Tanger Factory Outlet Centers, Inc. - 10-Q Summary
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Tanger Factory Outlet Centers, Inc., a self-administered and self-managed Real Estate Investment Trust (REIT) focused on factory outlet shopping centers. The reporting period covers the three and six months ended June 30, 2008. As of the period end, the Company owned and operated 29 wholly-owned outlet centers totaling approximately 8.5 million square feet with a 96% occupancy rate. The Company also held interests in three unconsolidated joint ventures.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2008 | Six Months Ended June 30, 2007 |
|---|---|---|
| Total Revenues | $114.3 million | $108.4 million |
| Net Income | $8.2 million | $9.7 million |
| Net Income Available to Common Shareholders | $5.4 million | $6.9 million |
| Funds From Operations (FFO) | $40.7 million | $46.3 million |
| Net Cash Provided by Operating Activities | $36.2 million | $42.9 million |
| Total Debt Outstanding | $762.1 million | $706.3 million |
| Cash and Cash Equivalents | $1.1 million | $2.4 million |
| Dividends Paid per Common Share | $0.74 | $0.70 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 5.4% year-over-year, driven by a 6% increase in base rentals due to lease renewals at higher rates and the addition of approximately 179,000 square feet of expansion space. However, percentage rentals decreased 27% as tenants renewed leases with higher base rents, shifting variable rent components to fixed components.
- Profitability Impact: Net income decreased 15% primarily due to an $8.9 million loss on the settlement of US Treasury rate locks. This non-cash loss occurred because the Company settled interest rate protection agreements intended for a public debt offering that was ultimately replaced by a LIBOR-based term loan.
- Debt Restructuring: The Company closed a $235.0 million unsecured term loan in June 2008. Proceeds were used to repay a $170.7 million mortgage, rendering the entire wholly-owned portfolio unencumbered. The Company also repaid $100 million in senior notes at maturity in February 2008.
- Development Activity: Net cash used in investing activities increased significantly to $65.2 million (from $30.8 million in 2007) due to the development of a new center in Washington County, Pennsylvania, and expansions at existing centers.
Guidance, Outlook, and Risks
- Outlook: Management expects to continue growing the portfolio through development and acquisitions. The Company has announced plans for new centers in Irving, Texas, and Phoenix, Arizona, with ground-breaking scheduled for 2009. The Washington County, Pennsylvania center is expected to open in August 2008.
- Leasing Activity: As of June 30, 2008, the Company had renewed 73% of the square footage scheduled to expire in 2008 at an average base rental rate increase of 18%. Re-tenanted vacant space saw a 43% increase in base rental rates.
- Risks and Contingencies:
- Interest Rate Risk: 48% of outstanding debt has variable interest rates. A 100 basis point increase in LIBOR would increase annual interest expense by approximately $3.6 million.
- Joint Venture Guarantees: The Company provides joint and several guarantees for debt related to the Deer Park ($154.0 million) and Wisconsin Dells ($25.3 million) joint ventures.
- Market Conditions: The Company notes that while factory outlets remain profitable, retail formats vary in success, and tenant bankruptcies or lease terminations remain a risk.
Investor Verification Checklist
- Derivative Settlement: Verify the accounting treatment and future impact of the $8.9 million loss on US Treasury rate lock settlements.
- Debt Maturity Profile: Review the maturity dates of the new $235 million term loan (3-year) and the expanded $325 million lines of credit to assess refinancing risks.
- Development Timeline: Monitor the August 2008 opening of the Washington County, PA center and the leasing progress of the Deer Park, NY joint venture (expected opening Oct 2008).
- Occupancy Trends: Track the 16% of the portfolio coming up for renewal in 2008 to ensure renewal rates and rental increases remain consistent with current guidance.
- Joint Venture Exposure: Assess the financial health of the Deer Park joint venture, given the Company's 33% ownership and guarantee obligations on its $154 million construction loan.