Tanger Factory Outlet Centers, Inc. and Tanger Properties Limited Partnership — 2010 Q3 Form 10-Q
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2010, filed November 4, 2010. Tanger is a self-administered REIT focused on developing, owning and operating outlet shopping centers through Tanger Properties Limited Partnership. At quarter-end, the portfolio included 30 wholly owned centers totaling approximately 8.9 million square feet, plus two partially owned centers totaling approximately 948,000 square feet. Wholly owned portfolio occupancy was 98%, compared with 96% at September 30, 2009.
Key financial metrics
| Metric | Three months ended September 30, 2010 | Three months ended September 30, 2009 | Nine months ended September 30, 2010 | Nine months ended September 30, 2009 |
|---|---|---|---|---|
| Total revenues | $69.5 million | $70.0 million | $200.8 million | $199.3 million |
| Operating income | $23.7 million | $12.9 million | $54.8 million | $48.5 million |
| Operating margin | 34.1% | 18.4% | 27.3% | 24.4% |
| Net income | $14.8 million | $4.4 million | $23.1 million | $54.4 million |
| Net income attributable to common shareholders | $13.0 million | $4.0 million | $20.7 million | $46.5 million |
| Basic earnings per common share | $0.29 | $0.06 | $0.40 | $1.20 |
| Net cash provided by operating activities | Not separately reported | Not separately reported | $97.2 million | $95.4 million |
| FFO available to common shareholders and noncontrolling interest | $31.1 million | $24.0 million | $82.2 million | $81.2 million |
| FFO per share | $0.67 | $0.54 | $1.78 | $1.99 |
At September 30, 2010, total assets were $1.20 billion and total debt was $609.3 million, compared with $1.18 billion and $584.6 million, respectively, at December 31, 2009. Cash and cash equivalents were $2.8 million, and unused borrowing capacity under unsecured lines of credit was substantially greater than outstanding borrowings: $54.8 million was drawn against total capacity of $325.0 million. All outstanding debt was unsecured and approximately 100% of the gross book value of real estate was unencumbered.
Common dividends were $0.3875 per share for the quarter and $1.1575 per share for the first nine months. The 7.5% Class C preferred dividend was $0.46875 per share for the quarter. Management declared the same common dividend for payment on November 15, 2010.
Material changes versus the prior comparable period
- Third-quarter base rentals increased 2% to $44.9 million, while percentage rentals increased 33% to $1.9 million. Nine-month base rentals increased 2% to $132.3 million.
- Reported tenant comparable sales increased 6.3% to $349 per square foot for the rolling twelve months ended September 30, 2010.
- Third-quarter operating income increased 84%, principally because 2009 included $6.9 million of incremental share-based compensation related to the retirement of founder Stanley K. Tanger and 2010 depreciation declined following the Hilton Head I demolition and redevelopment.
- Nine-month net income declined substantially because 2009 included a $31.5 million gain on the fair-value measurement of a previously held joint-venture interest, a $10.5 million gain on early extinguishment of debt and fewer comparable unusual items in 2010.
- Nine-month operating cash flow increased modestly to $97.2 million. Investing cash outflows increased to $62.1 million, including $55.6 million of rental-property additions and $6.1 million paid to terminate interest-rate swaps.
- In June 2010, the Operating Partnership issued $300.0 million of 6.125% senior unsecured notes due 2020. Proceeds were used primarily to repay a $235.0 million term loan, terminate related swaps and reduce line-of-credit borrowings. Total debt increased by approximately $24.7 million from year-end.
- The majority of the Commerce I, Georgia center was sold in July 2010; the remaining portion was held for sale and subject to an additional $111,000 impairment charge in the third quarter.
Guidance, outlook, management commentary, risks and unusual items
- Mebane, North Carolina: the 317,000-square-foot center was scheduled to open November 5, 2010 and was 100% leased or out for signature as of October 31, 2010.
- Hilton Head I redevelopment: the planned 176,000-square-foot center, with four outparcel pads, had approximately 73% of space leased or out for signature as of October 31, 2010. The approximately $50.0 million redevelopment was projected to open in the second half of 2011.
- Contractual commitments for development, redevelopment and other capital expenditures totaled approximately $19.7 million at September 30, 2010.
- Management stated that operating cash flow, available credit and access to debt or equity markets were expected to fund planned capital expenditures, debt service and dividends. However, management cautioned that weakness and unpredictability in capital and credit markets could limit affordable access to capital.
- Approximately 16% of the wholly owned portfolio was scheduled for renewal during 2010. During the first nine months, approximately 70% of that space was renewed at a 10% average base-rent increase, while 427,000 square feet was re-tenanted at a 25% average base-rent increase.
- Liz Claiborne announced plans to exit its U.S. and Puerto Rico outlet-store concept. Its 22 stores represented 2.6% of Tanger’s total portfolio and less than 1.5% of combined base and percentage rental revenues; negotiations concerning the space were ongoing.
- Debt maturities include approximately $62.0 million in 2011, including the first potential repurchase date for $7.2 million of senior exchangeable notes, and approximately $550.0 million thereafter. Existing lines of credit expire in June 2011 or later, and the company was negotiating a syndicated replacement facility.
- Deer Park joint-venture debt had a total balance of $269.3 million, with Tanger’s share approximately $89.8 million, maturing May 17, 2011. The venture was not expected to qualify for its one-year extension based on current cash flows and occupancy and was negotiating refinancing. Failure to refinance could require a material capital contribution.
- Tanger had limited joint-and-several guarantees on debt of its Deer Park and Wisconsin Dells joint ventures. The maximum exposure to loss for Deer Park could not be estimated clearly in the filing.
- Approximately 9% of outstanding debt carried variable rates. A 100-basis-point increase in LIBOR was estimated to increase annual interest expense by approximately $548,000. No interest-rate swaps were outstanding at September 30, 2010.
- Stanley K. Tanger died on October 23, 2010. The filing stated that no death benefits were payable other than accelerated vesting of 2,548 restricted shares; the Board reduced its size from eight to seven members.
- The company and Operating Partnership stated that no material litigation was pending or threatened, no material changes had occurred to previously disclosed risk factors, and disclosure controls were effective as of September 30, 2010.
Important facts for investors to verify
- Confirm the opening and lease-up performance of the Mebane center and progress, costs and leasing at Hilton Head I.
- Monitor refinancing or replacement of the unsecured credit facilities and the approximately $62.0 million of 2011 maturities.
- Track Deer Park’s May 2011 refinancing, extension eligibility, guarantees and potential capital-call exposure.
- Reconcile GAAP earnings with FFO and AFFO, particularly the effects of debt refinancing, swap termination, impairments, redevelopment costs and discontinued operations.
- Assess tenant renewal spreads, re-leasing risk and the effect of Liz Claiborne’s announced outlet-store exits.
- Review dividend coverage relative to operating cash flow, FFO, AFFO, required REIT distributions and planned capital expenditures.