Business Context and Reporting Period
Company: Tanger Factory Outlet Centers, Inc. (Tanger)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2007
Business Overview: Tanger is a fully-integrated REIT focused on developing, acquiring, owning, and operating factory outlet shopping centers. As of March 31, 2007, the company owned 30 outlet centers totaling approximately 8.4 million square feet of gross leasable area (GLA) with an occupancy rate of 95%. The portfolio includes wholly-owned properties, unconsolidated joint ventures, and managed properties.
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2007 | Q1 2006 |
|---|---|---|
| Total Revenues | $53,241 | $48,198 |
| Operating Income | $13,472 | $13,402 |
| Net Income | $3,281 | $14,847 |
| Net Income Available to Common Shareholders | $1,875 | $13,632 |
| Diluted EPS (Net Income) | $0.06 | $0.44 |
| Funds From Operations (FFO) | $22,717 | $20,103 |
| FFO Available to Common Shareholders | $21,311 | $18,888 |
| Net Cash Provided by Operating Activities | $22,670 | $16,200 |
| Total Debt | $677,048 | $678,579 |
| Cash and Cash Equivalents | $3,273 | $8,453 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 10.5% to $53.2 million, driven by a 7% increase in base rentals (due to the new Charleston, SC center and lease renewals) and a 27% increase in percentage rentals.
- Net Income Decline: Net income dropped significantly to $3.3 million from $14.8 million. This decrease is primarily due to the absence of $11.7 million in gains from discontinued operations (sales of Pigeon Forge, TN and North Branch, MN properties) recorded in Q1 2006.
- Accelerated Depreciation: A change in accounting estimate regarding the reconfiguration of the Foley, AL center resulted in accelerated depreciation, reducing net income by approximately $3.4 million ($0.11 per share).
- Operating Expenses: Property operating expenses rose 15% to $17.0 million, attributed to the new Charleston center, higher snow removal costs, and increased insurance premiums.
- Liquidity: Cash and cash equivalents decreased by $5.2 million to $3.3 million, reflecting capital expenditures and dividend payments.
Guidance, Outlook, and Risks
- Development Pipeline: The company expects to open the first phase of a new center in Pittsburgh, PA (308,000 sq. ft.) in Q2 2008. Expansions at four existing centers (Barstow, CA; Branson, MO; Gonzales, LA; Tilton, NH) totaling 140,000 sq. ft. are projected for Q1 2008.
- Leasing Outlook: Approximately 1.55 million sq. ft. (19% of the portfolio) is scheduled for renewal in 2007. As of March 31, 2007, 47% of expiring space had been renewed at an average 13% rent increase. Vacant space re-tenanted in Q1 saw a 37% rent increase.
- Dividends: On April 12, 2007, the Board declared a $0.36 cash dividend per common share payable May 15, 2007.
- Capital Resources: The company maintains $200 million in unsecured revolving lines of credit. Management believes cash flow and existing facilities are sufficient to fund planned capital expenditures and debt service.
- Risks: Risks include the inability to renew leases on favorable terms, tenant bankruptcies, and the impact of interest rate fluctuations on variable-rate debt (though hedges are in place). No material litigation is pending.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the extent to which Q1 2006 net income was inflated by one-time property sale gains ($13.8 million) not present in 2007.
- Foley, AL Reconfiguration: Confirm the timeline and financial impact of the accelerated depreciation ($3.4 million charge) related to the demolition and reconfiguration of the Foley center.
- Joint Venture Guarantees: Review the off-balance sheet guarantees for the Deer Park Enterprise ($38.8 million loan) and Tanger Wisconsin Dells ($28.9 million loan) joint ventures.
- Lease Renewal Rates: Monitor the success of renewing the remaining 53% of the 1.55 million sq. ft. expiring in 2007 to ensure rent growth targets are met.
- Interest Rate Exposure: Assess the effectiveness of the US Treasury locks and interest rate swaps in mitigating the risk of rising rates on future financings and variable debt.