Tanger Inc. 2017 Q3 Form 10-Q Summary
Business context and reporting period
Tanger Factory Outlet Centers, Inc. is a self-administered REIT that owns and operates outlet shopping centers through Tanger Properties Limited Partnership. For the quarter ended September 30, 2017, the portfolio included 35 consolidated outlet centers totaling approximately 12.6 million square feet and eight unconsolidated joint-venture centers totaling approximately 2.4 million square feet. The filing presents the Company and Operating Partnership together because they are managed and operated as one enterprise.
Financial performance and key metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenue | $120.8 million | $119.1 million | $361.7 million | $341.3 million |
| Operating income | $41.4 million | $39.9 million | $117.1 million | $113.0 million |
| Operating margin | 34.3% | 33.5% | 32.4% | 33.1% |
| Net income (loss) | $(16.0) million | $72.8 million | $38.4 million | $178.7 million |
| Net income (loss) attributable to common shareholders | $(15.2) million | $69.1 million | $36.5 million | $169.7 million |
| Diluted EPS | $(0.17) | $0.72 | $0.38 | $1.76 |
| FFO available to common shareholders | $26.7 million | $62.1 million | $143.8 million | $175.9 million |
| AFFO available to common shareholders | $61.9 million | $62.3 million | $179.7 million | $177.5 million |
For the nine months, net cash provided by operating activities was $181.6 million, compared with $177.8 million in the prior-year period. Cash used in investing activities was $89.1 million, including $132.6 million of additions to rental property. Cash used in financing activities was $96.0 million. Cash and cash equivalents ended at $8.8 million, compared with $12.2 million at December 31, 2016.
At September 30, 2017, total debt was $1.774 billion, versus $1.688 billion at year-end 2016. The Company had $366.3 million available under its $520.0 million unsecured credit facilities after letters of credit. Approximately 91% of outstanding debt was unsecured, and 89% of the gross book value of real estate was unencumbered. The Company reported compliance with all debt covenants; actual debt-to-adjusted-assets leverage was 52% against a covenant limit below 60%.
Occupancy at consolidated centers was 97%. Same-center NOI was $72.7 million in the quarter and $212.3 million for nine months, compared with $72.1 million and $210.6 million, respectively, in the comparable periods. The quarterly dividend and Operating Partnership distribution declared was $0.3425 per share or unit, compared with $0.3250 in Q3 2016.
Material changes versus the prior comparable period
- Revenue increased 1% in Q3 and 6% for the first nine months. Base rentals increased 1% in Q3 and 6% year to date, supported by the Daytona Beach development and the prior-year acquisitions of Westgate and Savannah.
- Net income declined sharply because Q3 2017 included a $35.6 million loss on early extinguishment of debt, while Q3 2016 included a $46.3 million gain on the acquisition of the remaining interest in the Savannah joint venture. For the nine months, the 2016 period included $95.5 million of gains on the Westgate and Savannah transactions.
- Interest expense increased 6% in Q3 and 12% year to date, reflecting higher debt levels, higher LIBOR and the prior conversion of floating-rate debt to fixed-rate debt.
- Equity in earnings of unconsolidated joint ventures fell to a loss of $5.9 million in Q3 and a loss of $1.2 million for nine months. The decline included the Company’s $9.0 million share of a $18.0 million non-cash impairment charge at two Canadian outlet centers.
- In July 2017, the Operating Partnership issued $300.0 million of 3.875% senior notes due 2027. In August, proceeds and credit-facility borrowings were used to redeem approximately $300.0 million of 6.125% notes due 2020, requiring a $34.1 million make-whole premium and approximately $1.5 million of write-offs.
- The Company repurchased approximately 1.9 million common shares for $49.3 million at an average price of $25.80. Approximately $75.7 million remained available under the $125.0 million authorization at September 30.
- Capital expenditures increased to $132.6 million from $112.2 million. The Lancaster expansion opened in September, and the 352,000-square-foot Fort Worth center opened in October 2017.
Guidance, outlook, risks and unusual items
The filing does not provide a clear quantitative earnings or FFO guidance range. Management stated that operating cash flow, available credit and access to debt and equity markets were expected to fund planned capital expenditures through the end of 2018 and support operating expenses, debt service and REIT-required dividends. Management also stated that it expected to remain in compliance with existing debt covenants.
Key risks include the challenging retail environment, tenant bankruptcies or store closures, changes in consumer and travel behavior, pressure on tenant sales and percentage rents, lease-renewal and re-leasing risk, interest-rate volatility, access to capital markets, property impairments, Canadian currency exposure, joint-venture debt guarantees and the ability to complete developments on schedule and at expected returns. A 100-basis-point increase in LIBOR was estimated to increase annual interest expense by approximately $2.8 million; approximately 16% of debt remained exposed to variable rates after considering interest-rate protection.
Subsequent to quarter-end, the Company settled litigation involving the Foxwoods joint venture without cash consideration and received the former partner’s interest. On November 3, 2017, it repaid the $70.3 million Foxwoods mortgage using borrowings under its unsecured lines of credit. The Board subsequently declared a $0.3425 dividend payable November 15, 2017.
Important facts for investors to verify
- Reconcile reported GAAP net income with FFO and AFFO, particularly the treatment of the debt-refinancing charges and Canadian joint-venture impairment.
- Monitor leverage, credit-facility availability, debt maturities and the effect of refinancing the Foxwoods mortgage on liquidity.
- Assess tenant sales, occupancy, percentage rents and renewal spreads in the context of ongoing retail-sector stress.
- Evaluate the performance and carrying values of the Canadian and other unconsolidated joint ventures, including guaranteed debt of up to $32.8 million.
- Track development costs, lease-up and returns for the Fort Worth center, Lancaster expansion and other planned projects.
- Confirm the sustainability of dividends relative to operating cash flow, AFFO, capital expenditures and REIT distribution requirements.
- Consider the effect of future interest-rate increases and Canadian-dollar movements on earnings, cash flow and asset values.