Tanger Inc. 2015 Q3 Form 10-Q Summary
Business context and reporting period
Tanger Factory Outlet Centers, Inc. is a self-managed REIT that owns and operates outlet centers through Tanger Properties Limited Partnership. The filing covers the unaudited three and nine months ended September 30, 2015, compared with the corresponding 2014 periods. At quarter-end, the company had 34 consolidated outlet centers totaling approximately 11.6 million square feet and interests in nine unconsolidated centers totaling approximately 2.8 million square feet.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total revenues | $112.9 million | $105.2 million | $326.6 million | $310.2 million |
| Operating income | $36.4 million | $35.3 million | $106.2 million | $96.3 million |
| Net income | $46.5 million | $24.3 million | $108.2 million | $59.6 million |
| Net income attributable to Tanger | $44.1 million | $23.0 million | $103.1 million | $56.5 million |
| Diluted EPS | $0.46 | $0.24 | $1.08 | $0.59 |
| FFO per diluted share | $0.59 | $0.52 | $1.64 | $1.42 |
| Same-center NOI, cash basis | $68.3 million | $66.1 million | $197.6 million | $190.1 million |
| Cash flow from operating activities | Not separately provided | Not separately provided | $175.0 million | $148.5 million |
Q3 operating margin was approximately 32.2%, compared with 33.5% in the prior-year quarter. The nine-month operating margin was approximately 32.5%, compared with 31.0% in 2014. Net margins were materially affected by property-disposition gains.
- Q3 base rentals increased 9% to $75.8 million; nine-month base rentals increased 5% to $215.8 million.
- Q3 property operating expenses increased 10% to $36.2 million, while nine-month expenses increased 6% to $108.9 million.
- FFO increased 14% in Q3 to $60.1 million and 15% for nine months to $164.8 million.
- Dividends paid were $0.285 per share in Q3 and $0.810 per share for the first nine months, versus $0.240 and $0.705, respectively, in 2014.
- At September 30, cash and cash equivalents were $20.7 million and restricted cash was $42.9 million.
Debt, liquidity, and capital resources
- Total debt was $1.539 billion at September 30, 2015, up from $1.443 billion at December 31, 2014. The debt fair value was $1.608 billion.
- Unsecured borrowings represented 82% of outstanding debt, and approximately 75% of the gross book value of real estate was unencumbered.
- Unsecured lines of credit had $520.0 million of total capacity and $324.2 million of availability at quarter-end.
- Nine-month cash flow from operations of $175.0 million was more than offset by $183.5 million of investing outflows, including $181.1 million of additions to rental property. Financing activities provided $13.0 million.
- Debt maturities totaled $12.8 million in 2016, $276.6 million in 2017, $168.4 million in 2018, $253.4 million in 2019, and $830.9 million thereafter.
- Approximately 35% of debt was variable-rate debt, excluding variable-rate debt protected by interest-rate swaps. A 100-basis-point increase in LIBOR was estimated to increase annual interest expense by approximately $5.4 million.
- The company reported compliance with its debt covenants. Reported actual covenant measures included total debt to adjusted assets of 50%, secured debt to adjusted assets of 9%, and unencumbered assets to unsecured debt of 175%.
Material changes versus the prior comparable period
- Net income increased primarily because of a $20.2 million Q3 gain on the sale of the Kittery, Tuscola, and West Branch centers and a $13.7 million gain from the Wisconsin Dells joint-venture disposition in Q1.
- Revenue benefited from higher rents, re-tenanting, expansions, and the May opening of Foxwoods and July opening of Grand Rapids.
- Interest expense decreased 8% for the nine-month period, mainly following the refinancing of $250 million of higher-cost senior notes with 3.75% notes.
- Operating cash flow increased $27.3 million year over year, but development-related capital expenditures increased substantially to $181.1 million from $90.3 million.
- Consolidated occupancy was 97% at September 30, 2015, compared with 98% a year earlier. During the first nine months, approximately 1.131 million square feet was renewed at a 22% average base-rent increase, and 430,000 square feet was re-tenanted at a 31% average increase.
- Other comprehensive loss worsened to $21.0 million for nine months, primarily because of foreign-currency translation losses and changes in cash-flow hedge values.
Outlook, risks, contingencies, and unusual items
- No formal earnings or FFO guidance is provided in the filing. Management stated that it expected available cash, operating cash flow, credit facilities, and capital-market access to fund planned expenditures through the end of 2016, while noting that access to affordable capital is not assured.
- Southaven, Mississippi, a 320,000-square-foot consolidated development, was expected to open in November 2015. Columbus, Ohio, a 355,000-square-foot unconsolidated joint-venture project, was expected to open in the second quarter of 2016.
- In October 2015, the company amended its unsecured credit facilities, extending maturity from October 2017 to October 2019, reducing pricing from LIBOR plus 1.00% to LIBOR plus 0.90%, and increasing the potential accordion capacity from $750 million to $1.0 billion.
- Barstow was classified as held for sale at September 30 and sold in October 2015 for approximately $105.7 million, producing an estimated $86.4 million gain. Management estimated combined tax gains from five asset transactions and the Wisconsin Dells sale at approximately $90 million to $100 million, with an expected 80% to 90% deferral, although the actual deferral was uncertain.
- A noncontrolling interest holder exercised a right requiring the company to acquire its Deer Park interest for $28.4 million; closing was scheduled for January 5, 2016.
- The company had guarantees and completion or principal guarantees related to joint-venture debt. The maximum disclosed guarantees totaled approximately $33.6 million, excluding certain completion and carve-out obligations.
- Key risks include tenant closures or bankruptcies, changing consumer and travel patterns, development and leasing execution, real-estate valuation and liquidity, interest-rate and foreign-currency exposure, joint-venture partner conflicts, guarantee obligations, and the requirement to maintain REIT qualification.
Most important facts for investors to verify
- Determine normalized operating performance excluding the $33.9 million of year-to-date disposition gains and assess the sustainability of FFO growth.
- Review debt maturities, variable-rate exposure, credit-facility availability, covenant headroom, and the effect of the October 2015 refinancing amendments.
- Assess the funding requirements and stabilization prospects for Southaven, Columbus, Savannah expansion, and other development projects.
- Confirm the timing and tax treatment of the Barstow sale and whether proceeds are reinvested under Section 1031, used for debt reduction, or require a special dividend.
- Evaluate joint-venture debt, completion guarantees, principal guarantees, and potential exposure from the Deer Park acquisition obligation.
- Monitor occupancy, tenant renewals, store closures, rent spreads, and the effect of the 2015 decline in consolidated occupancy from 98% to 97%.