Tanger Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The filing combines Tanger Factory Outlet Centers, Inc. and Tanger Properties Limited Partnership. The company is a self-managed REIT focused on developing, owning and operating outlet centers in the United States and Canada. As of year-end, the consolidated portfolio included 36 centers totaling approximately 12.9 million square feet, with 97% occupancy, more than 2,600 stores and approximately 400 brands. Eight unconsolidated joint-venture centers added approximately 2.4 million square feet.
Financial and Operating Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $488.2 million | $465.8 million | +4.8% |
| Operating income | $160.7 million | $151.3 million | +6.2% |
| Operating margin | 32.9% | 32.5% | +40 bps |
| Net income | $71.9 million | $204.3 million | -64.8% |
| Net income available to common shareholders | $66.8 million | $191.8 million | -65.2% |
| Diluted EPS | $0.71 | $2.01 | Down from prior year |
| FFO available to common shareholders | $211.2 million | $236.9 million | -10.8% |
| Diluted FFO per share | $2.12 | $2.36 | Down from prior year |
| AFFO available to common shareholders | $245.3 million | $238.4 million | +2.9% |
| Diluted AFFO per share | $2.46 | $2.37 | +3.8% |
| Cash flow from operations | $253.2 million | $239.3 million | +5.8% |
| Total debt | $1.764 billion | $1.688 billion | +4.5% |
| Cash and cash equivalents | $6.1 million | $12.2 million | Down $6.1 million |
Base rentals increased 5.1% to $324.0 million, while expense reimbursements increased 6.7% to $142.8 million. Percentage rentals declined 12.2% to $9.9 million, primarily because of lower tenant sales per square foot and higher contractual breakpoints. Same Center NOI increased modestly to $285.2 million from $283.8 million. Tenant occupancy costs increased to 10.0% of reported tenant sales from 9.9%.
Capital expenditures on a cash basis were $166.2 million, including $110.8 million for new developments and expansions, $20.2 million for major renovations and $21.9 million for second-generation tenant allowances. The company paid $130.2 million in common dividends, or $1.3525 per share, compared with $1.2600 in 2016.
Material Changes Versus the Prior Comparable Period
- Revenue and operating income grew due primarily to the full-year contribution from the 2016 Westgate and Savannah acquisitions and additional contributions from Daytona Beach, Fort Worth and the Lancaster expansion.
- Net income declined sharply because 2016 included approximately $95.5 million of gains from acquiring partners' interests in Westgate and Savannah, while 2017 included a $35.6 million loss on early debt extinguishment and a $9.0 million share of impairments at Canadian joint ventures.
- FFO declined because of the debt extinguishment loss and lower equity earnings from unconsolidated joint ventures, while AFFO increased after adjusting for unusual items.
- Occupancy declined to 97% from 98%, and average annual base rent per square foot declined to $25.81 from $26.10. During 2017, the company renewed 84% of expiring square footage at a blended 9% increase in average base rental rates.
- Debt increased as borrowings under unsecured credit facilities rose to approximately $208.1 million from $61.0 million, partly reflecting the refinancing of the 2020 notes and repayment of the Foxwoods mortgage.
- The company repurchased approximately 1.9 million common shares for $49.3 million at an average price of $25.80. Approximately $75.7 million remained authorized under the repurchase program at year-end.
Financing, Liquidity and Outlook
In July 2017, the company issued $300.0 million of 3.875% senior notes due 2027, receiving approximately $295.9 million of net proceeds. In August 2017, it used the proceeds and credit-line borrowings to redeem approximately $300.0 million of 6.125% notes due 2020. The redemption generated a $34.1 million make-whole premium and a $1.5 million write-off of unamortized debt costs.
At December 31, 2017, unsecured borrowings represented 95% of outstanding debt and 93% of the gross book value of real estate was unencumbered. Approximately 15% of debt, excluding variable-rate debt protected by interest-rate agreements, was subject to variable rates. A 100-basis-point increase in LIBOR was estimated to increase annual interest expense by approximately $2.7 million. Debt covenants were satisfied, including 51% total debt to adjusted total assets, 3% secured debt to adjusted total assets and 187% unencumbered assets to unsecured debt.
In January 2018, the unsecured credit facilities were amended to increase capacity from $520.0 million to $600.0 million, extend maturity from October 2019 to October 2021, reduce the LIBOR spread to 0.875% and increase accordion capacity to $1.2 billion. Availability at December 31, 2017 was approximately $305.9 million after letters of credit. The Southaven mortgage was amended in February 2018, reducing principal to $51.4 million and extending maturity to April 2021.
Management stated that cash flow from operations, credit availability and access to debt and equity markets should fund planned 2018 capital expenditures, operating expenses, debt service and REIT distributions. However, management cautioned that access to affordable capital could be affected by volatility in credit and capital markets.
Management expects 2018 Same Center NOI to be flat to down 1% from 2017. The outlook reflects 13 tenant bankruptcy filings in 2017, retailer restructurings, store closures and selected short-term lease modifications. Management expects fewer filings and closures in 2018 but provided no assurance that this will occur.
Risks, Contingencies and Unusual Items
- Retailer bankruptcies, store closures, changing consumer preferences, e-commerce competition and weaker tenant sales could reduce occupancy, rents and percentage rentals.
- Approximately 1.7 million square feet, or 13% of the current consolidated portfolio, was scheduled for lease renewal in 2018. Renewal and re-leasing outcomes may not match historical rent increases.
- Real estate values may be affected by economic conditions, market rents, competition, capitalization rates, construction costs and impairment assumptions. The company recorded a $9.0 million share of non-cash impairment charges related to Bromont and Saint-Sauveur in Canada.
- The company had approximately $351.3 million of unconsolidated joint-venture debt and maximum guarantees of approximately $32.8 million. Joint-venture decisions, refinancing needs and partner interests may constrain operating flexibility.
- Debt refinancing, interest-rate increases, variable-rate exposure and limited cash balances remain liquidity considerations. Contractual debt payments total approximately $1.781 billion, including $330.8 million due in 2021.
- Canadian investments expose the company to foreign-currency, economic, regulatory and operating risks. The company generally does not hedge currency translation exposure.
- Insurance may not cover all risks, including certain natural disasters, terrorism and other losses. The company also faces environmental, cyber-security, REIT qualification and tax-law risks.
- Routine legal proceedings were not expected by management to have a material adverse effect. Internal controls over financial reporting were assessed as effective, and Deloitte & Touche issued unqualified audit opinions.
Most Important Facts for Investors to Verify
- Whether 2018 Same Center NOI remains within management's flat-to-down 1% outlook as retailer bankruptcies and store closures develop.
- Occupancy trends, tenant sales per square foot, renewal spreads and the ability to re-lease the 2018 expirations at favorable rents.
- Debt maturities, credit-facility utilization, refinancing plans and compliance with leverage and distribution covenants.
- The sustainability of AFFO relative to the $1.3525 per-share annual dividend and the impact of required REIT distributions on retained cash.
- Performance and impairment risk in the Canadian joint ventures, including currency exposure and the outstanding guarantees.
- Whether new developments and expansions, including Fort Worth and Lancaster, achieve stabilization and expected returns.
- The effect of the 2017 tax legislation and subsequent accounting standards, including lease accounting adoption, on future reported results and balance-sheet presentation.