TANGER INC. annual report, FY2012

Tanger Inc. 2012 Form 10-K Summary

Business context and reporting period

Tanger Factory Outlet Centers, Inc. is a self-managed REIT that operates through Tanger Properties Limited Partnership. The filing covers the fiscal year ended December 31, 2012; the source includes fourth-quarter information but is an annual Form 10-K rather than a standalone quarterly filing.

Owned and operated 36 consolidated outlet centers totaling approximately 10.7 million square feet in 24 states.
Held interests in seven unconsolidated joint-venture centers totaling approximately 2.2 million square feet, including three Canadian centers.
Consolidated centers were 99% occupied at year-end, with more than 2,300 stores and approximately 400 brands.
Reported comparable tenant sales increased 2.9% to $376 per square foot for the rolling twelve months ended December 31, 2012.

Financial performance and key metrics

Metric	2012	2011	Change
Total revenues	$357.0 million	$315.2 million	+$41.8 million, approximately +13%
Operating income	$109.6 million	$97.9 million	+$11.6 million, approximately +12%
Net income	$56.5 million	$51.0 million	+$5.5 million, approximately +11%
Net income attributable to Tanger	$53.2 million	$44.6 million	+$8.6 million
Diluted EPS	$0.57	$0.52	+10%
Funds from operations	$162.5 million	$139.7 million	+$22.7 million, approximately +16%
Diluted FFO per share	$1.63	$1.44	+$0.19, approximately +13%
Adjusted FFO	$164.0 million	$142.6 million	+$21.3 million, approximately +15%
Diluted AFFO per share	$1.65	$1.47	+$0.18, approximately +12%
Cash flow from operating activities	$165.8 million	$136.0 million	+$29.7 million, approximately +22%

Operating margin was approximately 30.7% in 2012 versus 31.1% in 2011, while net income margin was approximately 15.8% versus 16.2%. Margin pressure reflected higher property operating expenses, general and administrative costs, depreciation and interest expense.

Base rentals increased 13% to $235.2 million; percentage rentals increased 23% to $11.2 million; and expense reimbursements increased 12% to $100.1 million.
Existing-property base rentals increased $8.7 million, supported by lease renewals and re-tenanting vacant space.
2012 lease renewals covered 1.536 million square feet at a 16% average base-rent increase; 450,000 square feet re-leased to new tenants achieved a 54% average increase.
Cash capital expenditures were $41.3 million, down from $60.3 million in 2011.

Balance sheet, debt and liquidity

Total assets were $1.67 billion and total debt was $1.09 billion at December 31, 2012, compared with $1.62 billion and $1.03 billion, respectively, at year-end 2011.
Approximately 90% of outstanding debt was unsecured and approximately 90% of the gross book value of real estate was unencumbered.
The $250.0 million unsecured term loan completed in February 2012 bears interest at LIBOR plus 1.80%, is interest-only, and matures in the first quarter of 2019.
Unsecured revolving credit facilities had total capacity of $520.0 million, with $178.3 million outstanding at year-end, bearing interest at LIBOR plus 1.25% and scheduled to mature in November 2015, subject to an extension option.
Debt maturities include $460.6 million in 2015 and $587.5 million thereafter. Contractual debt, interest and operating-lease obligations totaled approximately $1.63 billion.
Cash and cash equivalents were $10.3 million at year-end. Operating cash flow exceeded cash dividends and distributions, but financing activities used $15.4 million during 2012.
Management stated that liquidity was adequate for planned 2013 capital expenditures, operations, debt service and REIT distributions, while cautioning that future access to affordable capital markets cannot be assured.

Material changes versus the prior comparable period

Revenue and operating cash flow benefited from the full-year contribution of properties acquired in 2011 and from higher rents and occupancy at existing centers.
Investments in unconsolidated joint ventures increased to $126.6 million from $28.5 million, primarily due to development and acquisitions in Texas, Arizona and Canada.
Interest expense increased 10% to $49.8 million as average debt increased to approximately $1.1 billion, partly offset by lower spreads on the revolving credit facilities.
Depreciation and amortization increased 17% to $98.7 million, principally because of the additional centers acquired in 2011.
General and administrative expense increased 24% to $37.5 million, primarily due to higher payroll and share-based compensation, including awards under the CEO’s amended employment agreement.
Equity in losses of unconsolidated joint ventures increased to $3.3 million from $1.6 million, reflecting acquisition, abandoned development and start-up costs.
Cash investment in joint ventures was $103.0 million in 2012, including funding for the RioCan Canadian acquisitions and construction projects in Texas and Arizona.
Common dividends increased to $0.8300 per share from $0.7938; the Company distributed approximately $76.9 million to shareholders against an estimated REIT distribution requirement of approximately $59.0 million.

Guidance, outlook, risks and unusual items

Management expects continued growth through rent increases, redevelopment, acquisitions, wholly owned developments and joint ventures. Potential development sites included Charlotte, Columbus, Foxwoods, Scottsdale, Toronto and Ottawa, but no assurance was given that these projects would proceed.
Texas City, Texas, and Glendale, Arizona, joint-venture centers opened in October and November 2012, respectively. National Harbor entered site development in November 2012, with a proposed construction loan expected to close in 2013.
Deer Park, New York, a 33.3%-owned joint venture, was not in compliance with its debt-service-coverage requirement at December 31, 2012. Lenders could require a principal payment, potentially requiring additional partner contributions.
The Deer Park warehouse joint venture had an overdue mortgage, entered into a forbearance arrangement, and had a lender-approved contract to sell the property.
Variable-rate debt represented 39% of outstanding debt; management estimated that a 100-basis-point increase in LIBOR would increase annual interest expense by approximately $4.3 million.
Key risks include tenant bankruptcies and store closures, short lease terms and renewal risk, retail and consumer-spending weakness, fuel prices, competition, development delays and cost overruns, joint-venture control limitations, environmental liabilities, uninsured losses, refinancing risk, impairment charges, cyber risks and potential loss of REIT status.
No consolidated property impairment was recorded in 2012, although management’s valuation estimates remain sensitive to rental rates, occupancy, competition and operating costs.
Management reported no material effect expected from ordinary-course litigation and stated that debt covenants were satisfied at year-end.

Most important facts for investors to verify

Confirm the 2015 refinancing and maturity plan for the $460.6 million of scheduled debt maturities, including the $250.0 million senior notes and revolving credit borrowings.
Monitor variable-rate exposure, LIBOR sensitivity and the availability and pricing of revolving credit facilities.
Track lease expirations: approximately 18% of the current consolidated portfolio was scheduled to expire in 2013.
Evaluate whether the 2012 lease-renewal and re-tenanting rent increases can be sustained as market conditions change.
Assess the financial condition, guarantees and potential capital requirements of Deer Park and other unconsolidated joint ventures.
Reconcile FFO and AFFO with GAAP cash flow and capital expenditures; these non-GAAP measures do not represent discretionary cash available for dividends or growth.
Review the effect of share-based compensation, Operating Partnership unit exchanges and potential future dilution.
Verify management’s 2013 liquidity assumptions, development commitments, tenant allowances and the ability to maintain REIT-required distributions.