Tanger Inc.
Q2 2013 Earnings Call Transcript

Published: 31 Jul 2013

[Cyndi M. Holt:]

Good morning. This is Cyndi Holt, Vice President, Finance and Investor Relations. And now I’d like to welcome you to Tanger Factory Outlet Centers Second Quarter 2013 Conference Call. Yesterday we issued this quarters earnings release as well as our supplemental information package and investor presentation. This information is available on our website under the investor relations tab. Please note that during this conference call some of management comments will be forward-looking statements, including statements regarding the company’s property operation, leasing, tenant sales trends, development, acquisition and expansion activity, as well as their comments regarding the company’s funds from operations, funds available for distribution and dividends. These forward-looking statements are subject to numerous risks and uncertainties and actual results could differ materially from those projected due to factors including, but not limited to changes in economic and real estate conditions, the availability in cost of capital, the company’s ongoing ability to lease, develop and acquire properties, as well as potential tenant bankruptcies and competition. We direct you to the company’s filings with the Securities and Exchange Commission for a detailed discussion of these risks and uncertainties. During the call, we will also discuss non-GAAP financial measures as defined by SEC Regulation G. Reconsolidations of these non-GAAP measures to the comparable GAAP financial measures are included in our earnings release and in our supplemental information. This call is being recorded for rebroadcast for a period of time in the future, as such it is important to note that management’s comments include time sensitive information that maybe accurate only as of today’s date July 31, 2013. At this time, all participants are in listen-only mode. Following managements prepared comments, the call will be opened up for your question. We ask that you limit your questions to two so that all callers will have the opportunity to ask questions. On the call today will be Steven Tanger, President and Chief Executive Officer; and Frank Marchisello, Executive Vice President and Chief Financial Officer. I will now turn the call over to Steven Tanger. Please go ahead Steve.

[Steven B. Tanger:]

Thank you, Cyndi and good morning everyone. High tenant demand for outlet space has again resulted in positive Tanger metrics for the second quarter of 2013. As of June 30, average occupancy within our consolidated portfolio was 98.3%. Same center net operating income growth of 4.5% during the quarter extends our streak to 34 consecutive quarters dating back to when we began measuring it in the first quarter of 2005. This internal growth combined with the incremental growth from four properties added to the portfolio late last year, resulted in FFO per share growth of 13.3% during the first half of 2013. This double digit growth did not come at the expense of our balance sheet. According to KeyBanc’s leadership report as of the end of June, our low leverage was best in class for the mall sector in terms of debt to total market capitalization, total debt to recurring EBITDA and recurring EBITDA to interest expense. And during the quarter, Tanger’s credit rating was upgraded by both Moody's Investor Service and Standard & Poor's. I will now turn the over to Frank to take you through our financial results and to discuss the balance sheet. Then I will follow up for the discussion of our operating performance, our development pipeline and our current expectations for the balance of 2013.

[Frank C. Marchisello:]

Thank you, Steve and good morning everyone. Our reported second quarter funds from operations or FFO increased 10.3% to $42.5 million compared to $38.6 million last year. Adjusted FFO per share increased 12.8% to 0.44 per share from $0.39 per share for the second quarter of last year, and be consensus by a penny. The first half of 2013, AFFO per share increased 11.8% to $0.85 per share from $0.76 per share the same period in 2012. This year-over-year increase is a direct result of our opening two developments in the U.S. and acquiring two centers in Canada in the fourth quarter of last year and our ability to continue to drive rental rates and grow same-center NOI. The lowest average tenant occupancy cost in our mall peer group, is just 8.4% for the consolidated portfolio in 2012. We believe opportunities to increase rents will continue. On a consolidated basis our total market capitalization at June 30, 2013 was approximately $4.4 billion up 5.2% from $4.2 billion last year. Our debt to total market capitalization was approximately 25.3% at June 30, 2013 compared to 25% last year. We also maintained a very strong interest coverage ratio of 4.15 times for the second quarter of 2013 up from 4.08 times during the second quarter of 2012. Our balance sheet strategy continues to be conservative targeting minimal use of secured financing and a manageable schedule of debt maturities. As of June 30, 2013 there was $306.9 million of available capacity under our unsecured lines of credit or 59% of the total commitment. Approximately 92% of our consolidated gross leasable area is unencumbered by mortgages, and we have no significant maturities on our balance sheet before November of 2015. As Steve mentioned, Tanger’s credit ratings were upgraded during the quarter to Baa1 by Moody's Investor services and BBB+ by Standard & Poor's. The company has paid cash dividends each quarter and has raised its dividend each of the 20 years since becoming a public company in May of 1993. Our dividend is well covered with an expected FAD payout ratio for 2013 of between 55% and 60%. At these levels we’re able to generate significant incremental cash flow over our dividend, which we plan to use to help fund our future growth or to reduce amounts outstanding under our lines of credit. We have been continuously monitoring the interest rate environment historically it has been our practice to trim out balances under our lines of credit, when the outstanding amounts reach the index eligible levels of approximately $250 million. As we approach that threshold we are focused on evaluating various options for terming out and locking down a portion of our short-term payable rate debt. We take the health of our balance sheet seriously and do not intend to risk any of our hard earned invest credit ratings. I will now turn the call back over to Steve.

[Steven B. Tanger:]

Thanks, Frank. I’m pleased to report that we continue to see positive base rental rates spreads for space renewed and released during the second quarter of 2013. This is in part a reflection of the performance of our tenant partners. Through the first half of 2013, straight line blended rental rates increased 22.1% on the renewal and re-leasing of space throughout the consolidated portfolio. These renewals accounted for 1.2880 million square feet or approximately 66% of the space coming up for renewal during 2013, and generated an 18.5% increase in average base rental rates. Remaining 3860 square feet was released at an increase in average base rental rates of 32.9%. Positive leasing spreads together with contractually embedded rental increases and a higher occupancy, resulted in same centre net operating income growth during the second quarter of 4.5% for the consolidated portfolio. For the first half of 2013, same-center net operating income growth was 4.2% on top of the increase of 5.3% last year. At June 30, 2013 consolidated portfolio occupancy was 98.3% up 30 basis points from 98% at June 30, 2012, and at March 31, 2013. Comparable tenant sales increased 2.3% to $384 per square foot for the twelve months ended June 30, 2013 and increased 1.3% for the three months ended June 30, 2013. This performance is in line with our initial expectation that tenant sales would remain stable or increase modestly this year. Excluding the eight consolidated properties impacted by Hurricane Sandy in the fourth quarter of last year, consolidated comparable tenant sales increased 3.1% for the 12 months ended June 30, 2013. This level of growth is consistent with the long-term compounded annual growth rate for Tanger tenant sales of about 3%. As evidenced by our occupancy rate, there is high demand for the tenant community for space in Tanger Centers. Tanger’s low cost of occupancy of 8.4% along with continued growth in tenant comparable sales over the long-term, have allowed us the opportunity to continue to increase rents, while maintaining a very profitable distribution channel for our tenant partners. This demand for outlet space coupled with our reputation within the industry of having refined skill set for developing, leasing, operating and marketing high quality outlet centers has afforded Tanger a robust, external growth pipeline throughout the United States and Canada. We currently have four projects under construction. During the quarter, we and our 50/50 co-owner RioCan Real Estate Investment Trust broke ground on two Canadian developments, both of which are expected to open in the third quarter of 2014. On May 15, construction commenced on Tanger Outlets Ottawa, located in sub-urban Kanata off the TransCanada Highway number 417 at Palladium Drive. Ottawa is the nation's capital and the fourth largest city in the country with $1.2 million residents and $7.5 million annual visitors. The 303,000 square foot center will be our first roundup development in Canada, and will feature approximately 80 brand name and designer outlet stores. On May 16, 2013 construction comments on a major expansion and renovation of Tanger Outlets Cookstown, located 30 miles north of the Greater Toronto Area directly off Highway 400 at Highway 89, the gateway to the highest concentration of vacation homes in Southern Ontario's cottage country. The 156,000 square foot property was acquired in December 2011, and this project will nearly double its size to approximately 310,000 square feet adding about 35 new brand name and designer outlet stores to this centre. Because it’s sales productivity exceeded original expectations, co-owners increased the properties budget by about $10 million to renovate the existing property in conjunction with the expansion. Although the going in yield is below our targeted range, we believe that over time this incremental investment will be money well spend for such a highly productive asset. Domestically we plan to complete two projects by year-end, despite more than 60 rain days since last November when we broke ground on the national harbor project. We are currently on track for a planned holiday opening in November 2013. The project budget was increased by $5 million to cover the cost associated with opening the Center on time and to include more upscale amenities than originally contemplated. Our projected yield which is based upon occupancy of 95% was reduced by 50 basis points as a result of these additional costs. However, leasing has exceeded expectations and we expect to be close to 100% lease to the opening. The other domestic project that we plan to open this year is a small expansion of our highly productive center in Sevierville, Tennessee by the end of the third quarter. In the pipeline, at various stages in the predevelopment project, process, we have good visibility on four new developments and two expansions that we plan to deliver in the next 24 months. These include domestic projects at Foxwoods Resort Casino in Mashantucket, Connecticut; in Charlotte, North Carolina; in Columbus, Ohio; in Scottsdale, Arizona; and a small expansion of our Center in Park City, Utah as well as a small expansion of our Canadian Outlet Center in Saint-Sauveur to back in the Montreal market. In addition, early in the second quarter, we announced our plan to form a partnership with the Peterson Group where the proposed development of a new Tanger Outlet Center in Clarksburg, Maryland, located 27 miles northwest of Washington DC and 36 miles west of Baltimore. This project is proceeding through the pre-development stage. We remain optimistic about the growth prospects for our company and our industry as shoppers continue to seek branded value. We believe the tenant community continues to indicate it’s desire to expand into new markets in the United States and Canada where Tanger is a preferred partner. With respect to earnings guidance, based on our current view of market conditions and trends, we are raising the low end of our previous guidance for 2013. We currently expect our estimated diluted net income will be between $0.78 and $0.81 per share and our FFO will be between $1.78 and $1.81 per share. Our estimates do not include the impact of any rent termination fees, any potential refinancing transactions, the sale of any outparcels of land, or the sale or acquisition of any properties for the balance of the year. Our guidance includes a projected increase in the same center net operating income of approximately 4% and is based on average general and administrative expenses of approximately $9.5 million to $10 million per quarter. We have over 2,700 leases with good credit, brand name tenants that have historically provided a continuous and predictable cash flow in good times and in challenging times. No single tenant accounts for more than 6.6% of our base and percentage rental revenues or 7.9% of our gross leasable area. In addition, approximately 90% of our total revenues are expected to be derived from contractual base rents and tenant expense reimbursements. And now I would like to open the call for questions.

[Operator:]

(Operator Instructions) Your first question comes from the line of Carol L. Kemple with Hilliard Lyons. Your line is open.

[Carol L. Kemple:]

Good morning. Was there anything specific in the acquisition cost line item that you often talk about?

[Frank C. Marchisello Jr.:]

Hey Carol, this is Frank. There are some minor professional fees associated with various projects that we have been working on during the year, nothing specific.

[Carol L. Kemple:]

Okay. And then what’s like your Fort Myers outlet center, the occupancy dropped to 88% in the quarter from 94% in the first quarter, what tenants was that related to or was there anything special going on at that center?

[Frank C. Marchisello Jr.:]

We had basically – it’s a very small center as you know. So only one tenant, and I am not going to mention the name, but one tenant moved out and we are in discussion with other tenants to move in. This is just an anomaly. In the small center the occupancy rate can go up or down depending on one tenant.

[Carol L. Kemple:]

Okay, thank you.

[Operator:]

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

[Todd M. Thomas:]

Hi good morning. I am on with Jordan Sadler as well. First question, just wanted to dig in a bit on some of the changes with regard to the assumptions on the development schedule. I think you touched on Cookstown, but was just wondering about National Harbor, the increased cost, the slightly lower yield there, what the driver of that changes were at that site?

[Steven B. Tanger:]

As I mentioned previously, we had 63 days of rain. So a small percentage of that was soil stabilization and other costs, unexpected costs associated with the weather, so that we could still meet the November opening date and generate the revenue. Second, the major increase in the cost which weren’t that great that the major increase was addition of more upscale amenities, we’ve been very successful in attracting more upscale and designer tenant than we originally had contemplated. So we wanted the environment for our shoppers for these up scale tenants to reflect that type of designer brand names.

[Todd M. Thomas:]

Okay.

[Frank C. Marchisello:]

And also I just want to point out that our original expectation, and original yield was based on 95%, based on the leasing velocity rate now, we expect to open-close to a 100%.

[Todd M. Thomas:]

Okay, that’s helpful and than just question for Frank with regarding to the floating rate debt, it sounds like the plan is to turn the line balance out soon. What kind of pricing is reasonable to expect for that?

[Frank C. Marchisello:]

I think based on current environment, we’ve been hearing a tenure at around the four handle.

[Todd M. Thomas:]

Okay, great. Thank you.

[Operator:]

Your next question comes from the line of [Daniel Bush] with Green Street Advisor. Your line is open.

[Unidentified Analyst:]

Thank you. This morning RioCan reported that you guys are under a contract for a land-parcel in Calgary. Can you talk a little bit about what that project maybe and where is that in the predevelopment phase?

[Steven B. Tanger:]

We are in the very early predevelopment stage and we’ve just started to show it to some of our Tanger tenants. So it’s premature to have further discussion about it.

[Unidentified Analyst:]

Okay, and I guess just looking forward obviously, it seems like you’re happy with that partnership. How do you see your next several projects, I guess said that where do you see the best growth for ground up development, whether it would be in domestic or in Canada?

[Steven B. Tanger:]

As we stated many times, there is a long runway to grow in our opinion in the United States and there is a limited number of Centers that will be built in Canada. Our expectation hasn’t really changed, we expect to be able to deliver one to two new centers in the United States and our plan is to deliver one new ground up center here in Canada.

[Unidentified Analyst:]

Okay. Thank you, guys.

[Operator:]

Your next question comes from the line of Rich Moore with RBC Capital Markets. Your line is open.

[Richard C. Moore:]

Hi, good morning guys. On that same line, see if I could, I heard also this morning that maybe you got something going in Vancouver with RioCan, is there anything to talk about there?

[Steven B. Tanger:]

We’re not in a position to announce anything other than what’s been announced publically.

[Richard C. Moore:]

Okay. Got it. And then, Frank, on the line, I got in a little bit late on the call. Is there any, it sounds like you’re going to turn that out with a bond. Is there any thought of issuing any equity in there as well?

[Frank C. Marchisello Jr.:]

Rich, I don’t see a need to raise any equity given our current leverage position and our pending requirements going forward particularly given that a lot of that is going to be equity and joint ventures which will have their own property level financing. So right now, we’re really not focused on an equity need. We think that the bond market would be available when we’re ready to push that button if and when and rates are still at 200 basis points plus less than our mix maturity that comes up, it’s like 6% and 8%, so we still think there is good opportunity to get some long-term money out there.

[Richard C. Moore:]

The yield is bouncing a little bit higher this morning. The next thing I have guys on the joint ventures, will all of those be unconsolidated I guess or well any of those be consolidated, I guess you got one that may, but is most of that unconsolidated as you go for the developments I am thinking?

[Steven B. Tanger:]

The vast majority are going to be unconsolidated. I think there is probably one in the pipeline that could end up on the balance sheet completely.

[Richard C. Moore:]

Okay, great. Thank you guys.

[Operator:]

(Operator Instructions) Your next question comes from the line of (inaudible) with Goldman Sachs. Your line is open.

[Unidentified Analyst:]

Hi, we were just wondering as you are in the number of JVs right now, how do you thinking your fee income will turn over time?

[Steven B. Tanger:]

Our fee income is going to probably increase next year. We haven’t issued any overall guidance, but you can expect our fee income will probably go up by $500,000 to $1 million.

[Unidentified Analyst:]

Okay, great. Thanks. That’s it.

[Operator:]

Your next question comes from the line of Todd Lukasik with Morningstar. Your line is open.

[Todd Lukasik:]

Good morning. Just a question about Canada. Is the story really there just about bringing the international retailers the Canadian consumers or has incremental developments deferred interest from Canadian retailers there for the outlet channel and is there an opportunity for you to get more Canadian retailers for demand for your U.S. portfolio as well?

[Steven B. Tanger:]

I think the answer is yes, yes, and yes.

[Todd Lukasik:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Yasmine Kamaruddin with J.P. Morgan. Your line is open.

[Yasmine Kamaruddin:]

Okay, just a question on the Columbus development, any commentary there because last quarter Sun raised concerns about Columbus going forward. So what are your thoughts on this?

[Steven B. Tanger:]

We are still very optimistic about Columbus. We think it’s a terrific market and there is no outlet center present there as of yet and we’re convinced we have the best site in the market which is on the north going towards Cleveland. There will be a – we are totally approved by the local community in the township. The local community has a kind of quirk that if a 100 citizen sign a petition that the challenge to the governments permits that we’ve received will go to referendum in November. There were more than a 100 signatures on a partition and we will go to referendum which we expect to win. Shortly after the referendum, we hope to break ground, the tenant demand is exceedingly high in Columbus and we’re looking forward to delivering with our joint venture partners, Sun Property Group, a very successful high volume center.

[Yasmine Kamaruddin:]

Okay, great. Thanks and also do you have sense on how visible the shadow pipeline is and how many markets that you’re going head-to-head with other competitors.

[Steven B. Tanger:]

Well, since it’s a shadow pipeline obviously it hasn’t been announced yet. It’s not our intention in our shadow pipeline to go into markets behind other developers that are already announced, so I wouldn’t expect that although in the past, the opposites occurred. We, as we continue to break ground, we expect to break ground this year on Foxwoods and Charlotte and as we break ground there, we wouldn’t intend to announce additional insights.

[Yasmine Kamaruddin:]

Okay, great. That’s it. Thanks.

[Operator:]

Your next question comes from the line of Ben Yang with Evercore. Your line is open.

[Ben Yang:]

Yeah, hi, good morning, thanks. Steve, there was an odd-up on the general, recently on Coach and its Outlet strategy, they are now more dependent on Outlet has been post priced and the challenges contemplated with them is balancing growth versus maintaining exclusivity of the brand and I know you don’t like talking about specific tenants, but maybe in general over the longer-term, do you think this is a concern for your business and are you in anyway stamping that, have you started key outlet retailers, maybe first saturation based on that?

[Steven B. Tanger:]

First, we have in respect with Frankfurt, we are get friends with the management group that as of yesterday announced that they are moving on. We have great expectation that the new group that’s coming in will seek profitable distribution channels of which the Outlet is a very profitable distribution channel. I don’t think the Coach is reached saturation but you would certainly have to speak to the management of Coach about that. There are other very high quality, high volume value tenants in that category such as Kate Spade, Michael Kors, etcetera. So the women’s accessory category is well represented in the Outlet space and well represented in the Tanger portfolio.

[Ben Yang:]

Okay. So maybe more specific demand than overall, and it sounds like you are not having any discussions about maybe slowing down the expansion in your portfolio at least in some of your recent conversations, is that kind of a fair assumption?

[Steven B. Tanger:]

I think you can draw the conclusions you want. We value Coach and as of today they were committed to go in several of our new developments.

[Ben Yang:]

Great, thank you.

[Operator:]

There are no further questions in queue at this time. I will turn the conference back over to our presenters.

[Steven B. Tanger:]

Thank you all for participating in the call today and your interest in our company. Frank and I are always available to answer any questions you may have. We hope to see you soon. Goodbye and have a great day.

[Operator:]

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