Tanger Inc. — Form 10-Q Summary
Business context and reporting period
This combined quarterly report covers Tanger Factory Outlet Centers, Inc. and Tanger Properties Limited Partnership for the quarter and six months ended June 30, 2011. Tanger operates as a self-administered REIT focused on owning, developing and managing outlet shopping centers. At June 30, 2011, the portfolio included 33 wholly owned centers totaling approximately 9.8 million square feet, plus two partially owned centers totaling approximately 949,000 square feet. Wholly owned-center occupancy was 98%.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenues | $72.1 million, versus $65.3 million | $142.8 million, versus $131.3 million |
| Operating income | $22.3 million, versus $20.1 million | $43.5 million, versus $31.1 million |
| Net income | $10.8 million, versus $5.4 million | $21.7 million, versus $8.4 million |
| Net income attributable to common shareholders | $9.4 million, versus $4.9 million | $18.8 million, versus $7.7 million |
| Diluted earnings per share | $0.11, versus $0.04 | $0.23, versus $0.06 |
| Funds from operations per share | $0.32, versus $0.24 | $0.64, versus $0.55 |
| Adjusted FFO per share | $0.33, versus $0.32 | $0.65, versus $0.64 |
Operating margin was approximately 31.0% in the second quarter and 30.4% for the six-month period, compared with approximately 30.8% and 23.7%, respectively, in the prior-year periods. Reported tenant comparable sales increased 4.6% to $361 per square foot for the rolling twelve months ended June 30, 2011.
Six-month cash flow from operations was $59.9 million, compared with $54.0 million in 2010. Investing cash outflow was $182.1 million, primarily reflecting the $134.0 million Jeffersonville, Ohio acquisition, capital expenditures and escrow deposits. Financing activities provided $134.9 million, compared with a $20.2 million use of cash in the prior-year period. Cash and cash equivalents increased to $18.4 million from $5.8 million at December 31, 2010.
At June 30, 2011, total debt was $886.6 million, consisting primarily of $554.6 million of senior unsecured notes, a $150.0 million bridge loan and $182.0 million drawn under unsecured credit lines with total capacity of $400.0 million. Approximately 37% of debt carried variable interest rates. A 100-basis-point increase in LIBOR was estimated to increase annual interest expense by approximately $3.1 million. All real estate was unencumbered, and the filing reported compliance with debt covenants.
Material changes versus the prior comparable period
- Revenue increased 10% in the second quarter and 9% for the six-month period, driven by higher existing-property rents, new developments, the Jeffersonville acquisition and increased expense reimbursements.
- Second-quarter base rentals increased 10% to $48.4 million; percentage rentals increased 8% to $1.1 million.
- Operating income increased 11% in the second quarter and 40% for the six-month period. The six-month improvement benefited from the absence of $6.7 million of prior-year debt-extinguishment and derivative-termination losses and from lower depreciation and amortization related to the completed Hilton Head redevelopment.
- Interest expense increased 35% in the second quarter and 32% for the six-month period because average debt outstanding increased to approximately $803.8 million and $800.6 million, respectively.
- General and administrative expense increased 20% in the second quarter and 22% for the six-month period, principally due to higher share-based compensation and payroll costs.
- The company completed the $134.0 million acquisition of Prime Outlets at Jeffersonville, Ohio, a 410,000-square-foot center that was approximately 99% occupied at quarter-end.
- The company completed the Hilton Head I redevelopment, and the center was 96% occupied at June 30, 2011. Portfolio-wide contractual capital expenditure commitments were approximately $4.1 million.
- During the first six months, the company renewed approximately 1.2 million square feet at a 15% average base-rent increase and re-tenanted approximately 469,000 square feet at a 52% average base-rent increase.
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 fund planned 2011 capital expenditures, debt service, dividends and distributions. No material changes were reported to the risk factors in the 2010 Form 10-K.
- Subsequent to quarter-end, Tanger completed a July 2011 common-share offering that generated approximately $117.3 million of net proceeds, used primarily to repay credit-line borrowings and for general purposes.
- The company acquired interests in Atlantic City Outlets The Walk and Ocean City Factory Outlets. The combined estimated acquisition price was approximately $199.3 million, including approximately $125.8 million of cash and $73.5 million of assumed debt. The company remained under contract for a further Atlantic City phase, but stated that closing was not assured.
- The $150.0 million bridge loan initially matured September 26, 2011, with three 90-day extension options potentially extending maturity to June 22, 2012. The filing also disclosed an August 2011 redemption of the remaining $7.0 million of senior exchangeable notes, subject to holders’ exchange rights.
- Deer Park, an unconsolidated joint venture, had approximately $269.3 million of debt that matured on May 17, 2011 and was in default while refinancing terms were being negotiated. Tanger guaranteed interest payments and completion of construction, with approximately $11.0 million of remaining construction and tenant-improvement needs. Tanger’s equity investment was approximately $108,000, but its maximum exposure could not be estimated because of performance guarantees.
- The company announced development joint ventures for National Harbor, Maryland, and Galveston/Houston, Texas. The Galveston/Houston venture acquired land for approximately $5.6 million after quarter-end; planned development remained subject to execution and market conditions.
- The June 1, 2011 dissolution of the Tanger Family Limited Partnership resulted in the distribution of its Operating Partnership units to individual family limited partners. The company was required to use best efforts to register approximately 12.1 million common shares issuable upon exchange of those units, creating potential future share issuance and selling pressure.
- Legal proceedings were described as routine and not material. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Bridge-loan repayment or extension terms and the effect of subsequent acquisitions on leverage and liquidity.
- Progress in refinancing the Deer Park joint-venture debt and Tanger’s eventual cash exposure under its guarantees.
- Actual contribution from Jeffersonville, Atlantic City and Ocean City properties to occupancy, NOI, FFO and debt service coverage.
- Registration, exchange and possible sale of the approximately 12.1 million shares associated with Family Limited Partner units.
- Availability and pricing of future debt or equity capital, particularly given the company’s acquisition and development pipeline.
- Whether reported rent increases, comparable sales growth and 98% occupancy are sustained as leases renew.
- The filing’s non-GAAP FFO and AFFO measures alongside GAAP earnings and cash flow, including capital-expenditure requirements excluded from those measures.