Tanger Inc. 2018 Q3 Form 10-Q Summary
Business Context and Reporting Period
Tanger Factory Outlet Centers, Inc. is a self-managed REIT operating through Tanger Properties Limited Partnership. As of September 30, 2018, the portfolio included 36 consolidated outlet centers totaling approximately 12.9 million square feet and eight unconsolidated joint-venture centers totaling approximately 2.4 million square feet. The filing covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods. Financial statements are unaudited.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $124.2 million | $120.8 million | $367.5 million | $361.7 million |
| Operating income (loss) | $(8.8) million | $41.4 million | $66.4 million | $117.1 million |
| Net income (loss) | $(23.0) million | $(16.0) million | $24.9 million | $38.4 million |
| Net income (loss) attributable to common shareholders | $(21.9) million | $(15.2) million | $23.9 million | $36.5 million |
| Diluted EPS | $(0.24) | $(0.17) | $0.25 | $0.38 |
| FFO available to common shareholders | $61.9 million | $26.7 million | $180.3 million | $143.8 million |
| AFFO available to common shareholders | $61.9 million | $61.9 million | $180.3 million | $179.7 million |
| Same Center NOI | $79.7 million | $80.5 million | $231.6 million | $235.0 million |
Q3 operating margin was approximately negative 7.1%, compared with 34.3% in Q3 2017, primarily because of the $49.7 million impairment charge. The nine-month operating margin was approximately 18.1%, compared with 32.4% in the prior-year period. Q3 net margin was approximately negative 18.5%; nine-month net margin was approximately 6.8%.
- Base rentals increased 2.5% in Q3 and 1.4% for the first nine months. Expense reimbursements increased 3.8% in Q3 and 2.9% year to date.
- Property operating expenses increased 5.5% in Q3 and 4.1% year to date. General and administrative expense declined 1.7% in Q3 and 2.9% year to date.
- Net cash provided by operating activities was $180.0 million for the first nine months, versus $181.6 million in 2017.
- Net cash used in investing activities was $36.8 million, compared with $89.1 million in 2017, reflecting lower development activity.
- Net cash used in financing activities was $144.8 million, compared with $96.0 million in 2017, primarily reflecting distributions, debt repayments and share repurchases.
- Cash and cash equivalents declined to $4.4 million at September 30, 2018, from $6.1 million at December 31, 2017.
- Dividends declared were $0.3500 per share in Q3 and $1.0425 per share for the first nine months, compared with $0.3425 and $1.0100, respectively, in 2017.
Balance Sheet, Debt and Liquidity
- Total assets were $2.42 billion and total equity was $524.5 million at September 30, 2018.
- Total debt was $1.748 billion, compared with $1.764 billion at December 31, 2017. Debt consisted primarily of $1.136 billion of senior unsecured notes, a $323.4 million unsecured term loan, $199.7 million drawn on unsecured lines of credit and $88.4 million of mortgages.
- Approximately 95% of outstanding debt was unsecured, and 93% of the gross book value of real estate was unencumbered.
- The unsecured lines of credit had total capacity of $600 million, with approximately $390.9 million available after letters of credit. The syndicated facility includes an accordion feature that may increase capacity to $1.2 billion in certain circumstances.
- Debt maturities included $585.3 million in 2021 and $1.167 billion thereafter. Management stated that the Company was in compliance with debt covenants.
- In October 2018, the unsecured term loan was amended to increase capacity from $325 million to $350 million, extend maturity from April 2021 to April 2024 and reduce the LIBOR spread from 0.95% to 0.90%. The $25 million increase was used to repay borrowings under the unsecured lines of credit.
- The Company guaranteed the Operating Partnership’s unsecured lines of credit and term loan. Maximum guarantees of unconsolidated joint-venture debt totaled $28.2 million.
Material Changes Versus the Prior Comparable Period
- Q3 net loss increased to $23.0 million from $16.0 million, driven by the Jeffersonville impairment. The 2017 quarter instead included a $35.6 million loss on early extinguishment of debt.
- Nine-month net income declined to $24.9 million from $38.4 million, despite the absence of the 2017 debt-extinguishment loss and the 2017 gain on sale of assets.
- Q3 equity in earnings of unconsolidated joint ventures improved to $1.8 million from a $5.9 million loss, while nine-month equity earnings improved to $6.2 million from a $1.2 million loss. The 2017 results included the Company’s $9.0 million share of Canadian joint-venture impairments.
- Same Center NOI declined 1.0% in Q3 and 1.5% for the first nine months. Consolidated occupancy declined to 96.4% from 96.9% at September 30, 2017.
- Capital expenditures declined to $53.3 million from $132.6 million, primarily because 2017 included construction activity for the Fort Worth and Lancaster projects.
- The Company repurchased 919,249 shares for approximately $20.0 million during the first nine months of 2018, compared with 1.9 million shares for approximately $49.4 million in the prior-year period. Approximately $55.7 million remained authorized for repurchases at September 30, 2018.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2018 Same Center NOI to decline approximately 1.5% to 2.0% from 2017, citing retailer bankruptcies, store closures and lease modifications. Four additional tenants filed for bankruptcy protection during the first nine months of 2018.
- The principal unusual item was the $49.7 million non-cash impairment charge on the Jeffersonville, Ohio outlet center. Management attributed the impairment to increased competition from the Columbus center and slower-than-expected improvement from remerchandising. The property’s estimated fair value was approximately $50.0 million, using a 10% discount rate and 10% terminal capitalization rate.
- Retailer performance, consumer spending, tenant sales, lease renewals, competition and the ability to re-lease space remain material operating risks. Approximately 1.7 million square feet, or 13% of the consolidated portfolio, was scheduled for renewal during 2018; approximately 73% had been renewed as of September 30, 2018.
- For the rolling twelve months ended September 30, 2018, renewals and re-leasing covered 1.8 million square feet at a blended 6.1% increase in average base rental rates compared with expiring rates.
- A 100-basis-point increase in LIBOR was estimated to increase annual interest expense by approximately $2.1 million. Interest-rate swaps with aggregate notional amounts of $365 million were outstanding for market-risk purposes at quarter-end.
- The Company expects to adopt the new lease accounting standard effective January 1, 2019. Management expects operating lease liabilities and right-of-use assets, primarily related to ground leases at seven centers, to increase reported assets and liabilities; the full impact was still under evaluation.
- Management stated that operating cash flow, available credit and access to debt and equity markets should be adequate to fund operations, debt service, dividends and planned capital needs for at least the next twelve months, while cautioning that capital-market access is not assured.
- Legal proceedings were described as arising in the ordinary course, with no expected material adverse effect. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether the Jeffersonville impairment is isolated or signals broader portfolio valuation pressure.
- Whether the projected 1.5% to 2.0% 2018 Same Center NOI decline materializes and whether occupancy and tenant sales stabilize.
- Lease-renewal spreads, retailer bankruptcies, store closures and re-leasing activity in 2019 and beyond.
- Debt maturities, covenant headroom and refinancing requirements around the 2021 maturity concentration.
- Liquidity after dividends, capital expenditures, share repurchases and expected lease-accounting changes.
- The sustainability of dividend distributions relative to FFO, AFFO and operating cash flow.
- Exposure to LIBOR, Canadian currency movements and guarantees of unconsolidated joint-venture debt.