We have reiterated our Neutral recommendation on Taubman Centers Inc. (TCO), a real estate investment trust (:REIT), as we expect the stock to perform in line with the broader market.The company reported first quarter 2012 FFO (funds from operations) of $65.1 million or 75 cents per share, compared with $52.7 million or 63 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.
Michigan-based Taubman owns, develops, acquires and operates regional and super-regional shopping centers throughout the U.S. and Asia.
Taubman focuses on dominant retail malls that command one of the highest average sales productivities in the U.S., measured in terms of mall tenants’ average sales per square foot. Mall tenant sales were $659 per square foot during the reported quarter. Furthermore, the shopping centers are located in the most affluent regions of the country, thereby enabling retailers to target high-end upscale customers and maximize their profitability.
Taubman leases majority of its mall GLA to national retail chains such as Gap Inc (GPS), Forever 21 and Limited Brands, Inc (LTD). This high quality roster of national tenants should continue to generate a steady source of revenue for the company in the coming quarters as well.
With strong results in the reported quarter, Taubman increased its 2012 FFO guidance per share from $3.14 - $3.24 to $3.18 - $3.25. The company has one of the strongest balance sheets in the sector with adequate liquidity.
Taubman has also taken prudent steps to reduce its operating expenses by pruning its pre-development spending in the U.S. and Asia, as well as significantly reducing its overall workforce. This, in turn, has improved the bottom line of the company.
However, the possibility of store closings at many Taubman centers due to lease terminations may hamper earnings and it might have to re-let large big box spaces at significantly lower rents amid a very tough leasing environment, thereby affecting the top-line growth of the company in the short term.
Taubman currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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