Tanger Inc. 2014 Q3 Form 10-Q Summary
Business Context and Reporting Period
Tanger Factory Outlet Centers, Inc. is a self-administered REIT that develops, owns, operates and manages outlet shopping centers through Tanger Properties Limited Partnership. The filing covers the three and nine months ended September 30, 2014, with comparative periods ended September 30, 2013. At quarter-end, Tanger operated 37 consolidated outlet centers totaling approximately 11.6 million square feet and held interests in eight unconsolidated centers totaling approximately 2.1 million square feet.
Financial Performance and Key Metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenue | $105.3 million | $97.9 million | $310.4 million | $277.6 million |
| Operating income | $35.4 million | $33.5 million | $96.5 million | $91.9 million |
| Operating margin | 33.6% | 34.3% | 31.1% | 33.1% |
| Net income | $24.3 million | $56.2 million | $59.6 million | $90.2 million |
| Net income attributable to common shareholders | $23.0 million | $53.3 million | $56.5 million | $85.6 million |
| Diluted EPS | $0.24 | $0.56 | $0.59 | $0.90 |
| FFO per diluted share | $0.52 | $0.57 | $1.42 | $1.41 |
| AFFO per diluted share | $0.52 | $0.49 | $1.44 | $1.35 |
Revenue growth was driven principally by higher base rentals, expense reimbursements and contributions from the Deer Park acquisition. Existing-property tenant comparable sales increased approximately 1% to $387 per square foot for the rolling twelve months ended September 30, 2014. Consolidated center occupancy was 98%, compared with 99% in the prior-year period.
Nine-month cash flow from operating activities was $148.5 million, up from $137.0 million. Investing cash outflows were $204.9 million, including $92.5 million of additions to rental property and $114.5 million of investments in and notes receivable from unconsolidated joint ventures. Financing activities provided $52.1 million. Cash declined to $10.8 million from $15.2 million at December 31, 2013.
Balance Sheet, Debt and Liquidity
- Total assets were $2.14 billion at September 30, 2014, compared with $2.01 billion at December 31, 2013.
- Total debt was $1.449 billion, up from $1.328 billion, primarily reflecting increased borrowings under unsecured lines of credit.
- Unsecured lines of credit outstanding increased to $139.8 million from $16.2 million. Total borrowing capacity was $520 million, including a $500 million syndicated facility and a $20 million liquidity line; the syndicated facility may be expandable to $750 million under specified conditions.
- Debt maturities include approximately $282.3 million in 2015, $30.3 million in 2016, $150.3 million in 2017 and $153.2 million in 2018.
- Approximately 83% of outstanding debt was unsecured and 77% of the gross book value of real estate was unencumbered.
- Management reported compliance with all debt covenants. Reported covenant metrics included total debt to adjusted total assets of 49%, secured debt to adjusted total assets of 8%, and unencumbered assets to unsecured debt of 174%.
- Approximately 27% of debt had variable interest rates, excluding variable-rate debt protected by interest-rate swaps. A 100-basis-point increase in LIBOR was estimated to increase annual interest expense by approximately $4.0 million.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased 8% and nine-month revenue increased 12%, while operating income increased 6% and 5%, respectively.
- Net income and EPS declined substantially because the 2013 period included a $26.0 million gain on the previously held Deer Park interest and elevated joint-venture earnings from debt-refinancing and litigation-related items.
- Base rentals increased 8% in Q3 and 11% for nine months. Percentage rentals declined 15% in Q3 and 5% for nine months, primarily because lease renewals carried higher fixed rents and higher contractual breakpoints.
- Property operating expenses increased 10% in Q3 and 18% for nine months. General and administrative expense increased 16% and 12%, respectively, partly due to higher share-based compensation, payroll, travel and legal costs.
- Interest expense increased 12% in Q3 and 15% for nine months, mainly due to consolidated Deer Park debt and the issuance of $250 million of 3.875% senior unsecured notes in late 2013.
- Same-center NOI on a cash basis increased to $66.6 million in Q3 from $65.0 million and to $191.4 million for nine months from $182.3 million.
- Capital expenditures increased to $92.5 million on a cash basis from $40.6 million, primarily because of new developments, renovations and expansions.
Outlook, Commentary, Risks and Unusual Items
- Management expected adequate liquidity to fund operating expenses, debt service, planned capital expenditures and REIT distributions through the end of 2014 and into 2015, relying on operating cash flow, available credit facilities and potential debt or equity issuance.
- Consolidated development projects included Foxwoods, expected to open in the second quarter of 2015, and Grand Rapids, expected in the second half of 2015. Planned consolidated project costs totaled approximately $209.8 million, with $62.4 million incurred at quarter-end.
- Joint-venture projects included Savannah, Ottawa, Columbus, Cookstown and Westgate, with aggregate projected costs of approximately $391.8 million and $194.0 million incurred at quarter-end. Ottawa subsequently opened on October 17, 2014, according to the filing.
- A severe snowstorm damaged the West Branch, Michigan center. Tanger recorded a $329,000 casualty gain and expected total insurance proceeds of approximately $1.8 million to $2.3 million, potentially producing a total gain of approximately $800,000 to $1.3 million.
- The company abandoned two pre-development projects and recorded a $1.6 million charge during the first quarter of 2014.
- Joint ventures expose Tanger to capital calls, debt obligations, completion and principal guarantees, partner disputes and potential forced purchase or sale provisions. Management stated that maximum exposure to loss for certain VIE guarantees could not be estimated clearly.
- Key risks include tenant closures or bankruptcies, dependence on rental income, development and construction risk, real estate market values, interest-rate and refinancing risk, foreign currency exposure from Canadian investments, access to capital, REIT qualification and compliance with debt covenants.
- No quantitative full-year earnings or FFO guidance was provided in the filing text.
Important Facts for Investors to Verify
- Confirm the timing, cost and leasing progress of Foxwoods, Grand Rapids, Savannah, Cookstown and Westgate developments.
- Review the approximately $282.3 million of debt maturities in 2015 and the company’s refinancing plans.
- Assess whether increased debt and credit-line usage remain consistent with covenant levels and targeted leverage.
- Separate recurring operating performance from the nonrecurring 2013 Deer Park gain and other joint-venture items when evaluating earnings trends.
- Monitor occupancy, tenant sales, renewal spreads and re-tenanting economics as leases roll over.
- Evaluate joint-venture guarantees, partner redemption or buy-sell provisions and the company’s potential funding obligations.
- Reconcile FFO and AFFO with GAAP cash flows, capital expenditures and dividend requirements; the filing cautions that these non-GAAP measures are not measures of discretionary cash available for investment or dividends.