By the end of 2013, Taubman Centers (NYSE: TCO) had expanded its portfolio to a high of 25 shopping centers. Since that time, the company has significantly downsized by selling seven of those centers to an affiliate of the Starwood Capital Group. This reduction in the size of their core portfolio impacted the company’s metrics both negatively and positively.
- Funds from operations per share decreased by 10 percent (Q1-2015 vs. Q1-2014), as opposed to increases in the cash dividend distribution as well as the dividend payout.
- Occupancy rates in their current portfolio have decreased.
- Combined average rent per square foot, sales per square foot, and mall tenant sales have all increased. This is a direct reflection of Taubman Centers’ goal to focus on their most productive centers.
- The Debt-to-Market Capitalization ratio has been reduced as a significant portion of the sales revenues was used to retire debt early.
- Investors received a special dividend of $4.75 per share, equivalent to a 6.2 percent yield, a benefit from the sale to Starwood Capital Group.
- Taubman Centers maintains a diversified portfolio of tenants for revenue generation. The company’s largest tenant, Forever 21, generates just 5.1 percent of mall Gross Leasable Area (GLA).
Although the proceeds from the sale of the 7 centers were employed to retire debt and pay cash dividends, the company is very interested in growth. Management anticipates there will be new development opportunities enabling the company to build a new center, on average, every two years. Taubman Centers recently opened a new mall in San Juan, Puerto Rico, and they expect to open another one in Honolulu, Hawaii next year. In addition to traditional malls, the company is also targeting outlet centers.
Similar to Taubman Centers’ peers in the retail space, the company experienced the effect of tenant bankruptcy. In 2014, tenants accounting for 1.6 percent of leases filed for bankruptcy compared to just 0.3 percent in 2013. The company realizes this might lead to lease termination and a reduction in cash flow so they had an annual provision for accounts receivable loss equivalent to 0.4 percent of total revenues in 2014.
The company’s valuation metrics include a Price-to-FFO ratio of 23.2, much greater than its historical average and peer group’s median, and a dividend yield of 3.0 percent that is lower than its peer group. Check peer comparison here.
In summary, Taubman Centers is a solid company but with FFO falling and a high valuation. It is not the right time to buy.
Written by Heli Brecailo
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