Business Context and Reporting Period
Company: Tanger Factory Outlet Centers, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2009
Filing Date: November 6, 2009
Tanger is a fully-integrated, self-administered, and self-managed Real Estate Investment Trust (REIT) focused on developing, acquiring, owning, and operating outlet shopping centers. As of September 30, 2009, the company owned and operated 31 wholly-owned outlet centers totaling approximately 9.2 million square feet with a 96% occupancy rate. The company also held partial ownership interests in two additional centers (Deer Park, NY and Wisconsin Dells, WI).
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sept 30, 2009 | Nine Months Ended Sept 30, 2009 | Nine Months Ended Sept 30, 2008 |
|---|---|---|---|
| Total Revenues | $70,317 | $200,142 | $177,054 |
| Net Income | $4,364 | $54,419 | $19,359 |
| Net Income Attributable to Tanger | $3,957 | $46,481 | $16,886 |
| Diluted EPS (Common) | $0.06 | $1.20 | $0.38 |
| Funds From Operations (FFO) | $25,691 | $86,446 | $66,632 |
| Cash from Operating Activities | N/A | $95,420 | $72,069 |
| Total Debt | $580,539 | $580,539 | $786,863 |
| Cash and Equivalents | $4,401 | $4,401 | $3,753 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 12% ($23.1 million) for the nine months ended September 30, 2009, compared to the same period in 2008. This was driven by the consolidation of the Myrtle Beach Hwy 17 center (acquired in January 2009) and the new Washington, PA center.
- Net Income Surge: Net income attributable to Tanger increased significantly to $46.5 million (from $16.9 million in 2008). This increase was primarily due to non-recurring gains: a $31.5 million gain on the fair value measurement of the previously held interest in the Myrtle Beach joint venture and a $10.5 million gain on the early extinguishment of debt.
- Debt Reduction: Total debt decreased by approximately $206 million year-over-year. The company exchanged $142.3 million of Exchangeable Notes for common shares and used proceeds from a $116.8 million common share offering to repay unsecured lines of credit.
- Expense Increases: General and administrative expenses rose 60% ($10.4 million) due to a $10.3 million executive severance charge (cash and accelerated share-based compensation) related to the retirement of founder Stanley K. Tanger. Depreciation and amortization increased 32% due to the addition of new properties and accelerated depreciation at the Hilton Head, SC center.
- Impairment Charge: A $5.2 million non-cash impairment charge was recorded in Q2 2009 for the Commerce I, GA outlet center due to deteriorating net operating income and expected occupancy declines.
Guidance, Outlook, and Risks
- Development Pipeline: Construction began in October 2009 on a new 317,000 sq. ft. center in Mebane, NC, with an estimated cost of $61.5 million. The company also holds an option for a site in Irving, TX.
- Leasing Outlook: Comparable sales for wholly-owned properties decreased 2.0% to $335 per square foot. While 74% of 2009 renewals were signed at a 10% rent increase, management notes that economic conditions may make re-leasing remaining space more difficult.
- Liquidity: The company maintains $325 million in unsecured lines of credit. Moody's affirmed the Baa3 rating with a positive outlook. Management believes current cash flows and credit facilities are sufficient to fund operations and dividends through 2011.
- Risks: Primary risks include the unpredictability of capital markets, potential tenant bankruptcies, and the ability to re-lease vacant space at favorable rates. The company has significant exposure to interest rate fluctuations on variable-rate debt, though 91% of debt is fixed or hedged.
Investor Verification Checklist
- Non-Recurring Gains: Verify the sustainability of net income by excluding the $31.5 million joint venture gain and $10.5 million debt extinguishment gain.
- Executive Severance: Confirm the one-time nature of the $10.3 million G&A expense related to Stanley K. Tanger's retirement.
- Impairment Details: Review the specific occupancy and cash flow projections for the Commerce I, GA center that triggered the $5.2 million impairment.
- Debt Maturities: Assess the refinancing risk for the $235 million term loan and $35.8 million mortgage maturing in 2010-2011.
- FFO vs. Net Income: Compare Funds From Operations ($86.4 million for 9 months) against Net Income to better gauge core operating performance.