Tanger Inc. 2015 Q2 Form 10-Q Summary
Business Context and Reporting Period
Tanger Factory Outlet Centers, Inc. is a self-administered REIT that develops, owns, operates and manages outlet shopping centers through Tanger Properties Limited Partnership. The unaudited filing covers the quarter and six months ended June 30, 2015, with comparative periods ended June 30, 2014.
At June 30, 2015, Tanger operated 37 consolidated outlet centers totaling approximately 11.7 million square feet and held interests in nine unconsolidated centers totaling approximately 2.7 million square feet. Consolidated centers were 97% occupied, compared with 98% at June 30, 2014.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 | ||
|---|---|---|---|---|
| 2015 | 2014 | 2015 | 2014 | |
| Total revenues | $107.7 million | $102.2 million | $213.7 million | $205.0 million |
| Operating income | $36.9 million | $32.6 million | $69.8 million | $61.0 million |
| Operating margin | 34.3% | 31.9% | 32.7% | 29.8% |
| Net income | $25.4 million | $19.9 million | $61.7 million | $35.3 million |
| Net income attributable to Tanger | $24.5 million | $18.9 million | $59.0 million | $33.5 million |
| Diluted earnings per share | $0.26 | $0.20 | $0.62 | $0.35 |
| FFO per diluted share | $0.54 | $0.47 | $1.04 | $0.90 |
| AFFO per diluted share | $0.54 | $0.47 | $1.04 | $0.92 |
Six-month net cash provided by operating activities was $101.7 million, compared with $84.3 million in 2014. Investing activities used $117.5 million, including $111.2 million of additions to rental property and $26.9 million of contributions to unconsolidated joint ventures. Financing activities provided $17.2 million. Cash increased by $1.1 million to $16.9 million at the Operating Partnership level and $16.9 million at the Company level.
Total debt was $1.514 billion at June 30, 2015, compared with $1.443 billion at December 31, 2014. Debt consisted primarily of $793.9 million of senior unsecured notes, $267.3 million of unsecured term loans, $276.9 million of mortgages and $176.3 million drawn on unsecured lines of credit. The Company reported $343.7 million of availability under its $520.0 million unsecured credit facilities. Approximately 82% of outstanding debt was unsecured, and 76% of the gross book value of the real estate portfolio was unencumbered.
Cash dividends increased to $0.285 per common share in the second quarter and $0.525 per share for the first six months, compared with $0.240 and $0.465, respectively, in the prior-year periods.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 5%, while six-month revenue increased 4%.
- Second-quarter net income increased $5.5 million, or approximately 27%; six-month net income increased $26.4 million, primarily due to a $13.7 million gain on the sale of the Wisconsin Dells joint venture interest, lower interest expense and stronger property operating results.
- Interest expense declined 10% in the second quarter and 11% for the six-month period, primarily following the refinancing of $250 million of higher-cost senior notes with 3.75% senior notes.
- Base rentals increased 6% in the second quarter and 4% for the six-month period. Termination fees increased materially because of brand-wide store closures.
- Management, leasing and other services increased 128% in the second quarter and 127% for the six-month period, primarily from services provided to the Savannah outlet center.
- Property operating expenses increased 4% in both comparative periods, reflecting higher advertising, snow removal, mall office and development-related costs.
- Depreciation and amortization declined 4% in the second quarter and 6% for the six-month period, partly because properties classified as held for sale were no longer depreciated.
- Same-center NOI on a cash basis increased to $68.7 million in the second quarter from $65.7 million and to $135.2 million for the six-month period from $129.5 million.
Guidance, Outlook, Risks and Unusual Items
Management stated that operating cash flow, available credit and access to debt and equity markets were expected to be adequate to fund planned capital expenditures through the end of 2016, subject to market conditions. Management also expected sufficient cash to fund operating expenses, debt service and dividends required to maintain REIT status. The filing does not provide specific earnings guidance.
- Foxwoods, Connecticut opened in May 2015. Grand Rapids, Michigan opened on July 31, 2015, after quarter-end. Southaven, Mississippi was under construction with a planned holiday 2015 opening.
- The Columbus, Ohio unconsolidated joint venture began construction during the second quarter and targeted a second-quarter 2016 opening.
- Four properties, totaling approximately 712,000 square feet and carried at $46.9 million, were classified as held for sale at June 30. After quarter-end, the expected sale became unlikely because the buyer could not secure acceptable financing. Tanger expected to reclassify the properties to held and used and record approximately $1.6 million of additional depreciation and amortization.
- The Company repaid the Hershey mortgage during the second quarter and repaid the $17.6 million Ocean City mortgage in July 2015.
- At June 30, approximately 33% of debt was variable-rate debt, excluding debt protected by interest-rate swaps. Management estimated that a 100-basis-point increase in LIBOR would increase annual interest expense by approximately $5.0 million.
- Tanger guaranteed portions of unconsolidated joint-venture debt, with reported maximum principal guarantees totaling approximately $33.6 million, in addition to completion guarantees and customary non-recourse carve-outs.
- Key risks include tenant closures or bankruptcies, renewal and re-leasing risk, consumer and travel trends, development execution, real estate valuation and impairment, interest rates, access to capital, joint-venture obligations, Canadian currency exposure, REIT qualification and cyber risks.
- Management reported compliance with all debt covenants. Legal proceedings were described as routine and not expected to have a material adverse effect. No material changes were reported to the 2014 Form 10-K risk factors.
Most Important Facts for Investors to Verify
- Whether the Grand Rapids and Southaven developments opened as planned and achieved expected occupancy and leasing levels.
- The final disposition or reclassification of the four properties previously held for sale and the related approximately $1.6 million accounting adjustment.
- Debt maturities, refinancing requirements and continued availability under the unsecured credit facilities, particularly maturities beginning in 2017.
- The sustainability of rent increases, termination fees and same-center NOI growth as leases renew and retailers adjust store portfolios.
- Exposure under joint-venture debt guarantees, including the Savannah completion and principal guarantees.
- The effect of variable interest rates and Canadian foreign-currency movements on future earnings, cash flow and comprehensive income.
- FFO and AFFO trends after excluding the one-time Wisconsin Dells gain and considering required capital expenditures and tenant allowances.