NIO and we’ve had done case study after case study. We are very confident that we are going to continue to see every high levels of growth there, in China and in the markets that we are looking at, not withstanding the general slow down that you are seeing.

There has been 30 years of 10% growth there, even in the context of 7.5% growth that they are projecting, which is again throughout the country. When you look at certain markets, those markets are continuing to grow even north of 20%. So its in that context of strong GDP growth that you end up with very strong NOI growth.

Christine McElroy – UBS

Thank you.

Operator

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

Quentin Velleley – Citi

Hi, good morning. Just staying on the China thing, I think in your prepared remarks you said that the internal rate of return would be similar to the US investments. I’m just curious to your thoughts given the additional risks in taking on the investment. You got more growth and initial yield in that IRR. There is more political risk, transparency risk, currency risk, etc, etc. Is that return enough, relative to the returns you can give us in the US.

Robert Taubman

Well, you always get into this debate is, is your capital coming from the US, perceiving enough risk versus capital that’s already near China or in China or in Asia. How do they perceive that same risk? These are very competitive yields in that market place, on a higher side frankly what others investing it, other REITS from Asia.

So our view strongly is there is an opportunity flow that we are going to see that’s coming out of China, and out of Asia, that will allow us to deploy our capital over many years. We want to be part of that opportunity flow and we believe that these kinds of returns are competitive with what we are doing in the United States and we want to continue to invest there.

Quentin Velleley – Citi

Okay, and then just on San Juan, I think you have confirmed that you won 80% of the development. The partners is going to have 20%, but you are going to loan up to half of their capital. Could you just maybe run through what the terms are of the loan? Is it just over the construction period or is it something longer term?

Robert Taubman

Well, I don’t want to go through the absolute terms. We have said publicly that we will fund in essence 90% of the equity that’s required and as part of our arrangement with them and they are going to own 20%, but they are favorable terms to our company.

Quentin Velleley – Citi

Okay, thanks guys.

Operator

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

Paul Morgan - Morgan Stanley Research

Hi, good morning. Going back to Asia I guess, you can say if you compare the opportunity that you see for additional projects in Korea, the risk and sort of the initial yields and the baked in growth to get the IRR you want. What’s the balance between Korea and China and I assume you would expect equity stakes in the additional projects in Korea, even though you don’t have one in IFC, is that correct?

Robert Taubman

Yes, we are looking for investment opportunities in Korea. We have announced one that we are looking at very closely, where we made an investment in Hanam and we are working on that more and that would be an investment clearly. And you are right, you would expect in Korea, which is further long in its development in many ways, to be somewhere higher initial yields and somewhat lower growth rates.

Still much faster growth rates than what we would anticipate in the United States though and again those lines would cross and would be very comparable, unleveled IRRs to what we have in the United States.

Paul Morgan - Morgan Stanley Research

And sort of the same scale projects and general kind of JV stuff here.

Robert Taubman

They would be very significant retail projects, with a JV structure, likely with a retail owner or at least a local real-estate partner, you know again very significant. Some mixed use, some are single purpose for real only. The Hanam project is largely a retail project.

Paul Morgan - Morgan Stanley Research

Okay, my second question just on the leasing leadership, are you planning to kind of refill that position or just sort of move some and track around and have Billy do more of the leasing as well.

Robert Taubman

Well, we did announce that we are conducting a search that we had both internal candidates, as well as an awful lot of expectation of external candidates. We have very strong teams. We are very pleased with the transition that has taken placed and Billy as I said has taken over until a new head is going to be announced and leasing is progressing at a very good pace, so we are very comfortable with where we are.

Paul Morgan - Morgan Stanley Research

But we are going to replace.

Robert Taubman

Yes, we are. Our plane is to replace, have a new head there.

Paul Morgan - Morgan Stanley Research

Okay, thanks.

Operator

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

Todd Thomas - KeyBanc Capital Markets

Hi, thanks, good morning. Bobby you mentioned in the prepared remakes that you expect to see sales moderate further in the coming quarters and I was just wondering what that might mean for your efforts to increase rents and whether or not we might expect to see the opening rental rates over the next several quarters moderate as well.

Robert Taubman

Well, I mean, I think as you’ve seen, with sales growing at such an accelerated phase, total occupancy costs have dropped pretty significantly. So we think there is a significant embedded rent opportunity that we will take advantage of over the next several years, and 8% sales is terrific. I would take 8% sales every day of the week for as long as possible.

We have historically grown at about 4%. If you look at the last 20 years our total compounded sales growth is right around 4%, which is well in excess of inflation during that period of time. So we gained very significant market share over that long period.

So we would expect to continue to do better on a long-term basis than inflection and we fell over the next several years we have a very significant embedded rent opportunity, given where total occupancy costs are today.

Todd Thomas - KeyBanc Capital Markets

Okay and then second question, as you think about this, all of the development that’s you know coming up here over the next couple of years, you talked about extracting excess proceeds from the refinancing. I was just wondering if there was any thought at all to selling one or two of your bottom assets in the say 10% to 20% or so at the bottom of the portfolio.

Robert Taubman

Well, we’ve shown that we are very willing and able to recycle assets over time, and we’ve talked about this publicly quite a bit. 20 years ago we started with 19 assets. I forget the exact numbers, but we built about 15 assets, bought may be another half a dozen or something and we ended up – we would have had 42 assets if we had not recycled and sold the assets and disposed of them, exchanged them, done all kinds of things.

Today we have 24, so we have gone from 19 to 24, yet the market cap to the company has almost quintupled and our total enterprise value is more than quadrupled. So and we’ve had the best total share returns of anyone. So we are very happy with the idea of recycling capital. If there is an asset that makes sense to us to dispose of over time we would certainly do it.

Our balance sheet is important to us. Lisa talked about a 32% debt to market capital lowest of our history. Obviously our stock price is a big component of that low numbers. But we have been very prudent about how we put debt on our company and how we raised capital and we will continue to do that and guard our balance sheet. We think it’s a very significant competitive advantage in this very uncertain world.

Todd Thomas - KeyBanc Capital Markets

All right. Thank you.

Operator

Your next question comes from the line of Mike Mueller from J.P. Morgan. Your line is open.

Mike Mueller - J.P. Morgan

Hi. A couple of questions on returns; first of all, going back to China, I heard what you said about the IRR being similar to the US, but I mean is it going in the yield of 60. Can you just talk a little about where you think a private market cap rate is on a stabilized asset? Is it well inside of six or is it around there.

Robert Taubman

No, its inside six. Believe me, its inside six. If you got to buy a stable asset that has good growth opportunity in China, you can’t find one for 6% and if you look at what capital land’s date, if you look at what large institutions have been willing to pay, its well inside six. There’s been assets in Hong Kong that have traded inside three. So I’m not saying that every asset in China is a three asset, but its well inside six.

Mike Mueller - J.P. Morgan

Okay. And then switching gears for a second on the outlets, the St. Louis return, 8, 8.5, I think most people only think of outlets and development and you tend to automatically think of a 10% returns, just because that’s what people have seen. The other opportunities that you are looking at in the US are the returns similar to St. Louis or do they tend to be a little bit higher?

Robert Taubman

Well, when you say returns that you’ve seen, I think its sometimes hard to see exactly what kinds of outlet development returns people are getting, even if they may state that.

Now having said that, we are delighted if we can build a strong asset, at 8% north. We think that the way Tanger trades, the way Simon trades, a very substantial portion of its income is in fact in the outlet business, suggest that there is very significant spread on a 8% un-levered yield. I don’t know whether these assets that we are build are worth five or less or whatever, but we think that there is a good 300 basis point margin in what we are planning on building in St. Louis.

Mike Mueller - J.P. Morgan

Okay, great. Thank you.

Operator

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

Alex Goldfarb - Sandler O'Neill

Thank you, good morning. Just continuing along the lines of St. Louis, Bobby now that, there is a potential to have two outlets in that market, what do you think that does to your returns. Do you think that returns improve, because now people see it as sort of an outlet Mecca and maybe having two centers creates more of a traffic draw, or you think that the market is just not deep and if there are ultimately two centers, its going to be end up cannibalizing and hurting returns.

Robert Taubman

Well, I think it is possible by having two, you do create an outlet Mecca. But I think its perhaps more likely that it would fragment the market somewhat, that it would reduce sales productivity at the two assets, and if you have one asset and it’s a largest asset, everybody is coming to that one asset and all its supply is in one location.

So if that was going to happen, that there would be some reduction in sales productivity, it would moderately impact returns. But returns would still be very attractive for our Chesterfield project. St. Louis is a terrific market, it has almost 3 million people in it with no outlet center and there is tremendous demand for this kind of a project. We love our location. It’s a far better location than the competing one and we have a very substantial head start.

Alex Goldfarb - Sandler O'Neill

But given that both you and your peer are very determined, it would seem likely that we are going to end up with two outlets there, regardless.

Robert Taubman

Again, as I said in my comments, time will tell.

Alex Goldfarb - Sandler O'Neill

Okay, second question is getting back to China, can you just remind, what the structure of the two deals that you are talking about? Is it presumably your partner owns the land or its – and then you have some sort of lease arrangement with your partner or it’s a ground lease situation or is this sort of like a fee management deal.

Robert Taubman

Well remember, in China, most all deals, the government owns the land and its long term leases. But in both cases that we are discussing, there is a local real-estate developer that we are going to become a partner in, in a joint venture that will also include this Chinese department store that we have not named. So we will be a key owner, we will be a joint venture owner, equity owner, but on a ground lease from the government.

Alex Goldfarb - Sandler O'Neill

And how long is the ground lease sort of typically?

Robert Taubman

Typically 40 to 50 years and then what happens is that there are renewals.

Alex Goldfarb - Sandler O'Neill

Okay, thank you.

Operator

Your next question comes from the line of Vincent Chao from Deutsche Bank. Your line is open.

Vincent Chao - Deutsche Bank

Hey, good morning everyone. Just going back to St, Louis for a second and just maybe a different way of asking it, but just wondering if the profile of the tendency has changed at all, given that there seems to be two sets that are going in there from what you maybe originally had envisioned.

Robert Taubman

No, I think we are delighted with our initial 40-tenant announcement. Whereas we talked about on the call, people like Gap and Banana and J. Crew and Brooks Brothers, these are top tenants that everybody wants. They are the key kind of tenants in an outlet mall. So we are very pleased with our tenants that we talked about. As I said, we have a very significant head start in this process.

Vincent Chao - Deutsche Bank

Okay and just with those announcements, what is the pre leasing there now?

Robert Taubman

The pre leasing, we haven’t announced a percentage, but as I said, we have 40 tenements that we announced.

Vincent Chao - Deutsche Bank

Okay and just a last question, just going back to same store NOI, just the guidance, I’m just trying to get a better understating of – obviously, the first half was very strong, 8.8% year-to-day, the CAM driven impacts were sort of I think when it was 4%. Just wondering how much of the increase is really driven by what’s happened so far already versus changes in your outlook for the second half.

Lisa Payne

Well, I do think that if you look at our six months, we are now six months done. We’ve exceeded our expectations on a growth during that sales, that six months. Sales performance has actually exceed our expectation, which is driving percentage rent as well and we do as we said I think, the new recoveries we are going to moderate in the second half. So I would say that probably we are seeing, we believe sales are going to continue to be strong. We still believe we are going to have strong percentage rents and we are six months through the year.

Vincent Chao - Deutsche Bank

Okay.

Operator

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

Cedrik La Chance - Green Street Advisors

Thank you. Looking at your occupancy, you’re now about nearly 4% occupied, which is probably the highest in the decade if not more. What does it do to your ability to upgrade or update the merchandising mix in your centers and when you have less room to play with?

Robert Taubman

Well, you are always like open to buy when you are a retailer Cedrik, and you need that flexibility. On the other hand you want to balance it with rent growth and with the growth in NIO. So there is always a delicate balance. You always have some standing vacancy, just the transitioning of tenants coming and going.

I think that as we search for new merchants and new concepts to come in, to freshen the centers all the time, whenever we have lower performing tenants, we are going to try to get termination agreements, optional termination agreements that will increase that amount of supply or that amount of flexibility that we have. But you’re right, that as you lease it more you end up with reduced flexibility and reduced open to buy. But I would say that it’s a happy problem.

Lisa Payne

Yes, I do think we are also always, our leasing group is always looking out 12 to 24 months and the merchandising plans that we have in place are looking out there and so as we are thinking strategically of the three or four must have tenants in a center, we know what the lease expirations are coming. So its longer term or medium term strategic review in the merchandising than it is the next three quarters. So I still think we have the flexibility to continue to upgrade tenants, looking out over the next 12 to 24 months.

Robert Taubman

As I said, it’s a happy problem.

Cedrik La Chance - Green Street Advisors

Okay, and in most retails and held for sale, can you give us a little update on what you’ve been able to accomplish since you closed on the tenants.

Robert Taubman

Well, we are really happy with the assets. They are terrific assets and they are growing nicely, their sales are growing nicely and you know we did…

Lisa Payne

Nordstrom’s doing great.

Robert Taubman

Nordstrom, the opening has been well above their plan, and we do have very interesting expansion opportunities at both, but especially at Green Hills. So we are continuing to work through those possibilities and hopefully over time will be able to accomplish it.

Lisa Payne

And in Green Hill, Cedrik, we did buy a very well occupied and particularly as we look at this year. So again we are looking out over the next 12 to 24 months, because we know it will have turned and we’ll continue to think about merchandising there. But at least for this year we were kind of anchored into what was already done.

Robert Taubman

But remember, very little occupancy cost, against the overall, the way we lease assets that are $700 assets, extremely low.

Cedrik La Chance - Green Street Advisors

Good. Thank you.

Operator

(Operator Instructions). Your next question comes from the line of Samit Parikh from ISI. Your line is open.

Samit Parikh – ISI Group

Hey, good morning. Based on Apple’s report a few days ago, the year-over-year sales comp from you Apple stores probably hurt your year-over-year sales growth number overall. Could you just speak to what sales growth was ex-Apple in the portfolio and basically any trends that you are seeing within your tenants in terms of sales growth for the rest of the year?

Robert Taubman

Well, on Apple we are never absolutely specific, but I would say that it was a modest difference and it was a modest positive through the quarter, not a modest negative.

And Apple is just an absolute incredible tenant. I mean they are probably the greatest retail tenant that’s every been invented and so we love them and we think that their new products, there is constant flow of new products that come out, as their sales may be down a little bit at the second end of the quarter in the minds and of the street. But people may be waiting for the iPhone 5, but they are an amazing asset to have in any shopping center, so we are delighted to have them in as many centers as we do.

From a sales generic stand point, all assets are up year-to-date. We talked about 12% growth in trailing 12 months to $679. For this quarter 8.4%, but 10.8% for the year-to-date. Generally geographically, its been good. Everywhere, Florida has been perhaps the strongest. Anything to do with tourism has been good. It was a good quarter, very good quarter. As I said, we will take 8.4% growth every single quarter forever and be very happy.

Samit Parikh – ISI Group

And I guess more so on that tourism comment that you had, given sort of the weakening currencies in South America, are you seeing any impact on your Florida centers from that, and I guess by an impact I mean just decelerating growth.

Robert Taubman

Not really. I mean Dolphin which is the one that is right there in Latin America country is fantastic and its doing great. But Orlando has a huge Latin America tourism customer and Orlando’s, Millenia is doing very, very well. So I will really – Florida, is great. A few years ago everybody though it was going to fall into the see and we kept saying, its gong to be great again one day guys, just hang in there and it is and its growing again and its growing very strongly.

Samit Parikh – ISI Group

And I guess last question, maybe for Lisa. You spoke about recovery, the recovery rate may be moderating year-over-year in the back half of the year. Looking at your supplemental right now, it looks like recovery ratio was 109% in Q3 last year, 115% in 4Q last year. Can you guide us may be to on an absolute basis how much do you think that may go down? Is it two percentage points? Could it be more than that?

Lisa Payne

Well, year over year in total we expect the recovery ratio to be down modestly, a percentage or two. Its very difficult to do a total, to do quarter-by-quarter, because its so dependent on how the centers spend, particularly on projects and we don’t tell them. We don’t say, hey, we want it to be like – its based on what they tend to do thing, timing of all that across their portfolio. So I can say that basically year-over-year its going to be down modestly; quarter-by-quarter, I can’t really tell you.

Samit Parikh – ISI Group

Okay, thanks.

Operator

There are no further questions at this time.

Robert Taubman

All right, great. As I said, we are really delighted with the quarter. All the metrics were up, NOI sales, FFO everything. We’ve increased our guidance and all our developments are moving forward. So we appreciate and we look forward to your questions over the quarter and thank you for investing with us. Bye-bye now.

Operator

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

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