Tanger Inc. 2017 First-Quarter 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. The company owns and operates outlet shopping centers in the United States and Canada. This unaudited combined filing covers the three months ended March 31, 2017, with comparisons to March 31, 2016.
- 36 consolidated outlet centers totaling approximately 12.7 million square feet.
- Eight unconsolidated joint-venture outlet centers totaling approximately 2.4 million square feet.
- Consolidated-center occupancy was 96% at March 31, 2017, compared with 97% at March 31, 2016.
Financial Performance and Position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenues | $121.4 million | $110.8 million | Up 9.5% |
| Operating income | $37.6 million | $34.8 million | Up 8.2% |
| Operating margin | 31.0% | 31.4% | Down approximately 40 bps |
| Net income | $23.5 million | $28.6 million | Down $5.1 million |
| Net income attributable to Tanger | $22.3 million | $27.2 million | Down 17.7% |
| Diluted EPS | $0.23 | $0.28 | Down $0.05 |
| FFO available to common shareholders | $57.7 million | $54.7 million | Up 5.6% |
| AFFO available to common shareholders | $58.3 million | $55.8 million | Up 4.5% |
| Diluted FFO per share | $0.58 | $0.55 | Up $0.03 |
| Same-center NOI | $69.8 million | $69.1 million | Up 1.0% |
Base rentals increased 11% to $80.3 million, primarily from the Daytona Beach development and the acquisition of the company’s former joint-venture interests in Westgate and Savannah. Percentage rentals declined 14% to $1.9 million, reflecting lower tenant sales per square foot and the shift of Easter into April 2017.
Net income was reduced by the absence of a $4.9 million gain on the sale of Fort Myers recorded in the prior-year quarter. Interest expense increased 11% to $16.5 million due to higher fixed-rate debt costs, higher LIBOR and additional debt associated with the 2016 acquisitions. The company also recorded a $627,000 charge for abandoned pre-development costs.
- Cash flow from operations: $56.6 million, compared with $54.0 million.
- Capital additions to rental property: $35.5 million, compared with $34.9 million.
- Net cash used in investing activities: $39.1 million, versus $100.8 million of cash provided in the prior year, which included asset-sale proceeds and restricted-cash activity.
- Net cash used in financing activities: $22.5 million, versus $158.1 million in the prior year.
- Cash and cash equivalents: $7.2 million at March 31, 2017, down from $12.2 million at December 31, 2016.
- Total debt: $1.699 billion, compared with $1.688 billion at December 31, 2016.
- Total assets: $2.540 billion; total equity: $698.0 million.
- Common dividend declared for the quarter: $0.325 per share, compared with $0.285 in the prior-year quarter.
Material Changes and Operating Trends
- Westgate and Savannah, previously held in unconsolidated joint ventures, were consolidated following acquisitions of the venture partners’ interests in 2016.
- Daytona Beach opened in November 2016 and contributed incremental rental income and expenses.
- Same-center NOI increased only 1.0%, despite overall revenue growth from development and acquisitions.
- During the quarter, the company renewed approximately 730,000 square feet at a 12% increase in average base rent and re-tenanted approximately 284,000 square feet at a 1% decrease.
- New development and expansion activity increased. Projects under construction at March 31, 2017 were Fort Worth, a 352,000-square-foot center, and Lancaster, a 123,000-square-foot expansion. Total projected cost was $137.9 million, with $59.5 million incurred.
- The company granted 428,312 restricted common share awards and issued 184,455 shares under the 2014 Outperformance Plan during early 2017.
Liquidity, Debt, Outlook and Risks
- Unsecured lines of credit had $520.0 million of total capacity and approximately $441.4 million available after letters of credit. The facilities mature in October 2019, with an extension option.
- Approximately 90% of outstanding debt was unsecured, and 88% of the gross book value of real estate was unencumbered.
- Debt maturities include $72.5 million in 2017, $62.5 million in 2018, $75.7 million in 2019, $303.6 million in 2020 and $330.8 million in 2021.
- Management stated that operating cash flow, available credit and access to debt and equity markets should fund planned capital expenditures through the end of 2017 and support regular debt service and dividends. No formal earnings guidance was provided.
- Fort Worth was projected to open in October 2017 and the Lancaster expansion in September 2017. Management expects approximately $17.2 million of additional 2017 spending on renovations at Riverhead, Rehoboth Beach and Myrtle Beach 17.
- The company was in compliance with all debt covenants. Reported covenant metrics included total debt to adjusted total assets of 50% versus a less-than-60% limit, secured debt of 5% versus a less-than-40% limit, and unencumbered assets to unsecured debt of 191% versus a greater-than-150% requirement.
- Interest-rate exposure remains material: a 100-basis-point increase in LIBOR was estimated to increase annual interest expense by approximately $2.0 million. Interest-rate swaps had a fair value asset of $4.7 million.
- The company guaranteed up to $28.0 million of unconsolidated joint-venture debt. Key risks include tenant financial weakness, changing consumer and retail trends, lease rollover, development execution, property values, Canadian foreign-currency exposure, capital-market access, debt refinancing and REIT qualification.
- Management reported no material changes to previously disclosed risk factors and no material adverse effect expected from ongoing legal proceedings.
Important Facts for Investors to Verify
- Reconcile the year-over-year decline in GAAP earnings with the growth in FFO and AFFO, particularly the prior-year Fort Myers gain and the 2017 abandoned-project charge.
- Monitor same-center NOI, occupancy, tenant sales and percentage-rent trends in the challenging retail environment.
- Verify progress, leasing and final costs for the Fort Worth development and Lancaster expansion.
- Assess refinancing plans for the 2017-2021 maturities and continued availability under the unsecured credit facilities.
- Review joint-venture debt, guarantees and negative carrying values for the Charlotte and Galveston/Houston investments.
- Evaluate dividend coverage using recurring cash flow and the company’s non-GAAP FFO and AFFO measures, which do not represent discretionary cash after capital expenditures.