TANGER INC. quarterly report, Q2 FY2019

Tanger Inc. 2019 Q2 Form 10-Q Summary

Business Context and Reporting Period

Tanger Factory Outlet Centers, Inc. is a self-administered and self-managed REIT operating through Tanger Properties Limited Partnership. As of June 30, 2019, the company owned and operated 32 consolidated outlet centers totaling approximately 12.0 million square feet and held interests in seven unconsolidated centers totaling approximately 2.2 million square feet.

This unaudited combined Form 10-Q covers the three and six months ended June 30, 2019, with comparisons to the same periods in 2018. The company adopted ASC 842, Leases, on January 1, 2019 using the modified retrospective method without a cumulative-effect adjustment.

Financial Performance and Key Metrics

Metric	Three Months Ended June 30	Six Months Ended June 30
Total revenue	$115.7 million, down 3.3%	$238.9 million, down 1.8%
Net income	$14.5 million, down 40.5%	$80.3 million, up 67.4%
Net income attributable to Tanger	$13.7 million	$76.1 million
Basic and diluted EPS	$0.15	$0.81
FFO available to common shareholders	$51.5 million, or $0.52 per diluted share	$107.4 million, or $1.09 per diluted share
AFFO available to common shareholders	$55.8 million, or $0.57 per diluted share	$111.7 million, or $1.14 per diluted share
Same Center NOI	$76.4 million, down 0.1%	$150.6 million, down 0.3%

Second-quarter net income attributable to Tanger represented approximately 11.9% of revenue, compared with approximately 19.2% in the prior-year quarter. The six-month net income margin was approximately 31.8%, compared with 19.7% in 2018, primarily because of a $43.4 million gain on property sales.

Second-quarter rental revenue was $112.4 million, down $4.1 million year over year. Revenue from existing properties declined modestly, while disposed properties reduced revenue by approximately $6.3 million.
Second-quarter property operating expense declined $1.2 million to $36.7 million. General and administrative expense increased $5.5 million to $16.5 million.
General and administrative expense included approximately $4.4 million of accelerated compensation related to the planned retirement of the President and Chief Operating Officer and approximately $1.1 million of additional costs resulting from ASC 842.
Net cash provided by operating activities was $92.7 million for the first six months, down from $115.4 million in 2018.
Investing activities provided $116.3 million, including $128.2 million of net proceeds from property sales. Capital additions to rental property were $22.4 million, compared with $41.2 million in 2018.
Financing activities used $210.7 million, principally reflecting repayment of $126.6 million of revolving credit borrowings, $66.4 million of dividends, and $10.0 million of share repurchases.

Balance Sheet, Debt, Liquidity and Capital Allocation

Total assets were $2.34 billion at June 30, 2019, including $1.95 billion of net rental property.
Total debt was $1.586 billion, compared with $1.713 billion at December 31, 2018. Approximately 95% of outstanding debt was unsecured, and 92% of the gross book value of real estate was unencumbered.
Debt consisted principally of $1.138 billion of senior unsecured notes, a $350.0 million unsecured term loan, $84.0 million of mortgages, and $18.5 million outstanding under unsecured lines of credit.
The company had approximately $581.3 million available under its $600.0 million unsecured lines of credit after considering approximately $170,000 of outstanding letters of credit.
Cash and cash equivalents were $7.4 million at June 30, 2019.
Debt maturities include $75.7 million in 2021 and $254.8 million in 2023, with $1.262 billion due thereafter. The unsecured lines of credit mature in 2021 and have a one-year extension option.
Management stated that the company was in compliance with its debt covenants. Reported senior-note covenant metrics included total debt to adjusted total assets of 49% versus a limit below 60%, secured debt to adjusted total assets of 3% versus a limit below 40%, and unencumbered assets to unsecured debt of 197% versus a minimum of 150%.
The company repurchased 558,399 shares for approximately $10.0 million during the quarter at an average price of $17.89 per share. Approximately $90.0 million remained authorized under the repurchase program at June 30, 2019, with the authorization extended through May 2021.
In July 2019, the company declared a quarterly dividend of $0.355 per common share, payable August 15, 2019.

Material Changes Versus the Prior Comparable Period

During the first quarter, Tanger sold four non-core outlet centers in Nags Head, Ocean City, Park City and Williamsburg for gross proceeds of $130.5 million, net proceeds of approximately $128.2 million, and a $43.4 million gain. The proceeds were used primarily to reduce unsecured line-of-credit borrowings.
The dispositions reduced the consolidated portfolio from 36 to 32 centers and reduced consolidated square footage by approximately 878,000 square feet.
The RioCan joint venture sold its Bromont, Quebec outlet center in May 2019. Tanger’s share of proceeds was approximately $3.2 million, but the transaction generated a $3.6 million foreign-currency loss recognized in other income.
Six-month revenue declined despite higher straight-line rent adjustments and lease termination fees, primarily because of the property dispositions and lower revenue from existing properties.
Same Center NOI declined slightly, while management reported lower average occupancy and rent modifications associated with tenant bankruptcies and store closures.
ASC 842 increased reported operating lease right-of-use assets and liabilities and caused certain indirect internal leasing and legal costs to be expensed rather than capitalized. The company recorded $87.4 million of operating lease right-of-use assets and $92.1 million of operating lease liabilities at June 30, 2019.
Interest expense declined by $1.0 million in the quarter and $0.5 million for the six months, primarily because of debt repayment following the property sales, partly offset by higher LIBOR and swap rates.

Guidance, Outlook, Commentary, Risks and Unusual Items

Management expects 2019 Same Center NOI to decline compared with 2018. The filing does not provide a specific quantitative earnings, revenue or FFO guidance range.

Management identified a challenging retail environment, tenant bankruptcies, store closures, brand restructurings, rent modifications and changing consumer preferences as principal operating risks. Three tenants filed for bankruptcy protection during the first six months of 2019, following five filings in 2018.
Approximately 1.3 million square feet, or 11% of the consolidated portfolio at January 1, 2019, was scheduled for renewal during 2019; approximately 66% had been renewed by June 30, 2019.
For the trailing twelve months ended June 30, 2019, renewals and re-tenanting covered 1.6 million square feet at a blended 3.5% increase in average base rental rates versus expiring rates.
Consolidated center occupancy was 96.0% at June 30, 2019, compared with 95.6% at June 30, 2018.
The company has $390.0 million of interest-rate swaps. Management estimated that a 100-basis-point increase in LIBOR would increase annual interest expense by approximately $549,000, and that a 100-basis-point increase in market rates would reduce the fair value of debt by approximately $65.2 million.
The company guarantees certain joint-venture debt and reported a maximum guaranteed amount of approximately $19.4 million at June 30, 2019. Near-term joint-venture maturities include $85.0 million in November 2019 and $80.0 million in July 2020, subject to the disclosed guarantees and refinancing risks.
Management believes available operating cash flow, credit facilities and access to debt and equity markets are adequate to fund operations, planned capital expenditures, debt service and dividends for at least the next twelve months, but cautions that capital-market availability is not assured.
Legal proceedings are described as arising in the ordinary course, and management does not expect them to have a material adverse effect. No material changes were reported to the risk factors in the 2018 Form 10-K.

Important Facts for Investors to Verify

Whether the anticipated decline in 2019 Same Center NOI is consistent with subsequent occupancy, tenant sales, bankruptcies, store closures and rent concessions.
The extent to which the $43.4 million property-sale gain and the $3.6 million foreign-currency loss affect comparisons of recurring earnings, FFO and AFFO.
Debt maturity refinancing requirements, particularly the 2021 unsecured line maturities, 2023 senior notes, and near-term unconsolidated joint-venture debt maturities.
Compliance with debt covenants and the continued availability of the $581.3 million of reported credit capacity.
The sustainability of dividends and share repurchases relative to recurring cash flow, capital expenditures, tenant improvements and required REIT distributions.
Whether tenant bankruptcies and lease renewals pressure rental revenue despite reported 96.0% occupancy and positive renewal and re-tenanting spreads.
The effects of ASC 842 presentation changes when comparing 2019 operating results with 2018 results.