Tanger Inc. 2010 Form 10-K Summary
Business Context and Reporting Period
This combined Form 10-K covers Tanger Factory Outlet Centers, Inc. and Tanger Properties Limited Partnership for the fiscal year ended December 31, 2010. Tanger is a self-administered and self-managed REIT focused on developing, owning, operating and managing outlet shopping centers. The Operating Partnership holds substantially all properties, operations and debt.
- 31 wholly owned outlet centers in 21 states totaling approximately 9.2 million square feet.
- Wholly owned centers were 98% occupied at year-end and contained more than 2,000 stores representing approximately 360 brands.
- Two unconsolidated joint ventures added approximately 948,000 square feet.
- Fixed rents and expense reimbursements represented approximately 90% of total revenue; contingent sources represented approximately 10%.
Financial Performance and Key Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Total revenue | $276.3 million | $270.6 million | +2% |
| Operating income | $79.6 million | $69.9 million | +14% |
| Operating margin | 28.8% | 25.8% | Improved |
| Income from continuing operations | $38.3 million | $72.7 million | -47% |
| Net income | $38.2 million | $67.5 million | -43% |
| Net income attributable to common shareholders | $34.2 million | $58.0 million | -41% |
| Diluted earnings per share | $0.32 | $0.72 | Decrease |
| Funds from operations available to common shareholders and noncontrolling interest | $112.2 million | $114.0 million | -2% |
| AFFO available to common shareholders and noncontrolling interest | $122.8 million | $115.7 million | +6% |
Revenue growth was driven primarily by higher existing-property rents, new development and stronger tenant sales. Comparable tenant sales increased 6.6% to $354 per square foot. Base rentals increased 3%, percentage rentals increased 16%, and expense reimbursements increased 3%.
Operating expenses increased 6% because of higher existing-property costs, snow removal and the opening of Mebane. General and administrative expense declined 25%, largely because 2009 included $10.3 million of severance and accelerated share-based compensation related to Stanley K. Tanger’s retirement.
Cash provided by operating activities was $118.5 million, down from $127.3 million in 2009. Investing cash outflows were $86.9 million, primarily for Mebane, Hilton Head redevelopment and derivative termination payments. Financing cash outflows were $29.2 million. Year-end cash and cash equivalents were $5.8 million.
Debt, Liquidity and Capital Structure
- Total debt was $714.6 million at December 31, 2010, compared with $584.6 million at year-end 2009.
- The increase primarily reflects the $300.0 million issuance of 6.125% senior notes due 2020. Proceeds were used to repay the $235.0 million term loan, terminate related swaps, reduce revolver borrowings and fund working capital.
- New unsecured revolving credit capacity totaled $400.0 million, consisting of a $385.0 million syndicated facility and a $15.0 million cash-management line. The facilities mature November 29, 2013, with a one-year extension option; the syndicated facility includes an accordion feature up to $500.0 million.
- All outstanding debt was unsecured and all gross book value of the real estate portfolio was unencumbered at year-end.
- Debt maturities included $7.2 million in 2011, $160.0 million in 2013, $250.0 million in 2015 and $300.0 million thereafter.
- Management reported compliance with all debt covenants. Actual total debt to adjusted total assets was 42% versus a 60% covenant limit, and unencumbered assets to unsecured debt was 238% versus a 135% minimum.
- Variable-rate debt represented 22% of total debt; a 100-basis-point increase in LIBOR was estimated to increase annual interest expense by approximately $1.6 million.
- The Company redeemed all 7.5% Class C cumulative preferred shares for total cash consideration of approximately $75.6 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased modestly, while operating income improved due to rent growth, development contributions and lower general and administrative expense.
- GAAP net income and earnings per share declined substantially because 2009 benefited from a $31.5 million gain on the remeasurement of the previously held Myrtle Beach joint venture interest and a $10.5 million gain on debt extinguishment.
- 2010 included a $6.1 million loss on termination of interest-rate swaps, a $563,000 debt-cost write-off and approximately $846,000 of impairment charges, including discontinued operations.
- FFO was broadly stable, while AFFO increased because 2010 had fewer non-core charges than 2009.
- Wholly owned occupancy improved from 96% at December 31, 2009 to 98% at December 31, 2010.
- The company opened the approximately 319,000-square-foot Mebane, North Carolina center at 100% occupancy. The project cost approximately $64.9 million.
- Commerce I in Georgia was substantially sold in 2010, with the remaining portion sold in January 2011.
- Approximately 1.5 million square feet of leases expired in 2010. Tanger renewed 83% of that space with existing tenants at a 9% average base-rent increase and re-leased 432,000 square feet to new tenants at a 26% average increase.
Guidance, Outlook, Risks and Unusual Items
Management stated that operating cash flow, available credit facilities and potential access to debt and equity markets should be sufficient to fund planned 2011 capital expenditures, debt service, operating expenses and REIT distributions. No formal earnings guidance was provided.
- Hilton Head I redevelopment was expected to reopen in April 2011 as an approximately 176,000-square-foot center with four outparcel pads. Total incremental cost was estimated at approximately $43.0 million, with $8.3 million remaining under the construction contract at year-end.
- Three potential development sites were under initial study in League City, Texas, Scottsdale, Arizona and West Phoenix, Arizona. There was no assurance that any would proceed.
- A January 2011 letter of intent with RioCan contemplated a 50/50 Canadian outlet-center joint venture targeting 10 to 15 centers over five to seven years and up to $1 billion of fully built-out investment. The venture was not assured of closing or achieving its stated plans.
- Deer Park joint venture debt of approximately $266.9 million was scheduled to mature in May 2011. Based on occupancy and cash flows, the venture did not expect to qualify for its extension option and was negotiating refinancing. Failure to refinance could require material capital contributions from the partners; Tanger’s reported share of joint-venture debt was approximately $89.8 million.
- Key risks include tenant bankruptcies and store closures, short lease terms, competition, development delays and cost overruns, impairment of real estate, interest-rate volatility, refinancing and capital-market access, uninsured losses, environmental liabilities and the requirement to maintain REIT qualification.
- Liz Claiborne announced plans to exit branded outlet stores. Its stores represented approximately 2.6% of portfolio space and less than 1.5% of base and percentage rental revenue; approximately 81% of the affected space had been re-tenanted by February 1, 2011.
- The founder, Stanley K. Tanger, died in October 2010. Kevin M. Dillon announced his resignation effective April 2011.
Most Important Facts for Investors to Verify
- Whether the 2011 Deer Park refinancing was completed without a material Tanger capital contribution or guarantee exposure.
- Actual 2011 performance of the Mebane opening and Hilton Head redevelopment, including final project costs and lease-up.
- Lease-renewal rates, tenant sales trends and re-leasing spreads as the 2011 and 2012 expiration schedule progresses.
- Availability and pricing of the $400.0 million revolving facilities and the company’s ability to address the 2013 and 2015 debt maturities.
- Whether occupancy, percentage rents and AFFO remain resilient if consumer spending, travel or tenant credit conditions weaken.
- The status and economics of the proposed RioCan Canadian joint venture and the three potential U.S. development sites.
- The effect of the preferred-share redemption, share split and noncontrolling partnership interests on per-share cash returns and dilution.
- Differences between GAAP earnings, FFO and AFFO, particularly because these non-GAAP measures exclude depreciation, capital requirements and other recurring or non-recurring items.