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  Taubman Changes Course Nearly six years after it came public, Taubman Centers is doing an abrupt about-face, returning to its roots as a shopping mall developer. Can its new strategy pay off for shareholders? by Barry Vinocur |
In part, Taubman’s “failings” may have resulted from an identity crisis. As Robert Taubman, the company’s president and chief executive officer, emphasized during several recent phone conversations, when his company—founded by his father Alfred Taubman more than 40 years ago—came public in November 1992, at the beginning of the “REIT revolution,” real estate had yet to emerge from its darkest days. One of the country’s preeminent shopping mall developers, Taubman had to reinvent itself. Instead of touting its considerable development acumen and expertise, the company focused on its operating skills. Like other mall owners that followed it into the public securities market, Taubman said it would grow primarily via acquisitions.
Though it may have downplayed development as an important growth strategy at the time of its IPO, Taubman never abandoned its roots as a mall developer. Gradually it rebuilt its development pipeline, focusing not only on its own new malls, but also on its joint venture with another publicly traded REIT, The Mills Corp. (Earlier this year, Taubman and Mills announced a $1.4 billion joint venture to build at least seven value regional malls.) At the same time, Taubman also began focusing on major redevelopment projects, such as Memorial City in Houston. Though most analysts don’t expect Taubman’s development effort to “kick-in” in a major way much before the turn of the century, it is increasingly viewed as a major plus.
Coupled with its recently announced restructuring, Taubman’s development effort, may just prove to be the catalyst that allows the company to deliver on what some investors and analysts have long argued is its considerable promise. Commenting on the restructuring, Mike Kirby, a principal and co-founder of Green Street Advisors, a Newport Beach, California buy-side research boutique, wrote: “The [restructuring] serves as a strong statement of where this generation of management intends to take the company. In many respects, it represents a case study in what a confident management team should do when its shares are depressed, despite the fact that the company has a fundamentally solid story.”
A few years ago, no one dared mention the word development, much less advocate it as his primary business strategy.
We have been in the regional mall business for almost 50 years. Development has always been an important part of our business. But when we went public in November 1992, it was the worst real estate market anybody had ever seen. It was the worst retail market anybody had ever seen. There were a number of high-profile bankruptcies, such as Macy’s and Federated. No one was talking about building malls. Everybody was saying that regional malls were going to go away.
Tell us about your development pipeline prior to your initial public offering.
We opened four assets in a two-and-one-half-year period between late 1987 and 1990. In the early 1980s, we opened about four or five assets within the same sort of time frame. Before that, it was the same thing. We would open three or four assets, and then there would be a three- to six-year period of time before we would open the next group of assets.
What was in the works when you came public?
When we went public we really didn’t have a pipeline. Our plan was to grow internally, acquire assets as we could, and build a development pipeline. Over the past five years, we have bought about $150 million of assets per year. We still plan to buy assets, selectively. Our best estimate is that we’ll acquire about $100 million per year going forward. For the most part, however, our focus will be on assets we consider major redevelopment opportunities. A good example would be Memorial City in Houston. It has sales in the low $200-per-square-foot range. When we’re done redeveloping that asset, we think sales will be well over $400 per square foot. The line-up of anchor tenants for Memorial City already includes Nieman Marcus, Lord & Taylor, Nordstrom, Foley’s, Sears, Montgomery Ward, and Mervyns.
Aren’t there too many malls already?
Many people say, “There’s already so much supply. Is there really a need to build more shopping malls?” Our answer is that we don’t think a lot of new malls are going to get built. At most, we think it will be five to 10 per year. Our strategy—our business plan—is to build one or two of those per year, into perpetuity.
U.S. population growth is averaging about 1% per year. That’s roughly 21¼2 million people per year. Most shopping centers are built around 200,000 people. So population growth alone would support as many as 12 centers. We tend to build centers around more than 200,000 people. We’re usually serving 250,000 to 350,000—even a half a million people. That’s how we get to five to 10 centers per year. Of course, population growth isn’t spread equally across the country. It moves in certain patterns. Population growth is focused in states such as Florida, Texas, and California. If you look at our development pipeline, you’ll see a lot of activity in Florida and Texas. We’ve proven, historically, that we understand those growth patterns and, importantly, that we’re able to plop ourselves down well in advance of them.
How quickly can you build them?
The lead time is very long. The average regional mall takes nine years, from beginning to end. Some take four years and some take 20 years. We’ve got all different varieties in our pipeline today. It’s taken us a long time to build that pipeline. It’s also costly to build that pipeline. As a public company, the costs of development end up being a drag on earnings. Since we went public, we’ve paid a price for building that pipeline.
What sort of return should investors expect from development projects?
We now have built up the pipeline to the point where we feel confident that we can spend at least $200 million per year on development. Historically, our development projects, once the asset is open, have delivered a 12% unleveraged return in the first year. So it’s by far our most accretive use of capital.
How does that stack up vs. your internal growth numbers?
Our historic growth has averaged 6.1% annually. That’s largely the result of internal growth. Unleveraged, our internal growth is roughly 3% annually, with a 50/50 balance sheet that’s 4.5% leveraged. What we are saying to the investment community is we believe we can continue that 4.5% leveraged annual internal growth. Once we add in the $200 million of development, we are easily in the 9% to 11% range.
What about competition from other mall REITs?
We are in a pretty unique position because there are very few developers out there at this point. A few of the other public REITs are pursuing developments here and there, but no one else is putting as much emphasis on it as we are. Once the investment community sees at least one asset per year coming out—once it’s comfortable with that predictability—it will accept that the growth in our FFO is more predictable than what they can expect in the acquisition world.
What about an acquisition strategy?
About half of the top 50% of regional malls in the United States today are in the hands of public real estate companies. While there will continue to be opportunities to acquire malls over, say, the next five years or perhaps a bit longer than that, eventually it’s going to be tougher and tougher to find external growth opportunities unless those public companies go into other businesses. So, while I think their strategies are good ones and they are good companies, unless they go into other businesses I don’t believe they’ll be able to deliver the same sort of sustained and predictable growth that will come from the development vehicle we have been building.
Cap rates on regional malls have come down over the past year or so. Do you see them going lower?
Have valuations peaked? I don’t know. I really don’t. What I can say is that assets are viewed differently today. In the past, it was, “What was an individual asset worth? What could you do to increase that asset’s value?” Today, they’re viewed as more than assets. They’re viewed as being part of the strategic direction a business is taking. They have strategic value. Regional malls are part of a network of regional malls. Mall REITs, like Simon and General Growth, are leading the way in that arena. All of a sudden people are looking at our business differently than they ever did before. A waste management company, or a credit card company, sees an opportunity in forging an alliance, a partnership of sorts, with the owner of a network of regional malls. What’s that worth? Is it worth 50 basis points? Is it worth 100 basis points? At some point in the future might it be worth 200 basis points in valuation? Nobody really knows. But, as I said, all of a sudden people are looking at real estate, and not just regional malls, differently than they ever have before.
Does selling assets fit into this new paradigm?
We absolutely will consider selling an asset, selling half of an asset, or selling more than one asset. Those are ways to raise equity, when necessary, in order to further our basic business. If you can sell assets at less than 12% and build new ones at 12%, it’s a good deployment of your capital. Our job is to always be looking for opportunities to, for instance, enhance our balance sheet or anything else that provides us with the opportunity to grow our business.
Is the Internet impacting your business?
In the context of our business, it’s impact has been far more modest. What we’re looking at is what’s being sold online today and, most important perhaps, what’s likely to be sold online in the future. There are some items that lend themselves to being sold over the Internet, such as books, CDs, even basic items of clothing, such as T-shirts. So, the Internet is going to have a very real impact in certain areas. But there are a lot of other items that it’s much harder to envision people buying online.
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