Tanger Factory Outlet Centers, Inc. - 10-Q Summary
Business Context and Reporting Period
This is a quarterly report (Form 10-Q) for Tanger Factory Outlet Centers, Inc., a self-administered and self-managed Real Estate Investment Trust (REIT) focused on factory outlet shopping centers. The reporting period covers the three and nine months ended September 30, 2008. As of the period end, the company owned and operated 30 wholly-owned outlet centers totaling approximately 8.8 million square feet with a 97% occupancy rate. The company also holds interests in three unconsolidated joint ventures.
Key Financial Metrics
| Metric (Nine Months Ended Sept 30, 2008) | Value (in thousands) |
|---|---|
| Total Revenues | $177,054 |
| Net Income | $18,527 |
| Net Income Available to Common Shareholders | $14,308 |
| Diluted EPS (Net Income) | $0.45 |
| Funds From Operations (FFO) | $68,594 |
| FFO Available to Common Shareholders | $64,375 |
| Net Cash Provided by Operating Activities | $72,069 |
| Net Cash Used in Investing Activities | $(107,459) |
| Total Debt Outstanding | $783,299 |
| Cash and Cash Equivalents | $3,753 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 6% to $177.1 million for the nine months ended Sept 30, 2008, compared to $166.8 million in 2007. Base rentals rose 7% due to lease renewals at higher rates and new space from the Washington, PA center opening.
- Percentage Rentals Decline: Percentage rentals decreased 24% to $4.1 million, attributed to general economic weakness, severe weather, and reconfiguration projects at two centers impacting tenant sales.
- Operating Expenses: Property operating expenses increased 7% to $57.4 million, driven by the new Washington, PA center and increased common area maintenance costs. General and administrative expenses rose 22% to $17.2 million, primarily due to share-based compensation amortization.
- Depreciation: Depreciation and amortization decreased 7% to $45.6 million. This decrease is largely due to the absence of accelerated depreciation charges in 2008 that were present in 2007 related to the demolition of buildings at the Foley, Alabama center.
- Unusual Items: The company recorded an $8.9 million loss on the settlement of US Treasury rate locks. This non-cash loss resulted from terminating interest rate protection agreements when the company opted for a LIBOR-based term loan instead of a US Treasury-based debt offering.
- Debt Restructuring: The company closed a $235 million unsecured term loan in June 2008, using proceeds to repay a $170.7 million mortgage and pay down lines of credit. This left the entire wholly-owned portfolio unencumbered.
Guidance, Outlook, and Risks
- Outlook: Management expects to continue growing the portfolio through development and expansion. They anticipate adequate cash flow to fund operations, debt service, and dividends. The company maintains investment-grade ratings (Moody's Baa3 stable, S&P BBB).
- Leasing Activity: As of Sept 30, 2008, 77% of the square footage scheduled to expire in 2008 had been renewed at an average base rental rate 18% higher than expiring rates. Re-tenanted vacant space saw a 44% increase in base rental rates.
- Development: The Washington, PA center opened in August 2008 at 86% leased. The Deer Park, NY joint venture opened in October 2008 at 77% leased. However, the company terminated purchase options for potential developments in Port St. Lucie, FL, and Phoenix, AZ, resulting in an expected $1.8 million write-off of predevelopment costs in Q4 2008.
- Risks: The filing highlights risks associated with the national and worldwide financial crisis, including potential disruptions in capital markets that could affect the ability to refinance debt or fund capital expenditures. There is also risk regarding tenant bankruptcies and store closures, though management notes these are often lower-performing locations.
Investor Verification Checklist
- Debt Maturities: Verify the company's ability to refinance or repay debt, noting that 19% of outstanding debt remains variable rate and subject to market fluctuations.
- Q4 Write-off Impact: Confirm the impact of the anticipated $1.8 million predevelopment cost write-off on Q4 2008 earnings.
- Derivative Accounting: Review the treatment of the $8.9 million loss on rate lock settlements and the fair value of current interest rate swaps ($1.3 million liability).
- Occupancy Trends: Monitor the stabilization of the new Washington, PA center and the re-tenanting of the 93,000 square feet of space from tenants announcing store closures.
- FFO vs. Net Income: Analyze Funds From Operations (FFO) as the primary performance metric for the REIT, noting it excludes depreciation and the impact of the rate lock loss.