Business Context and Reporting Period
Company: Tanger Factory Outlet Centers, Inc. (Tanger)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2004
Tanger is a fully-integrated, self-administered, self-managed real estate investment trust (REIT) that develops, owns, operates, and manages factory outlet centers. As of June 30, 2004, the Company had ownership interests in or management responsibilities for 38 centers in 23 states totaling 9.3 million square feet of gross leasable area (GLA). This represents significant growth from 33 centers and 6.2 million square feet as of June 30, 2003, driven primarily by the December 2003 acquisition of the Charter Oak Partners (COROC) portfolio of nine centers.
Key Financial Metrics
Revenue and Profitability (Six Months Ended June 30, 2004):
- Total Revenues: $94.4 million (up from $57.2 million in 2003)
- Operating Income: $34.0 million (up from $19.1 million in 2003)
- Net Income: $4.8 million (up from $4.5 million in 2003)
- Net Income Available to Common Shareholders: $4.8 million
- Diluted Earnings Per Share (EPS): $0.35 (up from $0.38 in 2003)
- Funds from Operations (FFO): $29.5 million (up from $21.3 million in 2003)
Cash Flow (Six Months Ended June 30, 2004):
- Net Cash Provided by Operating Activities: $40.4 million
- Net Cash Used in Investing Activities: $4.7 million
- Net Cash Used in Financing Activities: $36.8 million
- Cash and Cash Equivalents (End of Period): $8.7 million
Balance Sheet Highlights (As of June 30, 2004):
- Total Assets: $972.0 million
- Total Liabilities: $538.5 million
- Total Debt: $513.6 million (Senior unsecured notes: $147.5 million; Mortgages: $366.1 million)
- Shareholders' Equity: $174.6 million
- Occupancy Rate: 95% (down from 96% in 2003)
Material Changes Versus Prior Period
The financial results for the six months ended June 30, 2004, were significantly impacted by the consolidation of the COROC joint venture acquired in December 2003.
- Revenue Growth: Total revenues increased 65% year-over-year. Base rentals rose 68% ($25.9 million) primarily due to the COROC acquisition. Other income increased 124%, driven by a $1.2 million gain from the sale of three outparcels of land.
- Expense Increases: Property operating expenses increased 48% ($9.2 million) and interest expense increased 34% ($4.5 million) due to the assumption of $186.4 million in debt associated with the COROC portfolio. Depreciation and amortization increased 82% due to the new assets and a higher mix of tenant finishing allowances.
- Minority Interest Impact: Consolidated joint venture minority interest increased by $13.2 million. This allocation to the joint venture partner (Blackstone) is based on a preferred return on investment rather than ownership percentage, significantly reducing net income attributable to Tanger shareholders despite higher operating income.
- Discontinued Operations: The Company recorded a $2.1 million gain on the sale of two non-core properties in New Hampshire, compared to a $0.7 million loss on a property sale in the prior year.
Guidance, Outlook, and Risks
Management Commentary and Outlook:
- Leasing Activity: Approximately 19% of the portfolio (1.79 million sq. ft.) is scheduled for renewal in 2004. As of June 30, 58% of expiring space had been renewed at an average base rental rate 8% higher than the expiring rate. Vacant space was re-tenanted at a 2% increase in average base rental rates.
- Development Pipeline: Early development has begun on sites in Pittsburgh, PA; Charleston, SC; and Wisconsin Dells, WI, with initial phases scheduled to open in 2006. The Myrtle Beach joint venture (TWMB) completed a 79,000 sq. ft. expansion.
- Capital Strategy: The Company intends to restock its shelf registration to $400 million during 2004. It recently secured an additional $25 million unsecured line of credit, bringing total committed unsecured lines to $125 million.
- Dividends: A quarterly dividend of $0.6250 per common share was declared, payable August 16, 2004.
Risks and Contingencies:
- Market Risks: Exposure to interest rate changes, though managed via fixed-rate debt and swaps. A 1% increase in interest rates would decrease the fair value of long-term debt by approximately $8.7 million.
- Operational Risks: Risks include tenant bankruptcies, inability to renew leases on favorable terms, and potential cost overruns in development projects.
- Joint Venture Risks: The TWMB joint venture includes a "Russian roulette" provision allowing either partner to force a sale or purchase of the other's interest, which could result in significant cash outflows.
Investor Verification Checklist
- Minority Interest Allocation: Verify the impact of the preferred return structure in the COROC joint venture on net income available to common shareholders versus Funds from Operations (FFO).
- Debt Structure: Review the terms of the $186.4 million cross-collateralized debt assumed in the COROC acquisition, including the 6.59% stated rate and 2008 maturity.
- Occupancy Trends: Monitor the 1% decline in overall occupancy (96% to 95%) and the specific performance of the newly acquired COROC portfolio (94% occupancy).
- Lease Renewals: Track the renewal rate for the 1.79 million square feet expiring in 2004 to ensure the 8% rent increase trend holds.
- Development Costs: Assess the capital requirements and timelines for the three new development sites (Pittsburgh, Charleston, Wisconsin Dells) scheduled for 2006 openings.