Tanger Inc. — 2012 Q1 Form 10-Q Summary
Business Context and Reporting Period
Tanger Factory Outlet Centers, Inc. is a self-administered and self-managed REIT operating through Tanger Properties Limited Partnership. The company develops, owns and manages outlet shopping centers. As of March 31, 2012, it operated 36 consolidated centers totaling approximately 10.7 million square feet and held interests in three unconsolidated centers totaling approximately 1.2 million square feet. This unaudited Form 10-Q covers the three months ended March 31, 2012, compared with the three months ended March 31, 2011.
Key Financial Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenues | $84.2 million | $70.7 million | +19% |
| Operating income | $22.6 million | $21.2 million | +7% |
| Net income | $8.8 million | $10.8 million | -18% |
| Net income attributable to Tanger | $8.1 million | $9.4 million | -14% |
| Basic/diluted earnings per share | $0.09 | $0.11 | Declined |
| Funds from operations available to common shareholders and noncontrolling interests | $35.6 million | $29.6 million | +20% |
| FFO per share | $0.36 | $0.32 | +13% |
| AFFO available to common shareholders and noncontrolling interests | $36.3 million | $30.3 million | +20% |
| AFFO per share | $0.37 | $0.33 | +12% |
| Net cash provided by operating activities | $42.6 million | $31.1 million | +$11.5 million |
| Cash and cash equivalents at period-end | $10.8 million | $0.7 million | Increased |
Operating margin was approximately 26.9% in Q1 2012 versus 29.9% in Q1 2011. Net income margin was approximately 10.5% versus 15.3%; net income attributable to Tanger margin was approximately 9.6% versus 13.3%. The margin compression primarily reflected higher depreciation and amortization, general and administrative expense, interest expense and losses from unconsolidated joint ventures.
Balance Sheet, Debt and Liquidity
- Total assets were $1.63 billion at March 31, 2012, compared with $1.62 billion at December 31, 2011.
- Total debt was $1.04 billion, up from $1.03 billion at year-end 2011. Approximately 88% of debt was unsecured and approximately 90% of the gross book value of the real estate portfolio was unencumbered.
- The Operating Partnership closed a $250 million, seven-year unsecured term loan on February 24, 2012, bearing interest initially at LIBOR plus 1.80%. Proceeds were used primarily to repay borrowings under unsecured lines of credit.
- Outstanding unsecured line-of-credit borrowings declined to $121.1 million from $357.1 million. Total borrowing capacity was $520 million, with a stated maturity of November 2015 and an option for a one-year extension.
- Debt maturities included $403.4 million in 2015, $30.3 million in 2016 and $590.5 million thereafter, excluding net premiums.
- Operating cash flow of $42.6 million exceeded cash capital expenditures of $8.3 million, but investing activities also included $21.4 million of contributions to unconsolidated joint ventures.
- At March 31, 2012, 36% of outstanding debt carried variable interest rates. Management estimated that a 100-basis-point increase in LIBOR would increase annual interest expense by approximately $3.7 million.
- Debt covenants were reported as satisfied. Actual total debt to adjusted total assets was 47% against a covenant limit below 60%; secured debt to adjusted total assets was 5% against a limit below 40%; and unencumbered assets to unsecured debt were 208% against a requirement above 135%.
Material Changes Versus the Prior Comparable Period
- Base rentals increased $11.0 million, or 24%, primarily from properties acquired during 2011, new developments, higher existing-property rents and termination fees.
- Percentage rentals increased 25% to $1.7 million. Reported tenant comparable sales for the rolling twelve months increased 3.4% to $371 per square foot.
- Occupancy at consolidated centers was 97% at both March 31, 2012 and March 31, 2011.
- General and administrative expense increased 48% to $10.0 million, mainly because of higher share-based compensation and payroll costs.
- Depreciation and amortization increased 42% to $25.5 million, largely because of acquired centers and related lease intangibles.
- Interest expense increased 19% to $12.3 million as average debt outstanding increased from approximately $718 million to approximately $1.0 billion.
- Equity losses from unconsolidated joint ventures increased to $1.5 million from $0.03 million, reflecting higher financing costs, acquisition costs and a $0.95 million write-off of Halton Hills pre-development costs.
- FFO and AFFO increased despite lower GAAP net income, reflecting the substantial increase in depreciation and amortization from the expanded property portfolio.
- During the quarter, Family Limited Partners exchanged 1.33 million Operating Partnership units for 5.33 million common shares.
- The company increased its quarterly dividend to $0.21 per common share declared for payment in May 2012, compared with $0.20 per share paid during Q1 2012 and $0.1938 per share in Q1 2011.
Guidance, Outlook, Risks and Unusual Items
- No specific full-year earnings or FFO guidance is provided in the filing.
- Management expected continued portfolio growth through development, expansion, acquisitions and joint ventures, subject to market conditions and project execution.
- Projects discussed included Galveston/Houston, expected to open in October 2012; National Harbor, in pre-development; and a subsequent May 2012 joint venture for a planned Glendale, Arizona center targeted for a November 2012 opening.
- Management stated that available operating cash flow, credit facilities and potential debt or equity offerings were expected to fund planned 2012 capital expenditures and regular debt service, dividends and distributions. It cautioned that access to capital markets could become less affordable or unavailable.
- Approximately 1.6 million square feet, or 15% of the consolidated portfolio, was scheduled for lease renewal during 2012. During Q1, renewals achieved a 15% increase in average base rent and re-tenanting achieved a 58% increase, but management cautioned that similar results may not continue.
- The Deer Park Warehouse joint venture mortgage had matured without an available extension. The venture owed $2.3 million, accrued interest at an 8.25% default rate and was negotiating with the lender.
- Unconsolidated joint ventures had $273.5 million of total debt, including significant maturities at Deer Park in 2014 and Wisconsin Dells in December 2012. Joint venture agreements included make-whole and buy-sell provisions that could require a significant cash outflow.
- The filing states that there were no material changes to previously disclosed risk factors and no material litigation other than routine matters expected to be covered by insurance.
- Unusual or non-core items included higher share-based compensation, the joint venture pre-development write-off, and increased acquisition-related and financing activity.
Most Important Facts for Investors to Verify
- Whether the acquired and developed centers continue to generate sufficient rent growth and occupancy to offset higher depreciation, interest and overhead costs.
- The company’s ability to refinance or repay the approximately $403 million of debt maturing in 2015.
- Compliance with debt covenants and the continued availability of the $520 million unsecured credit facilities.
- Exposure to variable interest rates, particularly the effect of higher LIBOR on interest expense.
- Performance, financing and maturity risks at the Deer Park, Wisconsin Dells, Galveston/Houston, RioCan Canada and National Harbor joint ventures.
- Whether lease renewal and re-tenanting spreads achieved in Q1 can be sustained as 15% of the portfolio comes up for renewal during 2012.
- The reconciliation and limitations of non-GAAP FFO and AFFO, which management states should not be treated as measures of discretionary cash available for investment or dividends.