Taubman Centers Q2 2010 Earnings Call Transcript

Good morning, my name is Tabitha and I will be your conference operator today. At this time, I would like to everyone to the Taubman Centers second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer session. (Operator Instructions).

Thank you Ms. Baker you may begin your conference.

Thank you Tabitha and welcome everyone to Taubman Centers' second quarter conference call. I'm Barbara Baker, Taubman's Vice President of Investor Relations. Joining me on the call today are Robert Taubman, our Chairman, President and CEO, and Lisa Payne, our Vice Chairman and Chief Financial Officer. Yesterday we issued our results for the second quarter in our supplemental on information package.

As you know, during this conference call we will be making forward looking statements within the meaning of the Federal Securities Laws. These statements reflect our current views with respect to future events and financial performance although actual results may differ materially. Please see our SEC filings including our latest 10 K and subsequent reports for a discussion of various risks and uncertainties underlying our forward looking statements.

During this call, we will also suggest and discuss non GAAP financial measures as defined by SEC Regulation G. Reconciliation of these non GAAP financial measures to the comparable GAAP financial measures are included in our earnings release and in our supplemental information. In addition, a replay of the call is provided through a link on the Investor Relations section of our website. For our agenda today first Bobby will be providing an overview of the quarter followed by a discussion of the company's operating statistics and external growth.

Then Lisa will discuss our financial performance and our balance sheet. Bobby will return to discuss guidance and provide closing comments. Then we will be available for your questions. And with that let me turn the call over to Bobby.

Good morning everyone. Thank you Barbara and thank you all for joining us. This was an encouraging quarter. We are delighted to report the continued strength in our tenant sales. We politely lead the industry. Sales per square foot which increased 10.8% in the first quarter continue to surge, up 12.1% in the second quarter. All three months were strong with each month up double digit.

As we said in the press release we are especially pleased that Michigan and Florida continue to lead the sales per square foot increases. In fact Realty Trust and Partridge were our two fastest growing centers each with increases of about 25%. On a trailing 12 month basis this brings us to $523 per square foot moving us closer to our peak of $555 for the calendar year 2007,replica cartier bangle rose gold.

Women's Apparel, which until this year has not shown real strength for several years, did well in the first half. This was led by concepts such as Ann Taylor, J. Jill, and Chico's. Victoria's Secret and Aerie were standouts in the Women's Specialty category. Top performing luxury tenants were Louis Vuitton, Coach and Cartier. Family Shoes were also strong with Foot Locker and Skechers up in the double digits.

Electronics was led by Sony and of course Apple with its very successful iPad launch in early April. Home Furnishings was also strong. Pottery Barn, William Sonoma and Restoration Hardware were all up significantly. We signed some terrific leases. At Beverly, Superdry, an apparel concept from England (inaudible) a trendy, casual dining concept to be located in Center Court and D flagship modeled after the prototype in Milan, this 65,000 square foot store would be the first flagship in a mall in US. At Cherry Creek, (inaudible) one of the two new openings in the country now set for August. At Dolphin, Bloomingdale's outlets, we have only four in the country. At Great Lakes Crossing, four outstanding outlets to open later this year, Banana Republic outlet, Chico's outlet, Polo Ralph Lauren outlet and Taubman Aerie outlet at Sun Valley, Safeway for their new upscale prototype in the former moving space next to the center.

At Willow Bend, Ocean Blue, and a sea food restaurant opening this year. At Shoreview, Rugby which is the newer concept by Ralph Lauren and four new luxury tenants, Miu Miu, Prada, Van Cleef and Dolce Gabbana. And throughout our portfolio, 16 American Eagle leases, including four of the newest concept stores 77 kids ours will be among the first group of stores to open. We are still trending up now for nine months. Rents are beginning to strengthen. The retails are still sensitive to occupancy costs and are continually negotiating tough challenging ways. Opening rents were $46.55 for the second quarter, that's up from $44.80 in the first quarter.

We continue to believe that our opening rents will improve during 2010. We are confident that we will end the year measurably above 2009 levels of $46.63. Average rents for the quarter were $43.20, that's down half a percent from last year. For the full year, we expect average rent will be down about 1.5%, that's an improvement from our original guidance of down 2% to 2.5%. Our ending occupancy was 87.9%, 90 basis points below last year. This is consistent with our guidance and we continue to expect to end of the year even with 2009 which was 89.6%.

Our temporary leasing program continues to be strong ending the quarter at 3.5% of tenant area. If we added this number to our permanent occupancy statistics, we would be ending the quarter over 91% occupied. Temporary leasing is becoming more our year round business.

We pursue innovative uses for our space that will provide more income to us and greater convenience for our shoppers by filling merchandize void. F or example, the new Staples Back to School Express that just opened at Stanford, it is one of three they are testing this year. Staples is an ideal use as our shoppers cannot buy back the school supplies at the same time they buy the back to school apparel.

During the second quarter only two tenants filed bankruptcy, both small local stores. At this point they are (inaudible) 0.1%. This is one of our lowest recorded numbers for the first half. Our comp centers NOIs excluding lease cancellations income was nearly flat declining only 30 basis points for the quarter.

For the full year, we currently expect our NOI to be down about 2%. Remember about 100 basis points of the decline is due to CAM capital accounting. NOI down 2% is an improvement from our prior guidance of down 2% to 4%. This good news comes from better than anticipated rents, increase percentage rents,replica yellow gold cartier love bracelet, better net recoveries and higher sponsorship income. As we slowly move away from the great recession, we are focused on augmenting the company's organic growth. In addition to our growth from US development, which we believe will provide at least a handful of traditional projects over the next 10 years, we are pursuing acquisitions albeit and of course development in Asia.

On acquisitions we believe good opportunities will be scarce and expensive. However, we continue to look for assets where we can add significant value that will be strategic to the rest of our portfolio. As to the outlet business, we believe this is a natural extension of our capabilities. Much of current bases at both Great Lakes Crossing and Dolphin Mall are outlets and in many cases, the leasing executives and retailers are the same for both the outlets and traditional retail divisions. In fact many of our tenants have encouraged us to enter this segment.

Further, as we've analyzed the business we believe it's quite likely the pool of good development opportunities in this sector will exceed those of traditional malls. We will be disappointed if by the end of 2011 we haven't announced our involvement in at least one or two strong outlet opportunities.

Finally, Asia it is likely that it will be the end of the year before we announce our new President. As I said and many of you have may agree, getting the right person is critical. We have a strong existing team in Asia and are continuing to pursue opportunities in Korea and China. With four prongs of growth, US traditional center development, acquisitions, outlet and Asia, we are confident this diversity of markets and product size will create significant long term value for our shareholders.

Now, I would like to turn the call over to Lisa. Then I will return at the end of the call for some closing comments.

Thank you, Bobby. This quarter our FFO per share was $0.61. Here are the variances from 2009 which are listed on page nine of the supplemental. First, rents, up a penny from last year. This was due to higher percentage rents and greater income from temporary tenants. Net recoveries are unfavorable by $0.015. That's primarily because the timing of promotional expenses at the center and lower CAM capital spending.

We continue to expect net recoveries for the full year to be down on a year over year basis primarily due to reduced CAM capital spending. But net recoveries for 2010 should not be down as much as we originally anticipated. We have been working hard on reducing costs. Now that CAM is fixed in about 50% of our leases significant expense savings will drop to the bottom line. Part of the reason we originally guided to a wide negative NOI range was the uncertainty of whether we could achieve these benefits.

Now, we are confident that we will achieve these savings. Lease cancellation revenue down $0.035. This variance was the result of particularly high collections in the second quarter of 2009. To date, in 2010, we have collected $8.3 million including one large settlement in the first quarter. Our guidance now assumes $11 million for this line item. Other non operating income favorable by a penny and a half. This was due a land sale gain. The first we have had since 2008. This is consistent with our original guidance when we said that we expected $1 to $2 million of gains this year.

Impairment loss on marketable securities favorable by $0.02. This was entirely due to the write down we recorded in 2009. Interest expense, favorable by $0.015. Average LIBOR rates and outstanding under our lines were both down slightly compared to last year. With the default rate on the loans, the Peer Shops impacted our results unfavorably by $0.025. And finally, deletion from share based compensation is impacting our results unfavorably by $0.015.

Now, turning to our balance sheet, our debt to total market capitalizations stood at 47% quarter end. Our interest coverage was 2.4 times and our fixed charge coverage stood at 1.9 times. It made great progress on our fall 2010 debt maturities, over the past few months the market improved significantly. As a result, we've been able to lock in excellent tenure rates and at the same time generate excess proceeds. At Patridge, in May June we completed a 10 year mortgage financing at an all in rate of 6.25%.

The new non recourse loan was for $82.5 million versus the $74 million loan previously on the property. Arizona Mills up 50% on property was refinanced in early July at an all in rate of 5.83%. The $175 million 10 year non recourse loan reduced to pay off the existing 7.9%,replica screw love bracelet, $131 million on the property.

This generated about $40 million of excess proceeds that was distributed to the partners. We are currently working on a 10 year non recourse bank loan from MacArthur Center which we hope to close in September. Although the rate isn't lost yet,replica pink gold cartier love bracelet, we currently expect it to be about 6%, with proceeds roughly equal to the current loan amount on the center.

What a change that this is from six months ago, funding sources are looking for quality properties with strong sponsors and bidding aggressively. With interest rates so low, loans from mall offer attractive income vehicle for investors. At The Pier Shop, we continue to work with the special service order transfer for a title but it is moving quite slowly.

In April, as is normal to the process, a mortgage lender filed a lawsuit exercising its right to order the property to be sold at a public auction. We recently received a draft of the settlement agreement and are working diligently through this document. We anticipate this will result in a foreclosure sale of the property, at which time the ownership will be transferred.