Taubman Adjusted FFO Beats Estimates

Taubman Centers, Inc. (TCO - Analyst Report), a real estate investment trust (REIT), reported third quarter 2011 FFO (funds from operations) of $54.1 million or 63 cents per share, compared to $49.2 million or 59 cents in the year-earlier quarter.

Funds from operations – a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income, while adjusted FFO excludes impairment and restructuring charges.

The adjusted FFO for the reported quarter was 65 cents per share compared to 59 cents in the year-ago period. The third quarter 2011 adjusted FFO beat the Zacks Consensus Estimate by 2 cents.

Total revenues during the reported quarter were $164.2 million compared to $155.3 million in the year-ago quarter. Total revenues for third quarter 2011 well exceeded the Zacks Consensus Estimate of $152 million. Occupancy of the entire portfolio increased a shade to 88.5% at quarter-end from 88.2% in second quarter 2011.

Average rents in the overall portfolio were $45.28 per square foot during the quarter compared to $43.64 in the year-ago quarter, representing a healthy year-over-year increase of 3.8%. Mall tenant sales per square foot improved 11.7% during the quarter on a year-over-year basis. On a trailing 12-month basis, mall tenant sales were $615 per square foot.

During third quarter 2011, Taubman acquired ‘The Mall at Green Hills’ – a regional shopping mall in Nashville, Tennessee; ‘The Gardens on El Paseo/El Paseo Village’ – a shopping center in Palm Desert, California; and a 90% controlling interest in TCBL – a leading China-based retail real estate consultancy.

Taubman purchased ‘The Mall at Green Hills’ and ‘The Gardens on El Paseo/El Paseo Village’ for an aggregate price of $560 million. Both the retail assets are a strategic fit for its existing portfolio and have an upscale focus with strong demographics and a healthy tourism market.

In addition, the occupancy costs of these centers average below 10%, which is significantly less than that of the entire portfolio. Taubman expects annual sales to exceed $700 per square foot on an average in 2012 in each of these two malls.

On the other hand, Taubman TCBL is expected to combine the local insights and network of TCBL with Taubman's global industry expertise. Going forward, the firm will serve as the platform for the company to make future investments in mainland China.

Taubman has one of the strongest balance sheets in its sector. The company has moderate debt maturities in 2011. The company’s debt to total market cap ratio was 38.7% at quarter end, with $21.6 million of cash and cash equivalents.

With strong fundamentals in the reported quarter and positive expectations in the remainder of the year, Taubman has increased its FFO guidance for full year 2011 from the earlier range of $2.88 - $2.98 per share to $2.95 - $3.00.

We think Taubman is better positioned than many of its competitors due to its clean balance sheet and minimal debt maturity. In addition, the current dividend at 44 cents per share appears safe and the company is covering the payout with operating cash.

We maintain our Neutral recommendation on Taubman, which presently has a Zacks #3 Rank that translates into a short-term Hold rating. We also have a Neutral recommendation and a Zacks #3 Rank for Equity One Inc. (EQY - Snapshot Report), one of the peers of Taubman.