Tanger Inc. 2012 Q3 Form 10-Q Summary
Business Context and Reporting Period
Tanger Factory Outlet Centers, Inc. is a self-managed REIT that owns and operates outlet shopping centers through Tanger Properties Limited Partnership. For the quarter ended September 30, 2012, the company operated 36 consolidated outlet centers in 24 states totaling approximately 10.7 million square feet, with 99% occupancy. It also held interests in three unconsolidated outlet centers totaling approximately 1.2 million square feet.
The filing combines the unaudited quarterly reports of Tanger Factory Outlet Centers, Inc. and Tanger Properties Limited Partnership. Unless otherwise noted, financial results are substantially the same for both entities.
Financial Performance and Key Metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Total revenue | $90.5 million | $83.2 million | $262.1 million | $226.1 million |
| Operating income | $29.0 million | $26.2 million | $77.4 million | $69.7 million |
| Operating margin | 32.1% | 31.4% | 29.5% | 30.8% |
| Net income | $16.2 million | $14.2 million | $37.5 million | $35.9 million |
| Net income attributable to Tanger | $15.3 million | $12.5 million | $35.2 million | $31.3 million |
| Net margin | 17.9% | 17.1% | 14.3% | 15.9% |
| Diluted earnings per share | $0.16 | $0.14 | $0.37 | $0.37 |
| FFO available to common shareholders and OP unitholders | $41.9 million | $37.9 million | $116.1 million | $97.1 million |
| FFO per share | $0.42 | $0.39 | $1.18 | $1.02 |
| Same-center NOI, cash basis | $50.4 million | $47.7 million | $143.5 million | $134.8 million |
- Q3 revenue increased 8.7%, operating income increased 10.9%, and net income increased 13.9% year over year.
- For the first nine months, revenue increased 15.9%, while net income increased 4.5%; higher depreciation, general and administrative costs, interest expense, and joint-venture losses limited earnings growth.
- Base rentals increased 8% in Q3 and 17% for the first nine months, benefiting from acquisitions, higher renewal rents, re-tenanting, and new developments.
- Percentage rentals increased 18% in Q3 and 26% for the first nine months. Reported tenant comparable sales increased 5% to $381 per square foot for the rolling twelve months ended September 30, 2012.
- Same-center NOI increased 5.6% in Q3 and 6.5% for the first nine months, on a cash basis.
Cash Flow, Debt, and Liquidity
- Nine-month cash flow from operating activities was $129.2 million, compared with $104.8 million in the prior-year period.
- Cash used in investing activities was $92.1 million, primarily reflecting $57.8 million invested in unconsolidated joint ventures and $31.2 million of rental-property additions. The prior-year period included $262.5 million of property acquisitions.
- Cash used in financing activities was $35.5 million, including $57.2 million of dividends, $491.5 million of debt proceeds, and $463.7 million of debt repayments.
- Cash and cash equivalents totaled $9.5 million at September 30, 2012, compared with $7.9 million at December 31, 2011.
- Total debt was $1.053 billion at September 30, 2012, compared with $1.026 billion at year-end 2011. Debt consisted primarily of $548.0 million of senior unsecured notes, $259.4 million of unsecured term loans, $108.7 million of mortgages, and $136.8 million drawn on unsecured lines of credit.
- In February 2012, the Operating Partnership entered into a $250 million seven-year unsecured term loan bearing interest at LIBOR plus 1.80%; proceeds were used to reduce borrowings under the unsecured lines of credit.
- Approximately 90% of outstanding debt was unsecured and 88% of the gross book value of real estate was unencumbered. The unsecured credit facilities had total borrowing capacity of $520 million, with $136.8 million outstanding.
- Debt maturities include approximately $419.1 million in 2015 and $590.5 million thereafter. Management stated that it expected available operating cash flow, credit facilities, and capital-market access to fund planned expenditures through the end of 2013.
- Approximately 36% of debt carried variable interest rates. Management estimated that a 100-basis-point increase in LIBOR would increase annual interest expense by approximately $3.8 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by the 2011 acquisitions of four outlet centers, including Jeffersonville, Atlantic City, Ocean City, and Hershey, as well as higher existing-property rents and tenant sales.
- Q3 property operating expenses increased 10%, and nine-month expenses increased 12%, primarily because of the acquired properties. Existing-property operating expenses declined for the first nine months, partly because of lower snow-removal costs.
- General and administrative expense increased 14% in Q3 and 27% for the first nine months, primarily due to higher payroll and share-based compensation, including awards associated with the amended employment agreement of the chief executive officer.
- Depreciation and amortization increased 8% in Q3 and 28% for the first nine months, mainly because of acquired centers and related lease intangibles.
- Interest expense increased 3% in Q3 and 12% for the first nine months because of higher average debt balances, partially offset by lower spreads on the unsecured credit facilities.
- Equity losses from unconsolidated joint ventures increased to $2.9 million for the first nine months from $0.8 million, including the company’s share of a Deer Park Warehouse impairment charge, acquisition costs, and written-off pre-development costs.
- Family Limited Partners exchanged 1.64 million Operating Partnership units for 6.57 million common shares during the first nine months, increasing the company’s share count and reducing related noncontrolling interests.
Guidance, Outlook, Risks, and Unusual Items
- The filing does not provide formal earnings or FFO guidance. Management expressed an intent to continue growing through acquisitions, expansions, developments, and joint ventures.
- New or developing projects included the Galveston/Houston center, which opened October 19, 2012; Westgate in Glendale, Arizona, expected to open November 15, 2012; and National Harbor, which remained in pre-development.
- In November 2012, the RioCan Canadian joint venture acquired two Montreal-area outlet centers for approximately $94.8 million, including assumed financing of $18.7 million at one property.
- Unconsolidated joint ventures had total debt of approximately $288.9 million. Significant exposures included Deer Park debt of $246.9 million, Westgate construction debt of $15.9 million, and Wisconsin Dells debt of $24.3 million.
- The Deer Park Warehouse mortgage was past its original maturity and subject to a forbearance arrangement while the property was under contract for sale. Additional interest could accrue until closing.
- Joint-venture agreements include guarantees, make-whole provisions, and buy-sell provisions that could require significant cash outflows or the sale of interests. Management stated that maximum exposure to loss for certain guarantees could not be estimated.
- Retail tenant failures, bankruptcies, lease renewals, and re-leasing conditions remain material risks. Approximately 1.6 million square feet, or 15% of the consolidated portfolio, was scheduled for renewal during 2012.
- Management reported 14.7% higher average base rental rates on approximately 1.4 million square feet renewed during the first nine months and 53.9% higher rates on approximately 440,000 square feet re-tenanted, but cautioned that similar increases may not continue.
- Management stated that there were no material changes to previously disclosed risk factors, no material litigation beyond ordinary-course matters, and effective disclosure controls as of September 30, 2012.
Most Important Facts for Investors to Verify
- Verify the sustainability of rental growth and tenant sales, particularly as the portfolio cycles through substantial lease renewals.
- Review the 2015 debt maturities, refinancing requirements, credit-facility availability, and compliance with leverage and debt-service covenants.
- Assess exposure to variable-rate debt and the effect of higher LIBOR on interest expense and cash available for distributions.
- Evaluate performance, funding commitments, guarantees, and refinancing or disposition risks within the unconsolidated joint ventures, especially Deer Park and Westgate.
- Reconcile FFO and AFFO growth with GAAP earnings, capital expenditures, leasing costs, and dividend requirements; management cautions that these non-GAAP measures are not measures of discretionary cash flow.
- Confirm the operating and financial impact of the Galveston/Houston and Westgate openings and the subsequent Montreal-area acquisitions.