Taubman Centers, Inc. (NYSE:TCO) Q2 2014 Earnings Conference Call February 11, 2016 11:00 AM ET
Robert Taubman - Chairman, President and Chief Executive Officer
Simon Leopold - Chief Financial Officer
Ryan Hurren - Director of Investor Relations.
George Auerbach - Credit Suisse.
Craig Schmidt - Bank of America
Alexander Goldfarb - Sandler O’Neill
Todd Thomas - KeyBanc Capital Markets
Christy McElroy - Citi
Steve Sakwa - Evercore ISI
Omotayo Okusanya - Jefferies
Jim Sullivan - Cowen Group
Ross Nussbaum - UBS
Michael Mueller - JPMorgan
Michael Bilerman - Citi
Thank you for holding, and welcome to the Taubman Centers Fourth Quarter 2015 Earnings Conference Call. The call will begin with prepared remarks and then we'll open the line for questions.
On the call today will be Robert Taubman, Taubman Centers' Chairman, President and Chief Executive Officer; Simon Leopold; Chief Financial Officer; and; Ryan Hurren, Director of Investor Relations.
And now I'll turn the call over to Ryan for opening remarks.
Thanks, operator. Welcome to our fourth quarter conference call. As you know during this conference call, we’ll make forward-looking statements within the meaning of Federal Securities Laws. These statements reflect our current views with respect to future events and financial performance, although actual results may differ materially. Please see our SEC filings, including our latest 10-K and subsequent reports for a discussion of various risks and uncertainties underlying our forward-looking statements.
During this call we’ll also discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of 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.
And now, let me turn the call over to Bobby.
Thanks Ryan and good morning, everyone. Our financial results released yesterday were solid for the fourth quarter and full year. Comparable center NOI growth excluding lease cancellation income was 3.4% for the quarter and 3.1% for the year.
We exceeded our updated guidance of 2.5% to 3% with a stronger than anticipated fourth quarter. Net recoveries, rents and sponsorship were all up slightly higher than expected. Our adjusted FFO was $0.98 for the quarter and $3.42 for the year.
As of December 31, our comparable center occupancy was 95.3% up 0.6% compared to last year. Comp center lease space was 97%, up 80 basis point. Average rent per square foot was 1.7% for the quarter and 2.1% for the year. Our average rent growth for the year was lower by 100 basis points as we received no increase from our CPI’S claims
Our leasing spreads continue to be very strong at more than 23% and improved compared to the third quarter. Tenant sales per square foot were $800 for 2015, a 1% increase over last year. Among our best categories, were restaurants and shoes suggesting mall traffic continues to be up.
While reported a sales decline of 2.2% in the fourth quarter, it is directly tied to the sustained weakness in South American tourism and the strengthening dollar. Excluding two our tourist-oriented centers in Florida, comparable mall tenant sales per square foot for the quarter were up nearly 1% and almost 4% for the year.
A well publicized slow sales quarter for Apple also had a significant impact negative impact on our results, more than 100 basis points in the quarter. December was our best month of the quarter. We experienced moderate growth despite numerous headwinds faced by retailers over the holidays.
Impost food auctions such as Starbucks and [Indiscernible] were up double digits combined for the quarter. Again, suggesting traffic inner [ph] centers was up. In addition to restaurants and shoes, home furnishings also performed well.
In early January we made two announcements, the first was our agreement with Macerich Company to purchase the iconic Country Club Plaza in Kansas City, from Highwoods for $660. We will each own a 50% interest in the asset.
Country Club Plaza is a 1.3 million square feet composed of about 800,000 square feet of retail and restaurant space and about 500,000 square feet of office space. Approximately half the office space is in a single tower and is net leased to a long term credit tenant. The other half is positioned above the ground level retail space on the second and third floors of multiple buildings.
The Plaza is known as one of the best office addresses in Kansas City and has maintained both high occupancy and high rents relative to the market over many years. We were attracted to the asset for a number of reasons. First, it presented a unique opportunity to own a high quality dominant asset in a solid market.
Second, we believe the in place retail rents present a significant growth opportunity over the next few years. Third, we believe there are multiple ways to create additional value through medium through longer redevelopment and expansion. And finally, we felt that by partnering with Macerich we could use our collective relationships and leverage our operating expertise to create even greater value.
We expect to close on March 1. Our second announcement in January was our decision not to move forward within close reasonable of [Indiscernible] Miami World Center. We spent a significant amount of time on the project but in the end we were unable to structure the enclosed mall program that met our investment criteria. As a result, during the fourth quarter, we rode off $11.8 million of previously capitalized cost. We are now pursuing the development of our high street retail plan under a serviced agreement.
High Street retail in the context is so large; a mixed used project is more flexible and financially prudent as its cost of development are much lower than that of an enclosed regional mall. Our preliminary agreement with the developer gives us together with Forbes an option to purchase a 100% of what is effectively a condominium of the street retail at a favorable price. We love the sight, love the market and continue to believe there is great demand for more retail space in Miami.
Turning now to redevelopments. We’ve completed our project at Cherry Creek, Dolphin Mall, Sun Valley and International Plaza. The projects in total added 160,000 square feet of space to our portfolio and resulted in exciting addition to many of our best assets. We expect to receive strong returns on these investments, about 10% on average at stabilization.
At the mall at Green Hills International, our renovation and expansion is on schedule to open in 2019. Construction activity will continue throughout the year. We turned over the new space to Dillards and they have begun building their store. Once the new store is completed and occupied we’ll begin demolition of their former pad which will become mall area. The project is adding 170,000 square feet of inline space are anticipating investment is about $200 million and we’re expecting a 6.5% to 7.5% return at stabilization.
Overtime, many of you have asked about our plans for Beverly Center in Los Angeles. The center has been re-envisioned and is set to undergo a comprehensive renovation, the details of which we will unveil at the center on March 7. Our goal in re-envisioning the center is to create LA’s most exciting, dominant, urban shopping and dining experience. This will be a very expensive project and the initial returns will be lower than we have seen at our most recent development.
However, we are enjoying incredible central location that sits in a unique and very dense market with enormous affluence and an extremely fashion forward customer. It is a key asset in our portfolio and when complete, it will continue to be one of the most productive assets in the country. We look forward to speaking to you in greater detail after our March 7 announcement.
Now moving to ground up development. In San Juan, during the fourth quarter, we opened 20 spaces bringing the total number of stores opened to 81 of an eventual about 105 spaces. Recent store openings include American Cut Bar & Grill and BRIO Tuscan Grille, Daniel Espinosa Jewelry, Antroplogy [ph] Free People, Stuart Weitzman and Il Nuovo Mercato, a wonderful Italian food hall concept. We will continue to build on our already strong merchandising line up throughout this year.
Urban Outfitters, Tiffany, Gucci, Tumi and a 31,000 square foot Asian -- be among the retailers opening their various points in 2016. With each store opening traffic is building. The new restaurants and tenants like Zara have created a destination for a broader, customer based that is accelerating sales growth in the center.
We have four centers currently under construction. The first Asia, both of our projects in China are making excellent progress and remain on time and on budget. At CityOn.Xi'an, leasing has come together very well. Our Taubman Asia team has assembled a strong group of tenants including Coach, Forever 21, Gap, H&M, Zara, Starbucks, Moosi [ph] and an outstanding group of Chinese national retails. There has been excellent tenant demand. We expect to be well over 90% listed opening and about 80% occupied.
Of the roughly 220 spaces in the center, nearly 200 will be leased by opening. Roughly one third of the space will be international brands. Over half will be Chinese national and large regional retailers the scale. Less than 10% will be local Xi'an, operators, but even most of them have at least 5 to 10 locations.
About 40% of the merchandise is apparel accessories. As expected, nearly 30% is food and beverage. 10% is entertainment; another 10% is life style and home furnishings with the remainder, a combination of uses. We are delighted with the overall merchandising, brands and credit worthiness of our tenants.
On the construction front, the centers interior work is nearly complete and looks terrific. I was just there two weeks ago and I am really pleased with the quality of construction and the status the job as a whole. We are excited for the April 28 grand opening, our first center in Asia. We welcome you all.
At CityOn.Zhengzhou, leasing momentum [ph] continues to be strong. The merchandising and tenant roster will be very similar to Xi'an. Having just completed leases now in Xi'an we are now quickly finalizing leases with the same tenants at Zhengzhou. Given that Zhengzhou is expected to open about six months after Xi'an.
In Korea, things are also progressing well. The base structure of our building was completed in December. Overall construction is 55% to 60% complete. Shinsegae began their store fit out in mid November. We are very pleased with the leasing and merchandising. As we’ve indicated, the center will have a significant luxury component, lots of international brands and significant Korean national retailers. We anticipate a similar level of leasing and occupancy at the opening as the centers in China. The project remains on schedule and on budget.
In Honolulu, at international marketplace we are assembling a great mix of tenants and continue to make construction progress towards our August 25 opening. Steel and floors are complete and the parking garage will be finished in the next couple of months. We’ve also turned over our anchorage store facts to their team and they are making good headway.
At the end of last year, we announced a unique line-up of restaurants for the centers third floor grand lanai including Strip Steak by Michael Mina. Eating House 1849 by Roy Yamaguchi, Hakkasan dim-sum concept called Yauatcha. Flower and barley, a high end pizza and Italian restaurant, Goma Tei, a Korean Ramen noodle concept and Kona Grill. We also have an exciting market food all concepts the Streak by Michael Mina for the first floor.
From the inception of this project, we’ve been committed to bringing distinctive restaurants. They are a critical part of the project, functioning as the second anchor for the center. They will also take advantage of the huge natural traffic that passes this site on average throughout the year 55,000 people a day and drop people into our center. This project will be totally different from everything else in the market and will be its own destination.
I’ll now turn the call over to Simon, but before I do, I like to once again thank Lisa Payne for being such a wonderful partner for nearly 20 years. We all wish her very well. I think by now you’ve all had a chance to meet Simon. We’ve completed the transition and we are delighted to welcome him as our new CFO. Simon?
Thanks, Bobby. This quarter our FFO per share was $0.85, included in this quarter’s results is a $0.13 write off of previously capitalized cost related to the pre development of the enclosed mall at Miami Worldcenter.
Excluding the write off our adjusted FFO per share was $0.98. This compares to our fourth quarter of 2014 adjusted FFO of $1. Now let’s review the year-over-year variances and our results for the quarter. They are listed on page 11 of our supplemental.
First, minimum rents up $0.025 as occupancy and rents per square foot improved. Next, percentage rents were down a penny due to a combination of lease rolls and lower sales in certain centers.
Lease cancellation income was down $0.025; note that the fourth quarter of 2014 had an unusually high level of lease cancellation income. Other operating expenses were unfavorable by $0.02 primarily attributable to a reserve that we took in the fourth quarter of 2015 for a central legal matter.
Next, non-comparable centers added $0.015 net to our FFO. Interest expense was unfavorable by $0.04, approximately half the variances attributable to our new $1 billion loan on the Mall at Short Hills which is completed in September of 2015. The other half is attributable to less capitalized interest on our development pipeline as compared to 2014.
Finally the impact of our share repurchases added $0.02 this quarter as we now have fewer shares.
Turning to our balance sheet. During the quarter, we made our first draw on our non-recourse construction loan financing at Zhengzhou. This is the first financing we have completed in China. At the December 31 exchange rate the maximum amount available under the facility would be approximately US$125 million representing roughly 36% loan to cost.
The loan bears interest at up -- 1.3% of the PBOs [ph] base lending rate for a loan term greater than five years resulting in a rate of 6.37% at December 31. As you recall, we did not assume any financings for our projects in China in our previous liquidity plan. We are pleased to be able to fund projects in China on a non-recourse basis as we feel it represents a vote of confidence from a third party and the potential success of the asset.
In total, we completed nearly $2 billion worth of financings during 2015 at a weighted average rate significantly lower than our portfolio average at the time, while also extending our average debt maturities considerably.
Now I’d like to update you on our plans for our upcoming maturities in 2016. We’ve locked rate and expect to close on the refinancing of water side shops in April. It will be a $165 million fixed rate valid for 10 years at 3.86%.
At Cherry Creek, we are expecting our share of excess proceeds to be over $100 million at a rate inside of 4%. This re-financing should be complete in the second quarter of this year. We’ll pay off of $82 million on The Gardens at El Paseo as we now intend to combine Gardens with its sister center across the street in the village. We believe it’s advantageous to use these assets as additional support for our unsecured borrowings.
Lastly, although attractive long term financing is available today, we are likely going to let our construction loan on the Mall at University Town Center float at favorable rates for the balance of this year.
There’s plenty of time left on the loan as we have four one year extension options available to us after the maturity date in October. Our balance sheet remains in great shape, assuming these financings are completed as expected, the weighted average maturity of all of our debt will be approximately eight years, this figure assumes the financing on Country Club Plaza is completed as well.
The weighted average maturity of our fixed rate debt which projects to be 82% of all of our debt once this finance activity is complete would be ten years. Our fixed charge ratio of coverage ratios remain strong. At year end it was three times and finally our debt to EBITDA ratio at year end was comfortably 108 times on a forward basis.
During the quarter, we repurchased 26,000 shares of our stock at an average prices of $69.95 per share. At year end we had approximately $145 million available under the current share repurchase authorization.
Moving to guidance, as we said in the release for the full year 2016 we are introducing FFO guidance in the range of $3.45 to $3.65. Please note that this range excludes Country Club Plaza because it’s our convention to exclude pending transactions until they have been completed. As such, we expect they will include a center in our FFO guidance range when we update you again in April.
That said, we estimate the contribution to FFO from Country Club Plaza will be $0.06 to $0.07 in 2016 which excludes purchase accounting adjustments. This assumes a March 1st closing, long term debt at 50% of cost that will close in the second quarter and use of our credit line for funding the remaining cost.
Our $0.20 range is wider than what we typically provide. With the opening of four new centers over the course of this year as well as uncertainty around CPI sales and lease cancellation income, we felt the wider range was prudent. Our range is also based on the following assumptions all of which can be found on page 23 of our supplemental.
For the year we expect comp center NOI excluding lease cancellation income to be up 4.5% to 5%. Our NOI growth is partially dependant on the CPI escalation as we discussed at length last year. If CPI is positive in February we expect to be at the higher end of our NOI range. If its zero, we’ll be at the lower end.
Country Club Plaza, The Mall of San Juan and Beverly Center are all excluded from comparable centers. Country Club Plaza is excluded because it was not owned last year and will not be owned for the entire current year. The Mall at San Juan is excluded because it was only open for part of last year and Beverly Center’s inclusion is a result of the expected impact from the significant redevelopment activity that will begin this year.
As for the rest of our key guidance measures, average rent per square foot is expected to be up 3% to 4% year-over-year again partially dependent upon the CPI escalator. Year-end comp center occupancy is expected to be around 96% up approximately 80 basis point.
Net third party revenues from management leasing and development for services performed in both the U.S. and Asia is expected to be between $3.5 million to $4 million which is down from $7.3 million in 2015.
Last year we collected some additional non-recurring fees for the very successful opening of Studio City in Macau which accounts for that difference. We are estimating lease cancellation income to be about $6 million of our share, down from $7.7 in 2015. For 2016, total pre-development expense is expected to be about $6 million. As we have discussed numerous times we expected significant increase in interest income in 2016 as well.
We’ve been in a period of substantial development activity for a number of years and as a result we’ve been capitalizing in several [ph] amount of interest. As our projects open this year, the capitalization will largely end, resulting in increased interest expense.
Our share of consolidated and unconsolidated interest expense for the year is expected to be $125 million to $130 million compared to about $102 million in 2015. At a 100% consolidated and unconsolidated interest expense is expected to be $175 million to $180 million as compared to $147 million in 2015.
Lastly, our quarterly G&A run rate is expected to continue to average about $12 a quarter throughout 2016. And with that, I’ll turn the call back to Bobby.
Thanks, Simon. It’s been a little over a year since we sold seven of our lower performing assets to start with. We said that in selling these properties we would enhance our ability to grow net operating income overtime. The consistency and high quality nature of our portfolio continues to separate our company in the minds of retailers, shoppers and capital sources.
A quality malls are where everybody wants to be. We are pleased with the redevelopments completed in 2015 and we are excited about our newest asset Country Club Plaza and the four new centers will be opening before the end of this year.
We believe this current cycle of substantial investment will create significant net asset value over the coming years as it has throughout our history. Over the last decade, our total shareholder return has been 12.7% which is 17th highest of the 101 U.S. REITS that have operated during the period. And I am proud to say substantially better than the MSCI and S&P 500 returns of 7.3%.
Since our IPO in 1992, our compound annual growth rate through last year was over 15%. So with that we’ll take questions as Ryan said, please limit them to two. Shaa [ph] are you there?
[Operator Instructions] And our first question comes from the line of George Auerbach with Credit Suisse.
Great, thanks. Good morning. Bob, yes, I know you said the details on Beverly will be revealed early March but your investors are all here now. So, wondering if you can give us some broad brush idea of the scope of the project both in terms of the spend, their projected yields and the NOI disruption that you are expecting in 2016?
Well, George, we certainly understand that investors are interested in understanding all of those questions but we have a variety of constituents beyond our investors, our shoppers, that community at large, retailers that we’ve been working with for some time, tenants in the center, respected tenants, we’ve got a bunch of government agencies and political leaders and figures that also are of constituents there. So, we picked March 7th as our date to dispose all the details. We will be talking about the clause at that time, as well as the expected returns.
And as we said, we are positioning the asset as really the dominant and closed mall of the markets and is in the context of our direct competitor, our sanctuary city who’s spending a $1 billion on their property. We are not spending a $1 billion. I don’t want anybody to hear that but we are going to spend real money here. So, we are not in a position at this point to really disclose the details until March 7th.
But I guess it’s fair to say that on March 7th, we will get a press release with proper details.
Yes. Our plan is most likely to actually put an investor presentation up but we will have all the details that investors would want.
Okay. And I guess just one more for Simon. You mentioned in the shopping center related expenses there is a legal charge. I guess is that recurring and can you quantify the size of the charge in the fourth quarter?
It’s not recurring. It’s a reserve that we took in the fourth quarter and we did that to be prudent. I don’t want to give you the exact number but it’s not a huge dollar amount. And because of litigation, we really can’t comment too much further on that but it is one time.
All right. Thank you.
Our next question comes from the line of Craig Schmidt with Bank of America.
Thanks. I guess, given the 4.5% to 5% comp NOI, I would have expected maybe a little bit higher guidance in terms of FFO. What’s the major thing that’s dragging the FFO per share down?
Well, first, I think it is important to tell you that we are happy to be at that 4.5% to 5% range. We feel that’s reflective of the quality of our portfolio. And we do have a high range. At the high end of the range, we are talking about 7% FFO growth to be over 8%, if you include the effect of Country Club Plaza. But these are some of the things that are potentially affecting the FFO and creating a bit of drag on it. The interest expense, this year is increasing materially due to the fact that we are opening four new centers. The third-party income that we talked about before is also down because of the successful opening in Macau and the fee that we have received are related to that.
We are also projecting lease cancellation to be down. That is a bit of a norm at this point but right now that’s why we feel the $6 million is the right number. And the process is probably a little less apparent to everybody is related to Beverly where we are providing for the potential for some frictional vacancy and some other disruption at the center, as we start the project which is going to start this year. But that’s not something that we know for sure is going to occur but one of the reasons our range is wide as it is because anytime you are doing a substantial project like we are doing and the center is open, you have the potential for that to occur.
Great. Thanks. And then just what was the occupancy of The Mall of San Juan at the end of the year and when is H&M scheduled to open?
H&M, I think is scheduled like May -- in the May, June 1 range. And as we said, we had the 81 tenants side of it and eventual about a 105. And it’s roughly in that range at this point in terms of occupancy.
Okay. Thank you.
Our next question comes from the line of Alexander Goldfarb with Sandler O’Neill.
Good morning and welcome to the helm, Simon. Just some questions here. First, Simon you talked about the drivers offsetting the higher same-store NOI. But two items. One, can you just talk about the step-up from 3% level this year to the 4.5% to 5% next year? And then two, on the non-same store park, can you talk about the impact of San Juan, Xi'an and the developments that are coming on line.
Yes. In terms of the first question, Alex, it’s really rent. It’s really the revenue side that’s driving better comp center NOI growth. So from our perspective that’s obviously a very important thing. The other piece of that is redevelopment and we brought some not very sizeable projects but some very profitable projects on line over the course of next year, which are feeding into that 4.5% to 5%.
So the combination of the two is really where we are. And then on the second half, the non-comp centers with developments, we can sort of tick them off a little bit the more we touch on the mall. In San Juan, there will be obviously more of an NOI contribution than there was last year. We had previously talked about a 3% yield on cost in 2016. That cost, that’s in our K is $475 million.
We do know now that the costs are likely to be higher than that, about 10% higher and you will see that when we file our K in a couple of weeks. So, we now believe that we will be closer to 2.5% yield on that higher cost over the course of 2016, so similar on NOI, higher on costs. In Hawaii, the leasing is progressing extremely well there and so we are excited about that. We will know more about the exact timing of tenant openings in a few months but whatever tenants gets opened, given our location, we know they are plenty of customers because the center is only going to be opened for four months this year. The NOI contribution and the effect on FFO will not be material and it’s covered within our guidance range.
In China, consistent with what we’ve originally told folks in our investor presentation, we expect in year one and you will not have a full year one for any of these this year. We will be about between 4.5%, around 4.5% yield year one for both the China projects that will grow to 6%, 6.5% at the stabilization. Note that that’s the third full year in China and we do expect higher growth there over time. And then Hanam, again consistent with our original presentation, we expect about a 5% NOI yield year one but that will grow to 7%, 7.5% at stabilization again in the third year.
Okay. And then second question for Bobby. Bobby, Miami, you guys have previously spoken about the benefit of having Macy’s and Bloomies locked up and the strength of Miami’s East Coast, sorry New York till, that those are incredible anchors to have. Now, you are going with a street retail concept. So can you just talk about one, is this a sort of sign that maybe departments stores don’t really pencil for malls anymore?
And then two, if there was such a focus on locking up those two New York based departments stores before, what’s changed that the project works better without them or maybe they just weren’t the traffic draw or the economics just didn’t pencil without them -- sorry, didn’t pencil with them?
Well. Alex, I think as I said in my comments, the enclosed mall program became uneconomic in the context of this huge, this massive mixed-use project that’s being built. So, yes, the department stores were very important to a large regional draw and the idea that we were trying to create in that enclosed mall and we create a really dominant destination. When you talk about high street retail, we are really taking advantage of the enormous entities and the more of people that are expected to be on the street, all around you. It’s a lot easier to plan.
It’s a lot more flexible in terms of the space and how the space gets cut up. We are talking about something like 300,000 square feet of tenants. All of those tenants, we would be happy to have at any of our shopping centers. 300,000 feet is a large critical mass space and it will create a local destination but much more local than the expanded destination.
And again, these are all retailers that we normally talk to and any significant high productivity, potentially very high productivity retail space. We are talking about like on the street Miami, whether it’s in enclosed mall or some major mixed-use development; we would be very interested in trying to develop. And so when you talk about 300,000 feet in a gateway market like Miami, we will be very excited to build this and hopefully own it over time.
Okay. Thank you.
And our next question comes from the line of Todd Thomas with KeyBanc Capital Markets.
Hi. Thanks. Good morning. First, a follow-up on Beverly Center. I guess without discussing the plans and scope of the work that you plan to do there, are you able to share what the impact that 2016 FFO guidance is from potentially de-leasing some space of that center? I mean, what’s baked in the guidance?
As we said before, we do think there is potential for some frictional vacancy and other disruption. But past that, we feel we’ve covered it within the range and really don’t want to comment specifically on dollar amounts and the effect.
Okay. And then you mentioned that there has been a 10% increase in the project cost at San Juan. What specifically is driving that increase and do you still expect to ultimately achieve the 6% stabilized yield there?
Well, I will take the yield question first. We do expect to be near full-year run rate in 2017. We probably won’t be exactly there but we will be close to it. And we do expect significant growth in NOI above ’16. But until we get more history on the asset, we are not going to be able to update you on the stabilized yields. We feel very good about where the leasing is. We feel great about the tenant line up.
We are very excited to see what’s going to happen now that we’ve got real critical mass of retailers in the center. We continue to believe that it’s going to -- over time, it’s going to be one of our best assets and will create significant NAV. But we are going to need to see a little more with the retailers, see little bit more, get little more experience before we can confirm for you what the yields on stabilization is going to be.
And getting it opened at the end, Todd was very complicated and we ended up with a higher cost. We also refused to change or to lose an essence, the focus of our merchandising plan. We thought it was critically important to maintain the merchandised plan and we did. It is absolutely one of the best merchandise shopping centers anywhere, anywhere in North America.
And we go back to the basic investment thesis, our densest markets. And there is two and a half million people in the San Juan metropolitan area and there is 3.7 million people on the Island. The high level of fashion consciousness on the island with a very strong propensity to shop, we actually believe there is a big understated income in the market. The number of tourists, it’s over 4 million tourists.
In fact, tourism in that market notwithstanding all the noise, hotel registrations are up almost 5%. Visitor expenditures in ’15 were up 3.5%. Cruise ship visitors were up 25%. Employment is up and the employment rate is down. So tourism is growing and notwithstanding all the noise on the debt in that market, we think the investment thesis is a very strong line. It’s a tremendously under retail market as well. There is only five square feet of retail per capita there. There is almost 23 or 24 square feet in United States. So, we continue to believe that on a long-term basis, this is going to be a great asset that will create significant NAV. There is no question in the short-term. We’ve heard our return on this asset with the increased costs and the low return that we initially expected here. But in the long run, we’ve got a great asset.
So that’s good lead into the answer to the second piece to your question, which is cost overrun. And the overruns are really caused by a pretty broad group of things, cost on the island, cost of labor on the island, manual work that we needed to do, a lot of different things that contributed to it. There is not anything that led to these overruns.
Okay. Thank you.
And our next question comes from the line of Christy McElroy with Citi.
Hi. Good morning, everyone. Just regarding the $11.8 million impairment charge for Miami Worldcenter. In the past you have expensed a lot of your pre-development costs. Can you just remind us your policy with regard to expensing versus capitalizing those pre-development costs?
Christy, it’s Bobby. Normally, there are whole group of things that we have to have in place. Before we begin actually booking an asset as we did here in creating capitalized costs. You have to have the land under contract. You have to have entitlements in place. You have to have in this case, department store anchors with signed LOIs. You have to have contracts with your partners.
There are all kinds of things that we have a whole list of things that we review, when we review, when we make a determination to begin capitalizing. It is rare that we began capitalizing and actually have a write-off like this. And so obviously, we are disappointed because we were so far down the road in planning but otherwise, you are right. We expensed everything until we get to the point that we are very confident that we are moving forward. We review with our auditors, as well as internally on a quarter basis every decision like that we make.
Okay. And then just given that you are funding the purchase of Country Club Plaza in part effectively with the remaining excess proceeds from Short Hills refi and in part with debt on the asset. So effectively, 100% leverage from a net debt perspective. While accretive to FFO, how are you thinking about your leverage levels moving higher and where you are comfortable in the context of your development and redevelopment capital needs in the next few years? Simon, I think you mentioned you are comfortably below 8%, but sort of at what point do you think about other capital raising need?
So, right now -- and we said this in the past that we target in terms of debt to EBITDA, we target 6 to 8 times. We are trending towards the higher end of that range and I would say with the addition of Beverly and everything that’s in the spending plan right now, we are likely to trend a little bit even above that 8 times range, which is obviously a place where we are comfortable but over time, we would like to be lower. We expect that the peak of our range will happen probably in 2017. Over time, we will naturally delever as NOI from all of the spending and all of the development activity starts to come on line. We have fixed charge ratios right now of 3. We said that we always want to be above 2. We will -- we expect to be above 2 and hopefully with a significant cushion as the spending occurs.
In terms of future capital sources, we do not need to raise any new capital to fund all of the existing activity. In that I include Beverly. In fact, we have a significant cushion with our revolving line of credit. So, we are fine as we are right now. Obviously, we hope to get back to bit more like the middle of that target to 6 to 8 times debt to EBITDA range. That will happen but it’s going to take some time to get back down there.
But I guess the other thing I would point out is that while those ratios will trend a little higher than we would like them to be, we have done, spend a lot of time, making sure that we take advantage of where the debt markets are for our assets and debt maturities have been -- we've been extending those, taking advantage of the fact in the life company market, particularly right now that we are able to borrow 10, even 12 years at very competitive rates. So, as I like to say, not all debt to EBITDA ratios are created equal and we feel good about the risk in terms of where are maturities latter out within sort of where our debt is right now.
And our next question comes from the line of Steve Sakwa with Evercore ISI.
Thanks. Good morning. Bobby, I can appreciate waiting to April 7th, but you made the comment that Beverly was going to be a very expensive project, maybe not a $1 billion but certainly several $100 million with a very low yield that kind of sounds very defensive in terms of what you are doing with this asset and given kind of where we are economically, just kind of help us think why know is the right time to take on a project of this size and scope?
You’re looking at the market that requires it. It’s market that don’t wait for the economy of the XYZ or the capital market to improve or whatever. You got to operate your business within the competitive nature of that market you’re in, and we see significant opportunity in what we’re doing there.
I mean, the reimagining of this space is very exciting. Our tenants that we’ve been speaking to our really excited about what we’re doing. Many of them want to expand where they are. We have other tenants we’ve been talking to for some years and now with this major expansion are now wanting to commit into our center.
We’re going to have lot of food and lot of really good food. We’re going to renovate the center, but I don’t – I can’t – I really don’t want to get into the details before March 7. It’s not that far away and we know that you guys would like to know more, but you really have to appreciate that there is a much broader constituency on assets like this and we need to respect all of those constituents.
Okay. And I guess Simon, just to go back to the China projects. You said kind of the year one yields will be 4.5%. I know the lease structures are little bit different in terms of fixed versus percentage rents. So, just trying to sort of think through what kind of level of sales or what would cause that number to maybe miss or be better than that from a sales perspective. How do we think about the risks to that 4.5% as these centers are open?
Let me take the question, Steve, we – you’re right that they’re tend to be more sales based than less fixed based brand in the leases. They do also in China tend to be shorter, so that allows you to take advantage of the expected growth. I should say that in these markets there is always talk about the growth in China and China and the economy and everything else. Whatever the number for GDP in China and there’s a lot of pushing on that. Is it 7%, is it some number lower. I should say actually that even 7% in China, 6% in China is more absolute growth than is occurring in the U.S.
But even if you accept that number, in our markets in Xi'an and .Zhengzhou the GDP has historically has been much stronger than the average for the country and it continued and last it was 30% more in our two markets than it was on a average basis for the country. In addition, retail sales are growing above the GDP. So, and in typically 20%, 30%, 40% more on retail sales as you look over the last five years, year in and year out.
So, the reason that they’ve had shorter leases, the reason that yields have been willing to be less in the market is because the sales growth has been so great. So, coming back to you question we have literally on tenant by tenant basis, it builds up the sales productivity in the asset. It is at a very conservative level to achieve the returns that we have now put on the table that we said originally in our investor presentation that we are now saying again, we are meeting those levels that we set over two years ago. So, we are very, very excited about how these assets are coming out. The quality construction is good. The delivery on this is good and we think that two in China and one in Korea, we welcome you all to come see them as they open.
Okay. Thank you.
Our next question comes from the line of Omotayo Okusanya with Jefferies.
Yes. Good Morning. I just wanted to focus a little bit on IMP with all the other development projects you’ve given us really good information about where you expect initially stiff will be at open and also a sense of what the initial yields would be, because that data you could also provide for IMP as well?
Well, we have not changed our quarterly supplemental the information supplement, so we continue to believe that our stabilized returns will be what we’ve said and we will address them each quarter as we move forward. And we are very excited about the leasing that we’re doing there. And as we get closer in the coming months, I mean, we gave you a lot of specificity on Xi'an, we’re opening in three months, once in three months. So, as we get closer to the opening in Hawaii, we will give more specificity.
Okay. That’s helpful. Then, your general sense about Hawaii again, lot of talks about tourist markets and the level of sales coming down in the lot of these tourist markets, are you see that as well in Hawaii and is it impacting, how you’re thinking about merchandizing for the asset?
Well, Hawaii tourism is actually up, we talked about San Juan for minute. But Hawaii tourism in 2015 was up 2.8% to 5.3 million people. And this is not Hawaii; this is just Waikiki and Wahoo. And then, Chinese tourism was up 12.5%. Japanese was down 1%, but up 3% in December. And you can see it in the number of areas; hotel occupancy was up 50 basis points, 85%. Now the total spend retail spend of those customer was down 1% in 2015, and in luxury goods we think anecdotally that they were down probably than 10%.
But we’ve known that this was going to be a cyclical situation, it always is, when you at the strong dollar then they tends to less spending even if tourism is flat. We love our site. And remember there are 55,000 people a day walking by the site between Kalakaua and Kuhio it’s much more than in peak season.
So, we recognize this volatility. But when you have a lease structure and you have multiple maturities on your lease structure you never have a significant impact, you may see it in percentage rents, but again, we’ll have more fixed rent here than we would in Asia and much more attune to what we would have traditionally in the U.S.
Okay. That’s helpful. Thank you.
Our next question comes from the line of Jim Sullivan with Cowen Group.
Thank you. Good morning. Bobby and Simon, question from me really regarding the markets for permanent financing in China today and Ewers [ph] is a company with the significant amount of capital tied up in development not yet generating EBITDA. You were all familiar with the how you typically finance malls that are developed in the U.S. but in China given the rate of growth that you’re talking about or contemplating here, Bobby, what is the thought process now about what kind of permanent financing you would expect to put on the Chinese assets and if you could address kind of term, terms and in terms of costs where the current market is in duration and also loan to value?
Sure. Jim, its Simon, I’ll take that one. It is less defined market for asset specific financing China than it in the U.S. and by that I mean, very, very clearly what construction loans look like here in terms of terms and duration, very, very clearly what takeout loans look like as well in terms of those terms. It is less – it’s harder to predict exactly where you’re going to be in the market in China right now.
That said, there is a market for permanent financing on assets. It is typically -- the term is typically 10 years. Those -- the loans they are tend to be much more they tend to have much more amortization in them than the permanent financing that we get here in the U.S. And obviously the rates are substantially higher there than they are in the U.S. you see construction financing at Zhengzhou with 6.37%, permanent loans should be in a similar area right now. Those rates have come down. But there are still obviously much higher.
So, in terms of what we’re assuming is we’re assuming that we should be able to take out the financing, any construction loans that we do in Asia. Our proceeds level that are the same as where the construction loans are and that we would have a longer term on that, that means more amortization in them and the rates would be similar.
What about scope for prepayment rates?
Scope for – you mean, the ability to pay that loan office you want to?
Right and refinance.
We don’t think that should be substantially different than what we do in the U.S.
Okay. And then second question from me, if you will. Country club is obviously a very special asset. Can you give us some idea of and I know it’s very early days of course, but some idea whether there is –you are thinking now, Bobby, is that’s an asset that is ready for a substantial redevelopment in incremental capital or if the changes are going to be much more gradual in the same two to four-year period?
Well, I think initially we’re going to be really focused on just leasing, below market rent as both us and Macerich look at it together and there are a lot of street level tenants that prefer to be on the street than in the mall, that we think we will have an opportunity to get to know even better that are in several of our properties, but not in all of them. So we think that the ranges of tenants that are possible for this center are greater. So again in the shorter term this sort of bringing up the market level of rents we think is very possible.
In the medium to longer term Macerich and us spend a lot of time together and talking about potential ideas and opportunities that really enhance the center and create more value. So, if you put timeframe on it, we would probably see in the three, five, six, seven-year range depending on what it is that we’re able to do and what the community allows us to do and all those things.
So, it’s a segment of time, but we’ve bought this again with Macerich as we both felt that its really unusual iconic assets where we have significant ability to bring sort of our national presence and to bring our operational knowledge and to really make this asset even better than it’s been, I mean, it’s a fabulous asset and I don’t know how long it’s been has you been there, but its pleasure to walk around the place, it has wonderful tradition. It’s a Christmas lighting tradition. It’s amazing. Its art fair is incredible. The art fair draws literally hundreds of thousands of people, so it’s really a unique asset in a great. It’s a very solid market Kansas City and so we’re very excited now on it.
Okay. Then maybe if I could, a final question regarding Beverly Center, you talked about frictional vacancy as you embark on the measure redevelopment. But -- and you mentioned foods specially, Bobby here. I’m just curious my impression has been that the food use there has been coming down for some time. Was that part of the plan that you’re going to unveil in March or was that simply tenants opting out of the center for to go to a competing center or because of low productivity?
We’ve been working on a plan and a program for this for several years. And we’re now almost ready to talk about it. And food is of course important in any strong asset anywhere today, and it could be in Asia, it could be in Los Angeles, so we need to find a right mix, and we’ll talk about that more on March 7th.
Okay, great. Thanks guys.
And our next question comes from the line of Jeremy Metz with UBS.
Hey, its Ross Nussbaum here with Jeremy. Two different questions, the first is for the projects over in Asia. When you’re thinking about those initially yields that you quoted my understanding was that a significant majority of the leases were sales based. Can you give us a sense for each of the assets at this stage? What are you estimating the sales per square foot levels to be to achieve those yields?
As I said, I think we’re being very conservative in the way we’re going – the way we’re doing this. We build on a tenant by tenant basis. I really don’t think it’s appropriate to discuss the exact numbers on the assets and what the sales is expected to be and it have to category by category. We really don’t want to do that. Its – but we’re very happy with the merchandizing of these assets. We mentioned a bunch of tenants that are international brand.
We could mention Chinese national brand. But we got the best tenants that are operating in those markets right now and we think the Xi’an location that we talked about is astonish, it literally sits on top of two subway line, the two most important roadways in that area, right across the street is the prudential headquarters, offices, for that it’s like a state for the province.
It is as good a site as you could imagine. And so, we believe with the very conservative in the underwriting of this and we’re hitting all our targets, all our targets we lay out for ourselves from cost, the timing, the leasing, the merchandizing, credit worthiness, we’re hitting all the target and I think that’s where we’re comfortable saying at this point and as we open the center again, we welcome you guys to come and kick the tires.
It was there last summer to kick them. I look to forward to going back.
I delighted that you were, Ross.
I didn’t fall in any holes, but I almost did, but that doesn’t falls in the fourth quarter, it could have been. Next question, Green Hills, the 6% to 7.5% yield why isn’t that higher. When I look at some of the redevelopment expansion projects that your peers are doing, we often see numbers that are closer to 8% and 9% and 10%, what preventing that from being an 8%, 9%, 10% yielding?
Whenever – first of all, it’s an extremely tight site, that’s number one. So you have a lot of structured parking all over the site. You’re also going through department store. You’re literally going through Dillard’s. So, you have to move the parking, create new parking, move the store, create a new store, and then you’re creating the expansion of the mall itself. And it’s a wonderful asset.
We’re going to be able to really create more of a dominant asset by expanding the GLA, because it creates more customer choice, more one-stop shopping opportunity. We’re going to be to expand the categories that were in and be much deeper in those categories, so we’re creating a better more dominant asset in the long term and we’re also making money. And I think those 6.5% to 7.5% unlevered return in today’s world with all of constraints this site a fabulous deal and we will end up with very strong NAV creation.
Okay. And then quickly last from me, in the fourth quarter you really didn’t buyback stock at all, when you did buyback stock last year it was called 71-ish on that stock, you’re now at 67 and change. What your thoughts on stock buyback here or is all the capital is going to be going to development funding?
Well, its Simon here Ross. Basically where we look at you can do five things with your money, you can build things, you could buy things, you can reinvest in your existing assets which obviously were doing quite a bit of now. You can pay down your debt which in today world does make a whole lot of sense, so you can buyback your stock.
So there’s a lot of competing potential uses for your liquidity. We have a $145 million available right now. And we’re always evaluating what we think at that – at that any given moment in time what the best use of that capital is. Clearly we think that our share price is dramatically under value compared to NAV, that’s not just our saying, but that’s pretty much everybody who agrees, it’s just a matter of degree of undervalued.
So, we know there’s value in the shares at this level. And we’re going to look at what makes the most amount of sense going forward. As to why we didn’t do more in the last quarter it had nothing to do with the share price. There are lots of restrictions and requirements of the government when you can and cannot repurchase shares. And based on a lot of activity that was occurring in the fourth quarter we made a difficult to do that, it was not anything to do with share price that was really related to that.
Our next question comes from the line of [Indiscernible].
Hey, guys. Quick question, follow-up I guess on the share repurchase, as you evaluate all those options and obviously keeping in mind you’re looking at your balance sheet as well. Would you consider asking the board to increase your share buyback amounts as you’re getting close to using up more of your capacity?
Well, yes, to the extent that we got there, but we’re – you can’t – this isn’t just the financial exercise, you got to look at all of the issues that face the company and you have to lead yourself opportunity to be able to grow that company and you have to look long term. So, when you talk about the options that we have, buying back share is one of them. Simon laid out five different things. And so -- and we always going to be prudent with our balance sheet, because it is a funky world right now, nobody knows what’s going to happen.
The capital markets are very choppy. And that could extend itself, it could be a month, it could be three years, we don’t know and we will always want to keep a balance sheet that solid and very predictable. And we feel that’s what we have. Simon talked about the latter maturities that we have, that’s very important. We locked away lot of our debt on a fixed basis at very low rates for long period of time.
So, we do have a lot of due development going on right now. And we’d like to see all that open and I’m sure lot of you guys would like to see that open. So, I think you have to do it always in the context of all of the issues facing the company and that’s what we’re trying to do.
Just a quick follow-up, will that also potential cause you to delay a big redevelopment like Beverly Center if the returns are sufficient and you think your debt levels are starting to creep up a bit?
You always have to weigh all of the issues facing the company. As I’ve said, you can’t just look narrowly at what is the creation of buying back stock that day. You have to also look at the strategy of the company, the strategic nature of certain assets within the company and you have to take all that into account as you look at your balance sheet and make judgment and allocate capital. That’s what we try to do.
And our next question comes from the line of Michael Mueller with JPMorgan.
Hi. So, if you decide to make an investment in the Miami Street retail project, can you think you would do it before or after its completed?
Well, about the time that it would be complete is when we would make that judgment and that investment.
Okay. So, basically it’s stabilizing – it would stabilize at that point essentially when you would consider it?
Well, it would be opening.
Or least. Okay.
Yes. We would know a lot about it at that point in time.
Got it. Okay. And then Simon for the redevelopments that came on line in the fourth quarter how much of the NOI was reflected in the fourth quarter NOI run rate?
A - Simon Leopold
Round numbers, it’s about 100 basis points.
Got it. Okay. Thank you.
And we do have a follow-up question from the line of Christy McElroy with Citi.
Thank you. It’s Michael Bilerman. Good afternoon, Bobby. Just a question, I don’t know if Simon or Bobby wants to answer this. Just in terms of the Miami write-offs, so I just want to make sure we’re clear on this. The 12 million is just your share, so in aggregate with your partner there was about $24 million expense on this project and when I think about almost 24 million bucks. Maybe can you just walk some of the biggest pieces of that and just clarify whether there was any capitalization of executives within that number if that made up anything of it, effectively capitalizing of G&A, maybe your comp, or Head of Development or something like that, just so that we can better understand how money is being spent and how it got up to be $25 million in aggregate?
Okay. So, Mike, first of all, it was $24 million roughly. So, us and [Indiscernible] each lost that much money in the assets. I don’t have in front of me what the breakout was of it. But it was largely what we would call the broad pre-development activity. It was drawing plans. We actually because of the unique nature of this project, we went a long way down the road with plans. We didn’t have construction documents but we had something that’s right for that. We had very developed design documentation. We also brought on a lot of consultants to try to help us in the market, estimate the cost because the concrete program here was unbelievable.
And remember, we were going to have -- they were building platforms on top of the mall to build high-rise on top of it. That’s our densest project. There is going to be something like 15 million square feet of space built on these blocks. So, you think New York City, that’s what this was going to be and it will be. It’s not going to have an enclosed mall in the middle of it. So, we spent a lot of money on architectural time and engineering and estimating time. We also spent a lot on, lot of legal bills as well and so it was largely those things. Again, I don’t have it in front of me but it was largely all that. I assume there was some executive time in there as well from our own people but it was largely the other pre-development expenses.
So the exact breakdown is $9 million of the $11.8 million were related to our share of the joint venture. $2.8 million were our own internal costs.
And then -- right. And then I guess from the perspective of capitalizing versus expensing and Bobby, you went through the decision tree. I guess, as it stands today, is there any other projects upon which you are capitalizing rather than expensing other than the projects that are listed in the supplemental on page 19? So is there any other things that we should be cognizant about that has build up a certain amount of costs that if you make a no-go decision because I think from an investor perspective, there was always a level with Miami in terms of where you presented to us as we are not sure yet, we are not sure we are taking it very seriously as evidenced in the costs. But I don’t think people really understood that you build up and capitalized such a big balance. So is there anything else out there that we should be cognizant of?
Michael, it is Simon. The answer is no.
Okay. And then just lastly on Beverly, I’m pretty sure that’s under a ground lease. You never broke out the date of the ground lease. It is just grouped into 2,042 to 20,104 in terms of all the ground leases between that and Cherry Creek and some others. How does the ground lease play into this potential redevelopment that you are going to embark on and how should we think about that component of it?
Well, first of all, we don’t disclose the expiration dates of individual ground leases. It is included in the disclosure that you just described. We have plenty of time to amortize the investment that we plan to make here over the term of existing lease. And it’s been a long time since this thing was even built and it needs a lot of capital.
So the ground lease will not be touched at all in terms of this project? You won’t look to try to buy-out the ground lease or extend it further from what it is.
That’s not part of our decision on this at all.
Okay. And just lastly on Hawaii. I just want to make sure that we have the right confidence because the San Juan increased this late in the game. Hawaii shares a lot of things with Puerto Rico in terms of being an island and very extensive from a construction perspective and a labor perspective. What sort of confidence can you give us, a, on the $465 million in terms of construction budget that’s not going to shift upon completion? And two, what the current sort of pre-leasing is for us to better understand that first year return come this summer relative to that 7% stabilized yield?
So, I think Simon said earlier that in terms of 2016, we really don’t -- it's not going to impact our overall FFO dramatically one way or the other. And we do expect to have significant occupancy in 2017. It will not be a full-year run rate. We typically talk about the third year, at least the second full-year. So the second full-year would really be in 2018. And we have not changed our costs and our returns in the supplemental and as we get closer to the opening, if it’s necessary to do that, we will.
You are right that you are on an island and that we had a big construction cost increase earlier on this project. We’ve never ever seen an index year-over-year go up like the one in Hawaii. I don’t know if you’ve been there recently but there is cranes everywhere. And we sort of miss the buyout time in about 12 months because all that activity drove the contractor costs way high. But the project is fundamentally, is bought out. We have the project base we build in terms of the super structure as we talked about earlier. So, we have a pretty good idea at this point but as we get closer to the opening, we will continuously look at the costs and the returns. And if we have something to say or modify, we will.
Okay. Thank you.
And there are no further questions at this time.
Just before we end, I want to correct anything that we said. I misunderstood Mike Mueller’s question before. He asked about how much of fourth quarter ’15 NOI was coming from redevelopment. The answer to that is a negligible amount. The 100 basis points, the answer that I gave was related to our NOI comp guidance for 2016.
So, Shaa, thank you very much and thank you to all. We look forward to seeing you soon at the next investor conference. Thank you. Bye-bye.
This concludes today’s conference call. You may now disconnect.
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