Business Context and Reporting Period
Company: Tanger Factory Outlet Centers, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2007
Business Overview: A fully-integrated REIT focused on developing, acquiring, owning, and operating factory outlet shopping centers. As of September 30, 2007, the company owned 30 wholly-owned outlet centers totaling approximately 8.4 million square feet with an occupancy rate of 97%. The portfolio also includes 50% interests in two joint ventures and management agreements for two additional centers.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2007 |
Nine Months Ended Sep 30, 2007 |
Nine Months Ended Sep 30, 2006 |
|---|---|---|---|
| Total Revenues | $58,386 | $166,787 | $152,627 |
| Net Income | $8,397 | $18,103 | $28,550 |
| Net Income Available to Common Shareholders | $6,991 | $13,884 | $24,523 |
| Diluted EPS (Net Income) | $0.22 | $0.44 | $0.79 |
| Funds From Operations (FFO) | $25,335 | $71,605 | $63,827 |
| FFO Available to Common Shareholders | $23,929 | $67,386 | $59,800 |
| Net Cash Provided by Operating Activities | N/A | $68,944 | $57,264 |
| Total Debt | $697,334 | $697,334 | $678,579 |
| Cash and Cash Equivalents | $2,434 | $2,434 | $8,453 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 7.6% for the nine months ended September 30, 2007, compared to the prior year. Base rentals rose 7% ($6.8 million) driven by the August 2006 opening of the Charleston, SC center and lease renewals at an average 22% increase in base rental rates.
- Net Income Decline: Net income decreased significantly to $18.1 million for the nine months of 2007 from $28.6 million in 2006. This decline is primarily attributable to the absence of a $13.8 million gain on the sale of real estate recorded in the 2006 period (discontinued operations).
- Accelerated Depreciation: A reconfiguration plan at the Foley, Alabama center resulted in accelerated depreciation, reducing net income by approximately $5.0 million for the nine-month period.
- Debt and Liquidity: Total debt increased to $697.3 million, including $23.3 million drawn on unsecured lines of credit. Cash and cash equivalents decreased to $2.4 million from $8.5 million at the end of 2006 due to significant capital expenditures ($58.4 million) for new developments and expansions.
Guidance, Outlook, and Risks
- Development Pipeline: The company is constructing a new center in Pittsburgh, PA (expected opening Q3 2008) and expanding four existing centers (Barstow, CA; Branson, MO; Gonzales, LA; Tilton, NH). Total construction commitments are approximately $63.2 million.
- Leasing Outlook: As of September 30, 2007, 72% of space scheduled to expire in 2007 had been renewed at an average 13% increase in base rental rates. Re-tenanted vacant space saw a 38% increase in rental rates.
- Dividends: The Board declared a $0.36 cash dividend per common share payable November 15, 2007.
- Risks and Contingencies:
- Interest Rate Risk: The company utilizes interest rate swaps and treasury locks to hedge floating rate debt. A 1% decrease in LIBOR could result in termination costs of approximately $3.9 million for joint venture swaps and $16.5 million for company treasury locks.
- Off-Balance Sheet Guarantees: The company provides joint and several guarantees for construction loans held by the Wisconsin Dells ($25.3 million) and Deer Park ($67.8 million) joint ventures.
- Lease Renewals: Approximately 1.57 million square feet of portfolio space is up for renewal in 2007; failure to renew on favorable terms could materially impact results.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the exclusion of the $13.8 million 2006 real estate sale gain when comparing year-over-year net income trends.
- Capital Expenditure Funding: Confirm the ability to fund the $63.2 million in construction commitments given the low cash balance ($2.4 million) and reliance on operating cash flow and credit facilities.
- Accelerated Depreciation: Assess the one-time nature of the $5.0 million depreciation charge related to the Foley, AL reconfiguration and its impact on core operating margins.
- Joint Venture Exposure: Review the terms of the $67.8 million Deer Park construction loan and the associated interest rate swap hedges, noting the company's 33% ownership and guarantee obligations.
- Lease Renewal Rates: Monitor the 2008 renewal pipeline (29% completed as of Sept 30) to ensure the 13% renewal rate increase trend continues.