Taubman Centers, Inc. at REITWeek 2016

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

Mike:  Hi. Good afternoon, everybody. I'm Mike Mueller, from JP Morgan, and I'm thrilled to be hosting the Taubman panel, today. With me, we have Bobby Taubman, CEO, to my right. To his right, Simon Leopold, CFO. I'm going to turn it over to Bobby for intro comments, then we'll open up for your questions. Thanks. Bobby…

Bobby:  Thanks, Mike. Thanks to all of you, for joining us, today. In addition to Simon, we have our investment relations team, Ryan Hurren and Eric Wright, sitting with us in the audience. During this discussion, we'll be making forward looking statements. These statements will reflect our current views with respect to future events, and financial performance. Of course, actual results may differ materially, because of various risks, and uncertainties that are discussed in our filings, with the SEC.

We’ve gotten off to a good start in 2016. Our first quarter results were strong. NOI, excluding these cancellation income, grew five point eight percent, in line with our increased guidance of five percent for the year. Average rent per square foot was up two point seven percent.

Comp Center occupancy improved eighty basis points to ninety-three point two percent, an excellent first quarter number. Releasing spreads, were a very healthy twenty-five point two percent. For the last five years we've averaged nearly twenty-two percent, and the last two years we've averaged about twenty-six percent. In addition, we once again increased our regular quarterly dividend by five point three percent. Since going public in 1992, we've increased our dividend nineteen times. Delivering our shareholders a compound annual growth rate of four point four percent.

In March, we also finalized the acquisition of a fifty percent interest in the iconic Country Club Plaza, the premiere, retail, and office destination in Kansas City. Finally, in March, we unveiled plans for a total re-imagination of Beverly Center, which is now well underway. In Asia, we recently held the grand opening of CityOn.Xi’an, our first ground of development in Mainland China, the project is a winner. It was delivered on time, and on budget. The mall looks great, and it's been very well received by customers, and retailers. At opening, we were about ninety-five percent leased, and nearly eighty percent occupied.

Later this year, we'll be opening three more new centers. International marketplace in Honolulu, Hawaii will open on August, 25th. Starfield Hanam, in metropolitan soul south Korea, will open in mid September. CityOn.Zhengzhou in Zhengzhou, China, will open in the fall. As we look ahead, beyond 2016, we expect to materially increase our overall revenue and company NOI. From just the four developments opening this year, we expect a total of approximately eighty million dollars of NOI by 2019. In summary, we have the highest quality portfolio, and it's performing well, with fantastic growth prospects over the near, and medium term. With that we are happy to open it up to questions, Mike.

Mike:  Great. Thanks. Maybe, before turning it over, I'll ask one. Let's talk about Beverly, for a second. It seems like you've taken a lot of heat for, maybe the economics, and maybe being a little bit late on it. Can you talk a little bit about what's involved in the process of doing something this big in scale? How much planning is involved? When did you begin to think about it?

Bobby:  We've been thinking about it for a number of years. We spent over four years analyzing what the best decision was on Beverly Center. We looked at every option that you can imagine. It's been thirty-five years since a major improvement in the asset has occurred. Obviously, we knew our competition, were thinking about doing things, but it was, yes, in that context, but it was really irrespective of what they were doing. What do we want to do? Beverly opened as a really truly iconic asset in a market that was devoid of a lot of competition at that moment in time. It's a completely unique asset to be clear to everybody, this is the only asset that we have like this in the portfolio. We're making the kind of investment that we've chosen to make here. It's a very unique market.

You are in West LA, you are in an incredibly dense market. Our trade area is over four million people. The immediate trade area is almost a million people. Every day we have a hundred and fifty to two hundred thousand vehicles that pass the site. Literally, touch the site. It's not like it's a freeway. It's all surface roads. The affluence, the density, the fashion consciousness of the people in that market is unique. The retailers that are in the center, and that want to remain in the center, and expand in the center as well as the new retailers we've been trying to attract, have all been waiting for us to consider to do something.

The center has about nine hundred thousand square feet of retail space, but it's nearly three million square feet, in its total structure, because there's three thousand cars, it's on eight levels. It's only on eight acres. When you look at touching a structure of three million feet that's in a seismic zone, like you have in Los Angeles, anything you do, especially thirty-five years old, anything you do you have to bring it up to current ordinances, current regulations, and it's a very complicated, difficult process to do. As we went through all of the analysis over a four year period, where we came out this end, we've completely re-imagined the center, and we think that by effectively taking the roof off, as it were, we are not physically doing that, but we're opening up the roof dramatically to pour light, natural light into the space.

We're completely redoing the exterior, and it's more than just a recladding. We're completely addressing all the parking questions that have come up from our, you know, we analyzed, we talked to all the constituencies, our neighbors, the shoppers, the retailers, the government officials and all that before we made any decisions. We did focus groups, we went through all kinds of analysis. We've come to this conclusion about doing this. We had signaled, for about a year, into the investment community that this was something that we were considering. It was well known that Century City had made a decision that spend up to a billion dollars on their project, that Grove had spent a lot of money on their project. We had signaled for about a year that we were getting ready to do something. I think, people were surprised by the size, nonetheless, and the returns, but we are absolutely convinced that we've made the right decision, not just for the asset, but also strategically as important as that asset is for our company, and we again have been embraced, and enthusiastically by the retail community.

Mike:  Got it. Maybe, a question for Simon. I'm sure when guidance comes out for 2017, at some point, you'll give us a sense as to the short term impact, NOI disruption, but can you help us frame it? At all? In advance to that. What have conversations been like with retailers, and what are you thinking about for the numbers standpoint?

 

Simon:  This project is going to take us about thirty months to complete, start to finish. That spans a three year period for us in terms of earning. That's sixteen, seventeen, and eighteen. In sixteen, we don't expect any material impact in terms of any NOI decline, or any disruption from frictional vacancy, and the like, in the center. In 2018, what I can tell you is that, we expect to of done a fair amount of the leasing of the restaurants that are going to be on the first floor, and some of the additional leasing on levels six and seven. We believe that if there is any short term NOI disruption, that will be offset by some of the leasing that we are going to do in the interim.

It really leaves 2017 as a little bit more of a wild card. We have made the decision to keep the center open in its entirety while we're doing this construction. We think that we have a plan to be able to do that, and to do it in a way that's going to be minimally disruptive to the existing tenants. We think we've got a plan to minimize any short term disruption from frictional vacancy, and the like, but past that, it's a little hard for me to give you '17, at this point, we not quite at that point yet.

Mike:  That's fair. Thanks. Anything, in the audience, at this point? Yes?

Speaker 4:  I would like to ask you to go back in time with me to the 2014 session.  As I recall there were four developing projects [inaudible 00:09:02] later this year?

Mike:  Okay. The question ...

Speaker 4:  The question really is the stuff that was announced in 2014, both domestically, which would be University , Puerto Rico, Miami, and Hawaii. Those four centers, how are they varied as we sit here. I'm particularly, because I live near Sarasota. [inaudible 00:09:54].

Bobby:  Okay. Question is about our four domestic projects that we talked about a couple of years ago, probably at this conference, and elsewhere. Sarasota, is doing extremely well. It's met all of our targets. All of our expectations. All the return expectations that we had laid out there to the investment community, before, during, and then at the conclusion, and opening of the project.

San Juan, we expect to be nearly ninety percent occupied by year end. We're very excited that H & M is opening there actually, tomorrow. They've got a huge marketing campaign, all over the island. We think it's a key tenant, because it will bring the more moderate customer into the shopping center, that is there, but not in the robust terms that we would like. We've always planned to have a diversified merchandise mix.

With Nordstrom, and Saks, as our anchors. We are thought more of the upscale asset, and we have, I think, seventeen luxury tenants in there, so the combination of H & M, and the other stores opening, we have Urban Outfitters, we have Free People, we do have other luxury tenants, Gucci, Tiffany, Tumi is also opening up,all in the next two, three months. We're going to be close to ninety percent occupancy by year end, and we think the center is very well positioned to have a good holiday season through the resort season.

Moving to Miami, we had a major project planned with Macy's and Bloomingdale's announced.We decided to abandon that project, and in fact move to a streetscape, more project, which is more of a high streak kind of project. We have talked about working with the land owners that were going to be our partners on the other project, but not as an investment upfront, but an investment perhaps later on. It's a more fee for services, than it is an investment opportunity today, but it will give us an opportunity to invest in the future.

Finally, Hawaii, we're opening on August 25th. We're very excited about it. It's on the fifty yard line of Kalakaua Boulevard. There are on average fifty thousand people, a day. In high season, it gets to eighty thousand people a day. There's thirty thousand hotel rooms, within a mile of our site, and every night those thirty thousand hotel rooms empty out, looking for places to dine, and the food operations in that area are dramatically successful. We have said, publicly, that we expect to be eighty percent leased at the opening of the center. We're anchored by Saks, and we have a Grand Lanai that we've created with about eighty thousand square feet of food.

The combination of those two will be anchors, we think the food operation will be incredibly important, but pulling the traffic off the street, and really extending the high streak into our project, we think that we've planned for that to occur, and it should be a very exciting project, and it could end up being the most productive asset in our portfolio. Those are the four that you've questioned?

Speaker 4:  Yes.

Bobby:  Good. Other questions?

Speaker 5:  I'm from Los Angeles. Thank you, for all the kind things you say about Angeleno's. I think, it's wonderful that you're putting a half a billion dollars into the Beverly Center, and I think it's wonderful Westfield is putting a billion dollars into their mall. They got a big score with the Eataly concept, what kind of steps are you taking at the Beverly Center to compete effectively and attract traffic.

Bobby:  We have announced that, have we announced the restaurant line up? We haven't announced it yet. No. We have destination restaurants, some chef driven restaurants, and a food hall, that we have planned, as well. On the ground floor, one of the key things we are doing is opening ourselves up much more to the neighborhood, and we are going to have terrific restaurants around the ground floor, in addition to creating this food hall. We think the food hall will be every bit as competitive as Eataly. We think Eataly is a great operation, but we're very excited about the food hall that we are creating. We have a luxury component that is not really present at Century City in the same way, and our conversations with retailers, we expect to extend that. We also are going to be very diversified, we'll have fast fashion and all that, but we think our position in the marketplace will be dramatically enhanced by the time we’re completed. We'll be very competitive with Century City. Just shop there.

Mike:  There you go. In the back.

Speaker 6:  Can you tell us more about your involvement [inaudible 00:15:18]?

Mike:  The question was about the development pipeline and funding.

Simon:  Bobby talked about the domestic projects that we are effectively going to have completed in a few months when Hawaii opens, so that.. in effect the entire domestic pipeline, at this point, the projects that are underway have been funded. We are also opening three projects, actually two more projects in Asia, we just opened one in China, as Bobby said before, we have two more that are going to open later this year. One in September, and one later into the fall.

For the most part, we have spent all but, relatively immaterial amount of money that we need to spend to get those open. There's not a lot more spending that we need to do to get these done. The bulk of the spending that's still on the come is really related to Beverly Center, the five hundred million that we talked about, very early on in paying for that project. We have another project, about two hundred million dollar project in Nashville, at our mall at Green Hills, which we're expanding pretty significantly, and a lot of that money is still to be spent.

Let's say round numbers, it's between six hundred and six hundred and fifty million, that still needs to be spent. The bulk of that money we're going to get by using our revolving line of credit. Which is up to almost a billion two in total availability and we have very little drawn on it, right now. We'll likely, also do some other things, terming out some of that debt, once we draw it. We have more liquidity by at least a half a billion dollars, than we need to complete everything that is in our plan, right now. Leverage during this process will tick up a little bit higher than our target range, six to eight times debt to EBITDA ratio. It will get into the low eights, most likely, at some point in 2017.

With all the NOI that's coming online from the developments we're opening this year, plus growth in the core, over the course of really 2017 into 2018, we get quite naturally down into a leverage point, right in the heart of that six to eight times range, which we're very comfortable in terms of living there, on a more permanent basis.

Mike:  Anything else? Okay. Simon, you mentioned Green Hills, it's probably a good segway into Country Club. When you bought Green Hills, when you fast forward a few years, and you're putting a lot of capital into it, a nice expansion, what's the angle with Country Club? Why is that an attractive acquisition?

Simon:  Bobby?

Bobby:  We can both do it.

Simon:  We obviously bought half of the center, the other half was bought by the Macerich Company. We're delighted with the acquisition, we think there's an enormous amount that we can do, just in the renewal of leases, but in addition, we do hope that over time we will find ways to redevelop aspects of the center that we think can improve our overall return, whether we get to the level of redevelopment opportunity that we have at Green Hills, I cannot say at this point. We're delighted with the acquisition, all the sort of early ownership of it, as we confirm that, the transition from Highwoods, was excellent. The partnership with Macerich, has been seamless, and I think combined our two organizations will bring our relationships and ideas together, and I think we'll find lots to do.

Mike:  Okay.

Bobby:  Is that open?

Mike:  Sure.

Bobby:  When we underwrote the asset, we didn't necessarily underwrite any major changes to it, in terms of the physical plan. We think there's enough upside in the asset, just from improving the merchandising and getting a different tenant mix, and getting rents up to market to make the investment absolutely justified, in terms of the return, that we can generate. Thankfully, we also, have an additional opportunity which we think is probably more of a medium term opportunity, where if we do invest more capital, and do some redevelopment, do some additions, we think, we can just add to the return that we've already underwritten, but one of the really attractive things about the investment to begin with is you didn't have to do a ton of heavy lifting to get to a really nice return, and get, an already iconic asset, even closer to kind of what we would think of as a standard Taubman asset.

Mike:  Got it.

Simon:  Just to add, again, the tenant occupancy cost in the Center was way below what we would normally enjoy, or what Macerich would enjoy, so we both saw big pick up in the renewal.

Mike:  Got it. Okay. Great. Anything? Maybe, switch gears then, and go to Asia. Xi'an has been open for about a month or so, give or take?

Bobby:  Yeah.

Mike:  A little over a month.

Bobby:  April 28th.

Mike:  What is the early rate in terms of tenant sales. You talked a little bit about opening occupancy, at least percentages, but what are tenants doing? what's the ...

Bobby:  The traffic in the center has been excellent, and all the early returns from the retailers, especially international retailers, are they’re really delighted. I think, if you talk to these international retailers they will tell you that it's the single best opening, the quality of the construction. The number of tenants opened. The way the whole opening went. Their initial volumes, it's as good as they've ever had, in any center in China. They are really delighted with what they've seen and all the data points coming out of Asia. On Korea, we actually lowered the costs from a billion one, to a billion dollars, we're three months out from opening.

We wouldn't have done that unless we had a lot of confidence on what the costs were going to be. We reiterated, now the second call in a row, that on Korea, and for that matter on Zhengzhou, that the leasing and occupancy that we achieved at Xi’an, ninety-five percent leased, and nearly eighty percent occupied, we expect it to be similar in these two projects, and hopefully we will exceed that. We had a very strong nonrecourse financing in Korea, and everything that's happened on Korea, has been excellent.

We increased the returns when we brought the cost down. We went from seven to seven and a half percent, to seven and a half to eight percent of stabilization. Combined when you look at all of our investment in Asia, we expect that we are probably going to be averaging around seven percent in stabilization, perhaps higher than that, on the full invested capital, between China and Korea.

Mike:  Got it. Just one other quick follow-up. Any tailwinds that you are seeing in terms of leasing as you go to the second China project opening? Considering ones been opened.

Simon:  Basically, the merchandise mix, is very similar. We're about a third international brands. People like Zara, H & M, Gap, Forever 21, people like that, that you would recognize. We're about fifty percent Chinese national brands. These are people that have hundreds of stores, sometimes over a thousand stores of various brands that they're operating. Very well capitalized. Very professional retailers. You look at their store, and it could be in the United States. Then, about ten percent and plus of the brands of the stores are actually regionally based, but almost all of them have at least four or five stores, so you are talking about very professionally managed retailers.

The one thing that we targeted was a greater food allocation. In the United States, we typically have about fifty or sixty thousand square feet of food, and that's sort of on the high side. Hawaii, is an exception. In a normal suburban mall in this center, and in Zhengzhou, as well, we will have about two hundred thousand feet of food. Every kind of food that you could imagine, but the culture in China, the culture in Asia, is to eat out a lot, and to eat a variety of foods. We're thrilled with how the food, how the initial traffic and sales at the food operations has been outstanding.

When you look at Xi'an, which is literally sitting in the midst of incredible density. It's like being at 57th and 5th in terms of density. There's two subways that cross right at our site, that feed into our site, the two most important roads. There's nine million people living in Xi'an, it's the size of Chicago. When you think about the best project, and the best location in Chicago. That is what you want to think about in this context. We're very happy with the initial.

Mike:  Great. I think you had a question?

Speaker 7:  [inaudible 00:24:21] Asia, to say the least has [inaudible 00:24:28] Do you have a shadow pipeline type of arrangement over there?

Simon:  I was asked a similar question, at the last conference, and I want to be really clear. We have nothing today to announce. We do expect that if we are going to begin construction on another project the likelihood is it would be in Asia, not in the US, and not before the second half of 2017. I have also been asked which country would you expect it in? The likelihood is it would be in Korea, the second half of 2017. We have nothing to announce today. We're obviously looking at things. Given the successful opening of CityOn.Xi'an. Given the expected openings of the other two projects we have a lot of interest from our strategic partners over there to do more, as well as other people that are contacting us.

Speaker 8:  You're not really expecting a new joint venture partner in the immediate future in Asia?

Simon:  I don't want to say specifically, but we are very pleased with our Shinsegae partnership, and we're very pleased with our Wangfujing partnership, and it wouldn't be surprising if we extended it to other projects.

Mike:  Dennis, did you have something? Yeah.

Dennis:  [inaudible 00:26:09].

Bobby:  Luxury has obviously pulled back generically. You have to look at each individual name, and specifically in Asia, and specifically in China, there has been pull back. Our two projects have never really envisioned luxury at Xi'an, and Zhengzhou, so it doesn't impact us at all. The closest we get to, I'll call it affordable luxury, which it is viewed that way in China is we have a Coach store in Xi'an, but we never expected one in Zhengzhou. It doesn't really impact us.

Now, we are in Hawaii going to have some luxury representation. We have very significant luxury representation in San Juan, and also in the Hanam project in Seoul. We're going to have very significant luxury. I would say that our expectations are they'll continue to sustain their volumes and do well, and we're very, we have high expectations of how the luxury will do in Korea. But generically, there has been some pull back.

Mike:  We've got about two or three minutes left. That's probably a good segway. If we're thinking about the broader retail environment, what we see on the tape with the department stores, the mixed results with retailers. Can you talk about what your leasing folks are seeing, what the conversations with retailers are. What's real? What do you think is overblown?

Bobby:  I think our core is, you can see in all the statistics I gave earlier, is really performing well. At the ICSC, which was the industry conference that we have every year out in Las Vegas, which was a few weeks ago, we literally had only one tenant show up in our booth, and one center looking for rent relief. That's very unusual at any time. I think that the decisions that we've made, about our asset base, and our portfolio, and how we want to run going forward, are proving to be good decisions.

The strength and demand of retailers in high quality assets is continuing and I think strengthening. The top three hundred assets, all of our assets basically fit into the top three hundred, most of them fit into the top hundred assets, those are other peoples’ views, but our views as well. That's really the strength of our company, are those high quality assets, and we think retailing generically, whether department stores, whether luxury, whether fast fashion, whether restaurant and entertainment, everything is moving towards those assets, those top three hundred, are where all of the retailers and shoppers are going to want to be.

These emerging concepts that we talked about earlier online, people like Warby Parker,  people like Bonobos, people like, a whole list of them, as they begin online, and they want to expand their business, they got to go to brick and mortar, and it becomes the heart of their omni channel presence. That the branding, the logistics, the service center, the customer acquisition, there's many, many reasons that the brand needs brick and mortar.

In that context, we feel very strongly that we are well positioned, and really our assets and the top three hundred assets are going to continue to strengthen. We really think that we have an asymmetric position, right now, as we are obviously selling it at very significant discount. Our core is protected, and now the pipeline is starting to show. As that pipeline shows, and as we actually have NOI growth, that NOI growth as it shows in our numbers, we think that the investment community will recognize that.

Mike:  Got it. We just hit red. Does anybody have a last question? Before we wrap it up. Okay. Great.

Bobby:  Thank you very much for joining us.