Tanger Inc. 2015 Form 10-K Summary
Business context and reporting period
This combined Form 10-K covers Tanger Factory Outlet Centers, Inc. and Tanger Properties Limited Partnership for the fiscal year ended December 31, 2015. Tanger is a self-managed REIT focused on developing, owning, operating and managing outlet shopping centers in the United States and Canada. At year-end, the consolidated portfolio included 34 centers totaling approximately 11.7 million square feet, with 97% occupancy, more than 2,400 stores and approximately 400 brands. The Company also held interests in nine unconsolidated centers totaling approximately 2.7 million square feet.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $439.4 million | $418.6 million | +5.0% |
| Operating income | $144.5 million | $131.9 million | +9.6% |
| Operating margin | 32.9% | 31.5% | +140 bps |
| Net income | $222.2 million | $78.2 million | +184.3% |
| Net income attributable to Tanger | $211.2 million | $74.0 million | +185.4% |
| Diluted EPS | $2.20 | $0.77 | +185.7% |
| FFO per diluted share/unit | $2.23 | $1.82 | +22.5% |
| AFFO per diluted share/unit | $2.22 | $1.97 | +12.7% |
| Cash flow from operations | $220.8 million | $188.8 million | +17.0% |
Base rentals increased 6% to $289.7 million, while expense reimbursements increased 3% to $126.5 million. Percentage rentals declined 1% to $10.2 million. Reported comparable tenant sales were $395 per square foot, flat year over year. Same-center NOI on a cash basis increased to $264.3 million from $255.4 million.
Net income and GAAP margins were materially affected by approximately $120.4 million of gains from property and joint venture dispositions. Excluding disposition gains, FFO increased to $224.3 million from $183.8 million, providing a better indication of recurring operating performance.
Balance sheet, debt and liquidity
- Total assets were $2.33 billion and total equity was $606.0 million at December 31, 2015.
- Total debt was $1.56 billion, compared with $1.44 billion at year-end 2014. Debt represented approximately 49% of adjusted total assets under the senior note covenant calculation.
- Unsecured borrowings represented approximately 80% of outstanding debt, and approximately 75% of the gross book value of real estate was unencumbered.
- Unsecured credit facilities provided total capacity of $520.0 million, including a $20.0 million liquidity line and a $500.0 million syndicated facility. The facilities mature in October 2019, with a one-year extension option, and the borrowing spread was reduced to LIBOR plus 0.90%.
- Cash and cash equivalents were $21.6 million, supplemented by $121.3 million of restricted cash from property sales held for tax-efficient reinvestment.
- Debt maturities totaled $12.8 million in 2016, $80.8 million in 2017, $199.0 million in 2018, $443.7 million in 2019 and $303.6 million in 2020, before consideration of subsequent refinancing or repayment activity.
- Operating cash flow of $220.8 million was approximately equal to investing cash outflows of $221.8 million. Capital expenditures on a cash basis were $238.7 million, primarily for new developments.
Material changes versus the prior comparable period
- Three consolidated centers opened in 2015: Foxwoods, Grand Rapids and Southaven. Daytona Beach was under construction and expected to open by Holiday 2016.
- Three new or expanded unconsolidated joint venture projects materially increased development activity, including Savannah and Columbus.
- Tanger sold its Wisconsin Dells joint venture interest and five consolidated centers for aggregate net proceeds of approximately $164.6 million and recorded approximately $120.4 million of gains.
- Occupancy declined to 97% from 98%, but average annual base rent per square foot increased to $25.19 from $23.78.
- 2015 interest expense decreased 6% to $54.2 million, primarily reflecting the prior-year refinancing of higher-cost senior notes.
- Operating expenses increased 7% to $146.5 million, partly due to higher snow removal costs, mall office expenses, maintenance and real estate taxes.
- The regular dividend increased to $1.095 per share from $0.945. Including a $0.21 special dividend paid in January 2016, 2015 distributions totaled $1.305 per share.
Guidance, outlook, commentary, risks and unusual items
Management stated that cash flow from operations, existing credit facilities and access to debt and equity markets were expected to fund planned 2016 capital expenditures, operating expenses, debt service and REIT distributions. No formal earnings guidance was provided in the filing.
Management expects positive overall rent spreads on leases expiring in 2016, but cautioned that future renewals and re-leasing may not achieve historical increases. In 2015, 84% of expiring space was renewed with existing tenants at a 20% increase in average base rent, while 444,000 square feet was re-leased to new tenants at a 29% increase.
- Development and expansion projects carry risks of cost overruns, delays, permitting failures, tenant demand shortfalls and lower-than-historical investment returns.
- Retail tenant performance, bankruptcies, store closures, e-commerce competition and consumer spending trends could reduce rents, occupancy and percentage rental income.
- Interest-rate exposure remains material: 36% of outstanding debt was variable-rate after considering interest-rate protection; a 100-basis-point LIBOR increase was estimated to increase annual interest expense by approximately $5.6 million.
- The Company had $34.4 million of maximum guarantees related to certain unconsolidated joint venture debt, in addition to completion and non-recourse carve-out guarantees.
- Contractual commitments included approximately $50.6 million for consolidated construction and development, $17.2 million for the Company’s share of unconsolidated joint venture construction commitments, and approximately $5.4 million of consolidated tenant allowances.
- In January 2016, Tanger sold Fort Myers for approximately $25.8 million, repaid the $150.0 million Deer Park mortgage and the $28.4 million deferred financing obligation, and used remaining proceeds and credit facilities for a $0.21 per share special dividend and qualified replacement property.
- Management reported no material impairment losses, no material unresolved legal proceedings and effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Reconcile reported GAAP earnings with recurring FFO and AFFO, given the significant 2015 disposition gains.
- Review debt maturities, variable-rate exposure, covenant headroom and available capacity under the $520.0 million credit facilities.
- Assess lease rollover exposure: approximately 12% of the current consolidated portfolio was scheduled to expire in 2016.
- Monitor stabilization, leasing progress and returns for Foxwoods, Grand Rapids, Southaven, Daytona Beach, Savannah and Columbus.
- Evaluate joint venture debt, completion guarantees and the Company’s economic interests, which may differ materially from legal ownership percentages.
- Confirm the post-year-end use of restricted sale proceeds, Deer Park debt repayment, Fort Myers proceeds and the special dividend.
- Consider Canadian foreign-currency exposure, tenant concentration, e-commerce competition, insurance limitations and potential impairment risk.