Tanger Inc. — Q2 2014 Form 10-Q Summary
Business Context and Reporting Period
Tanger Factory Outlet Centers, Inc. is a self-managed REIT that develops, owns and operates outlet shopping centers through Tanger Properties Limited Partnership. For the quarter ended June 30, 2014, the company operated 37 consolidated outlet centers totaling approximately 11.5 million square feet, with partial interests in seven unconsolidated centers totaling approximately 1.7 million square feet. Consolidated occupancy was 98%.
The filing combines the financial statements of Tanger Factory Outlet Centers, Inc. and its operating partnership. The financial statements are unaudited and cover the three and six months ended June 30, 2014, compared with the corresponding 2013 periods.
Financial Performance and Key Metrics
| Metric | Q2 2014 | Q2 2013 | Change |
|---|---|---|---|
| Total revenue | $102.3 million | $91.0 million | +12.4% |
| Operating income | $32.7 million | $29.9 million | +9.5% |
| Operating margin | 32.0% | 32.8% | Lower |
| Net income | $19.9 million | $17.8 million | +11.9% |
| Net income attributable to Tanger | $18.9 million | $16.9 million | +11.6% |
| Diluted EPS | $0.20 | $0.18 | +11.1% |
| FFO per diluted share | $0.47 | $0.43 | +9.3% |
| AFFO per diluted share | $0.47 | $0.44 | +6.8% |
| Metric | Six Months 2014 | Six Months 2013 | Change |
|---|---|---|---|
| Total revenue | $205.1 million | $179.7 million | +14.1% |
| Operating income | $61.1 million | $58.4 million | +4.7% |
| Net income | $35.3 million | $34.0 million | +3.9% |
| Net income attributable to Tanger | $33.5 million | $32.3 million | +3.5% |
| Diluted EPS | $0.35 | $0.34 | +2.9% |
| FFO per diluted share | $0.90 | $0.85 | +5.9% |
| AFFO per diluted share | $0.92 | $0.85 | +8.2% |
Q2 revenue growth was led by a 12% increase in base rentals, including $5.7 million from the Deer Park acquisition, and a 14% increase in expense reimbursements. Same-center NOI on a cash basis increased to $63.4 million from $59.4 million. Renewal leases covering approximately 1.0 million square feet achieved a 17% average base-rent increase, while 385,000 square feet of re-tenanted space achieved a 36% average increase.
For the six months, cash provided by operating activities was $84.3 million, compared with $75.4 million in 2013. Investing activities used $115.2 million, primarily for property development, renovations and contributions to joint ventures. Financing activities provided $29.0 million. Cash declined by $1.8 million during the period to $13.2 million.
Capital expenditures on a cash basis were $45.8 million, including $28.4 million for new center development, $7.8 million for major renovations and $6.3 million for second-generation tenant allowances. Dividends paid were $44.4 million, or $0.465 per common share for the six-month period.
Balance Sheet, Debt and Liquidity
- Total assets were $2.07 billion at June 30, 2014, compared with $2.01 billion at December 31, 2013.
- Total debt was $1.40 billion, up from $1.33 billion, primarily reflecting increased borrowings under unsecured lines of credit.
- Debt included $794.6 million of senior unsecured notes, $267.2 million of unsecured term loans, $248.3 million of mortgages and $91.2 million of unsecured line borrowings.
- Unsecured borrowings represented 82% of outstanding debt, and 77% of the gross book value of real estate was unencumbered.
- Unsecured credit facilities had total capacity of $520.0 million, including a $500.0 million syndicated facility and a $20.0 million liquidity line. The syndicated facility could be increased to $750.0 million under an accordion feature.
- Debt maturities include $282.3 million in 2015, $30.3 million in 2016, $101.7 million in 2017 and $153.2 million in 2018; $834.3 million matures thereafter.
- Management reported compliance with all debt covenants. Actual covenant measures included total debt to adjusted total assets of 49%, secured debt to adjusted total assets of 9% and unencumbered assets to unsecured debt of 179%.
- Approximately 25% of debt carried variable interest rates. Management estimated that a 100-basis-point increase in LIBOR would increase annual interest expense by approximately $3.5 million.
Material Changes and Unusual Items
- The 2013 acquisition of a controlling interest in Deer Park, New York added rental revenue and operating income but also increased depreciation, amortization and interest expense.
- Equity in earnings from unconsolidated joint ventures increased to $3.7 million for the six months, compared with $1.1 million, primarily due to National Harbor becoming operational.
- The company recorded a $1.6 million charge for abandoned pre-development projects during the first quarter of 2014.
- Share-based compensation increased to $7.1 million for the six months from $5.4 million.
- Interest expense increased 16% for both the quarter and six-month period, mainly due to Deer Park debt and the 2013 issuance of $250 million of 3.875% senior notes.
- Accumulated other comprehensive loss was $3.3 million at June 30, 2014, including the effect of changes in cash-flow hedge values and foreign-currency translation.
Guidance, Outlook, Risks and Contingencies
Management expected adequate liquidity to fund operating expenses, regular debt service, planned capital expenditures and dividends through the end of 2014 and into 2015, subject to continued access to capital markets and credit facilities. No formal earnings guidance was provided in the filing.
- Consolidated development projects included Foxwoods, Connecticut, expected to open in the second quarter of 2015, and Grand Rapids, Michigan, expected to open in the second half of 2015. Planned expansions at Park City and Branson were targeted for the fourth quarter of 2014.
- Joint venture projects included Charlotte, Ottawa, Savannah, Cookstown and Westgate, with expected openings or expansions generally from the fourth quarter of 2014 through the second half of 2015.
- In July 2014, the company amended its $250.0 million term loan, reducing the spread from LIBOR plus 1.60% to LIBOR plus 1.05% and removing the prepayment penalty.
- In July 2014, the company purchased land in Grand Rapids for approximately $8.0 million.
- Insurance proceeds related to West Branch, Michigan storm damage were expected to total approximately $1.3 million to $1.8 million, potentially producing a gain of approximately $0.8 million to $1.3 million once contingencies were resolved.
- Material risks include tenant closures or bankruptcies, dependence on rental income and retailer performance, development and construction risk, joint venture and guarantee exposure, refinancing and interest-rate risk, real estate valuation risk, foreign-currency exposure in Canada, regulatory and environmental matters, and the requirement to maintain REIT qualification.
- The company provided guarantees for certain joint venture debt, including potential completion and principal guarantees. It stated that the maximum exposure to loss for certain variable-interest-entity joint ventures could not be estimated at the reporting date.
- Management reported no material changes to previously disclosed risk factors and no legal proceedings expected to have a material adverse effect.
Most Important Facts for Investors to Verify
- Whether development projects and joint venture openings occur on schedule and within projected costs.
- Debt refinancing plans for the $282.3 million of 2015 maturities and the company’s ability to preserve covenant compliance.
- Actual same-center rental growth, occupancy and tenant renewal performance, particularly as 14% of the portfolio was scheduled for renewal during 2014.
- The effect of higher variable interest rates on interest expense and property valuations.
- The ultimate insurance settlement and related gain for the West Branch property.
- The company’s future capital needs, reliance on unsecured borrowings and equity issuance, and ability to fund dividends while pursuing development.
- The methodology and limitations of FFO, AFFO and same-center NOI, which are non-GAAP measures and are not substitutes for GAAP cash flow or earnings.