November/December 2011

www.reit.com

20 the

modern reit at

Pioneer Milton CooPer led the Way.

Taubman CenTers’ IPO InTrOduCed The

uPreIT and helPed Change The IndusTry.

robert taubman Chairman, President & CEO

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taubman’s iPo brought the UPreit into practice and more real estate players into the public market.

Robert S. Taubman Chairman, President & CEO

y the early 1990s, Taubman Centers Inc. (NYSE: TCO) had amassed one of the best-performing port-folios in its sector and established itself as a pioneer of the American mall business.

Yet, in November 1992, the company, which had been the managing partner of a limited partnership, became a pioneer of a different sort when it went public in the form of the first-ever umbrella partnership real estate investment trust (UPREIT)—an approach that allowed Taubman and eventu-ally many other privately held real estate companies to go public without exposing existing partners to large capital gains tax bills, explains REIT historian Ralph L. Block.

“Taubman’s UPREIT structure solved the problem of existing partners being hit with heavy capital gains taxes if all the part-nership’s properties were simply sold or contributed to the new Taubman REIT,” says Block, author and owner of Westlake Village, Calif.-based Essential REIT Publications.

An UPREIT is typically the general partner and majority owner of an operating partnership. It contributes cash proceeds from its initial public offering to the operating partnership. Individuals or partnerships owning real estate contribute their holdings to the operating partnership in exchange for limited partnership units. After a certain period, the units can be tendered for cash or REIT shares, which may result in the partners incurring the liability deferred at the UPREIT’s formation.

The Taubman IPO raised about $300 million, a considerable amount at the time, and gave the Bloomfield Hills, Mich.-based

company access to a more permanent source of capital at a time when financing was scarce and the scope of its projects was growing.

“The UPREIT really unlocked the public capital markets to pri-vate ownership of real estate,” says Robert Taubman, the company’s chairman, president and CEO. He estimates that more than 90 percent of the equity capital that has been raised by listed REITs since his company’s IPO has been raised through the UPREIT structure and the total REIT float has increased from about $10 billion in 1992 to nearly $400 billion today.

“All of these (private) companies rolled up their assets and created a consolidated entity in the UPREIT structure because it solved the tax problem,” he explains.

developing a reputationWhile many of its competitors have been aggressive acquirers of properties and other companies since their IPOs, Taubman Centers has largely remained true to its roots as a developer.

Taubman Centers was founded in 1950 by A. Alfred Taubman, father of current CEO Robert Taubman. who started out his career in real estate as a general contractor and later became a developer. He broke ground on his first large-scale mall, Arborland in Ann Arbor, Mich., in 1961.

Alfred Taubman went on to develop malls throughout the coun-try, including Southland Mall in Hayward, Calif., the first enclosed mall in Northern California and the region’s largest shopping center when it opened in 1964. Three years later, he opened Sunvalley

By: Anna Robaton

Lifts UP reits

B

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mall, billed then as the world’s largest air-conditioned shopping center, in the San Francisco suburb of Concord.

Many of his early projects were built on inexpensive farmland in areas that he correctly assumed would undergo huge transforma-tions thanks to the passage of the Interstate Highway Act of 1956.

“My father recognized that around those roads would be opportunities for new growth. He would look at where significant interchanges were being built and knew that they would create hot spots for commercial and residential development,” says Robert Taubman, who joined the firm in 1976.

Alfred Taubman, who served as chairman until 2001, drew on his background in architecture and store planning to come up with ideas that are now common features of the American mall, from ring roads to escalator placement designed to circulate shoppers.

“The hallmark of our company is really the quality of our assets and the ability to program assets and plan them better than anyone else,” Robert Taubman says.

managing GrowthWhen the company went public in 1992, it had a portfolio of 19 regional and superre-gional malls located throughout the country. Since then, it has built 12 malls and acquired eight. It has also sold 16 properties, shedding assets that no longer meet its return hurdles.

“Taubman has always been conscious of the necessary returns to achieve on its invest-ments,” says Cedrik Lachance, a managing director at Green Street Advisors. “It figured out a while ago that it could realize good returns without dramatically increasing the size of the company.”

Taubman now owns 23 malls that are among the best-performing in the country, from Beverly Center in Los Angeles to North-ern New Jersey’s The Mall at Short Hills, which recently underwent its fifth renovation and expansion in 30 years. In January, Taubman Centers was added to the Standard & Poor’s MidCap 400 index.

“We only have about two dozen assets,” says Robert Taubman, “but we have been able to grow our total enterprise value by more than three times since the IPO (from $2.5 billion to $8 billion) and our equity market capitalization by nearly four times (from $1.3 billion to about $5 billion).”

In the third quarter, Taubman Centers’ tenant sales per square foot hit a record $615 on a trailing, 12-month basis, according to the company. The tenant mix in many of its malls skews toward high-end retailers, which were hit hard early in the recession but have since bounced back. Many luxury brands have benefitted from

stock market gains over the past couple years and the effect those have had on the spending habits of wealthy Americans.

“Luxury took it hard (during the recession) but has come back,” says Steve Sakwa, a senior managing director and head of real estate research at International Strategy & Investment Group Inc. “Taub-man,” he adds, “clearly caters more to the Tiffany customer than they do to the Wal-Mart customer.”

taking the regional mall GlobalTaubman Centers is poised to capture its fair share of the limited pool of regional mall development opportunities in the United States, but it is also establishing a presence in China and South Korea, countries with a burgeoning middle class. In 2005 it formed a subsidiary based in Hong Kong that serves as a platform for its

expansion in the region. In August, its subsid-iary, Taubman Asia, announced an agreement to acquire a controlling interest in a leading, Beijing-based retail real estate consulting firm, a move that will give it greater access to invest-ment opportunities in China.

While it scouts for development projects and acquisitions, Taubman Asia has been providing leasing, management and fee development services for major retail real estate projects. In Seoul, South Korea, it is providing leasing and management services for the planned International Financial Center Mall, part of a 5.4 million-square foot mixed-use project that aims to position the Yeouido area as the financial center for Northeast Asia.

developing new opportunitiesBack home, Taubman is seeking to become a larger player in the outlet center sector, a silver lining in retail real estate over the last several years. Through a joint venture, it expects to

develop five to 10 outlet centers over the next decade and is targeting markets that can support outlet centers capable of achieving tenant sales of at least $400 per square foot, according to the company.

Taubman already has three successful outlet centers—Arizona Mills in Tempe, Ariz.; Dolphin Mall in Miami and Great Lakes Crossing in Auburn Hills, Mich. The company decided to enter the sector, whose biggest players include Simon Property Group (NYSE: SPG) and Tanger Factory Outlet Centers Inc. (NYSE: SKT), at the request of many of its existing tenants, according to Robert Taubman.

“They are looking for new supply and asked us to consider com-ing into the business,” he says.

Taubman is also moving forward with several regional mall proj-ects. In downtown Salt Lake City, it is currently building the only

taUBman Centersnyse: tCO 200 e. Long Lake road, Suite 300 Bloomfield Hills, Mi 48304-2324

www.taubman.com 248-258-6800

Key executives: robert taubman Chairman, President & CEO

Lisa Payne Vice Chairman & CFO

William taubman COO

4 • NOVEMBER–DECEMBER 2011

regional mall under construction in the country, according to the company. Measuring about 700,000 square feet, City Creek Center, slated to open next March, is part of a large mixed-use project. The mall will be anchored by Nordstrom and Macy’s and has a retract-able glass roof over its central corridor.

Taubman Centers estimates that 15 to 20 malls will be built in the United States over the next decade, and it hopes to develop four to five of those, along with making some acquisitions.

More than six decades after its founding, the company is intent on remaining nimble and has set its sights on doubling its enterprise value over the next decade.

“Maintaining a prudent balance sheet, we believe we can take the company from $8 billion in total enterprise value to double that over the next 10 years,” Robert Taubman says. u

Anna Robaton is a regular contributor to REIT magazine.

the UPreit reaLLy UnLoCked the PUBLiC CaPitaL markets to Private ownershiP of reaL estate.

—roBert taUBman

The Mall at Millenia (Orlando, Fla.)

The Beverly Center (Los Angeles, Calif.)

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edITOr’s desK

listed reITs have earned

their place in the investment

mainstream.

“all gOOd ThIngs must come to an end” is a tired old cliché most people say half-heartedly to explain away an unfortunate turn of events. But where is the cliché about “all good things must start?” There isn’t one.

Sometimes events begin with a clear-cut signal like the kick-off to start a football game or a kiss with a loved one to start a new year. Other times the start is harder to define. Often it’s missed as it happens, only gaining signifi-cance through the course of history and with the advantage of hindsight.

While the U.S. REIT industry got its start with an act of Congress in 1960, it wasn’t until 30 years later that it began to become what we see today. Investors have embraced the liquidity, transparency, dividends and diversification provided by listed real estate securities over the past two decades. Listed REITs have earned their place in the investment main-stream. The industry has undergone a metamorphosis over that period, a time commonly referred to as the Modern REIT Era.

This era of expansion and evolution did not begin with a clear-cut single event. Instead it began with the initial public offerings of two retail REITs about a year apart in the early 1990s. These two events were certainly noticed at the time, but few in the industry, if any, understood what they would set in motion.

In this issue, we celebrate the significant roles Kimco Realty Corp. (NYSE: KIM) and Taubman Centers (NYSE: TCO) played in laying the ground work for the growth and prosperity that followed for the REIT industry. Each of these companies faced obstacles and had to buck conven-tional thinking when they went to the public market.

REITs were, at best, misunderstood and, at worst, disregarded by the broader investment community at the time. Kimco and Taubman helped redefine the market’s perception of what a REIT is and what it could offer. In so doing, many of the best private real estate companies were encouraged to also go public.

In this holiday season, join me in giving thanks to Milton Cooper, Robert Taubman and their teams for having the foresight and conviction to see the benefits of the listed REIT format and for setting an example that is still being emulated today. What better place to start than that.

maTThew beChard Editor in Chief

The start of something good

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