Tanger Inc. 2016 Q3 Form 10-Q Summary
Business Context and Reporting Period
Unaudited results for the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. Tanger is a self-managed REIT focused on owning, developing and operating outlet shopping centers in the United States and Canada. At quarter-end, it operated 35 consolidated centers totaling approximately 12.4 million square feet and held interests in eight unconsolidated centers totaling approximately 2.3 million square feet. The filing combines Tanger Factory Outlet Centers, Inc. and Tanger Properties Limited Partnership, which management operates as one enterprise.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | Change |
|---|---|---|---|
| Total revenue | $119.1 million | $112.9 million | +5.5% |
| Operating income | $39.9 million | $36.4 million | +9.6% |
| Operating margin | 33.5% | 32.2% | +130 bps |
| Net income | $72.8 million | $46.5 million | +56.6% |
| Net income attributable to Tanger | $69.1 million | $44.1 million | +56.8% |
| Diluted EPS | $0.72 | $0.46 | +$0.26 |
| FFO available to common shareholders | $62.1 million | $59.4 million | +4.5% |
| AFFO available to common shareholders | $62.3 million | $59.4 million | +4.9% |
| Same-center NOI | $69.4 million | $67.6 million | +2.6% |
| Metric | Nine Months 2016 | Nine Months 2015 | Change |
|---|---|---|---|
| Total revenue | $341.3 million | $326.6 million | +4.5% |
| Operating income | $113.0 million | $106.2 million | +6.4% |
| Net income | $178.7 million | $108.2 million | +65.2% |
| Net income attributable to Tanger | $169.7 million | $103.1 million | +64.6% |
| Diluted EPS | $1.76 | $1.08 | +$0.68 |
| FFO available to common shareholders | $175.9 million | $163.3 million | +7.7% |
| AFFO available to common shareholders | $177.5 million | $163.3 million | +8.7% |
Q3 revenue growth reflected higher base rentals, percentage rentals and expense reimbursements. Consolidated occupancy was 97% at September 30, 2016, unchanged from September 30, 2015. During the first nine months, the company renewed approximately 1.1 million square feet at a 17% increase in average base rent and re-tenanted approximately 368,000 square feet at a 28% increase.
Cash Flow, Liquidity and Capital Structure
- Net cash provided by operating activities was $177.8 million for the first nine months, compared with $175.0 million in 2015.
- Net cash used in investing activities was $39.5 million, versus $183.5 million in 2015, reflecting lower development spending and changes in restricted cash.
- Capital expenditures were $112.2 million on a cash basis, including $74.4 million for new center development, $13.9 million for major renovations and $7.0 million for second-generation tenant allowances.
- Cash and cash equivalents were $25.9 million at September 30, 2016. The company reported $324.0 million available under its $520.0 million unsecured lines of credit.
- Total debt was $1.725 billion, compared with $1.552 billion at December 31, 2015. Approximately 90% of debt was unsecured and 88% of the gross book value of real estate was unencumbered.
- Debt fair value was $1.829 billion versus recorded debt of $1.725 billion. Approximately 19% of outstanding debt had variable rates after considering interest-rate protection.
- Debt maturities total $73.3 million in 2017, $62.3 million in 2018, $199.4 million in 2019 and $303.6 million in 2020; the filing identifies 2020 as the next significant maturity period, assuming extensions are exercised.
- Debt covenants were satisfied at quarter-end. Actual covenant measures included total debt to adjusted total assets of 51%, secured debt to adjusted total assets of 5% and unencumbered assets to unsecured debt of 184%.
Material Changes Versus the Prior Comparable Period
- Revenue and operating income increased, supported by rent growth, new developments and the consolidation of the Westgate and Savannah centers.
- Net income growth was substantially affected by nonrecurring or unusual items: a $46.3 million gain on the previously held Savannah interest in Q3, and aggregate nine-month gains of $95.5 million on the previously held Westgate and Savannah interests.
- Q3 2015 included $20.2 million of gains from selling the Kittery, Tuscola and West Branch centers, making the year-over-year net income comparison less representative of recurring operations.
- Interest expense increased 11% in Q3 and 10% for the nine months, reflecting higher debt balances, higher LIBOR, the amended term loan, interest-rate swaps and debt assumed or incurred in connection with acquisitions.
- Equity earnings from unconsolidated joint ventures fell to $0.7 million in Q3 from $3.7 million, partly because Tanger recorded its $2.9 million share of a noncash impairment charge on the Bromont, Quebec center.
- The company acquired the remaining interests in Westgate in June and Savannah in August, bringing both properties into consolidated reporting. It also sold the Fort Myers center and a Myrtle Beach outparcel.
- The quarterly dividend increased to $0.325 per share from $0.285, while the nine-month dividend increased to $0.935 per share from $0.810.
Guidance, Outlook, Risks and Unusual Items
- Management stated that operating cash flow, available credit and access to debt and equity markets are expected to fund planned capital expenditures through the end of 2017. No specific earnings or FFO guidance was provided in the filing.
- Projects under development at September 30, 2016 included Daytona Beach, Fort Worth and a Lancaster expansion, totaling approximately 827,000 square feet and $228.0 million of projected net cost. Daytona Beach was expected to open in November 2016, Fort Worth in holiday 2017 and the Lancaster expansion in the third quarter of 2017.
- Management expects adequate cash for operating expenses, debt service and REIT-required dividends, but cautioned that access to affordable capital cannot be assured.
- Key risks include retail tenant closures or bankruptcies, changes in consumer and travel behavior, competition, property impairment, development and acquisition execution, real estate illiquidity, Canadian and foreign-currency exposure, interest-rate risk, debt covenant compliance, joint-venture guarantees and maintaining REIT status.
- A 100-basis-point increase in LIBOR would increase annual interest expense by approximately $3.3 million. A 100-basis-point increase in market rates would reduce the estimated fair value of debt by approximately $70.0 million.
- Unconsolidated joint-venture debt totaled approximately $252.0 million, with maximum company guarantees of approximately $19.5 million, excluding potential obligations under completion and other customary guarantees.
- Acquisition purchase-price allocations for Westgate and Savannah remained provisional and could change significantly. A New Jersey property-tax lawsuit was filed in July 2016; management intends to defend the claims and stated that the outcome cannot be assured.
- In October 2016, after quarter-end, Tanger issued an additional $100.0 million of 3.125% senior notes due 2026, bringing the aggregate principal amount of that series to $350.0 million. The net proceeds were approximately $97.8 million and were used primarily to repay unsecured line borrowings and for general corporate purposes.
Most Important Facts for Investors to Verify
- Separate recurring operating performance from the $95.5 million of nine-month gains on previously held joint-venture interests and other asset-sale gains.
- Review FFO and AFFO growth, same-center NOI growth of 2.6% in Q3, occupancy trends and the sustainability of reported rent spreads.
- Reconcile the increase in total debt with acquisitions, development spending, the 2026 notes issuance and the availability under unsecured credit facilities.
- Monitor 2017–2020 debt maturities, variable-rate exposure, interest-rate swap terms and compliance with debt covenants.
- Assess the Bromont impairment, Canadian joint-venture performance and exposure to additional property impairments.
- Confirm completion, cost and leasing progress for the Daytona Beach, Fort Worth and Lancaster projects.
- Review provisional acquisition accounting for Westgate and Savannah and the potential impact of final purchase-price allocation changes.
- Evaluate the New Jersey property-tax litigation and the scope of guarantees supporting unconsolidated joint-venture debt.
- Consider the dependence of Tanger Factory Outlet Centers, Inc. on distributions from the Operating Partnership to fund dividends and corporate obligations.