Tanger Inc. 2017 Q2 Form 10-Q Summary
Business context and reporting period
Tanger Factory Outlet Centers, Inc. is a self-administered and self-managed REIT that develops, owns and operates outlet shopping centers through Tanger Properties Limited Partnership. The unaudited filing covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods.
- As of June 30, 2017, the company operated 35 consolidated outlet centers totaling approximately 12.4 million square feet and held interests in 8 unconsolidated centers totaling approximately 2.4 million square feet.
- Consolidated portfolio occupancy was 96%, compared with 97% at June 30, 2016.
Financial performance and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenues | $119.6 million, up 7.4% | $241.0 million, up 8.5% |
| Operating income | $38.1 million, down 0.6% | $75.7 million, up 3.6% |
| Net income | $30.9 million, down 60.0% | $54.5 million, down 48.6% |
| Net income attributable to Tanger | $29.4 million | $51.7 million |
| Diluted earnings per share | $0.31, versus $0.76 | $0.54, versus $1.04 |
| FFO available to common shareholders | $59.4 million, or $0.59 per diluted share | $117.1 million, or $1.17 per diluted share |
| AFFO available to common shareholders | $59.4 million, or $0.59 per diluted share | $117.7 million, or $1.17 per diluted share |
Calculated operating margin was approximately 31.8% for the quarter and 31.4% for the six-month period. Net margin was approximately 25.9% for the quarter and 22.6% for the six-month period. Margins are affected by depreciation, interest expense and nonrecurring gains.
- Quarterly base rentals increased 8% to $80.8 million; expense reimbursements increased 11% to $34.0 million.
- Percentage rentals declined 22% to $1.8 million, primarily reflecting lower average tenant sales per square foot and higher contractual breakpoints.
- Same Center NOI increased to $70.9 million in the quarter from $70.4 million and to $139.6 million for the six months from $138.5 million.
- Cash flow from operating activities was $110.8 million for the six months, compared with $105.0 million in 2016.
- Cash capital additions to rental property were $88.8 million, compared with $68.6 million in 2016.
- Cash and cash equivalents were $8.4 million at June 30, 2017, compared with $12.2 million at December 31, 2016.
- Dividends declared were $0.3425 per common share for the quarter and $0.6675 per share for the six months, compared with $0.3250 and $0.6100, respectively, in 2016.
Debt, liquidity and capital structure
- Total debt was $1.729 billion at June 30, 2017, compared with $1.688 billion at December 31, 2016. Approximately 90% of outstanding debt was unsecured.
- Debt consisted principally of $1.136 billion of senior unsecured notes, $322.8 million of unsecured term debt, $171.2 million of mortgages and $98.7 million drawn on unsecured lines of credit.
- The company had $412.5 million available under its $520.0 million unsecured credit facilities after letters of credit.
- Debt maturities included $71.8 million in 2017, $62.9 million in 2018, $104.5 million in 2019, $303.6 million in 2020 and $330.8 million in 2021.
- Management reported compliance with all debt covenants. Actual covenant ratios included 51% total debt to adjusted total assets versus a limit below 60%, 5% secured debt versus a limit below 40%, and 186% unencumbered assets to unsecured debt versus a minimum of 150%.
- Interest-rate swaps covered $325.0 million of notional debt. Management estimated that a 100-basis-point increase in LIBOR would increase annual interest expense by approximately $2.3 million on the exposed debt.
Material changes versus the prior comparable period
- Net income fell substantially because the 2016 periods included a $49.3 million gain from acquiring the previously held Westgate joint-venture interest. The 2016 six-month period also included a $4.9 million gain on the sale of Fort Myers.
- 2017 included a $6.9 million gain on the sale of the Westbrook outlet center in May.
- Revenue growth benefited from the Daytona Beach development and the consolidation of the Westgate and Savannah centers acquired from joint-venture partners in 2016.
- Depreciation and amortization increased 25% in the quarter and 21% for the six months, partly because of acquisitions, new development and accelerated amortization related to store closures and demolition activities.
- Interest expense increased 20% in the quarter and 15% for the six months because of higher LIBOR, additional debt and the conversion of floating-rate debt to higher fixed rates.
- The company repurchased 1,497,981 common shares for approximately $39.3 million at an average price of $26.25. Approximately $85.7 million remained under the $125.0 million authorization at June 30.
- Operating cash flow improved, but investing cash flow changed to a $55.0 million use from a $25.9 million source in 2016, largely because 2016 benefited from a $121.3 million restricted-cash release.
Guidance, outlook, risks and unusual items
- Projects under development at June 30 included a 352,000-square-foot Fort Worth center and a 123,000-square-foot Lancaster expansion. Total projected cost was approximately $137.9 million, with $86.6 million incurred; projected openings were October and September 2017, respectively.
- Management expected approximately $7.5 million of additional 2017 renovation spending and believed available operating cash flow, credit capacity and capital-market access were adequate to fund planned expenditures through year-end 2017.
- Management stated that the challenging retail environment could affect tenant sales, percentage rents, occupancy, lease renewals and tenants’ ability to pay rent. Approximately 1.5 million square feet, or 12% of the consolidated portfolio, was scheduled for renewal during 2017.
- During the first six months, the company renewed approximately 1.0 million square feet at a 10% increase in average base rent and re-tenanted approximately 336,000 square feet at a 2% increase, but cautioned that similar results may not continue.
- Other risks include real estate valuation and impairment risk, development and acquisition execution, competition, interest-rate and refinancing risk, Canadian currency exposure, joint-venture guarantees, tenant bankruptcies, reliance on distributions from the Operating Partnership and continued REIT qualification.
- The company recorded a $627,000 charge for abandoned pre-development costs related to terminating a purchase option near Detroit.
- Subsequent to quarter-end, the company issued $300.0 million of 3.875% senior notes due 2027 for estimated net proceeds of $295.9 million. In August 2017, it used those proceeds and credit-line borrowings to redeem approximately $300.0 million of 6.125% notes due 2020, including an approximately $34.1 million make-whole premium.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing states that there were no material changes to the risk factors reported in the 2016 Form 10-K.
Important facts for investors to verify
- Confirm the effect of the 2027 note issuance and 2020 note redemption on debt maturities, interest expense, liquidity and leverage after June 30, 2017.
- Assess whether occupancy, tenant sales per square foot, percentage rents and lease-renewal spreads stabilize or deteriorate.
- Monitor completion, cost and lease-up of the Fort Worth development and Lancaster expansion.
- Reconcile GAAP net income with FFO and AFFO, particularly the effects of property-sale gains, depreciation and unusual charges.
- Review refinancing exposure for 2017–2021 maturities and the company’s continued compliance with debt covenants.
- Evaluate contingent exposure from guarantees of unconsolidated joint-venture debt, reported at a maximum of $26.0 million.
- Verify the remaining share-repurchase authorization and its effect on outstanding shares, equity and future dividend obligations.