Taubman Centers, Inc. at REITWeek 2015

Taubman Centers is an S&P MidCap 400 Real Estate Investment Trust engaged in the ownership, management and/or leasing of 27 regional, super-regional and outlet shopping centers in the U.S. and Asia. Taubman’s U.S.-owned properties are the most productive in the publicly held U.S. regional mall industry. Founded in 1950, Taubman is headquartered in Bloomfield Hills, Mich. Taubman Asia, founded in 2005, is headquartered in Hong Kong. http://www.taubman.com.

Ryan Hurren
Director, Investor Relations
rhurren@taubman.com
T: (248) 258-7232

DJ:  Good morning everyone and thanks for joining us. My name is DJ Busch, I'm a Senior Equity Research Analyst with Green Street Advisors, and it's my pleasure to moderate the presentation and discussion for Taubman Centers. Representing Taubman today is Bobby Taubman, Chairman and Chief Executive Officer and Lisa Payne, Chief Financial Officer. I think company has a few opening remarks and then I think we can jump into a question and answer session after that so I'll turn it over to Bobby.

Bobby:  Good. Welcome everybody. Thank you for being here and thank you DJ. In addition to Lisa, I have Simon Leopold, our Executive Vice President and Treasurer of capital in Capital Markets. I have Barbra Baker with me, our Vice President of Investor Relations. Ryan Hearn, our Manager of Investor Relations. They're all available for you. During this discussion, we'll be making forward looking statements. These statements reflect our current use with respect to future events and financial performance. Of course actual results may differ materially because of various risks and uncertainties which are discussed in our filings with the SCC.

We've gotten off to a good start in 2015. We recently announced our first quarter results which were very strong. We saw solid and a wide growth of 3.7%, average rent per square foot growth of 4.2%, sales per square foot of 2.3% and releasing spreads with 31.8%. During the quarter, we also increased our regular quarterly dividend by 4.6%. Since going public in 1992, we've increased our dividend 18 times at a compounding annual growth rate of 4.4%. We continue to believe our shares are undervalued and significantly below our NAV.

In March, we announced a $250 million increase to our share repurchase program. The increase brings the company's total authorization to $450 million. We think it's an excellent use of capital purchasing our own assets at today's share price which the market is implying is north of a 5% cap rate giving no value to the development pipeline. The rest of this year will be focused on delivering strong results and on the execution of our development and redevelopment projects. Last year, we announced six major redevelopments totaling $275 million.

Five of those six redevelopments will be completed later this year or early next year. The sixth, the largest and most significant at Green Hills in Nashville will be completed in 2018. We also have four ground-up developments that will open at various points in 2016. In total, we will add over 4.2 million square feet of new space with these nine projects. These projects will be the latest to emerge from our development and redevelopment pipelines, that along with our recently opened university town center in Sarasota and the Mall of San Juan, total an investment of over 1.7 billion at our share.

Roughly two thirds is here in the US, and roughly one third, $600 million is in Asia. Clearly, 2016 will be a big year for us. University town center will reach stabilization. We expect to see marked improvement in the results of San Juan. We will begin to benefit from the five redevelopment completions. As I said, we'll open the four new ground-up development projects. First up, will be our two projects in China, CityOn.Xi'an and CityOn.ZhengZhou. Next will be International Market in Waikiki, Honolulu, and then finally, Hanam Union Square just outside Seoul in South Korea which will open early fall. Developing new centers has been the primary driver of our company's growth and has created significant net asset value over time. We expect these projects we're developing today will create similar value and drive our NOI growth over the next three to five years and beyond. So DJ ...

DJ:  Sir.

Bobby:  Questions.

DJ:  I'll start it off with a question or two and then I encourage the audience to participate. Please step up to the microphone as we're recording the session. Let's start the topic on tended sales growth. Tended sales obviously, have a spectacular rebound coming out of the recession but over the last year or so, has materially slowed. How do you see tenant sales growing in your portfolio over the next couple of years, and how should we think about the growing impact of e-commerce or online sales as it relates to the physical source.

Bobby:  Well historically, our sales have grown above inflation. You sort of start with inflation and whatever your expectation is for that but let's say that I think most people feel that over time, most economist, that something up to 2% is likely to be inflation so something above inflation. If you look over the last 10 years or so, the last decade including the dip that we saw in 2008 and 2009, as well as the dip that we saw in the last four quarters or not this first quarter but the four quarters in 2014. We still are north of 4% compounding growth. If you think of inflation at 2%, we've been able to find ways in the mix of assets, the mix of tenants, the mix of centers, we've been able to find ways to keep growing our sales productivity very dramatically.

Our goal would be to always be in excess of inflation. We think that the consumer continues to be very interested in buying goods and services in our shopping centers. As to the internet, clearly the internet is taking some piece of business from I'll say, malls and brick-and-mortar retailing generically. Having said that, class A malls tend to be the focus of the whole omnichannel experience is the heart of any retailer is going to be brick-and-mortar, and even those that have been online only are now opening stores, and every year, the matriculation of online-only into brick-and-mortar as well is really accelerating.

Even Amazon is now testing stores brick-and-mortar stores. Yes, there's been some atrophy. Your analysis over the weekend suggested that it was something like a 100 basis point or 1% across the board kind of atrophy over time. I would argue very strongly that A assets, whatever atrophy there maybe. A assets are having much less atrophy than lower quality assets. I believe over time that as you have the great brands and the great new stores, and the great destinations that want to be in the A centers, including those retailers that have been online only, you actually may have incremental growth as opposed to atrophy.

DJ:  Just staying on the top are going to be e-commerce, what are some of the things or can you discuss some of the things that you're doing inside the centers to complement the omnichannel-type of initiatives and perhaps as your merchandise mix evolve as well, as sales have trends assumed online.

Bobby:  Well, I don't think our merchandise makes us change dramatically. I think again, all successful retailers are going to be omnichannel. They're just not going to be able to be successful if they don't touch that customer, however the customer wants, whenever the customer wants. If you're a retailer, you want to sell. You don't care how you get to sell. The advantages of brick-and-mortar are so strong. I mean the customer service center opportunity, the distribution opportunity, the inventory, the imaging, the branding, all that stuff is so strong. I don't really see it in quite that way. As far as what else we're doing, the company is really embracing technology in a wholesome way. It's not just the apps. It's smart-building technology. It's how you run the centers, how you operate the centers but from the standpoint of just the customer experience, customer-facing experience, and Sarasota is an example.

We have navigational way-finding app. The parking apps are coming very soon. The software, the development world is focusing on the consumer-facing in shopping centers. The marketing, by permission, the stories, our favorite stories of customers is very clear already. There are many new technologies that are in the mobile phone in the smart phone that are going to be very advantageous to the customer in the mall and vice versa.

DJ:  Any questions from the audience? Please.

Speaker 3:  Bobby, question regarding China. Can you address the risk management in China? Are you addressing mitigating the risk of expanding internationally and also if you can touch on China as it relates to the technology that you just discuss. If you've seen any trends in China that were different from what you're seeing in the US?

Bobby:  Well, I'll come back to risk mitigating but just quickly on the ... There's no question that the acceleration and adaptation of technology and the use of smart phones and the like for purchasing in China is advanced beyond where the US is today, and is being incorporated in all the brick-and-mortar retailer thought processes. How it impacts, what that differential is and on what relative basis is hard for me to say but because we're not operating yet in those centers. There's no question the adaption is very high. Remember, they basically did have land lines. When you suddenly had wireless technology, everybody could have a phone. The adaption rate of smartphones generically has been very strong.

Let me come back to risk mitigant. Obviously, China is a very different market than the US. The rule of law is different. The culture is different. The culture is different. The regulatory environment is different, how things get done is different, the construction process. I mean there's all different things that we've adjusted. First thing we did was bring in a partner who partially stayed on the enterprise, [Wangfujing 00:11:14] Department Store, whose both been our strategic partner. It's not exclusive but a strategic partner there in the two projects that we're working as well as an anchor store when in those assets.

It makes a huge difference to have someone that's fully aligned with you that is in [pari passu 00:11:33] in the context of capital making decisions with you that has that best at stake and understands the culture, and operates in that culture in the way that they do. I can tell I can't conceive, not for many, many, many years the idea of us not having a partner like that in jobs that we would do. In addition to Wangfujing, I'll call them the strategic retail partner, we also have the local real estate partner. In both jobs, there's a local real estate partner. In both instances, we own about a third of each project, 30%, 32.5% of another. That in of itself is its own mitigants.

Now, we have the partners but the size of the job is actually smaller. The total job even, let's say is north of $300 million, our position in it is about 115 and 120. When you think about our involvement here, we're building jobs that are $ 3, 4, 5 hundred million and our positions tend to be very large in terms of absolutely dollars. From a standpoint of just beginning the process of being there and trying to create the template for future development, the first most important mitigants really are in those three.

We also have created a very strong local team that is largely a Chinese nationals. There are some Hong Kong nationals as well but there are almost no westerners at all in our people in China. We have about, I think 60 people in total between Beijing, Shanghai in all the disciplines. We have construction people on the ground. In addition to Wangfujing's construction people also monitoring what's happening. There a whole endless number of mitigants to the risk that we perceive and see. We've been happy that we've had them in place. Would you add anything [inaudible 00:13:36].

Lisa:  Just one thing. When we selected the two projects that we have selected, we actually did a very disciplined process because we were being ... You think about China as a big country and you say, we're going to do two projects and ultimately, which city do you go to. Where in that city? We used a major consulting firm with a big presence there to really focus on what your best bet cities were. Then as Wangfujing came to us and we were working with them, they had a bunch of projects offered to us. We kind of did a matrix of which ones really fit into these best bet cities that somebody else had really vetted as committed by the government, really growing from the middle population, and really selected these two projects. I think that started kind of the mitigation of risk right there because we had a third party also thinking the same as we that these would be good projects or good cities to be involved with.

DJ:  [inaudible 00:14:36].

Speaker 5:  You seen 2013 FFO as a base, how far along will it take you to double that FFO base?

Bobby:  Double.

Lisa:  Probably each answer that differently but I'll let you go.

Bobby:  I think that we did an exercise a couple of years ago about just the natural growth in the core plus our expectation of external growth where it was coming from. We expected that within a decade, we would roughly double the size of the company. Using the same multiples and the same ratios, I would sort of think about it in that context.

Speaker 5:  Would you feel that from last year's presentation to this year's presentation, that that time frame can compress based on the timely delivery of projects that we were discussing the two China projects, the two Korea projects, and the four US projects. All of which are now well under way.

Bobby:  I think it's sort of inline with what our thinking was because we knew about those projects a couple of years ago and we were planning them. The timing of when the new capital for external growth is being used, and also importantly the core. I mean the core is the vast majority of where growth is going to come from. Where inflation is, where sales trends are, where rent growth is, those are very important substance when you look out over 10 years.

Speaker 5:  The Miami market just touched on one of your new markets. You have the Swire properties retail project and the design ...

Bobby:  Design district.

Speaker 5:  Thank you. Of course, yours. Looks like all three of them are going to deliver, I wouldn't say simultaneously but very closely and of course, Simon bought in to the Swire project. Do you think that at the last 10 or 20% of space is going to be a problem given those three ongoing projects.

Bobby:  Well, we've said publicly some, a lot that we really believed the demand in the market is very great for the supply that's being suggested even by all three projects. There really is no other metropolitan area like Miami. You're talking about the productivity of the assets that are there. There's more A plus malls per capita in that market than anywhere else in the United States. I think actually you guys have done some work, Green Street's done some work that also reinforces what underscores I've just said. Our view strongly is that there is the demand in this market today in moving forward. We absolutely believe as you look out over the next 10-20 years, that Miami is a market that's going to continue to grow very strongly. The tourism will continue to be very important in the market and that all three projects will be successful.

They are quite different. The design district is really focused on luxury tenants. There's probably going to be 60 or 70 luxury tenants with a huge aggregation of those kinds of tenants. It's been supported by LVMH, L Capital's been one of the main capital providers. They've also supported with their store brands. That's a singular project. It's two miles north. We haven't been trying to [inaudible 00:18:51] ever. Our project is really on the back of Macy's and Bloomingdale's. Macy's is by far in a way the number one store in the whole southern Florida market.

Number two store is Bloomingdale's. Number three store is Nordstrom's. Number four store is Neiman's and number five in that market is Saks. We have the number one and number two stores. We also have the most regional access and all the transportation systems come into downtown right there. You have the train. You have the All Aboard Florida. We have all the infrastructures spending in the port that's being done right now. All the cultural events are there. All the roads and everything leads into that city. Brickell is also a very dense, very strong market.

The project that the retail assignment has bought into a 25% share into the Swire-led project. A project that Swire actually own the land for over 20 years and they were going to begin construction earlier in 2007, I believe and decided not to given how the market was changing. It's really a largely residential project that's 3 million square feet of condominiums. They have a million square feet of office, two hotels, and then the half a million square feet of retail. We think that that retail will be very successful off of just the density that is being created both in that project as well as it exist today within Brickell.

The way the transportation systems work, it really is a much more local project based really on what's in Brickell. I mean we would all agree that if they weren't going forward, our project would have the benefit of that. If we weren't going forward, they would have the benefit of that. But we believe there's tremendous need for new supply.

Speaker 5:  [inaudible 00:20:49] even if they'd wanted to do a bigger project, [inaudible 00:20:57].

Bobby:  That's correct. It's not four blocks. It's not three levels but they're going to be very successful. I think all three of us are going to be very successful. There is the demand there and we're dressing slightly different markets in each one.

DJ:  Just switching gears for a second, allocation of capital. You've talked a lot about the redevelopment and development program. You've also recently increased your share of repurchased program which has quite a bit availability at the end of the first quarter. Can you discuss that where that falls on your capital allocation priority list given your current cost of capital?

Bobby:  Well, we've always said there really are three things you can do with capital. You can build. You can acquire. You can buy back their shares. Number one always with us is building. We can build new projects or do redevelopments. Generally, that's the best capital spending that you can have. Now, whether or not acquisitions or buying back your shares clearly today, you can't buy $800 assets which is our average in our portfolio. You can't buy in for north of high percent. The reality is that the market is implying north of high percent with no value for the new developments that we're putting place that are not easy to find and not easy to build and have been overtime the best source of capital spending. Clearly, if we could build that would be number one. Number two, buy back your shares today. Number three, acquisitions.

DJ:  Any other questions? Can we talk a little bit about anchors and it seems like a hot topic now, just the risk of bankrupts, the lessons as it relates to some of the struggling department stores. How important are the department stores to the mall today? Is your definition of anchor changing? Is Apple considered an anchor today or restaurants, or is it still very important to have a decent exposure to the department stores?

Bobby:  We believe it continued to be very important to have the right department stores in the right locations that reflect the market that you want to create a destination for. Clearly, there's been some impact in the more moderate stores, Sears, Penny's, no question. Macy's continues to be very strong anchor. Nordstrom is just a very strong anchor and obviously, Nieman, Saks and those guys are wonderful to have in your project. We believe in anchors. We think they're important. We do believe they have always been sort of more other destinations or other anchors and an asset depending on the moment in time. Clearly, restaurants are very key today. Theaters have been important and depending on what the project is.

Dolphin Mall is an example. It has a very important theater in it but I wouldn't put a theater in Bell Harbor if I own Bell Harbor. Theaters can be very important. There's no question that individual tenants and Apple is a good example. It does draw a tremendous traffic. Apple doesn't always, depending on the market, depending on the location, doesn't always provide traffic into the center that is good synergistic traffic. Apple does create a destination that really is unique and there really has never been a retailer at that level ever that we know of.

Speaker 6:     Can you talk a little bit about some of the different specialty retail concepts? What should be trending? What should be run?

Bobby:  Well certainly in categories. The fast fashion has been sort of captivating, women's apparel. Now for the last I would say five years, they've become more and more dominant. I mean it wasn't that long ago that Forever 21 was sort of a nascent idea on the west coast and started growing. H&M obviously was in Europe, and Uniqlo in Asia. These tenants have become very dominant, very important in women's fashion. There are whole bunch of new concepts. One of the things that came out of the ICSC, I think, we actually put together a list, a story board basically on each new tenant to show our board recently because there were probably 35-40 new concepts that were being marketed in essence and presented to the landlord community at the ICSC.

You're seeing them in food. You're seeing them in all categories of whether women's apparel, men's apparel, the gifts and specialties. You're seeing them across the board. That's very encouraging. I don't know if that fully answers your question.

Speaker 6:  [inaudible 00:26:08] which part of retail should be leaving your centers?

Bobby:  Well, there is this constant evolution of which form of retailing. I'm just trying to remember, other than Apple, I'll say or Microsoft, something like that. Electronics used to be as an example in our centers. They're gone. RadioShack is a concept that's gone. There is an ...

Lisa:  Brands.

Bobby:  Brands.

Lisa:  There's more individual retailers that come in and out depending on how well they're merchandising your centers. That's more than a category.

Bobby:  Yeah. I don't know. I mean there's been a lot of brands that try and they don't get there. I don't I'm drawing a blank. To us, it's sort of the constant evolution of retail.

Lisa:  I think we just recently did a study though and the amount of apparel, we wondered whether apparel was still as important. I would say our percent of space allocated to apparel is about where it was 10 years ago.

Bobby:  10 and 20 years ago.

Lisa:  The people have change. The concepts have changed a lot but the actual breakdown of what is in. Part of that's driven by our merchandising. We want to keep that balance and not to have too many jewelry or too much apparel but it's really about the same.

Bobby:  Yeah and there were big stores 20 years ago, and there were big stores 10 years ago, they just have changed.

Speaker 6:  Why didn't you use the proceeds from the south transaction to buy back stock and/or extending that on [inaudible 00:27:50] operations in the private market [inaudible 00:27:53 - 00:28:10].

Bobby:  Well, I'll go first and then maybe Lisa will jump in. I don't feel that we have leverage constraints at all. I think we've done exactly what you said which is we value our money is fungible. Cash is fungible and we did have to take a special dividend because it was requirement for ... There was a tax, we had to have distribution for tax purposes for the individual share holders. We only sent out but we had to sent out from a tax perspective. We kept everything else in the company and we've been buying back shares. We would love to have bought an asset. We would have loved to do a 1031. We scoured the earth and then we made offers on assets and the kinds of assets that we want that would fit into our portfolio that does $800 a foot.

There aren't that many. When you actually go to the people that own them, they don't want to sell them. Even if you offered them big numbers, the scarcity of assets and they're very rare at this level. I don't feel capital constrain. I think it peered in the first quarter in, we were about seven times, 7.0 or 7.1. That's well within our range that we've talked about in plea of six to eight times. At times of heavy development, it'll get up to eight. When we're not doing big development, we'll go down to six.

We have levered up in essence using both cash proceeds from Starwood but also from our credit lines to actually buy shares. We have more, the refinancing of Short Hills that we've announced that that is a committed is a committed deal. We're refinancing a $540 million mortgage into a billion dollar financing so there's over $450 million that's going to come out. It's on a 12-year basis at about 3.5%. We don't feel capital constraint. We feel like we're in very good shape to do all things we're doing and do what has been authorized which is to buy back $450 million worth of stock. Would you agree with all that?

Lisa:  Yes. The problem with selling more assets is we've probably just to have special dividend it which is many of you might like but we'd rather keep the asset. That's one of the structural issues with our [inaudible 00:30:36] frankly.

DJ:  All right. We're out of time. Please join me in thanking Bobby, Lisa, and the Taubman team.

Lisa:  Thank you.

Bobby:  Thank you very much.