TANGER INC. quarterly report, Q1 FY2011

Tanger Inc. — Q1 2011 Form 10-Q Summary

Business context and reporting period

Tanger Factory Outlet Centers, Inc. is a self-administered and self-managed REIT operating through Tanger Properties Limited Partnership. The filing covers the unaudited quarter ended March 31, 2011, compared with the quarter ended March 31, 2010. At March 31, 2011, the company owned and operated 32 outlet centers totaling approximately 9.4 million square feet, and had partial ownership interests in two additional centers totaling approximately 948,000 square feet.

Key financial metrics

Metric	Q1 2011	Q1 2010	Change
Total revenue	$70.7 million	$66.0 million	+7%
Operating income	$21.2 million	$11.0 million	+92%
Net income	$10.8 million	$3.0 million	+260%
Net income attributable to Tanger	$9.4 million	$2.8 million	+237%
Diluted EPS	$0.11	$0.02	+0.09
Funds from operations	$29.9 million	$30.7 million	-2%
AFFO	$30.7 million	$31.3 million	-2%
Cash flow from operations	$31.0 million	$28.7 million	+8%

Operating margin was approximately 30%, compared with 17% in the prior-year quarter, primarily because Q1 2010 included $9.2 million of accelerated depreciation and amortization related to the Hilton Head I redevelopment and a $735,000 impairment charge. Net income attributable to Tanger represented approximately 13% of revenue.

Base rentals increased 6% to $46.2 million, driven by rent increases, re-tenanting and the Mebane, North Carolina development.
Percentage rentals increased 7% to $1.4 million.
Expense reimbursements increased 9% to $21.2 million.
Reported tenant comparable sales increased 5.9% to $359 per square foot for the rolling twelve months ended March 31, 2011.
Wholly owned portfolio occupancy was 97%, compared with 95% at March 31, 2010.
Common dividend paid was $0.1938 per share, compared with $0.1913 in Q1 2010.

Balance sheet, debt and liquidity

Total assets were $1.218 billion at March 31, 2011, including $1.122 billion of net rental property.
Total debt was $721.0 million, up from $714.6 million at December 31, 2010. Debt consisted of senior unsecured notes and $166.3 million drawn under unsecured lines of credit with total capacity of $400 million.
Approximately 100% of outstanding debt was unsecured and 100% of the gross book value of real estate was unencumbered.
Debt-to-adjusted-total-assets was 42%, below the 60% covenant limit; unencumbered assets to unsecured debt was 238%, above the 135% requirement.
Cash and cash equivalents declined to $731,000 from $5.8 million at year-end 2010.
Operating cash flow was $31.0 million. Investing activities used $24.2 million, including $15.3 million of property additions and $8.4 million placed in escrow for potential acquisitions. Financing activities used $11.9 million.
Approximately 23% of debt carried variable interest rates. Management estimated that a 100-basis-point increase in LIBOR would increase annual interest expense by approximately $1.7 million.

Material changes versus the prior comparable period

The Mebane, North Carolina outlet center, opened in November 2010, contributed incremental rental revenue and operating cash flow.
The Hilton Head I, South Carolina redevelopment was completed and reopened on March 31, 2011. Its total incremental cost, including development and leasing costs, was expected to be approximately $43 million; approximately $5 million of construction and other capital commitments remained at quarter-end.
Depreciation and amortization declined 32% to $18.0 million because Q1 2010 included $9.2 million of accelerated charges related to the Hilton Head I redevelopment.
General and administrative expense increased 24% to $6.8 million, primarily due to higher share-based compensation and additional personnel.
Property operating expense increased 8% to $24.1 million, reflecting higher snow removal, property taxes, common-area maintenance and costs associated with Mebane.
Q1 2011 included $567,000 of acquisition costs and $158,000 of abandoned development costs. Q1 2010 included a $735,000 impairment charge and $161,000 gain on land outparcel sales.
The Commerce I, Georgia disposition was completed in January 2011, eliminating related discontinued-operation revenue in the quarter.

Guidance, outlook, risks and unusual items

Management expected operating cash flow, available credit and access to debt or equity markets to fund planned 2011 capital expenditures, debt service and REIT distributions, but cautioned that future capital-market access is not assured.
Management reported no significant debt maturities until the unsecured credit facilities expire in November 2013. The $7.2 million of senior exchangeable notes may be subject to repurchase beginning August 18, 2011.
Approximately 1.7 million square feet, or 18% of the wholly owned portfolio, was scheduled for renewal during 2011. During the first quarter, 55% of this space was renewed at a reported 16% average base-rent increase, while 336,000 square feet was re-tenanted at a reported 50% increase. Management cautioned that similar increases may not continue.
Potential acquisitions under negotiation or agreement represented approximately $489 million of potential purchase price, including up to $291 million of assumed debt and approximately 1.9 million square feet. Closings remained subject to due diligence, regulatory approvals, lender approvals or other conditions.
Subsequent to quarter-end, the company entered agreements to acquire economic interests in outlet centers in Atlantic City, New Jersey, and Ocean City, Maryland, for approximately $125 million in cash plus approximately $75 million of assumed debt. Closing was expected in the third quarter of 2011, subject to mortgage-holder approval.
The company also signed an agreement to purchase Simon Property Group’s Jeffersonville, Ohio outlet center, subject to FTC approval and other customary conditions.
The unconsolidated Deer Park joint venture had approximately $89.8 million of the company’s share of debt maturing May 17, 2011. The venture did not qualify for its one-year extension based on current cash flows and occupancy and was negotiating a refinancing. Failure to extend or refinance could require a material capital contribution.
Deer Park-related guarantees included an estimated completion guarantee of up to $15 million, with additional exposure tied to operating-performance guarantees. The filing states that maximum exposure could not be estimated at that time.
The Tanger Family Limited Partnership intended to dissolve in connection with the settlement of the founder’s estate. Some resulting holders may exchange partnership units for common shares and request registration for resale, potentially increasing share supply.
No material litigation was reported, no material changes were reported to previously disclosed risk factors, and management concluded that disclosure controls were effective.

Important facts for investors to verify

Reconcile GAAP net income growth with FFO and AFFO declines, particularly the effect of Q1 2010 accelerated depreciation and other unusual items.
Monitor refinancing or extension of the Deer Park joint venture debt and any resulting capital contribution or guarantee exposure.
Confirm the closing status, financing and leverage impact of the Jeffersonville, Atlantic City and Ocean City acquisitions.
Assess liquidity after the quarter-end acquisition deposit and potential acquisition commitments, given quarter-end cash of only $731,000.
Review renewal spreads and occupancy trends as the company addresses the remaining 2011 lease expirations.
Evaluate variable-rate debt exposure, the November 2013 credit-facility maturity and the potential August 2011 repurchase of exchangeable notes.
Consider possible future share issuance or registration requests associated with dissolution of the Tanger Family Limited Partnership.