Taubman’s Bet on Asia Shakes Investors’ Faith; Investors Worry the Company Is Too Tied Up in Asia Projects

Taubman’s Bet on Asia Shakes Investors’ Faith

Investors Worry the Company Is Too Tied Up in Asia Projects


Dec. 3, 2013 7:57 p.m. ET

In late October, executives from Taubman Centers Inc., TCO +0.32% the luxury retail real-estate empire built by the Taubman family of Michigan, gathered with local officials and business leaders in Hanam City, South Korea, to celebrate the groundbreaking of a massive mall the company is building there.The project, Hanam Union Square, is part of a commitment Taubman made in 2012 to invest $550 million in malls in South Korea and China. South Korea is attractive to Taubman because rising rents and rising consumer demand have boosted the market for retail real estate, while the recovery in the U.S. has remained slow.

But investors are getting nervous. The projected opening for the Hanam City development has been delayed, fueling concerns that too much of Taubman’s $1.6 billion development pipeline is tied up in risky projects in Asia.

Taubman’s stock has trailed other real-estate investment trusts since the beginning of the year, shortly after it announced stakes in two Chinese malls to be anchored by department-store giant Wangfujing.

Analysts and investors attribute the poor performance to uncertainty over Taubman’s lack of experience in the region, as well as delays.

Last quarter, the company said the 1.7-million-square-foot South Korean mall, located roughly 15 miles from the center of the capital city of Seoul, would open in late 2016, at least a year later than originally planned.

Despite the challenges, Taubman is pushing ahead. In conference calls with investors, Robert S. Taubman, the company’s chairman and chief executive and son of its founder, A. Alfred Taubman, has said that the company has to look east to expand.

Only 12 U.S. malls have been built since 2009, compared with an average of more than 25 a year in the previous five years, according to CoStar Group Inc. Rent growth at regional malls has been stuck between 1% and 1.4% over the past year, according to Reis Inc.

By contrast, in South Korea, sales at department stores and discount stores are growing at a rate of between 3% and 4% a year, while retail rents rose by more than 18% between early 2009 and the end of 2012, according to brokerage Jones Lang LaSalle Korea.

Mr. Taubman, whose family owns roughly 30% of the company’s stock, is trying to convince shareholders that the Asian malls will pay investors handsomely for their patience. “You can end up with losses early on, but once you build one of these things, they’re tremendous engines of income and growth,” Mr. Taubman said.

But that could be difficult, as Taubman and other U.S. mall-builders have found already. In 2004, Taubman announced it would partner with Morgan Stanley MS -1.46% Real Estate Funds and developer Gale International to develop a shopping center in Songdo. But that project fell apart after the financial crisis struck, and Taubman decided not to bid on the project when it was put up for sale.

Taubman’s largest competitor, Simon Property Group of Indianapolis, partnered with Morgan Stanley on four Chinese malls in 2006. But three years later, Simon sold its interest in the malls at a $20 million loss.

For the Hanam City project, Taubman is partnering with Shinsegae Group,004170.SE -2.38% a large luxury department-store retailer, and planning to eventually invest $330 million for a 30% stake.

“The market’s fear is that with all this Asia focus, it’s taking a ton of management’s time away from focusing on the core business—managing and redeveloping the existing portfolio,” said Jonathan Miniman, an associate portfolio manager with CBRE Clarion Securities in Radnor, Pa.

Alexander Goldfarb, a REIT analyst with Sandler O’Neill + Partners, says that the delays for the Korean and Chinese projects are cause for concern, and that the risk has kept Taubman’s stock from performing well. “At some point, the market says, ‘Stop, Go back to doing what you do best,'” he said.

Mr. Taubman says it is “natural” that investors “don’t have the same level of confidence that management, sitting at the controls, might have,” and points to his family’s large stake in the company as proof that Taubman believes in the potential of the Asian market.

“We’re eating our own cooking,” Mr. Taubman said. “We believe in what we’re doing.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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