Tanger Inc. 2013 Q3 Form 10-Q Summary
Business Context and Reporting Period
Tanger Factory Outlet Centers, Inc. is a self-administered REIT that operates through Tanger Properties Limited Partnership. The company develops, owns and manages outlet shopping centers. The filing covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods.
At September 30, 2013, Tanger operated 37 consolidated outlet centers totaling approximately 11.5 million square feet in 24 states, plus partial interests in six unconsolidated centers totaling approximately 1.4 million square feet. Consolidated portfolio occupancy was 99%.
Financial Performance and Key Metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenues | $97.9 million, versus $90.5 million | $277.6 million, versus $262.1 million |
| Operating income | $33.5 million, versus $29.0 million | $91.9 million, versus $77.4 million |
| Net income | $56.2 million, versus $16.2 million | $90.2 million, versus $37.5 million |
| Net income attributable to Tanger | $53.3 million, versus $15.3 million | $85.6 million, versus $35.2 million |
| Diluted EPS | $0.56, versus $0.16 | $0.90, versus $0.37 |
| FFO available to common shareholders and OP unitholders | $56.2 million, versus $41.9 million | $139.8 million, versus $116.1 million |
| Diluted FFO per share/unit | $0.57, versus $0.42 | $1.41, versus $1.18 |
| AFFO available to common shareholders and OP unitholders | $48.9 million, versus $41.9 million | $133.5 million, versus $117.0 million |
| Diluted AFFO per share/unit | $0.49, versus $0.42 | $1.35, versus $1.19 |
Operating margin was approximately 34.3% in the quarter and 33.1% for the nine months, compared with approximately 32.1% and 29.5%, respectively, in the prior-year periods. The reported earnings increase was substantially affected by nonrecurring Deer Park-related gains.
Base rentals increased 8% in the quarter and 5% for the nine months. Same-center NOI on a cash basis increased to $56.4 million in the quarter from $54.2 million and to $160.8 million for the nine months from $154.5 million. Reported tenant comparable sales increased approximately 1% to $384 per square foot for the rolling twelve months ended September 30, 2013.
Cash Flow, Balance Sheet, Debt and Liquidity
- Net cash provided by operating activities was $137.1 million for the first nine months of 2013, compared with $129.2 million in 2012.
- Net cash used in investing activities was $157.5 million, versus $92.1 million, primarily due to development and joint-venture funding, including an approximately $89.5 million loan to the Deer Park joint venture.
- Net cash provided by financing activities was $20.6 million, compared with cash used of $35.5 million in 2012. Debt proceeds were $500.0 million and repayments were $413.8 million.
- Cash and cash equivalents totaled $10.5 million at September 30, 2013, compared with $10.3 million at December 31, 2012.
- Total debt was $1.326 billion, compared with $1.094 billion at December 31, 2012. Approximately 81% of debt was unsecured and 80% of the gross book value of real estate was unencumbered.
- The company had $520.0 million of unsecured revolving credit capacity, with $259.0 million outstanding at quarter-end. Debt maturities included approximately $541.3 million in 2015 and $737.5 million thereafter.
- Management reported compliance with all debt covenants. Reported covenant metrics included total debt to adjusted total assets of 48%, secured debt to adjusted total assets of 9%, and unencumbered assets to unsecured debt of 187%.
Approximately 50% of outstanding debt carried variable interest rates at quarter-end. Management estimated that a 100-basis-point increase in LIBOR would increase annual interest expense by approximately $6.7 million.
Material Changes Versus the Prior Comparable Period
- In August 2013, Tanger acquired an additional one-third interest in the Deer Park, New York property, increasing ownership to two-thirds and resulting in consolidation of the property.
- The Deer Park transaction generated a $26.0 million gain on remeasurement of Tanger's previously held interest. Deer Park also recorded a $13.8 million gain on early extinguishment of debt and approximately $9.5 million of lawsuit settlement income before Tanger acquired control.
- Deer Park added approximately 742,000 square feet and contributed $3.2 million of revenue and a $337,000 net loss from the acquisition date through September 30, 2013.
- Debt increased primarily because Tanger assumed approximately $237.9 million of Deer Park debt and increased borrowings to fund development and joint-venture investments.
- Capital expenditures increased to $40.6 million from $31.2 million, including spending on developments and expansions at Gonzales, Sevierville and Foxwoods.
- General and administrative expenses increased 5% for the nine months, primarily due to higher payroll and share-based compensation expense.
- Percentage rental revenue decreased 3% in the quarter but increased 6% for the nine months.
Outlook, Management Commentary, Risks and Unusual Items
Management expected adequate liquidity to fund operating expenses, regular debt service, planned capital expenditures and REIT dividend requirements through 2013 and into 2014, relying on operating cash flow, existing credit facilities and access to debt and equity markets. The company stated that it may pursue additional financing, acquisitions, developments, joint ventures or asset sales depending on market conditions.
- Foxwoods, Connecticut: a two-thirds-owned, approximately 314,000-square-foot center was under construction and expected to open in the second quarter of 2015.
- Charlotte: a 50/50 joint venture began construction on an approximately 400,000-square-foot center, expected to open in the third quarter of 2014.
- National Harbor was expected to open in November 2013.
- RioCan Canada projects, including Cookstown expansion and Tanger Outlets Ottawa, were expected to open in the fourth quarter of 2014.
- During the first nine months, Tanger renewed approximately 1.5 million square feet at an 18% increase in average base rent and re-tenanted approximately 510,000 square feet at a 38% increase. Management cautioned that these increases may not be sustainable.
- Joint-venture agreements contain guarantees, make-whole provisions and buy/sell provisions that could require significant cash outflows. The company could not estimate its maximum exposure to loss for the Westgate joint venture.
- Retail tenant bankruptcies, early lease terminations, renewal risk, development delays, interest-rate increases, capital-market access and covenant compliance remain material risks.
- Subsequent to quarter-end, Tanger amended its credit facilities, extending maturity to October 24, 2017, reducing the spread over LIBOR to 1.00% and lowering the commitment fee to 0.15%. Tanger also entered into swaps fixing the base LIBOR rate on the $150.0 million Deer Park mortgage at an average of 1.30%, producing a contractual rate of 2.80% through August 2018.
No material changes were reported to the risk factors in the 2012 Form 10-K. Management stated that disclosure controls were effective and that neither the company nor the Operating Partnership was involved in material litigation beyond ordinary-course matters.
Important Facts for Investors to Verify
- Separate recurring operating performance from the $26.0 million Deer Park remeasurement gain and other Deer Park-related unusual income.
- Reconcile FFO and AFFO to GAAP net income and evaluate the effect of acquisition costs, litigation proceeds and debt-extinguishment gains.
- Review the increased debt balance, 2015 maturities and the amount of unused revolving credit capacity.
- Assess exposure to variable interest rates, joint-venture guarantees and potential partner buyout provisions.
- Monitor leasing performance, tenant sales, occupancy, renewal spreads and the ability to maintain the reported 99% occupancy.
- Track construction costs, opening dates and lease-up progress for Foxwoods, Charlotte, National Harbor and the Canadian projects.
- Confirm the impact of the October 2013 credit-facility amendments and Deer Park interest-rate swaps in subsequent filings.