Tanger Inc. — FY2018 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, 2018. Tanger is a self-managed REIT focused on owning, developing and operating outlet shopping centers in the United States and Canada. The Operating Partnership owns the properties and conducts substantially all operations.
At year-end, the consolidated portfolio included 36 outlet centers totaling 12.9 million square feet, with 97% occupancy, more than 2,600 stores and approximately 400 brands. Tanger also held 50% interests in eight unconsolidated centers totaling 2.4 million square feet, including four Canadian properties.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $494.7 million | $488.2 million | +1.3% |
| Net income | $45.6 million | $71.9 million | -36.6% |
| Net income attributable to Tanger | $43.7 million | $68.0 million | -35.8% |
| Diluted EPS | $0.45 | $0.71 | -36.6% |
| FFO available to common shareholders | $243.3 million | $211.2 million | +15.2% |
| FFO per diluted share | $2.48 | $2.12 | +17.0% |
| Portfolio NOI | $330.7 million | $327.6 million | +0.9% |
| Same Center NOI | $312.8 million | $316.8 million | -1.3% |
| Cash flow from operations | $258.3 million | $253.2 million | +2.0% |
| Capital additions to rental property | $64.3 million | $166.2 million | -61.4% |
| Total debt | $1.713 billion | $1.764 billion | -2.9% |
Approximate 2018 margins were 9.2% for GAAP net income, 49.4% for FFO available to common shareholders and 66.9% for Portfolio NOI. These comparisons are affected by significant impairment and other unusual items.
- Base rentals increased to $328.0 million from $324.0 million; expense reimbursements increased to $145.4 million from $142.8 million.
- Property operating expenses rose to $160.5 million from $155.2 million, partly due to higher snow removal costs and other property expenses.
- Year-end average annual base rent declined to $25.51 per square foot from $25.81, while occupancy remained 97%.
- Renewals and re-leasing during the rolling twelve months ended December 31, 2018 covered 1.8 million square feet at a blended 5.3% increase in average base rental rates.
- Common dividends totaled $1.3925 per share, compared with $1.3525 in 2017. Approximately $130.1 million of dividends were paid during 2018.
Material changes versus the prior comparable period
- Net income declined primarily because 2018 included a $49.7 million non-cash impairment charge on the Jeffersonville, Ohio outlet center and Tanger's $7.2 million share of impairment charges at two Canadian joint-venture properties.
- 2017 included a $35.6 million loss on early extinguishment of debt and a $6.9 million gain on the sale of the Westbrook, Connecticut center; neither item recurred in 2018.
- FFO improved despite lower GAAP earnings, reflecting the add-back of real estate depreciation and impairment charges and the absence of the 2017 debt extinguishment charge.
- Same Center NOI decreased 1.3%, reflecting retailer bankruptcies, store closures, rent adjustments and pressure on existing-center operations.
- Capital spending fell substantially because major construction activity for the Fort Worth center and Lancaster expansion occurred in 2017; no new consolidated developments were under construction in 2018.
- Share repurchases totaled 919,249 shares for approximately $20.0 million in 2018, compared with 1.9 million shares for approximately $49.3 million in 2017.
Debt, liquidity and capital structure
- Total debt was $1.713 billion at December 31, 2018. Approximately 95% of outstanding debt was unsecured, and 93% of the gross book value of real estate was unencumbered.
- The $600.0 million unsecured credit facilities had $454.7 million of unused capacity, or 76%, at year-end. The facilities mature in October 2021 and include a one-year extension option.
- In January 2018, borrowing capacity increased from $520.0 million to $600.0 million, the maturity was extended to 2021, and the LIBOR spread was reduced to 0.875%.
- In October 2018, the unsecured term loan increased from $325.0 million to $350.0 million, its maturity was extended to April 2024, and the LIBOR spread was reduced to 0.90%. Proceeds were used to reduce revolver borrowings.
- Debt maturities include approximately $202.3 million in 2021, $254.8 million in 2023 and $1.262 billion thereafter, before debt discounts and financing costs.
- Management reported compliance with all debt covenants. Actual total debt to adjusted total assets was 50%, versus a covenant limit below 60%; total secured debt was 3%, versus a limit below 40%; and unencumbered assets to unsecured debt was 189%, versus a required minimum of 150%.
- Interest-rate swaps had aggregate notional amounts of $365.0 million. Management estimated that a 100-basis-point increase in LIBOR would increase annual interest expense by approximately $1.8 million.
Guidance, outlook, risks and unusual items
Management believes operating cash flow, available credit facilities and access to debt and equity markets will fund planned capital expenditures, debt service, operating needs and REIT distributions for at least the next twelve months. No specific revenue or earnings guidance was provided.
Management expects 2019 Same Center NOI to decline from 2018 because of tenant bankruptcies, store closures, rent adjustments and anticipated additional retailer restructurings. Five tenants filed for bankruptcy in 2018 and three additional tenants had filed by February 18, 2019.
- Retailer performance is a central risk because rental income depends on tenant sales, occupancy and credit quality. E-commerce competition and changing consumer preferences may increase vacancies, bankruptcies and rent concessions.
- Approximately 7% of gross annualized base rent was scheduled to expire in 2019, 12% in 2020 and 13% in 2021, assuming no renewal options are exercised.
- Joint ventures had approximately $367.9 million of debt, and the Operating Partnership provided guarantees with a maximum amount of approximately $19.3 million.
- Canadian investments carry foreign currency, economic, regulatory and property-management risks. The Canadian joint ventures recorded $14.4 million of impairment charges in 2018, of which Tanger's share was $7.2 million.
- LIBOR uncertainty, refinancing requirements, interest-rate volatility, property impairments, uninsured losses, environmental liabilities and cyber risks may affect future results.
- Adoption of the new lease standard in 2019 was expected to add approximately $89 million to $96 million of operating lease liabilities and right-of-use assets. Management also expected 2019 revenue to increase by approximately $5.0 million from fixed common-area-maintenance arrangements and general and administrative expense to increase by approximately $4.0 million to $5.0 million from leasing-cost accounting changes.
- In February 2019, the company authorized an additional $44.3 million of share repurchases, bringing total remaining authorization to approximately $100.0 million and extending the program to May 2021. The board also declared a $0.355 per-share dividend payable in May 2019.
Most important facts for an investor to verify
- Reconcile the $49.7 million Jeffersonville impairment and the $7.2 million Canadian joint-venture impairment to reported GAAP earnings and FFO.
- Assess whether the projected 2019 decline in Same Center NOI materializes and track occupancy, tenant sales, renewal spreads, store closures and bankruptcy filings.
- Review the 2021 credit-facility maturity, 2021 mortgage maturities and covenant headroom, including the availability and cost of refinancing.
- Evaluate whether FFO growth is supported by recurring property operations rather than impairment add-backs or other non-recurring adjustments.
- Monitor tenant concentration and exposure to financially stressed retailers, particularly the largest tenants and the 2019–2021 lease-expiration schedule.
- Confirm the actual balance-sheet impact and income-statement effects of adopting Topic 842 in 2019.
- Review joint-venture debt guarantees, Canadian property valuations and the potential for additional impairment charges.