Wall Street Journal  Aug 13  Comment 
William Taubman of Taubman Centers says the mall isn’t dead. It’s just changing.
Motley Fool  Apr 12  Comment 
Late last month, GGP agreed to be acquired for less than its net asset value. However, this may not mean much for shareholders of other high-quality mall REITs.


Michigan-based Taubman Centers, Inc. (TCO) is a real estate investment trust (REIT) which owns and operates regional shopping centers. TCO owns a smaller number of properties in fewer geographic areas than its competitors, but these properties are more valuable than those of competing companies. TCO's tenant sales of $555 a square foot are the highest in the mall industry, and its properties command, on average, the highest rents of any mall operator in the nation.[1] As a result, TCO's revenues and market capitalization are in line with its competitors even though the company owns fewer properties.

Like other retail REITs, TCO's fortunes are connected to those of its retail tenants, who fare poorly when the U.S. economy is contracting, and face threats from discount and stand alone big box stores.

In 2007 TCO increased its line of revolving credit and refinanced mature debt to insulate itself from the growing credit crisis - financing being crucial to a company that aquires real estate. As a result, the company won't have to pay off any of its long-term debt until 2010.

The company's properties are in urban or suburban metropolitan areas throughout the United States, and its shopping centers are relatively large, ranging in size from between 242,000 and 1.6M square feet of Gross Leasable Area (area available to be leased), with the smallest center housing over 60 stores and the largest over 200.[2]

Business Financials

TCO's primary source of revenue comes from leasing space in its properties. TCO receives revenues from its tenants in the form of base rent (a pre-specified amount per square foot stipulated in a tenant's lease), expense reimbursements the company receives from its tenants for the costs of maintaining a tenant's space, and pre-specified "percentage rents" (percentage of tenants sales paid towards the property owner). TCO also earns a small amount of revenue each year from providing leasing and management services to third parties, though this accounted for only 6% of revenues in 2007.[3]

Unlike many industry peers Taubman does not use acquisition of properties as its primary driver of growth.[4] TCO prefers to expand by expanding and developing its existing properties.[5] To fund its expansion TCO uses debt and equity issuances, and it recycles capital by selling existing centers. The company is not as focused as its peers on expanding its portfolio; since TCO went public in 1992 it has developed 12 new centers, purchsaed 8 and sold 16.[6] The company is also examining expansion options in Asia, where it expects to develop five new properties over the next ten years.[7]

During 2007 revenues at TCO continued to grow, up approximately 8% from 2006.[8] The vast majority of the increase was seen in minimum rents and expense recoveries, due to the consolidation of one new center, the opening of development in October and the expansion of an existing retail center.[9] Operating income was also up for the year. Comparing operating income with revenues, it is encouraging that TCO's operating income as a percentage of revenues has been steadily increasing, reaching 12% in 2007.[10] TCO's operating income (revenues TCO receives from operating its properties less its expenses from operating those properties) is a measure of TCO's ability to operate its core business profitably. The company is becoming more efficient in operating its centers, as the percentage of revenue it is able to convert to income increases each year.

TCO's Funds From Operations (FFO) has also been steadily increasing. FFO, a performance measure commonly used in the real estate industry, is obtained from a company's net income, excluding any gain/sale on real estate sold during the period and excluding any depreciation/amortization. This is contrasted with TCO's net income, which has increased and decreased sporadically in the past five years. This again suggests that the company has been realizing steady increases in cash flow from its centers, even though its income fluctuates because of accounting gains or losses due to depreciation of its buildings.

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TCO's Funds From Operations (FFO) has also been steadily increasing. FFO, a performance measure commonly used in the real estate industry, is obtained from a company's net income, excluding any gain/sale on real estate sold during the period and excluding any depreciation/amortization. This is contrasted with TCO's net income, which has increased and decreased sporadically over the past five years. This again suggests that the company has had steady increases in income from operating its centers, though its accounting income is sporadic due to accounting gains or losses due to the depreciation of its buildings.

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TCO’s ownership is concentrated in the Taubman Family. The Taubman Family controls approximately 32% of the company's voting stock (common and Series B preferred stock, considered as a single class of stock for voting purposes).[15] The family controls 91% of Series B preferred stock, which carries with it special rights such as nominating 4 individuals for election to the board of directors every year.[16] Members of the Taubman family also serve as Chairman of the Board, President, Chief Executive Officer and Chief Operating Officer of TCO. TCO's articles of incorporation impose a stock ownership limit on any outside parties and, because these articles can't be changed without a 2/3 vote of shareholders, it is unlikely TCO will undergo a change of control without the consent of the Taubman family.[17]

Trends and Forces

U.S. Economic Cycles Will Lead To Fluctuating Revenues

  • TCO's properties consist primarily of retail space, making the company especially vulnerable in a general economic downturn. If consumer spending levels decline, demand for TCO's properties will decrease as retail businesses will contract rather than expand. Slow demand lowers the rents that tenants are willing to pay for TCO's properties. Though leased space at TCO's centers increased to 93.8% in 2007, up from 92.5% in 2006, TCO estimates occupancy to be flat to down in the 1st half of 2008.[18]
  • This risk is exacerbated by the fact that as of December 31, 2007, TCO charges the highest rents of any mall operator.[19] They are able to do this because their sales per square foot, $555 in 2007, are also the highest in the industry.[20] However, during an economic downturn the high margin retailers (GAP , Forever 21, Victoria's Secret, Bath and Body Works) which make up the bulk of TCO's tenant base can be the hardest hit. If their sales decline or stagnate, these retailers will likely no longer be willing to pay the premium TCO charges for store locations in its centers. This is particularly disconcerting in December, the most important month of the year for retailers - and in December 2007, sales in TCO's centers remained flat.[21]
  • If TCO's rent rolls decline it will impact the company’s ability to operate profitably; in 2007 TCO's operating income was only 12% of its revenues. Because many of the costs of operating retail centers are fixed, TCO’s low profit margin leaves little room for revenue decreases.
  • TCO has the shortest tenant lease length in the industry, averaging approximately 8 years.[22] This short lease length has positive and negative effects. On the negative side, because it requires TCO to release its properties more often, it is more likely TCO will have to release some of its space during an economic downturn, yielding lower rental revenues. For example, approximately half of TCO’s leases expirie by 2013.[23] If the economy were to decline during that period, TCO will have to rent that space at lower rates. On the positive side it also means that if TCO is forced to re-lease during an economic downturn, the effects won't last long as, due to its short lease lengths, TCO will be able to negotiate new leases at higher rates sooner than its competitors

Increasing Competition From Discount Stores Has The Potential To Adversely Affect Anchor Tenants' Ability to Meet Lease Obligations

  • TCO operates up-scale regional and super regional shopping centers, which are facing increasing competition from the rise in popularity of discount stores(Wal*Mart's Impact). As these competitors gain market share, they adversely impact the ability of TCO's tenants to pay rent, and decrease TCO's collections of base rents, expense reimbursements and overages, especially given the rise of bankruptcies in up-scale and luxury retailers nationwide.[24]
  • Though no single tenant occupies more than 3.3% of GLA owned by TCO, and its top five tenants account for only 13.4% of TCO's GLA, this is not the full picture of the risk that one of TCO's tenants will cancel their lease obligations.[25] TCO's centers use anchor tenants, large tenants which occupy a large portion of the center’s space and draw other tenants to a property. Many of TCO's anchor tenants own the properties in which their stores are located. This means that though anchor tenants accounted for just a small portion of TCO’s rental income in 2007, they accounted for a majority of its centers total area. TCO's 13 anchor tenants occupied 54.3% of total space, or 11 million square feet, at its properties as of December 31, 2007. TCO's top anchor tenant, Macy's accounts for 20.1% of total space at its properties, and 37% of space occupied by its anchor tenants.[26] This concentration represents a risk that one of those companies will become insolvent or cease operation. If a single one of TCO’s largest anchor tenants decided to close down its stores it would impact not just one but many of TCO’s centers.
  • If an anchor tenant cancels their lease or become insolvent, not only would TCO lose the base rent, overages, and expense reimbursements from that single tenant, but its smaller tenants would suffer from the decreased foot traffic. Leases for smaller tenants in a retail center often contain clauses allowing for lease terminations or rent reductions if an anchor tenant leaves the property. If an anchor tenant left the property, smaller tenants can choose to simply cancel their leases rather than wait for TCO to locate a new anchor. Because of this, the abrupt departure of anchor tenant can drastically decrease the value of a retail center.

TCO has taken steps to insulate itself from the Credit Crunch And Fluctuating Interest Rates

  • TCO has approximately $2.9B in outstanding debt at December 31st 2007, 12.6%, or $369M of which was variable rate debt.[27] Due to TCO's variable rate debt, a 1% increase in interest rates would increase TCO's debt service payments by approximately $3.5M.[28] TCO has also entered into various swap and hedging agreements that leave it hedged against changes in interest rates.[29]
  • During late 2007, in the midst of the credit crisis, TCO increased its revolving line of credit by $200M, to a total of 500M while extending the lines term two years until 2011 and maintaining its interest rate.[30] In January and April of 2008 the company completed refinancing on two other properties, leaving the company with no debt maturities in 2008 or 2009.[31][32] With no debt maturing for the next two years and access to capital from its revolving credit line, TCO faces less risk from the credit crunch than many of its competitors.


TCO competes with numerous other firms to both acquire properties and lease tenants. Competing REITs include:

  • Macerich Company (MAC) focuses on shopping centers particularly in Arizona, California, the New York City metropolitan area, and suburban Washington, D.C. Its holdings include 74 regional shopping centers and 20 community shopping centers with over 80 million square feet of space.[33]
  • Simon Property Group (SPG) Simon property group owns 320 income producing properties in 41 states and Puerto Rico. It operates 184 regional malls, as well as outlet centers, community lifestyle centers and other shopping centers. It properties contain approximately 242M square feet of gross leasable area.[34]
  • General Growth Properties (GGP) owns and operates over 200 regional malls in 45 states.[35]
  • CBL & Associates Properties (CBL) is an active developer of new regional malls, open-air centers, lifestyle and community centers that owns, holds interests in, or manages 159 properties including 86 enclosed malls and open-air centers. Their strategy focuses on acquisition of regional malls.[36]

The table below provides competitive data comparing TCO with some of its close competitors.

Company Revenues (12/31/2007, Millions) Market Cap(Billions, 04/17/08) Operating Properties Number of States With Operating Properties
Taubman Centers (TCO) 626.82 [37] 2.96 [38] 23 [39] 10 [40]
Macerich Company (MAC) 896.37 [41] 5.35 [42] 94 [43] 19 [44]
Simon Property Group (SPG) 3650.80 [45] 22.75 [46] 320 [47] 41 [48]
General Growth Properties (GGP) 3261.80 [49] 9.92 [50] 200 [51] 45 [52]
CBL & Associates Properties (CBL) 1040.63 [53] 1.62 [54] 159 [55] 27 [56]

Market Share

In 2007 TCO's market share among global Retail REITs was just 3%. Market share is listed by Funds From Operations (FFO), a metric that takes into account earnings from existing properties but not cash from acquisitions or sales of assets. Globally there are 38 REITs focusing on retail properties producing an aggregate $10.0B in FFO.[57][58]] Most of those were small companies, only 9 Retail REITs are listed in the Russell 1000.

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2007 Data[59][60]
  • General Growth Properties (GGP) has ownership interests in and/or management responsibility across regional shopping malls totaling over 200 million square feet of retail space with 24,000 retail stores and anchor department stores, as well as theaters, sit-down restaurants, ice skating rinks, and other forms of family entertainment.[61]
  • Westfield Group ((WDC) is the largest retail property group is the world with a portfolio of 119 shopping centers across Australia, the U.S., New Zealand, and the United Kingdom, valued at $53.2 billion.[62]
  • Kimco Realty (KIM) is largest publicly traded owner and operator of neighborhood and community shopping centers in the U.S., with more than 1,519 properties comprising 180 million square feet of leasable space across 45 states, Puerto Rico, Canada, Mexico and Chile.[63]
  • Simon Property Group (SPG) develops and leases regional malls, shopping centers and strip malls. Simon Property Group owns or has an interest in over 379 properties comprising over 256 million square feet of gross leasable area across investments in the U.S., Europe, and Asia,[64] making it the largest public U.S. real estate company.[65] Simon Property Group's investments tend to be in large metropolitan areas with very high consumer traffic and are comprised of anchor department stores alongside smaller retailers.


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