Tanger Inc. 2016 Form 10-K Summary
Business context and reporting period
This combined Form 10-K covers Tanger Factory Outlet Centers, Inc. and Tanger Properties Limited Partnership for the fiscal year ended December 31, 2016. Tanger is a self-managed REIT focused on developing, acquiring, owning and operating outlet shopping centers. At year-end, the consolidated portfolio comprised 36 centers totaling approximately 12.7 million square feet, with 98% occupancy, more than 2,600 stores and approximately 400 brands. Tanger also held interests in eight unconsolidated centers totaling approximately 2.3 million square feet, including four Canadian properties.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $465.8 million | $439.4 million | +6.0% |
| Operating income | $151.3 million | $144.5 million | +4.7% |
| Net income | $204.3 million | $222.2 million | -8.0% |
| Net income attributable to common shareholders | $191.8 million | $208.8 million | -8.1% |
| Diluted earnings per share | $2.01 | $2.20 | -8.6% |
| FFO available to common shareholders | $236.9 million | $222.1 million | +6.6% |
| AFFO available to common shareholders | $238.4 million | $221.4 million | +7.7% |
| Cash flow from operating activities | $239.3 million | $221.8 million | +7.9% |
| Total debt | $1.688 billion | $1.552 billion | +$135.9 million |
| Cash and cash equivalents | $12.2 million | $21.6 million | -$9.4 million |
Operating margin was approximately 32.5%; net margin was approximately 43.9%, although net income included significant acquisition-related gains. Portfolio NOI increased to $306.3 million from $282.7 million, and same-center NOI increased to $273.2 million from $264.3 million. Consolidated average annual base rent increased to $26.10 per square foot from $25.19, while year-end occupancy increased to 98% from 97%.
Base rentals increased 6% to $308.4 million, percentage rentals increased 10% to $11.2 million, and expense reimbursements increased 6% to $133.8 million. Fixed rents and expense reimbursements represented approximately 91% of total revenue, limiting reliance on contingent revenue sources.
Material changes versus the prior comparable period
- Revenue and operating income grew primarily from higher rents, new developments, the full-year contribution of 2015 openings and the consolidation of Westgate and Savannah.
- Net income declined because 2015 included approximately $120.4 million of disposition gains, while 2016 included approximately $95.5 million of gains from remeasuring previously held interests in Westgate and Savannah, plus $6.3 million of property-sale gains.
- Interest expense increased 12% to $60.7 million because of higher average borrowings, higher interest rates, additional acquisition debt and the conversion of floating-rate debt to fixed-rate debt.
- Westgate in Glendale, Arizona, and Savannah in Pooler, Georgia, became wholly owned and consolidated during 2016. The Westgate acquisition cost approximately $40.9 million; Savannah required $15.0 million of cash consideration.
- Tanger opened a wholly owned, approximately 349,000-square-foot center in Daytona Beach, Florida, and began construction of the Fort Worth development and Lancaster expansion.
- Fort Myers was sold for approximately $25.8 million of net proceeds, producing a $4.9 million gain. An additional Myrtle Beach outparcel sale generated $2.9 million of proceeds and a $1.4 million gain.
- Same-center NOI increased approximately 3.3%. Tanger renewed 85% of 2016 expiring square footage at an 18% average base-rent increase and re-leased 384,000 square feet at a 27% increase.
Debt, liquidity and capital allocation
Debt was $1.688 billion at year-end, with approximately 90% unsecured and 88% of the gross real estate portfolio unencumbered. The company issued $350 million of 3.125% senior notes due September 2026, receiving approximately $344.5 million of net proceeds. It also increased its unsecured term loan capacity to $325 million, extended maturity to April 2021 and reduced the LIBOR spread to 0.95%.
Unsecured credit facilities provided $520 million of borrowing capacity, with $453.6 million available after letters of credit. These facilities mature in October 2019, with an extension option. Approximately 11% of debt, excluding variable-rate debt protected by swaps, remained variable-rate. Management estimated that a 100-basis-point increase in LIBOR would increase annual interest expense by approximately $1.9 million.
Cash flow from operations was $239.3 million, while capital expenditures on a cash basis were $165.1 million. Cash used in financing activities was $203.5 million, driven by dividends, debt repayments and other financing uses. Cash declined by approximately $9.4 million during the year to $12.2 million.
The company paid $1.260 per common share in regular 2016 dividends and distributed approximately $120.0 million to shareholders during 2016, excluding the special dividend paid in January 2016 for the 2015 tax year. Management stated that operating cash flow, available credit facilities and access to debt and equity markets should fund planned 2017 expenditures, debt service and REIT distributions, subject to market conditions.
Guidance, outlook, commentary, risks and unusual items
- Management expected the Fort Worth center to open by Holiday 2017 and the Lancaster expansion during the third quarter of 2017. Estimated total project costs were $90.2 million for Fort Worth and $47.7 million for Lancaster, with $35.2 million incurred at year-end.
- Management expected positive overall rent increases on 2017 expirations, but cautioned that individual renewals and re-leasing results may be positive or negative.
- Contractual commitments included approximately $77.9 million for consolidated construction and development contracts, approximately $33.7 million of executed-lease tenant allowances and approximately $5.0 million of Tanger’s share of unconsolidated-joint-venture development commitments.
- Unusual 2016 items included the $95.5 million aggregate gain from Westgate and Savannah remeasurement, the $2.9 million share of a non-cash Bromont, Quebec impairment, and gains from property dispositions. No impairment losses were recorded for consolidated properties.
- Unconsolidated joint ventures had approximately $336.0 million of debt and Tanger guaranteed up to approximately $28.0 million. Joint-venture debt, refinancing and completion guarantees create contingent exposure.
- Key risks include tenant bankruptcies and store closures, changing consumer spending and e-commerce competition, short lease terms, development cost overruns and delays, property impairment, interest-rate and refinancing risk, Canadian currency exposure, uninsured losses, joint-venture governance, environmental liabilities, cybersecurity events and potential loss of REIT status.
- The company reported compliance with its debt covenants. Its senior-note covenants showed actual debt-to-adjusted-assets of 50% versus a limit below 60%, secured debt-to-adjusted-assets of 5% versus a limit below 40%, and unencumbered assets to unsecured debt of 190% versus a minimum of 150%.
- Management and Deloitte & Touche LLP concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2016.
Most important facts for investors to verify
- Reconcile recurring operating performance using FFO, AFFO, Portfolio NOI and same-center NOI rather than relying on GAAP net income, which was materially affected by acquisition and disposition gains.
- Review the 2017-2021 debt maturities, including $73.3 million due in 2017, $62.5 million in 2018, $64.4 million in 2019, $303.6 million in 2020 and $330.8 million in 2021.
- Assess liquidity after planned capital expenditures, dividends and debt repayments, particularly given only $12.2 million of year-end cash and the October 2019 credit-facility maturity.
- Monitor leasing results for the approximately 1.6 million square feet scheduled to expire in 2017 and whether historical rent spreads remain achievable.
- Evaluate the stabilization and returns of Daytona Beach, Columbus, Westgate and Savannah, as well as execution and funding requirements for Fort Worth and Lancaster.
- Review tenant sales, occupancy-cost trends and exposure to retailer distress; occupancy costs rose to 9.9% of tenant sales in 2016 from 9.3% in 2015.
- Assess joint-venture debt, guarantees, Canadian currency exposure and the Bromont impairment for potential additional obligations or valuation pressure.