Tanger Inc. — Form 10-Q Summary
Business Context and Reporting Period
This unaudited quarterly report covers Tanger Factory Outlet Centers, Inc. and Tanger Properties Limited Partnership for the quarter and six months ended June 30, 2012, with comparisons to the corresponding 2011 periods. Tanger operates as a self-managed REIT focused on developing, acquiring, owning and managing outlet shopping centers. At June 30, 2012, the consolidated portfolio included 36 centers in 24 states totaling approximately 10.7 million square feet, plus partial interests in three unconsolidated centers totaling approximately 1.2 million square feet.
Key Financial Metrics
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Six months ended June 30, 2012 | Six months ended June 30, 2011 |
|---|---|---|---|---|
| Total revenue | $87.3 million | $72.1 million | $171.6 million | $142.8 million |
| Operating income | $25.7 million | $22.3 million | $48.4 million | $43.5 million |
| Net income | $12.5 million | $10.8 million | $21.3 million | $21.7 million |
| Net income attributable to Tanger | $11.7 million | $9.4 million | $19.8 million | $18.8 million |
| Diluted earnings per share | $0.12 | $0.11 | $0.21 | $0.23 |
| FFO available to common shareholders and noncontrolling interests | $38.6 million | $29.6 million | $74.2 million | $59.2 million |
| FFO per share | $0.39 | $0.32 | $0.75 | $0.64 |
| Cash flow from operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $82.8 million | $59.9 million |
Second-quarter operating margin was approximately 29.5%, compared with approximately 31.0% in the prior-year quarter. Net margin was approximately 14.3%, compared with approximately 15.0%. The six-month operating margin was approximately 28.2%, compared with 30.5% in 2011.
- Comparable tenant sales increased 3.9% to $375 per square foot for the rolling twelve months ended June 30, 2012.
- Consolidated occupancy was 98% at June 30, 2012 and June 30, 2011.
- During the first six months, approximately 1.2 million square feet was renewed at a 15% increase in average base rent, and approximately 319,000 square feet was re-tenanted at a 55% increase in average base rent.
- Cash and cash equivalents were $11.9 million at June 30, 2012, compared with $7.9 million at December 31, 2011.
- Total debt was $1.058 billion at June 30, 2012, compared with $1.026 billion at December 31, 2011. Approximately 90% of debt was unsecured and 87% of the gross book value of real estate was unencumbered.
- The company maintained unsecured lines of credit with total borrowing capacity of $520.0 million; $141.2 million was outstanding at June 30, 2012.
- The company paid $37.6 million of common dividends during the first six months, or $0.41 per share. A further $0.21 per-share dividend was declared on July 5, 2012.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 21.1%, driven primarily by properties acquired during 2011, higher existing-property rents, increased percentage rentals and related expense reimbursements.
- Six-month revenue increased 20.1%, while six-month net income decreased modestly by $0.4 million. Growth was offset by higher property operating costs, general and administrative expense, depreciation and amortization, interest expense and losses from unconsolidated joint ventures.
- Interest expense increased 16% in the second quarter and 18% for the six-month period as average debt rose to approximately $1.0 billion from approximately $0.8 billion.
- Depreciation and amortization increased 40% in the second quarter and 41% for the six-month period, primarily due to acquired centers and related lease intangibles.
- General and administrative expense increased 21% in the second quarter and 34% for the six-month period, largely due to higher share-based compensation and additional payroll.
- FFO available to common shareholders and noncontrolling interests increased 30% in the second quarter and 25% for the six-month period, despite lower GAAP net income for the six-month period.
- Investing cash outflows declined to $69.1 million from $182.1 million, principally because the 2011 period included the $134.0 million Jeffersonville acquisition. The 2012 period included $46.9 million of investments in unconsolidated joint ventures and $19.9 million of additions to rental property.
- On February 24, 2012, the Operating Partnership entered into a seven-year, $250.0 million unsecured term loan at LIBOR plus 1.80%, using proceeds primarily to repay borrowings under its unsecured lines of credit.
Guidance, Outlook, Risks and Unusual Items
- Management stated that cash flow from operations, existing credit facilities and access to debt and equity markets were expected to fund planned 2012 capital expenditures, regular debt service, operating expenses and dividends. No quantitative earnings guidance was provided.
- Planned or active development projects included Texas City, Texas, expected to open October 19, 2012, and Westgate in Glendale, Arizona, expected to open November 15, 2012. The filing cautions that developments may be delayed, not completed or may not be accretive to net income or FFO.
- Management identified potential development sites in Scottsdale, Foxwoods, Toronto and Ottawa, but stated that no assurance exists that these projects will proceed.
- Approximately 37% of outstanding debt carried variable interest rates. A 100-basis-point increase in LIBOR was estimated to increase annual interest expense by approximately $3.9 million.
- The company was in compliance with debt covenants. Reported covenant metrics included total debt to adjusted total assets of 47% versus a limit below 60%, secured debt to adjusted total assets of 5% versus a limit below 40%, and unencumbered assets to unsecured debt of 204% versus a required level above 135%.
- The Deer Park Warehouse joint venture reduced its mortgage balance to $1.8 million and obtained forbearance through October 1, 2012 unless extended. The joint venture recorded an approximately $420,000 impairment charge and planned to sell the property.
- The company’s share of losses from unconsolidated joint ventures included its portion of the Deer Park Warehouse impairment and a write-off of pre-development costs related to the terminated Halton Hills, Ontario development option.
- Unconsolidated joint ventures had total debt of approximately $273.0 million. The company stated that its maximum exposure to loss could not be estimated because certain guarantees depend on future operating performance.
- Management noted that tenants may close stores, seek bankruptcy protection or terminate leases early. Although tenant concentration is limited, failure to renew or re-lease space on favorable terms could materially affect results.
- No material changes were reported to the risk factors in the 2011 Form 10-K, and no material litigation was reported other than routine matters expected to be covered by insurance.
Important Facts for Investors to Verify
- Verify the timing, construction progress, leasing and financing of the Texas City and Westgate developments.
- Review 2015 debt maturities of approximately $423.6 million and the availability and covenants of the $520.0 million unsecured credit facilities.
- Monitor variable-rate debt exposure and the effect of LIBOR changes on interest expense and debt fair value.
- Assess the Deer Park Warehouse forbearance, planned sale and potential guarantee obligations.
- Reconcile FFO and AFFO growth with GAAP earnings, capital expenditures, leasing costs and dividend requirements.
- Evaluate whether occupancy, comparable tenant sales and rental-rate increases remain sustainable as leases renew.
- Review the impact of continued equity issuance or Operating Partnership unit exchanges on per-share ownership and earnings.