Tanger Inc. 2016 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Tanger Factory Outlet Centers, Inc. is a self-managed REIT that owns and operates outlet shopping centers through Tanger Properties Limited Partnership. The unaudited filing covers the three and six months ended June 30, 2016, with comparisons to the same 2015 periods.
At June 30, 2016, the company operated 34 consolidated outlet centers totaling approximately 11.9 million square feet and held interests in nine unconsolidated outlet centers totaling approximately 2.8 million square feet. Consolidated centers were 97% occupied.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 | ||
|---|---|---|---|---|
| 2016 | 2015 | 2016 | 2015 | |
| Total revenue | $111.3 million | $107.7 million | $222.1 million | $213.7 million |
| Operating income | $38.3 million | $36.9 million | $73.1 million | $69.8 million |
| Operating margin | 34.4% | 34.3% | 32.9% | 32.7% |
| Net income | $77.3 million | $25.4 million | $105.9 million | $61.7 million |
| Net income attributable to Tanger | $73.4 million | $24.5 million | $100.6 million | $59.0 million |
| Diluted earnings per share | $0.76 | $0.26 | $1.04 | $0.62 |
| FFO available to common shareholders | $59.2 million | $54.1 million | $113.9 million | $103.9 million |
| AFFO available to common shareholders | $59.4 million | $54.1 million | $115.2 million | $103.9 million |
| FFO per diluted share | $0.59 | $0.54 | $1.14 | $1.04 |
Six-month cash flow from operating activities was $105.0 million, compared with $100.7 million in 2015. Capital additions to rental property were $68.6 million, versus $111.2 million in 2015. Cash and cash equivalents totaled $27.1 million at June 30, 2016.
Total debt was $1.603 billion, compared with $1.552 billion at December 31, 2015. Debt comprised $790.0 million of senior unsecured notes, $322.0 million of unsecured term loans, $235.2 million of mortgages and $255.7 million drawn under unsecured lines of credit. The company reported $260.8 million of availability under its $520.0 million unsecured credit facilities and compliance with all debt covenants.
Dividends declared were $0.325 per common share for the second quarter and $0.610 per share for the first six months, compared with $0.285 and $0.525, respectively, in the prior-year periods.
Material Changes Versus the Prior Comparable Period
- Revenue increased 3% in the second quarter and 4% for the first six months, primarily from higher base rentals, new developments and improved existing-property rental rates.
- Same Center NOI increased to $67.6 million from $65.2 million in the second quarter and to $133.3 million from $128.0 million for the six months.
- Net income included a $49.3 million gain from remeasuring the company’s previously held interest in the Westgate joint venture after acquiring the remaining partner interests. This materially increased reported earnings but is not representative of recurring operations.
- Six-month FFO increased 10% to $113.9 million, while AFFO increased 11% to $115.2 million. FFO growth was substantially less than GAAP net-income growth because the Westgate gain was excluded from FFO.
- On June 30, 2016, the company acquired the remaining interests in Westgate in Glendale, Arizona, for approximately $40.9 million, funded with unsecured line borrowings. Westgate became wholly owned and consolidated.
- The company sold its Fort Myers, Florida outlet center for net proceeds of approximately $25.8 million and recognized a $4.9 million gain.
- The unsecured term loan was increased from $250.0 million to $325.0 million, its maturity was extended to April 2021, and its LIBOR spread was reduced to 0.95%.
- The company repaid the $150.0 million Deer Park mortgage, a $28.4 million deferred financing obligation and a $7.5 million unsecured term note. It also repaid a $10.0 million unsecured note payable in June 2016.
- Interest expense increased 10% for the six-month period, reflecting higher borrowings, debt refinancing, reduced capitalization of interest and higher LIBOR.
Guidance, Outlook, Risks, Contingencies and Unusual Items
Management stated that operating cash flow, available credit facilities and access to debt and equity markets were expected to be adequate to fund planned capital expenditures, debt service, distributions and operations through the end of 2016. The filing does not provide formal earnings guidance.
- Daytona Beach, Florida, a 352,000-square-foot center with projected total net cost of $91.3 million, was under development with $49.8 million incurred and an expected November 2016 opening.
- Management expected approximately $25.1 million of additional 2016 spending on renovations at Riverhead, Rehoboth Beach and Howell.
- A 355,000-square-foot Columbus, Ohio center opened in June 2016 through an unconsolidated joint venture. The projected total net cost was approximately $94.9 million.
- Management announced a potential 350,000-square-foot Fort Worth-area development and planned a 123,000-square-foot Lancaster, Pennsylvania expansion, subject to development and pre-leasing conditions.
- Approximately 28% of outstanding debt was variable-rate debt after considering interest-rate protection. A 100-basis-point increase in LIBOR was estimated to increase annual interest expense by approximately $4.5 million.
- Interest-rate swaps had a total notional amount of $575.0 million and a net fair-value liability of $4.4 million at June 30, 2016.
- The company provided guarantees relating to unconsolidated joint-venture debt, with a disclosed maximum guaranteed amount of approximately $34.6 million. Certain arrangements also included completion guarantees and other contingent obligations.
- Joint-venture debt maturities included $96.9 million of Savannah debt due in May 2017 and $65.0 million of Galveston/Houston debt due in July 2017.
- A New Jersey lawsuit filed after quarter-end challenged certain property-tax agreements. Management believed the agreements were valid and intended to defend the action, but the outcome and potential costs were uncertain.
- Westgate acquisition fair values were provisional and based primarily on Level 3 assumptions; the final purchase-price allocation could change significantly.
- Key ongoing risks include retail tenant failures, lease renewals, consumer spending, outlet-center development and acquisition execution, real-estate values, access to capital, interest rates, joint-venture guarantees, Canadian currency exposure and maintaining REIT qualification.
Important Facts for Investors to Verify
- Separate recurring operating performance from the $49.3 million Westgate remeasurement gain and the $4.9 million Fort Myers disposition gain.
- Reconcile FFO and AFFO to GAAP net income and review the company’s adjustments, including capital expenditures and other cash requirements excluded from these non-GAAP measures.
- Review debt maturities, variable-rate exposure, credit-facility availability and covenant headroom, particularly the 2017 mortgage and joint-venture maturities.
- Assess the funding requirements and leasing progress for Daytona Beach, Columbus, the Fort Worth proposal and the Lancaster expansion.
- Monitor lease rollover and renewal economics: approximately 1.4 million square feet was scheduled to mature during 2016, with 934,000 square feet renewed and 302,000 square feet re-tenanted during the first six months.
- Evaluate contingent exposure from joint-venture guarantees, completion guarantees and potential buy-sell provisions.
- Follow the New Jersey property-tax litigation and any changes to the provisional Westgate purchase-price allocation.
- Confirm the July 2016 declaration of a $0.325 per-share dividend payable August 15, 2016, and consider the sustainability of distributions relative to recurring cash flow and capital needs.