Tanger Inc. 2018 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. The company owns and operates outlet shopping centers in the United States and Canada. For the quarter ended June 30, 2018, the portfolio included 36 consolidated centers totaling approximately 12.9 million square feet and eight unconsolidated joint-venture centers totaling approximately 2.4 million square feet. Consolidated-center occupancy was 95.6%.
The filing presents unaudited results for the three and six months ended June 30, 2018, compared with the corresponding 2017 periods.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $119.7 million, versus $119.6 million | $243.2 million, versus $241.0 million |
| Operating income | $38.1 million, versus $38.1 million | $75.2 million, versus $75.7 million |
| Net income | $24.3 million, versus $30.9 million | $48.0 million, versus $54.5 million |
| Net income attributable to common shareholders | $23.0 million, versus $29.4 million | $45.8 million, versus $51.7 million |
| Diluted earnings per share | $0.24, versus $0.31 | $0.48, versus $0.54 |
| FFO available to common shareholders | $59.1 million, versus $59.4 million | $118.4 million, versus $117.1 million |
| FFO per diluted share | $0.60, versus $0.59 | $1.20, versus $1.17 |
| Same-center NOI | $76.9 million, versus $78.4 million | $151.9 million, versus $154.5 million |
Approximate operating margins were 31.8% for the second quarter and 30.9% for the six-month period. Approximate net margins were 20.3% and 19.7%, respectively.
Six-month operating cash flow was $115.3 million, compared with $110.8 million in 2017. Cash used in investing activities was $28.7 million, compared with $55.0 million, while cash used in financing activities was $88.5 million, compared with $59.6 million. Cash declined by $1.8 million during the period to $4.3 million.
Capital expenditures on a cash basis were $41.2 million, compared with $88.8 million in 2017, primarily because significant construction spending for the Fort Worth and Lancaster projects occurred in 2017.
Total debt was $1.768 billion at June 30, 2018, compared with $1.764 billion at December 31, 2017. Debt consisted primarily of $1.136 billion of senior unsecured notes, $323.2 million of unsecured term debt, $220.0 million of unsecured lines of credit and $89.2 million of mortgages. Approximately 95% of outstanding debt was unsecured, and 93% of the gross book value of real estate was unencumbered. The company reported $370.3 million of availability under its unsecured lines of credit after letters of credit.
The quarterly common dividend was $0.3500 per share, compared with $0.3425 in the prior-year quarter. The company repurchased 919,249 shares for approximately $20.0 million during the first six months, leaving approximately $55.7 million available under the authorization.
Material changes versus the prior comparable period
- Revenue increased modestly, driven by new development and expansion activity, including the Fort Worth center and Lancaster expansion, partially offset by lower existing-property base rentals and percentage rentals.
- Second-quarter net income declined $6.7 million and six-month net income declined $6.5 million, principally because 2017 included a $6.9 million gain on the sale of the Westbrook center.
- Same-center NOI declined approximately 1.9% in the quarter and 1.7% for the six-month period.
- Property operating expenses increased $0.8 million in the quarter and $2.7 million for the six-month period. Six-month expenses reflected higher snow-removal costs, partly offset by lower marketing costs.
- General and administrative expense declined $0.5 million in the quarter and $0.8 million year to date, primarily due to lower payroll-related expenses.
- Interest expense declined $0.3 million in the quarter and $1.0 million year to date, mainly due to the 2017 refinancing of $300 million of senior notes at a lower rate, partly offset by higher LIBOR.
- FFO per diluted share increased to $0.60 from $0.59 for the quarter and to $1.20 from $1.17 for the six-month period, despite lower GAAP net income.
Guidance, outlook, risks and unusual items
Management expects 2018 same-center NOI to decline approximately 1.5% to 2.5% from 2017. The outlook reflects tenant bankruptcies, store closures and lease modifications. Four additional tenants filed for bankruptcy protection during the first six months of 2018, following 13 tenant filings in 2017.
Management stated that cash flow from operations, available credit capacity and access to debt and equity markets are expected to fund operations, capital expenditures, debt service and dividends for at least the next twelve months. However, access to capital markets is not assured, particularly before the significant 2021 debt maturities.
In January 2018, the unsecured credit facilities were increased from $520 million to $600 million and extended to October 2021, with a one-year extension option. In February, the Southaven mortgage was amended to reduce principal to $51.4 million and extend maturity to April 2021. In June, the Charlotte joint venture refinanced a $90 million mortgage with a $100 million fixed-rate loan maturing in July 2028.
The company had $1.786 billion of debt principal outstanding, with approximately $605.9 million scheduled to mature in 2021. A 100-basis-point increase in LIBOR would increase annual interest expense by approximately $2.4 million. Interest-rate swaps had a total notional amount of $515 million and a reported fair value of $8.9 million.
The company guarantees certain Operating Partnership debt and up to $28.1 million of unconsolidated joint-venture debt. Management reported compliance with all debt covenants. Legal proceedings are described as arising in the ordinary course, with no expected material adverse effect. The filing identifies retail tenant performance, economic conditions, real estate values, interest rates, refinancing, joint-venture obligations, Canadian currency exposure, REIT qualification and access to capital as key risks.
The company adopted the new revenue recognition guidance effective January 1, 2018 without a material impact. It expects to adopt the new leases standard on January 1, 2019, which is expected to add operating lease liabilities and right-of-use assets, primarily for ground leases.
Important facts for investors to verify
- Whether same-center NOI declines remain within management's 1.5% to 2.5% 2018 expectation as tenant bankruptcies and store closures continue.
- Occupancy, rent spreads and renewal results, including the reported 6.3% blended increase in average base rental rates on renewals and re-tenanting over the trailing twelve months.
- Liquidity and refinancing plans for the approximately $605.9 million of debt maturing in 2021.
- Compliance with leverage, debt-service and unencumbered-asset covenants, including reported actual ratios of 51% debt to adjusted assets, 3% secured debt to adjusted assets and 187% unencumbered assets to unsecured debt.
- The effect of rising LIBOR and changes in interest-rate swap coverage on interest expense and joint-venture earnings.
- The impact of the 2019 lease-accounting adoption on reported assets, liabilities, leasing costs and CAM reimbursement revenue.
- The sustainability of dividends and share repurchases relative to operating cash flow, FFO and required REIT distributions.