Tanger Inc. — Q1 2018 Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly results for the three months ended March 31, 2018, compared with the same period in 2017. Tanger Factory Outlet Centers, Inc. operates as a REIT through Tanger Properties Limited Partnership, which owns and operates the properties and holds substantially all debt. At quarter-end, the portfolio included 36 consolidated outlet centers totaling approximately 12.9 million square feet and eight unconsolidated centers totaling approximately 2.4 million square feet. Consolidated portfolio occupancy was 96%.
Financial Performance and Key Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenues | $123.5 million | $121.4 million | +1.8% |
| Operating income | $37.1 million | $37.6 million | -1.5% |
| Net income | $23.7 million | $23.5 million | +0.7% |
| Net income attributable to the Company | $22.8 million | $22.3 million | +2.2% |
| Diluted EPS | $0.24 | $0.23 | Increase |
| FFO available to common shareholders | $59.3 million | $57.7 million | +2.9% |
| AFFO available to common shareholders | $59.3 million | $58.3 million | +1.8% |
| Diluted FFO/AFFO per share | $0.60 | $0.58 | +3.4% |
| Net cash provided by operating activities | $50.0 million | $56.6 million | -11.7% |
| Net cash used in investing activities | $14.1 million | $39.1 million | Lower use |
| Net cash used in financing activities | $38.6 million | $22.5 million | Higher use |
Operating margin was approximately 30.0% in Q1 2018 versus 31.0% in Q1 2017; net margin was approximately 19.2% versus 19.4%. Base rentals increased 1.5% to $81.5 million, while expense reimbursements increased 4.6% to $38.3 million. Percentage rentals declined 23.0% to $1.4 million.
Capital expenditures on a cash basis were $19.7 million, compared with $35.5 million in the prior-year quarter. Ending cash and cash equivalents were $3.4 million, compared with $6.1 million at December 31, 2017. The Company repurchased 443,700 common shares for approximately $10.0 million at an average price of $22.52 per share.
Balance Sheet, Debt, and Liquidity
- Total assets were $2.51 billion and total equity was $593.5 million at March 31, 2018.
- Total debt was $1.77 billion, consisting primarily of $1.14 billion of senior unsecured notes, a $323.1 million unsecured term loan, $223.6 million of unsecured line borrowings, and $90.1 million of mortgages.
- Approximately 95% of outstanding debt was unsecured, and 93% of the gross book value of the real estate portfolio was unencumbered.
- The unsecured credit facilities had total capacity of $600 million, with approximately $366.4 million available after letters of credit. The syndicated facility includes an accordion feature that may increase capacity to $1.2 billion under specified conditions.
- In January 2018, the credit facilities were extended to October 2021, with a one-year extension option, and the applicable LIBOR spread was reduced to 0.875%.
- Approximately $609.8 million of debt matures in 2021, with $1.17 billion maturing thereafter. Management stated that all debt covenants were satisfied at quarter-end.
- The Company guarantees the Operating Partnership’s unsecured lines of credit and term loan and had maximum guarantees of $32.7 million related to unconsolidated joint-venture debt.
Material Changes Versus the Prior Comparable Period
- Revenue growth was modest and was driven by new developments and expansions, particularly the Fort Worth center and Lancaster expansion, partly offset by lower revenue from existing properties and the prior-year contribution of the disposed Westbrook center.
- Existing-property base rentals declined by $0.4 million, while new developments and expansions contributed $2.4 million of incremental base rentals.
- Property operating expenses increased 4.5%, primarily because of higher snow-removal costs and costs associated with newer properties.
- Operating income declined despite higher revenue because property operating expenses and depreciation increased.
- Interest expense decreased 4.2%, primarily from the July 2017 refinancing of $300 million of senior notes from a 6.125% rate to 3.875%, partly offset by higher LIBOR rates.
- Same Center NOI declined to $75.0 million from $76.2 million, or approximately 1.5%.
- Operating cash flow declined mainly because of the timing of bond-interest payments, while investing cash usage declined due to lower development activity.
- The Company adopted the revenue-recognition and nonfinancial-asset derecognition standards effective January 1, 2018. Management reported no material impact and no cumulative catch-up adjustment.
Guidance, Outlook, Risks, and Unusual Items
Management expected 2018 Same Center NOI to decline approximately 1.5% to 2.5% from 2017, reflecting retailer bankruptcies, store closures, and lease modifications. Management cautioned that results could be worse if 2018 bankruptcy and restructuring activity remains at or exceeds 2017 levels. Four tenants filed for bankruptcy protection during the first quarter of 2018; 13 had filed during 2017.
Approximately 1.7 million square feet, or 13% of the consolidated portfolio, was scheduled for renewal during 2018, and approximately 62% of that space had been renewed as of March 31, 2018. During the trailing twelve months, renewed and re-tenanted space produced a blended 5.3% increase in average base rental rates, although management stated that comparable increases may not continue.
Key risks include dependence on retailer sales and rental payments, tenant bankruptcies and changing consumer behavior, interest-rate and refinancing risk, reliance on distributions from the Operating Partnership to fund Company dividends, joint-venture guarantees, Canadian foreign-currency exposure, property valuation and impairment risk, and the ability to access debt and equity markets.
The Company used interest-rate swaps with a total notional amount of $515 million. Management estimated that a 100-basis-point increase in LIBOR would increase annual interest expense by approximately $2.4 million. A $0.35 per-share dividend was declared in April 2018, payable May 15, 2018.
Management stated that liquidity is adequate for at least the next twelve months to fund operations, capital expenditures, debt service, dividends, and expected growth requirements, but noted that access to capital markets cannot be assured. The filing reported no material changes to previously disclosed risk factors and no legal proceedings expected to have a material adverse effect.
Important Facts for Investors to Verify
- Reconcile Same Center NOI performance with the stated 2018 outlook of a 1.5% to 2.5% decline.
- Monitor tenant bankruptcies, store closures, lease modifications, occupancy, and renewal spreads.
- Assess the $609.8 million of scheduled 2021 debt maturities and refinancing requirements.
- Confirm continued availability under the $600 million credit facilities and compliance with leverage and coverage covenants.
- Evaluate cash dividend coverage using operating cash flow, FFO/AFFO, capital expenditures, and required debt repayments rather than GAAP net income alone.
- Review exposure from unconsolidated joint ventures, including negative carrying values for certain investments and up to $32.7 million of debt guarantees.
- Consider the effect of higher LIBOR rates and Canadian-dollar movements on earnings, cash flow, and comprehensive income.
- Track the remaining approximately $65.7 million authorization under the share-repurchase program and its effect on liquidity and per-share metrics.