Tanger Inc. 2014 Q1 Form 10-Q Summary
Business context and reporting period
Tanger Factory Outlet Centers, Inc. is a self-managed REIT that owns and operates outlet shopping centers through Tanger Properties Limited Partnership. The filing covers the three months ended March 31, 2014, with comparative results for the three months ended March 31, 2013. At quarter-end, the company had 37 consolidated outlet centers in 24 states totaling approximately 11.5 million square feet, plus partial interests in seven unconsolidated centers totaling approximately 1.7 million square feet.
Financial performance and key metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $102.8 million | $88.7 million | +16.0% |
| Operating income | $28.4 million | $28.5 million | -0.3% |
| Net income | $15.4 million | $16.2 million | -4.9% |
| Net income attributable to Tanger | $14.6 million | $15.4 million | -5.3% |
| Basic and diluted EPS | $0.15 | $0.16 | Down $0.01 |
| Operating cash flow | $42.5 million | $35.3 million | +20.4% |
| FFO | $43.7 million | $41.4 million | +5.6% |
| AFFO | $45.4 million | $41.8 million | +8.4% |
| Diluted FFO per share | $0.43 | $0.42 | +2.4% |
| Diluted AFFO per share | $0.45 | $0.42 | +7.1% |
Revenue growth was driven primarily by the consolidation of Deer Park, New York, internal rent growth, and higher expense reimbursements. Operating income was approximately 27.6% of revenue versus 32.2% in the prior-year quarter; net income margin was approximately 15.0% versus 18.3%.
Base rentals increased 13.0% to $67.0 million, including $5.4 million from acquired properties. Expense reimbursements increased 25.0% to $31.5 million. Same-center NOI on a cash basis increased to $59.8 million from $57.8 million, approximately 3.3%. Portfolio occupancy was 97% at March 31, 2014, compared with 98% a year earlier.
At March 31, 2014, total assets were approximately $2.03 billion, cash and cash equivalents were $16.9 million, and total debt was $1.36 billion. Debt increased from $1.33 billion at December 31, 2013, primarily due to borrowings supporting development and joint-venture investments. Approximately 82% of outstanding debt was unsecured and 80% of the gross book value of real estate was unencumbered. The company had $46.9 million outstanding under unsecured lines with total borrowing capacity of $520.0 million.
Cash used in investing activities was $48.2 million, including $13.3 million of rental-property additions and $33.7 million of investments in unconsolidated joint ventures. Financing activities provided $7.4 million after $133.1 million of debt proceeds, $103.3 million of debt repayments, and $21.5 million of common dividends. Cash increased by $1.7 million during the quarter.
Material changes versus the prior comparable period
- Deer Park, New York, acquired in August 2013, contributed $5.4 million of base rentals, $2.9 million of expense reimbursements, and $4.0 million of depreciation and amortization in the quarter.
- Property operating expenses increased 28.0% to $36.0 million, reflecting Deer Park and significantly higher snow-removal costs from heavy first-quarter snowfall.
- Interest expense increased 16.0% to $14.9 million as average debt rose to approximately $1.3 billion from approximately $1.1 billion.
- Depreciation and amortization increased 17.0% to $26.1 million, primarily from the Deer Park consolidation.
- A $1.6 million charge was recorded for abandoned pre-development projects in Clarksburg, Maryland, and Scottsdale, Arizona.
- Equity in earnings of unconsolidated joint ventures increased to $1.9 million from $0.6 million, primarily due to National Harbor opening in the fourth quarter of 2013.
- Other comprehensive loss was $3.3 million, principally reflecting a $2.8 million foreign-currency translation loss and a $0.3 million loss on cash-flow hedges, compared with an immaterial loss in Q1 2013.
Guidance, outlook, commentary, risks and unusual items
Management stated that it expects adequate liquidity to fund operating expenses, regular debt service, planned capital expenditures, and REIT-required dividends in the short and long term. Management also stated that available operating cash flow, borrowing capacity, financial relationships, and access to debt and equity markets should fund planned capital expenditures through the end of 2014 and into 2015. No quantitative earnings guidance was provided.
Development projects include Tanger Outlets at Foxwoods, Connecticut, expected to open in the second quarter of 2015, and a planned 350,000-square-foot Grand Rapids, Michigan, center expected to open in the second half of 2015. Joint-venture projects in Charlotte, Savannah, Ottawa, and Cookstown were also under development, with expected openings generally in 2014 or later.
Debt maturities include approximately $282.3 million in 2015 and $30.3 million in 2016. The company was in compliance with all debt covenants at quarter-end. Reported senior unsecured note covenant metrics included total debt to adjusted total assets of 48% versus a maximum of 60%, secured debt to adjusted total assets of 9% versus a maximum of 40%, and unencumbered assets to unsecured debt of 184% versus a minimum of 150%.
Approximately 22% of debt carried variable interest rates. Management estimated that a 100-basis-point increase in LIBOR would increase annual interest expense by approximately $3.0 million. The company used $150.0 million of interest-rate swaps to fix the base LIBOR rate on the Deer Park mortgage at approximately 1.30% through August 2018.
Key risks include tenant closures or bankruptcies, lease-renewal and re-leasing risk, development delays or cost overruns, dependence on access to capital markets, refinancing risk, variable interest rates, foreign-currency exposure from Canadian investments, joint-venture guarantees and potential buy-sell obligations. Management reported no material changes to the risk factors in the 2013 Form 10-K. Legal proceedings were described as routine and not expected to have a material adverse effect.
Important facts for investors to verify
- Whether revenue growth from Deer Park and other developments translates into sustained NOI and FFO growth after higher operating costs, depreciation, and interest expense.
- The company’s ability to refinance or repay the approximately $282.3 million of debt maturing in 2015 under prevailing capital-market conditions.
- Progress, total funding requirements, leasing, and opening dates for Foxwoods, Grand Rapids, Charlotte, Savannah, Ottawa, and Cookstown.
- Exposure under joint-venture debt guarantees, completion guarantees, non-recourse carve-outs, and partner buy-sell provisions.
- Whether 97% occupancy and reported renewal and re-tenanting rent increases can be maintained as leases expire.
- The effect of snow-removal costs, abandoned development charges, foreign-currency movements, and future interest-rate changes on earnings and cash flow.
- The distinction between GAAP net income and non-GAAP FFO/AFFO, including capital expenditures and other cash requirements not captured by those measures.