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Edited Transcript of TCO earnings conference call or presentation 28-Apr-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Taubman Centers Inc Earnings Call

Bloomfield Hills May 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Taubman Centers Inc earnings conference call or presentation Friday, April 28, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Robert S. Taubman

Taubman Centers, Inc. - Chairman, CEO and President

* Ryan T. Hurren

Taubman Centers, Inc. - Director of IR

* Simon J. Leopold

Taubman Centers, Inc. - CFO, EVP and Treasurer

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Conference Call Participants

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* Alexander David Goldfarb

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research and Senior REIT Analyst

* Christine Mary McElroy Tulloch

Citigroup Inc, Research Division - Director

* Craig Richard Schmidt

BofA Merrill Lynch, Research Division - Director

* Floris Gerbrand Hendrik van Dijkum

Boenning and Scattergood, Inc., Research Division - Senior Analyst of REIT

* Michael Bilerman

Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research

* Michael William Mueller

JP Morgan Chase & Co, Research Division - Senior Analyst

* Nicholas Yulico

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst- REIT's

* Omotayo Tejamude Okusanya

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* Richard Hill

Morgan Stanley, Research Division - Head of U.S. REIT Equity and Commercial Real Estate Debt Research and Head of U.S. CMBS

* Samir Upadhyay Khanal

Evercore ISI, Research Division - MD and Fundament Equity Research Analyst

* Todd Michael Thomas

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

* Vincent Chao

Deutsche Bank AG, Research Division - VP

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Presentation

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Operator [1]

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Thank you for holding. And welcome to the Taubman Centers' First Quarter 2017 Earnings Call. The call will begin with prepared remarks, and then we will open the line to questions. On the call today will be Robert Taubman, Taubman Centers' Chairman, President and Chief Executive Officer; Simon Leopold, Chief Financial Officer; and Ryan Hurren, Director, Investor Relations.

Now I'll turn the call over to Ryan for opening remarks.

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Ryan T. Hurren, Taubman Centers, Inc. - Director of IR [2]

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Thank you, operator. Welcome to our first quarter conference call. As you know, during this conference call, we will make forward-looking statements within the meaning of 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 yesterday's earnings release and 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 discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included when possible in our earnings release, our supplemental information and our historical SEC filings. In addition, a replay of the call is provided through a link on the Investor Relations section of our website.

Non-GAAP measures referenced on this call may include estimates of future EBITDA, NOI, after-tax NOI and/or FFO performance of our investment properties. Such forward looking non-GAAP measures may differ significantly from the corresponding GAAP measure, net income, due to depreciation and amortization, tax expense and/or interest expense, some or all of which management has not quantified for the future periods.

(Operator Instructions) Now let me turn the call over to Bobby.

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [3]

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Thanks, Ryan, and good morning, everyone. Yesterday we released our first quarter earnings. We produced solid overall results, with adjusted FFO per share of $0.92, up a strong 9.5%. Comp center NOI was up 3.9%, including lease cancellation income, and up 2.8% without. Our quarterly AFFO and NOI results met our expectations. The Mall of San Juan, which opened in March 2015, is now included in our comp center statistics. For trailing 12-month statistics our practice is to include centers in our comparable center pool after 8 full quarters of operation. Likewise, University Town Center in Sarasota, which opened in October 2014, is also included in the statistics for the trailing 12-month period and the period ended March 31, 2016, has been restated.

Average rent per square foot grew 1% in the quarter, consistent with our guidance for the year. Trailing 12-month releasing spreads remain healthy at 16.3% at March 31. At quarter end, our comparable center occupancy was 92.3%, unchanged from March 31 last year. Leased space in comp centers was 93.9%, down 1.5%. This variance is in large part due to the closures of Sports Authority and The Limited who accounted for 169,000 square feet or 1.7% of mall GLA in comp centers.

Since last fall, challenges for the retail environment have become very visible. What we know today is that in addition to Sports Authority and The Limited, BCBG, Agent Provocateur, Herve Leger, Bebe, Payless, (inaudible), Family Christian, Wet Seal, American Apparel, YOGASMOGA, (inaudible) Sushi and Stride Rite have announced they would be closing all or a substantial portion of their stores. Collectively these stores account or accounted for, 62 locations, totaling 337,000 square feet within our centers. Of these, we currently expect that 52 stores, totaling 297,000 square feet will close.

In terms of GLA, the Sports Authority closures represent the largest portion at 130,000 square feet, roughly 45% of the space expected to close. We have re-leased 86,000 square feet of the Sports Authority space to tenants that are not expected to open -- or that are expected to open later this year. As for the remaining space, 211,000 square feet, which represents about 1.7% of our total mall GLA, we're having conversations at every location and are seeing very good tenant interest. Backfilling spaces presents a challenge, but it also presents an opportunity. In some cases, when they are not filing for bankruptcy, we will receive termination fees. If those fees are greater than the rent loss during the re-lease period, we would have accretion. In addition, our experience historically has been that there will be an opportunity for average rent increase. Simon will discuss all this more extensively.

Putting store closings aside, we were pleased that sales had positive trends in the third consecutive quarter. In the quarter, they were up 1.2%. Trailing 12-month sales per square foot in comparable centers were $776, up about 1% from last year. In the quarter, home furnishing and luxury retailers were among our strongest performers, including Restoration Hardware, Gucci, Tumi, Crate & Barrel, Louis Vuitton, Jimmy Choo, Bose, Pottery Barn and Cartier. Other retailers with strong results included Zara, Tesla, UNIQLO, Apple, Helzberg Diamonds, Eddie Bauer and SIX:02 by Foot Locker. We were also encouraged by the performance of our floor incentives, including those that had been previously impacted by softness in tourism. Notably, while not included in our comp centers' results, sales at our newest centers in Asia continue to grow. In CityOn. Xi'an, quarterly sales were up strong single digits over the last quarter. First quarter sales at Starfield Hanam during what is typically the slowest retail period on the South Korean calendar were also good and bolstered by the opening of the first Tesla showroom in the country. Both these centers are on track and fully occupied.

On March 16, we held the grand opening of CityOn. Zhengzhou, our second ground-up project in China and our third in Asia. The approximately 1 million square foot shopping center opened 100% leased and is now 100% occupied. The center is anchored by a 4-level Wangfujing Department Store and includes nearly 200 stores. Adidas, Nike and Nike Kids, Forever 21, H&M, Zara, Zara Home, UNIQLO, North Face, Puma, La Chapelle, La Chapelle Kids, Massimo Dutti, Bershka, Oysho, Pandora, Lenovo, Skechers, Vans and Toys "R" Us are among the noteworthy brands within the center. As planned, nearly 30% of our inline space is dedicated to food. We have 21 table service sit-down restaurants and another 21 specialty food offerings. In addition, we have quick service operations such as KFC, PizzaHut, Subway, Starbucks Reserve and a food village which has 14 food stations. Zhengzhou is a major finance, business and transportation hub in Central China. Today, it's home to over 9.5 million residents, with tremendous population growth planned by the Chinese government. The center has already won a national level award as China's most prospective commercial real estate project.

Further, we were delighted that recently it was publicly announced that subway line 6 will now have a direct access point at our shopping center. By all accounts, the center is meeting expectations. There are many tenants above plan and we are very happy with the center's opening performance. We hope some of you will have the opportunity to see the center soon, and we would be delighted to set up visits to Zhengzhou or any of our Asia centers if your travels take you there.

Our redevelopments at the Mall of Green Hills and Beverly Center continue to progress well. At Green Hills in Nashville, Dillard's opened their new 180,000 square foot store on March 30 and it looks fantastic. Their old store is being replaced by about 130,000 square feet of new mall space that will link the existing mall to the new Dillard's. Demolition of their old store will begin in May, and we are on schedule for a 2019 opening of the new mall space.

At Beverly Center in LA, we just completed Phase 1 of our 3-Phase renovation. The Phase 1 interior looks great and customer and retailer response has been terrific. Our progress was highlighted in an exclusive by Curbed Los Angeles last week, a leading online source of news regarding neighborhoods and cities which released the first pictures of the center's renovation as well as the space Mina Social Hall while occupied on level 8 with its sweeping views of LA. The exterior is also taking shape, with new finishes, lighting and mesh. We encourage all of you when next in Los Angeles to go and see our progress or go online to view the article on Curbed.

We are extremely pleased with our leasing efforts and tenant response thus far. One of the main components of the re-imagination of the center is to open it up to pedestrians and surrounding neighborhoods. We are doing this through an exciting lineup of restaurants at street level, many of which will be announced in just a few weeks at ICSC.

I'll now turn the call over to Simon and return at the end with some closing comments.

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Simon J. Leopold, Taubman Centers, Inc. - CFO, EVP and Treasurer [4]

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Thank you, Bobby. And good morning, everybody. I'll first review the year-over-year FFO variances for the quarter. They are listed on Page 9 of the supplemental. Our first quarter AFFO per share was $0.92, which compares favorably to $0.84 in the first quarter of 2016. FFO per share was $0.85. This quarter we adjusted for 3 items. First, as we mentioned our last earnings call, we've reached the end of our latest major development cycle. As we've done in the past, we have reduced spending in a number of areas, particularly costs have previously been capitalized. As a result of this rightsizing, we incurred a restructuring charge of $0.02 during the quarter.

We also incurred $0.04 of legal and other advisory costs unrelated to our business operations. Finally, we wrote off $0.005 of deferred financing costs associated with the refinancing of our primary line of credit. Other year-over-year variances include minimum rents, up $0.02 due to higher rent per square foot; net recoveries up $0.025 as recoveries at nearly all of our comparable centers improved; lease cancellation income up $0.01. During the quarter, a national tenant closed its only store in our portfolio and a restaurant chain closed 3 locations.

Other operating expenses were favorable by $0.015, primarily due to corporate level expense savings. Interest expense was $0.01 unfavorable, largely related to reduced interest capitalization. And lastly, our noncomp centers in aggregate were $0.015 favorable.

In March, as planned, when we acquired the Country Club Plaza, we sold the Valencia Place office tower for about $75 million. Our 50% share of the net proceeds was approximately $37 million. It was a good outcome with pricing slightly better than our expectations.

Moving to our balance sheet, as we indicated on our last call in February, we amended and restated $1.1 billion primary line of credit, including an extension to February 2021. The transaction also included the addition of a new 5-year $300 million unsecured term loan. In order to reduce our exposure to interest rate fluctuation, in March, we entered into forward-starting swap agreements on term loan, which are effective January 18 through the loan's maturity in February 2022. Interest on the term loan is in a range of LIBOR plus 1.25% to 1.9% based on total corporate leverage.

Beginning in January 2018, the LIBOR rate on the term loan will be swapped to a fixed rate of 2.14%, resulting in an effective interest rate in the range of 3.39% to 4.04%. Also in March, we repaid in full to construction loan on the Mall of San Juan, which had an outstanding balance of $302 million and was scheduled to mature in April 2017. This asset is now unencumbered and available to be used as part of our collateral pool for our unsecured bank borrowings.

We've now completed all our major financing plans for 2017, and we do not have another mortgage maturity until July 2018. At the end of the quarter, the weighted average interest rate on -- weighted average rate on all of our debt was 3.56%. The weighted average maturity of our fixed rate debt was about 8 years and our total debt was about 6.5 years. Our coverage ratio has remained solid and our balance sheet remains in good shape. Now an update on guidance.

As we said in the release, for the full year 2017, we're expecting adjusted FFO per share to be in the range of $3.67 to $3.82 and FFO per share to be in the range of $3.60 and $3.75. After adjusting for the first quarter items I mentioned earlier, this guidance is unchanged from the original 2017 guidance we introduced in February. For the year, we expect comp center NOI, including lease cancellation income, to be up about 3.5%. For this year, we think it's appropriate to focus on NOI including lease cancellation, as we believe there are several creditworthy tenants who will close stores, preferring to pay fees in lieu of rent this year.

Our guidance now assumes that our share of lease cancellation income will be between $10 million and $12 million, up from our previous estimate of $5 million to $6 million. The number is volatile and difficult to predict. As of March 31, we've received $2.2 million at our share. We now expect year-end occupancy in our comp centers to be about 95%. This is a decrease of about 1% from our original guidance and is largely due to the planned closure of a single national tenant with 16 locations. The tenant will likely be vacating at the end of May. We have not assumed that its spaces will be filled by year-end. The rest of our key assumptions remain unchanged. And as a reminder, a summary of all these guidance assumptions can be found on Page 19 of our supplemental.

So before I turn the call back to Bobby, it's become clear from commentary and questions we've had from analysts since we put out our earnings release yesterday, the people would appreciate a little more detail on lease cancellation income. Lease cancellation income in almost all cases is generated when a creditworthy tenant that has lease obligations decides it wants to close stores, but has no right to under their lease. They have a landlord revenue, but would like to negotiate the right to close making a onetime payment in exchange for that right. The tenant will typically come to the landlord with an offer, the landlord will counter and there will either be an agreement or there will not. When there is an agreement, we receive a payment and it is characterized on our income statement as lease cancellation income. The tenant then closes and we have the right to re-lease the space. This can be a good thing for us depending upon how much rent and charges we are able to get upon re-lease and how big the lease cancellation payment is. As an example, and only an example, if we receive a payment that is the equivalent of 1 year of revenue, and we're able to retenant the space in 6 months at a similar annual revenue amount, we come out ahead. Similarly, if we receive that same payment and it takes us a year to retenant this space, but at higher revenue, we also come out ahead. If we cannot come to an agreement with a tenant, a number of things can happen, including nothing. The tenant continues operating and living up to its obligations under the lease. It can lead to bad debt expense if the tenant does not live up to its payment obligations on the lease or it can lead to bankruptcy if the tenant has that avenue available and chooses it. When we give guidance for the year, we project an amount of lease cancellation income that's a combination of what we know and what we expect based on market conditions and what we're seeing with specific tenants. We have had years where it amounts to just a few million dollars and some where it's been more than $20 million. It is hard to predict. This year, we made that projection and our guidance incorporated an amount of $5 million to $6 million for the year at our share, which has been about our average in recent years. After we gave guidance, but before this call, we became aware that a tenant that we did not expect to want to close prior to the end of their lease term, wanted to close. If the tenant does it in more than half of our malls, has a number of years on average of lease term left and on an average pays below market rent. Therefore, the payment we expect to receive is large, large enough to have a material effect on components of our earnings guidance this year, but not on our overall AFFO guidance. This is not a typical situation. Because of that, we felt that it was important to change our guidance component so investors can see what's going on, but also understand that our NOI and AFFO expectations for the year were not changing. The decision to take this lease cancellation income is part of what we do every day, make decisions that maximize NOI and AFFO and are good for our portfolio. When an uncommon situation occurs, it's also important that we highlight it for our investors, which is what we've done here.

With that I'll turn it back to Bobby.

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [5]

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Thanks, Simon. As we said, the retail environment is challenging, but we still expect to deliver solid results for the year. We are clearly at a nexus point where consumer behavior is shifting and while e-commerce is a critical component of an evolving landscape, it is not the only one. People are spending on categories that hardly existed a decade ago. For mobile apps to music downloads, Netflix and Apple TV. They are also spending on tech-related items like new hardware and data plans. In addition, food of all kinds is gaining greater share of wallet, with our high quality prepared foods in a grocery store, new quick service concepts offering a much better experience than traditional fast food or destination restaurants like those by Michael Mina. Further given extended low interest rates, large purchases like cars, homes and furniture have been strong. Taken together, this is putting pressure on many traditional brick-and-mortar concepts, especially in the context of the proliferation of total retail supply over the last 20 years. We believe this has been leading to a secular shift away from lower quality retail real estate. Conversely, once this volatility subsides, we believe the results will have been a cyclical shift to greater market share in the highest quality retail asset. When we went public in 1992, there were about 2,000 regional malls in the United States. Today most people believe there are about 1,000. Surely that number will significantly decline over the next decade. This view has led us to a number of strategic decisions over the last several years, including the most evident, the sale of our lowest productivity asset, which represented nearly 1/3 of our portfolio in late 2014. This view has also led us to continually reinvest in both the physical building as well as the merchandising of our assets, all with the intent of enhancing the experiential element of our centers. Since 2008, we've developed, expanded or renovated over 75% of our portfolio. We've added many destination retailers in new acres such as SEA LIFE aquarium, Legoland, RH Gallery and Round One. And in Asia, tenants like the Sports Monster, Aquafield, E-Mart Traders and grocery stores in our China centers. It's also not by accident that our portfolio has the highest concentration of Tesla and Apple stores. As we've said, food has become very important and an essential aspect of the best retail destinations and in Asia, as much as 30% of the inline space. We've recently added meaningful food components to Dolphin Mall in Miami, Cherry Creek in Denver and Sunvalley outside San Francisco. The Country Club Plaza in Kansas City, our latest acquisition, features over 25 unique restaurants with total annual sales over $100 million. And our new Grand Lanai at International Market Place in Hawaii with 9 of the center's 11 restaurants, is a critical anchor to the center. Our partnership with renowned chef Michael Mina, both in Hawaii and at Beverly Center, further underscores this commitment.

All of these decisions, whether to sell our lower productivity assets, continuously reinvest in our high-quality real estate or create unique destinations for our customers, are part of our strategy to build a portfolio best positioned for the evolving retail landscape and to gain market share going forward. Today, the whole sector is selling at huge NAV discount. When the dust settles, we strongly believe that A mall companies will continue to grow their income streams and will once again be recognized and valued as the high-quality investment vehicles they are.

So with that, we'll take your questions. As Ryan said, please limit your questions to 2. Natasha, are you there?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of Christine McElroy with Citi.

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [2]

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Christy?

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [3]

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Can you hear me?

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [4]

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Now we can.

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Simon J. Leopold, Taubman Centers, Inc. - CFO, EVP and Treasurer [5]

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We can now.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [6]

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Great. Sorry about that. Just, Simon, following up on your last comments about the lease cancellation income, which are really helpful. Just in the case of that 1 large tenant that you talked about that accounted for the majority of the changes to guidance. What was the size of the cancellation income -- what is the size of that 1 year of rent in that case? And what's your determination of the period to re-lease that space? And what do you think is the mark-to-market on that space?

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Simon J. Leopold, Taubman Centers, Inc. - CFO, EVP and Treasurer [7]

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Well. That really was an example that I gave in the comments. So please don't take that as specific to negotiations that we're having with tenants right now. And for us, Christy, what we gave you and the reason we changed guidance was based on our expectations for the year. There is the one tenant that is very significant that we do expect will be closing stores. So that's why we reduced our occupancy expectations for the year by 100 basis points. But in terms of specific lease cancellation income and those negotiations and our expectations, I can't comment really much further because we are still in the middle of it.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [8]

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But to the extent that all of that 211,000 square foot of space you expect to get back, all of that is in the current guidance range?

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Simon J. Leopold, Taubman Centers, Inc. - CFO, EVP and Treasurer [9]

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IYes.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [10]

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Okay. And then just second question, Bobby, just following up on your comments about pressure on retailers. You've talked a lot in the past about the importance of occupancy cost. And I'm wondering where retailers are either choosing to close stores or not renew their lease. I know it's different for every retailer. But just thinking about what level of occupancy costs are they generally kind of throwing in the towel and where are they signing new leases today. Just trying to get a sense for how retailers are thinking about their real estate costs today versus in the past.

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [11]

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Christy, we've talked for years about circling 15% as the average for our portfolio for total occupancy cost. And in times of accelerating sales, those numbers have been in the low 13%. In times of weak sales, they have gotten as high as 16.5%, 17%. Now today we are just above 14%, I think 14.1%. So we feel very comfortable that we are not -- it is not the occupancy load that is putting pressure specifically on tenants. It's their investment cycles, their products, the shift in consumer patterns that we're talking about. And you're seeing it in all different kinds of ways. So in part what we tried to show in our comments is bottom line high quality real estate is going to get the best merchants and that's going to attract the best customers. And that's what we have. That's why we have Apple Stores and Tesla stores. That's why we are bringing in these great food operations. Tenants and customers want to be in those locations.

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Operator [12]

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Your next question comes from the line of Craig Schmidt from Bank of America.

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [13]

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Craig, we can't hear you. Natasha, if you can help Craig to...

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Operator [14]

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(Operator Instructions)

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [15]

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Natasha, maybe we should go to the next question and come back to Craig.

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Operator [16]

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(Operator Instructions) Your next question comes from the line of Samir Khanal from Evercore ISI.

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Samir Upadhyay Khanal, Evercore ISI, Research Division - MD and Fundament Equity Research Analyst [17]

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I'm sorry if I miss this, but can you talk a little bit about any sort of disruption you may be seeing at Beverly Center, whether it's on rents or any kind of traffic, I'm sorry, sales or traffic while all the ongoing redevelopment is there?

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [18]

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Yes, I mean, we've been very pleased generally that all of our tenants have stayed open throughout the renovation. Disruption has been much less than we feared. The first phase is completely done, as we talked about. We expect our '17 NOI to be very similar to '16. And we're going to begin to open up these restaurants at the end of the year-end and in '18, that will begin to offset some of the transition or fractional vacancy that's occurring. But we are very pleased with the retail response, and the customer response to what we've now unveiled has been incredible and people are talking about it all over LA and Curbed Los Angeles article, I mentioned, and that I encourage all of you to go online and see, that's a big blog. It's like 4 million people that read that blog, and it gives very high marks for what we're doing.

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Samir Upadhyay Khanal, Evercore ISI, Research Division - MD and Fundament Equity Research Analyst [19]

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And I guess second one is, I know you're taking the additional lease term fees, but I know you haven't identified a specific tenant, but just in terms of the prospects for backfilling that space and maybe you can just take a step back and talk about maybe how some of the negotiations are going with the retailers. I mean, what are the pushbacks you're getting, is it do they -- is it lower rent, is it higher TIs, just generally if you can speak on that?

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [20]

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When a tenant is trying to decide to close all its stores and possibly go into bankruptcy, they obviously are not doing well, not just in one location. They may be doing well in one of our locations, but not doing well as a chain. And so you can't really look at one individual store. And it's not -- again, it's products, it's the investment they made in the store, are they fashioned right, are they connecting with the customer, those are all the things that matter. And so to try to talk about the individual negotiation of a tenant, if they are creditworthy and they make a judgment that they want to pay to get out of all their leases, then there are other reasons that they decide to do that rather than go -- just go into bankruptcy. And it's very, very tenant specific.

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Simon J. Leopold, Taubman Centers, Inc. - CFO, EVP and Treasurer [21]

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But you can -- just to follow-up on that, Samir, you can assume that if tenants are looking to close stores in -- either individual stores or a large number of stores, that tenant is probably not doing all that well and replacing them with a tenant that has better merchandising is better for the centers obviously is going to be good for the landlord.

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Samir Upadhyay Khanal, Evercore ISI, Research Division - MD and Fundament Equity Research Analyst [22]

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Right. When you're going to replace them with the better tenants, I guess, my question is, these better tenants that you're going to replace them with, what are the converse -- how are the conversations going with them, the perspective tenants? I mean, are they looking for more TIs? You know It's kind of -- I mean, they are sort of seeing the same headlines that we're all seeing and there is these retail headwinds. So I'm just saying, generally speaking from talking to the perspective tenants out there, what are they are seeking in terms of negotiations?

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [23]

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Well, first of all, we've guided now to 95% occupancy. We've talked about 211,000 feet that isn't leased of the stores that are coming back, the 62 stores coming back. There are 52 not yet leased and it's 1.7% of the space. That's also in our guidance. So there's obviously demand. We also talked about that one tenant that we didn't name where the average rent is below the average rent in those centers. So there's lots of data points that suggest that there is good demand in good assets for good space, and that's what we have. So it doesn't mean that there won't be some transitional time. It doesn't mean that we are taking lease cancellation income where it makes sense. We are always going to manage for NOI, that's what we have always done for 25 years and so that's what we're going to continue to do.

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Operator [24]

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Your next question comes from the line of Todd Thomas from KeyBanc Capital Markets.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [25]

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Just sticking with the lease cancellation topic, I understand the decision to negotiate with retailers regarding the termination of one lease or multiple leases and then it's handled on a case-by-case basis, but would you say, just in general, that you are seeing a big increase in tenants that are looking to pay lease termination fees in order to get out of leases and close stores? Have you been entertaining more of those discussions, in general?

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [26]

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Well, we are increasing our guidance. Simon was real clear. I mean, the average over the last 5 years, our original guidance of $5 million to $6 million was absolutely in the range of the last 5 years. So the idea of stepping up that guidance to $10 million to $12 million suggests that there is more lease cancellation discussions going on, including with the one specific tenant we talked about. But it's very uncertain, it's very volatile. But we do feel like if the rent isn't going to be there, the lease termination payments will. And then we have to backfill the space. And we feel very confident about backfilling space. There's good demand on all the spaces that we know about today and tenants want to be in our centers.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [27]

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Okay. So in terms of the demand, I guess, just trying to get a sense for how deep that demand is in the portfolio. How does that waiting list, I guess, so to say for further space that you're recapturing, or expect to recapture, compare to how long that list might have been say several years ago or in prior cycles? I mean, is there a way for you to sort of characterize how deep the demand is and is there a meaningful difference across the portfolio?

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [28]

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Well, there's all kinds of new tenants out there. There's all kinds of people that are going from online only into both. We've got tenants like (inaudible) and Warby Parker. Tesla came out of nowhere few years ago. I mean, Amazon's now taking stores. Shinola is opening stores. And we've got a lot of -- you have all the fast fashion that is out there trying to gobble up as much space as they possibly can, especially in great locations. So you've got good demand. So to compare it -- it's an evolving landscape, that's what I said, the consumer is buying different things. And you've got to be that flexible envelope. The mall has to be designed to be a flexible envelope to really accept and present whatever that customer wants to buy, and that's what we do. And we've done it for years and this is a different moment in time, and the department stores and the boxes. We would love to get more of those back. We've got lots of demand from larger tenants that would like to go in our department stores. We haven't seen that. We were delighted to get Saks Fifth Avenue back, and we're going to likely put 2 large tenants in there. They're going to be in there by 2018, at some point in '18 and paying us rent and bringing the new demand, a new tenant into that center.

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Operator [29]

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Your next question comes from the line of Alexander Goldfarb from Sandler O'Neill.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research and Senior REIT Analyst [30]

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Two questions. The first one is, as you guys get all this space back and you think about the downtime to backfill it, can you just walk us through sort of the economics of the decision to either put a temp tenant in the space versus holding that space offline, whether it's to reconfigure or because you just want to have it available to get in a more permanent tenant so you can do it sooner. So if you can just walk through sort of the economics of temp versus waiting until you get a full paying tenant in there?

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [31]

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Well, generally, you would always prefer to have a permanent tenant. But there are some unique merchandise opportunities that come with temp tenants, they then later turn into permanent tenants. And we've had that happen a number of times. But generally, you put a permanent tenant in when -- excuse me, you put a temporary tenant in when you have at least several months ahead of you where a permanent tenant isn't going to come in place. So it's not one in -- sort of at the exclusive of the other, it isn't one in lieu of the other. They really are -- again, it comes back to managing for NOI. You try to put the temporary tenant and you try to make the permanent tenant. And could there be some frictional loss of a few months? Sure, if you have demand for both. There's always more demand for temporary tenants in the last 2 quarters than in the first 2 quarters. That's just seasonal. That's normal. So if we are not able to sign permanent tenants, who will go under construction in 2017 then it's quite likely that in 2017 many of these transition spaces from tenants that are buying out of their leases will in fact be leased to temporary tenants while we then go find and finish getting a permanent tenant for the location.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research and Senior REIT Analyst [32]

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So with that said, Bobby, is there in your guidance or should we be thinking that maybe some of the space that's coming back, the 211,000 or whatever the 1.7% of GLA, should we think that some of that may be temp income in the back half of the year or the view is that should be thought of as vacant and hopefully is filled starting next year?

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Simon J. Leopold, Taubman Centers, Inc. - CFO, EVP and Treasurer [33]

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We gave -- when we changed the guidance occupancy, the occupancy guidance numbers rather by 100 basis points down to 95%. If you look right now, we are about 92.3% occupied. So that's 270 basis points that we believe we'll make up by the end of the year. There will be a good portion of that ends up being tenanted permanent, that's filling Sports Authority boxes and things like that. There will also be some temps in there. Clearly around holiday time is a great time for temps. So it will be a mix. It will probably be more permanent than temp though.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research and Senior REIT Analyst [34]

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Okay. And the second question is, you guys, obviously, are in touch with your tenants all the time. So as you look out over the year and provided guidance back in February and then obviously the update now, of all the store happenings that have occurred and closings, et cetera, how many of these have been true surprises versus when you guys were budgeting originally you are like, say, listen, we think that these tenants are likely going to have some issues and put those into our numbers. And the point is, how many times are you truly surprised by a store closing? You mentioned this national chain. I don’t know if that was a surprise or not to you, but how many times are you truly surprised versus everyone that comes up you've already sort of known about and to some degree has already been factored into your guidance and outlook that you provide the Street?

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Simon J. Leopold, Taubman Centers, Inc. - CFO, EVP and Treasurer [35]

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You never know. You never know for sure when you give guidance in February. It's one of the challenges of our business is that we have to manage for some unforeseen things. But in general, when we hear of tenants looking to pay lease termination income or to file for bankruptcy, in general, we have -- we've been tracking that tenant for a number of months before that happens. So we typically are not that surprised when it occurs. I will say that the one tenant we're talking about before was not contemplated when we gave guidance this year. But typically we have a heads-up and we start thinking about it and working on it before the vacancy actually occurs.

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Operator [36]

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Your next question comes from the line of Nick Yulico from UBS.

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Nicholas Yulico, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst- REIT's [37]

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Can you just give what the same-store NOI guidance would be if you actually exclude the lease term fees?

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Simon J. Leopold, Taubman Centers, Inc. - CFO, EVP and Treasurer [38]

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Yes, if you exclude it, I would say the lease term fees as we revised them, it affected our original guidance by about 100 basis points.

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Nicholas Yulico, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst- REIT's [39]

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Okay. And then on the occupancy assumption at year-end, you talked a little bit about refilling Sports Authority boxes plus some of this space where there's lease term fees. Maybe you can talk a little bit more about what's built in as far as additional bankruptcies or store closures in the occupancy guidance for year end.

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Simon J. Leopold, Taubman Centers, Inc. - CFO, EVP and Treasurer [40]

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I think probably the best way to answer that is that with the exception of the one surprise that we talked about, everything that we are seeing right now was incorporated into our thinking when we gave guidance and in revising our occupancy guidance down by 100 basis points, we took everything we know today into account. You have to understand that typically you are going to get a very significant portion of the bankruptcies that you're going to get in a year, you're going to get in the first quarter. And by the end of the second quarter, you're going to have the majority usually even close to 0.75 of what you're going to see over the course of the year. So we feel like right now we've got a good handle of what's going on, doesn't say that there won't be a surprise here or there. But we feel like we've got a good handle on what's going on and that's reflected in the guidance that we've given and updated this quarter.

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Nicholas Yulico, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst- REIT's [41]

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Okay. So there is some of level of additional sort of cushion on closings built in at this point?

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Simon J. Leopold, Taubman Centers, Inc. - CFO, EVP and Treasurer [42]

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Yes, that's why we have a range.

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Operator [43]

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Your next question comes from the line of Tayo Okusanya from Jefferies.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [44]

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I was just curious with ICSC coming up, just wanted to get a sense of what your schedule looks like if you kind of have seen any material changes in regards to retail, as in I want to meet with you? Or is this just kind of gives you any sense that things are changing in regards to how retailers are thinking about their space requirements going forward?

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [45]

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There's a tremendous demand to meet with us. We got a lot of meetings booked. We are looking forward to the ICSC. We typically are able to move things along rapidly then and afterwards. So hopefully, it will be good convention. We're going to make some announcements about Beverly Center and the new restaurants there. So we are looking forward to it.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [46]

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The schedule doesn't look slower or doesn't -- nothing like that?

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [47]

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I think it looks about the same.

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Operator [48]

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Your next question comes from Michael Mueller of JPMorgan.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [49]

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I was wondering, can you walk through expectations for store openings throughout 2017 where you expect leasing to end the year for International Market Place?

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [50]

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Sure, Mike. So today we have 68 stores open. We have 8 opening in May, including 2 of our most key food operations, The Street, which is Michael Mina's food hall and Mitsuwa, which is the Japanese prepared foods with also 4 food stations within it. Both those operations are going to be opening in May. They are about 12,000 square feet each. So they are very significant. We are also opening Tesla which is right on Kalakaua in May and then we have other very good tenants opening through the end of May. We expect, by the end of June, that we're going to have nearly 80 tenants, which is about high 70% occupancy, 77%, 78% occupancy. We expect by year-end to have over 90 tenants open and be about 85% occupied.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [51]

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Okay. And then separately for the second question, are you still contemplating beginning another development in Korea this year?

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [52]

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What I think we said on the last call was that it was unlikely that we're going break ground on anything this year. We have nothing imminent to discuss. We are focused on executing our newly opened developments. And if something material -- if we have any material update, we'll let you know, but I think it's very unlikely. It's much more likely sometime in 2018.

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Operator [53]

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Your next question comes from the line of Vincent Chao from Deutsche Bank.

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Vincent Chao, Deutsche Bank AG, Research Division - VP [54]

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I know you've talked about this quite a bit. But I just want to clarify the 16 stores that are tied to the termination, what's the square footage on those?

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [55]

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Well, I think, it's 59,000 square feet.

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Vincent Chao, Deutsche Bank AG, Research Division - VP [56]

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59,000, okay. And the termination fee increase, we just heard that the occupancy guidance does contemplate additional closures beyond what you know of today. Does it also -- was the entire increase in the lease terminal, just tied to that one tenant? Or was there additional termination assumptions?

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Simon J. Leopold, Taubman Centers, Inc. - CFO, EVP and Treasurer [57]

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That one tenant is a material piece, but it's not all that.

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Vincent Chao, Deutsche Bank AG, Research Division - VP [58]

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Not all that.

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Simon J. Leopold, Taubman Centers, Inc. - CFO, EVP and Treasurer [59]

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It's not all that. We've built in the potential for more. We have also built in even though we brought down occupancy by 100 basis points, that is not necessarily just the one tenant. There's a lot of ins and outs there, but the one tenant is having the largest effect on the changes that we're making.

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Vincent Chao, Deutsche Bank AG, Research Division - VP [60]

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Right. Okay. I just want to clarify that. Okay. And then, I think, Bobby, you talked about the quality of the portfolio and really seeing secular challenges for weaker centers and turning into a cyclical benefit for the quality players. I think one of the questions that's out there is, where or how much secular change will there be? Everybody agrees that there's too much retail square footage in the country unmet, not necessarily quality, but just overall retail. How should we be thinking about when the secular phase is done?

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [61]

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It took 25 years to go from 2,000 malls to 1,000 malls, and I think that given the shifts in consumer behavior, given what's happening technologically, I think the next sort of movement will be more rapidly than 25 years. But I do think that weaker assets are going to be challenged and that was very evident in my comments. So I think once you have sort of a downward cycle, it's very hard to sort of move it off that trend. So I think the better assets are going to get better and that's -- I really believe that you'll see over the next 5 to 10 years, the market share of the best assets just keep it increasing. There's been lots of studies that roughly 30% of the existing centers represent about 75% of the value. So roughly 300 assets of 1,000 represent 75% of value in sector. I would not be shocked to see that 300 assets own 90% of the value in the sector. So I just -- I think you're going to see this over time.

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Simon J. Leopold, Taubman Centers, Inc. - CFO, EVP and Treasurer [62]

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And then just to add to that. Clearly, that the department stores and what they choose to do with closures will have an impact on the timing there, will have an impact on the pace of supply shrinking and that's not something that we can predict obviously, but it is a factor clearly in the pace of that change.

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Vincent Chao, Deutsche Bank AG, Research Division - VP [63]

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Right. Right. I think just folks struggling with -- there's too many today. There's 1,000, but does it go to 300, does it go to 500, 600, but obviously it's more of a theoretical question. I guess, on the other side of things, given all of the discounts to NAV that the publicly-traded stocks are at, including the Class As, have you seen a pickup in interest from the pension funds or the sovereign wealth funds? Obviously, you're always talking to them about potentially doing something, but I was just curious if that pace has picked up or changed at all?

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Simon J. Leopold, Taubman Centers, Inc. - CFO, EVP and Treasurer [64]

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There's always been tremendous demand from institutional investors for malls, particularly the highest quality malls. There's always been a lot more demand from the capital side than there's been supply for investment. That still remains the same. I do believe that there's been a shading in the thought process of institutional investors to even higher up the quality spectrum than may have been there in the past, but there's still -- every indication that we've had, every conversation we've had is that there's still very significant demand for the highest quality regional malls in this country.

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Operator [65]

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Your next question comes from the line of Rich Hill from Morgan Stanley.

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Richard Hill, Morgan Stanley, Research Division - Head of U.S. REIT Equity and Commercial Real Estate Debt Research and Head of U.S. CMBS [66]

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I think just a quick housekeeping item on the modeling side of the equation. You guys have been really helpful in the past in thinking about capitalized interest with some of your construction projects in Asia. Any updates there or should we be thinking of that the same way as your guidance in the past?

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Simon J. Leopold, Taubman Centers, Inc. - CFO, EVP and Treasurer [67]

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You should think of it in the same way as our guidance in the past. At this point, there's still some capitalized interest in Hawaii, and we're capitalizing interest in Beverly and at Green Hills. But capitalized interest in Asia has come to an end. But we'll give interest guidance when we give guidance typically.

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Operator [68]

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Your next question comes from the line of Craig Schmidt from Bank of America.

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Craig Richard Schmidt, BofA Merrill Lynch, Research Division - Director [69]

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I know in the past we've talked about the fact that the sales growth of the China assets would be rapid and that in turn would accelerate the returns. Is that what you're seeing happen in the projects and where could returns go in, say, 3 or 4 years?

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Simon J. Leopold, Taubman Centers, Inc. - CFO, EVP and Treasurer [70]

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Well, we're delighted that you came on Craig.

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [71]

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It's good to hear your voice.

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Craig Richard Schmidt, BofA Merrill Lynch, Research Division - Director [72]

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I took it personally, but now I realize that’s my fault.

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [73]

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So as we said, all 3 assets have come out of the gate very well. Xi’an has had very strong growth, and we continue to believe that all 3 assets will grow to the stabilized levels of NOI that we talked about. They can only get there if the sales you also grow, again, in all 3 assets, and that's certainly been the history and the -- of good assets in those markets, that's exactly what's happened. And when you look at sort of the loyalty programs and the marketing efforts and all the things we've done, it's very clear that we have very strong customer loyalty in each one of these assets and it's growing rapidly. So it's too early to say. We have -- the income is sales dependent, more so than in the U.S. We've talked about that a lot. That's been part of our presentation on this on our website and our discussions. So hopefully the sales will grow as we anticipate and that will translate into the NOI that we anticipate and stabilization largely by the end of 2019.

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Craig Richard Schmidt, BofA Merrill Lynch, Research Division - Director [74]

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Okay. And then thinking about the replacement anchors at the Saks space in Mall of Short Hills. Was greater consideration given to the ability to increase traffic at the mall or the ability to push rents?

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [75]

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You mean in terms of the replacement tenants?

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Craig Richard Schmidt, BofA Merrill Lynch, Research Division - Director [76]

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Yes, when you are thinking about the replacement tenants and reviewing them. Were you more focused on drawing greater traffic than Saks was able to deliver? Or are you more focused on growing the rents from maybe what Saks was paying?

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [77]

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Well, we are obviously doing a combination of both. It's a balance. We anticipate that there'll be 2 -- principally 2 large tenants, one on each floor in the Saks space. That doesn't count the third floor yet. We think that there'd be 2 terrific tenants that would add value to the shopping center and add destination and it would give us a nice development kind of return on the investments that we made. As I said, we were delighted to get the Saks space back. It was not producing a lot of sales or destination trips and other of the stores are -- were doing significantly more volume. So we're very happy to be able to attract the tenants to the center that we are. Incidentally I would say that all you guys on Wall Street who live in northern New Jersey, there's somebody shopping a lot for sure though because the sales have been absolutely phenomenal in the shopping center. The growth in that asset has been very, very strong.

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Craig Richard Schmidt, BofA Merrill Lynch, Research Division - Director [78]

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I think you could put Jeff Spector in that group.

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [79]

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Thank you, Jeff.

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Operator [80]

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Your next question comes from the line of Floris van Dijkum from Boenning.

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Floris Gerbrand Hendrik van Dijkum, Boenning and Scattergood, Inc., Research Division - Senior Analyst of REIT [81]

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A quick question, sort of a follow-up on the institutional demand for your assets. I guess, one of the concerns that investors have is are cap rates going up for A assets. And can you maybe comment on cap rates for your properties and whether they are changing?

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [82]

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We don't believe they're changing, certainly not materially at all. Go try to buy an A quality asset, A++ asset for sure that's owned by an individual. They have no interest in selling. And even when the markets went down in 2008, '09, there wasn't a single sale of a really high-quality asset. So even when they're difficult times, people who own these things figure out how to hang onto them. So it is -- if you want to buy a great asset that's doing the average of our portfolio or more, they are not for sale, number one, and if they are, they are at very, very low cap rates.

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Simon J. Leopold, Taubman Centers, Inc. - CFO, EVP and Treasurer [83]

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Don’t forget the last time that assets that are of the kind of quality that we have that anchor our portfolio, the last time that assets like that traded in any real size was when Rouse was sold to GGP going on 12, 13 years now. And even in a much higher interest rate environment then, the cap rate on that portfolio, which as a portfolio was nowhere near as good as ours is, was still in the 4s. So as Bobby was pointing out and as that transaction points out, the scarcity value for the highest quality malls in the country remains, and we think the demand for those is far outstrips the supply, which is really 0.

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Floris Gerbrand Hendrik van Dijkum, Boenning and Scattergood, Inc., Research Division - Senior Analyst of REIT [84]

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Great, great. Thanks. I realize you probably can't comment on the charge and anything having to do with that. But maybe if you can comment on your outlook for UTC and San Juan and whether they're going to be accretive or additive to your same-store NOI expectations or not?

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Simon J. Leopold, Taubman Centers, Inc. - CFO, EVP and Treasurer [85]

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We can be -- yes, we can comment on that. In terms of sales, those are both San Juan and UTC are now in our sales numbers. So you can see those there, but both UTC and San Juan coming in clearly is accretive to our same-store sales growth.

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Floris Gerbrand Hendrik van Dijkum, Boenning and Scattergood, Inc., Research Division - Senior Analyst of REIT [86]

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Right. And then -- but they won't be in your same-store NOI?

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Simon J. Leopold, Taubman Centers, Inc. - CFO, EVP and Treasurer [87]

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They are now.

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Floris Gerbrand Hendrik van Dijkum, Boenning and Scattergood, Inc., Research Division - Senior Analyst of REIT [88]

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They are. So the expectations is the sales are up, but the NOI will be up in line with their sales or is that going to lag? I guess, is what I was trying to get at.

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Simon J. Leopold, Taubman Centers, Inc. - CFO, EVP and Treasurer [89]

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Well, we expect to get to have UTC, which has been in our numbers for a while now; San Juan coming in. We expect that they are accretive to our sales per square -- sorry our NOI -- comp center NOI growth.

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Operator [90]

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Your next question comes from the line of Christy McElroy from Citi.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [91]

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It's Michael Bilerman here with Christy. Bobby, I wanted to come back to your final comments you had in the opening remarks where you talked about the NAV discount that the sector trades at and you made the comment that when the dust settles. And I'm curious rather than letting the dust settle whether you would take advantage of what sounds to be a significant amount of capital that still wants to buy Class A assets. So, I guess, how aggressive do you want to be at trying to narrow what you perceived to be an extraordinarily large discount to NAV and I would think the market does as well for shareholders, of which you are one. I guess why wait till the dust settles?

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [92]

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Are you saying should we buy back stock or sell assets, what are you saying?

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [93]

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I don't -- I mean, there's a variety of different ways to do that, right. You can certainly sell interest in assets, you can sell assets outright, you can sell the entire company, you could pursue leverage to buy back. There is a variety of ways to, I guess, narrow that discount and the question is how aggressive do you want to be at doing that?

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [94]

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Let me say that the narrative out there, we think, is way overplayed. We think that the -- our assets will continue to grow their NOI's, that's what we're focused on. The NAV discount, we think, is just tremendous and we said that. And I think that there are many others that feel the same way. The idea of buying back stock is always interesting. It's one of the things we can do with our capital, but we also have to manage the balance sheet for the entire business and not just for a moment in time. And as we've seen during financial crisis, things that you don't expect can happen, and you have to be ready to be able to take advantage of them which, we believe, we are in a position to do. So I'm not sure. As I said, I think the narrative is very overplayed right now and there will be closing of the NAV over time.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [95]

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Right. I guess, it's just a question of whether -- I mean, I hear you on the points of balance sheet and stock buyback, which then leads to sale of interest, either partial sales of assets to infuse some capital or sale of the whole company rather than waiting till the narrative changes or the dust settles. I'm just trying to figure out whether that's something that's even on your mind doing or not?

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [96]

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Well, we thought about selling portions of assets and it's always something that is in sort of the bag of tricks. And Simon spoke a few minutes ago about the tremendous interest in our assets from large institutions, which exists. It's always existed, but it exists today. And you see that in decisions that large investors are making, investing in these assets either through the public vehicle or directly. So yes, it is something that we've talked about. We have not yet availed ourselves of that opportunity.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [97]

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If I can ask a question on the narratives, meaning the mall retailers, generally the weaker ones are out there with pretty negative comments on sales and traffic trends at their mall stores in recent months. Now your portfolio, as well as some of the others were up in sales, so good so far. How do you sort of reconcile those comments with what you are seeing in any early indications in April? I'm just trying to put those 2 things together.

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [98]

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Well, I think, generally, our centers are doing better, which we're seeing reflected in our sales growth, but it is a shifting environment, which is exactly what I try to speak to. There are a number of tenants that are experiencing problems. There was a list, I forgot the number, but I think 14 that I named that have publicly announced that they are closing stores, from 1 store to 16 stores in our shopping centers that they talked about. So there is that noise out there. But on the other side is that there is significant demand for the space. Tenants want to be in there. There are lots of new tenants that are thinking about having space in our shopping centers. And this is an opportunity for them to actually get good space in our centers, because it's now available and it's rare when some of these companies that have announced they are closing stores are in great locations. So I think that you'll see tenants matriculate in that will grow and they're going to find themselves in the great shopping centers. That's the bottom line. Michael, I think it's the best I can do.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [99]

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Great. I appreciate that. If I can just, one last question just in terms of costs. You have an activist there now that's starting a proxy campaign, which, arguably, probably, costs a little bit more money from your end. I'm just curious if there is any estimate as we go into the second quarter. I know there was about $3.5 million of cost in the first quarter, how we should sort of handicap the amount of capital or money that needs to be spent to defend yourself to go through your normal proxy season. I don't know if you're going to do anything special to try to defend yourself, whether you have to -- I don't know what's involved, and so I was just curious how we should think about it?

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Simon J. Leopold, Taubman Centers, Inc. - CFO, EVP and Treasurer [100]

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So I think it's important. I'm going to answer. I'll answer. This is Simon here. I think it's important, one, that everyone understand, that it's not something we asked for. But when you find yourself in a situation like this, it's important for the board, for management, for all the stakeholders to be well advised. And when this began last year, obviously, we don’t know exactly how it's going to go. The advisers that we have, we took an accrual for the first -- for the fourth quarter of last year of about $3 million and the first quarter this year was $3.5 million, you shouldn't look at either of those as quarterly run rate numbers, because this is the fluid situation and you have to see how it plays out. But we do expect that there will be additional costs in the second quarter. We don't know what those will be yet. They are not in our guidance, but we do expect there will be additional costs. But like I said, you can't take the last 2 quarters and look at that as a run rate.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [101]

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Would you do any differently like in terms of, I guess, what's the process now that it's a live proxy campaign with nominations? Do you have to -- do you have to do more outreach, do you have to give presentations. We haven't had a live proxy campaigning a little while and (inaudible).

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Simon J. Leopold, Taubman Centers, Inc. - CFO, EVP and Treasurer [102]

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So we filed our definitive proxy, it's out there, and we will be meeting with investors over the course of the month of May.

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [103]

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And our Annual Meeting is on June 1.

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Operator [104]

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There are no further questions at this time. I'll turn the call back over to the presenters.

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Robert S. Taubman, Taubman Centers, Inc. - Chairman, CEO and President [105]

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Thank you. We look forward to talking to you, and we are going to meet a lot of you over the course of May. We are looking forward to speaking to you directly. Thank you for your time today.

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Operator [106]

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This concludes today's conference call. You may now disconnect.