Tanger Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and six months ended June 30, 2010, filed August 6, 2010. Tanger Factory Outlet Centers, Inc. is a self-managed REIT operating through Tanger Properties Limited Partnership. At June 30, 2010, the company owned and operated 31 outlet centers in 21 states totaling approximately 9.1 million square feet, with 97% occupancy. It also held interests in two unconsolidated joint ventures.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $65.3 million, versus $64.4 million | $131.3 million, versus $129.3 million |
| Operating income | $20.1 million, versus $18.5 million | $31.1 million, versus $35.6 million |
| Net income | $5.4 million, versus $13.6 million | $8.4 million, versus $50.1 million |
| Net income attributable to common shareholders | $4.9 million, versus $11.8 million | $7.7 million, versus $42.5 million |
| EPS | $0.08, versus $0.30 | $0.11, versus $1.19 |
| Cash flow from operations | Not separately reported | $54.0 million, versus $57.8 million |
| FFO | $23.7 million, versus $34.3 million | $54.4 million, versus $60.8 million |
| AFFO | $31.4 million, versus $29.1 million | $62.7 million, versus $55.5 million |
Second-quarter operating margin was approximately 30.8%, compared with 28.7% in the prior-year quarter. Six-month operating margin was approximately 23.7%, compared with 27.6%. Second-quarter net margin attributable to common shareholders was approximately 7.5%; six-month margin was approximately 5.8%.
- Base rentals increased 2% in both the quarter and year-to-date period, to $44.0 million and $87.5 million, respectively. Percentage rentals increased 11% in the quarter and 5% year to date.
- Property operating expenses increased 7% in the quarter and 5% year to date, reflecting demolition, predevelopment write-offs, snow removal and other common-area costs.
- Interest expense declined 17% in the quarter and 23% year to date, primarily because of lower average debt balances following 2009 equity and debt transactions.
- Cash used in investing activities was $33.7 million year to date, including $26.7 million of rental-property additions and $6.1 million of interest-rate-swap termination payments.
- Cash used in financing activities was $20.2 million year to date. Cash and cash equivalents were $3.5 million at June 30, 2010, compared with $3.3 million at December 31, 2009.
Material Changes Versus the Prior Comparable Period
- Revenue increased modestly, supported by higher renewal rents, re-tenanting, the Commerce II expansion and stronger tenant sales.
- Operating income declined year to date because of accelerated depreciation related to the Hilton Head redevelopment and higher operating costs, despite lower interest expense.
- Net income and EPS declined substantially because 2009 included a $31.5 million gain from the fair-value measurement of a previously held joint-venture interest and a $10.5 million gain on debt extinguishment. The 2010 period included a $6.1 million loss on terminating interest-rate swaps and a $0.7 million impairment charge.
- FFO declined year to date, while AFFO increased after adjustments for non-core items, including the swap termination, impairment, debt-extinguishment costs, Hilton Head demolition and abandoned due-diligence costs.
- Debt increased to $605.2 million from $584.6 million at year-end. In June 2010, the company issued $300.0 million of 6.125% senior unsecured notes due 2020 and used the proceeds primarily to repay a $235.0 million term loan, terminate related swaps and reduce credit-line borrowings.
Guidance, Outlook, Risks and Unusual Items
- The 317,000-square-foot Mebane, North Carolina outlet center was approximately 91% leased or subject to leases for signature and was expected to open November 5, 2010. The $50.0 million Hilton Head redevelopment was expected to open in the second half of 2011 and was approximately 54.6% leased or subject to leases for signature.
- Contractual commitments for development, redevelopment and other capital expenditures totaled approximately $30.0 million at June 30, 2010.
- Management expected available operating cash flow and credit facilities to fund planned 2010 capital expenditures, debt service and dividends, but noted uncertainty in capital and credit markets and no assurance that financing would remain available on favorable terms.
- Credit facilities with total capacity of $325.0 million had $50.8 million outstanding. The company reported compliance with debt covenants. Approximately 8% of outstanding debt carried variable rates; a 100-basis-point increase in LIBOR was estimated to increase annual interest expense by approximately $0.5 million.
- Significant refinancing risks included credit-line expirations in June 2011 and the Deer Park joint venture’s $89.8 million proportionate debt maturity in May 2011, subject to a one-year extension option.
- The company guaranteed certain Operating Partnership debt and had limited joint-and-several guarantees relating to the Wisconsin Dells and Deer Park joint ventures. Management stated that the maximum potential loss related to Deer Park could not be estimated.
- Commerce I, Georgia was classified as held for sale and discontinued operations. A major portion was sold in July 2010 for approximately $1.4 million, with one building retained and marketed.
- Liz Claiborne announced plans to exit its U.S. and Puerto Rico outlet concept. Tanger had 22 affected stores representing 2.6% of portfolio space and less than 1.5% of base and percentage rental revenue.
- Approximately 1.5 million square feet, or 16% of the wholly owned portfolio, was scheduled for renewal during 2010. Through June 30, approximately 60% had been renewed at a 9% average base-rent increase, and 323,000 square feet had been re-tenanted at a 22% average increase.
- No material changes were reported to the risk factors in the 2009 Form 10-K, and management reported effective disclosure controls.
Most Important Facts for Investors to Verify
- Whether Mebane opened as scheduled and achieved projected occupancy and returns.
- Progress, cost control and leasing for the Hilton Head redevelopment, including the remaining $30.0 million of contractual commitments.
- Extension or refinancing of the credit facilities expiring in June 2011 and the Deer Park joint-venture debt.
- Post-sale results and remaining exposure related to Commerce I, Georgia.
- Renewal spreads, tenant sales trends and the ability to release the remaining 2010 expiration volume on favorable terms.
- The sustainability of dividends relative to AFFO, capital expenditures, debt service and required REIT distributions.
- Potential tenant-concentration effects from Liz Claiborne’s planned outlet-store exit and other tenant closures or bankruptcies.