Tanger Inc. — Form 10-Q Summary
Business Context and Reporting Period
For the quarter and six months ended June 30, 2013, Tanger Factory Outlet Centers, Inc. and Tanger Properties Limited Partnership operated as an integrated REIT enterprise focused on developing, owning and managing outlet shopping centers. The portfolio included 36 consolidated centers totaling approximately 10.8 million square feet, plus partial interests in seven unconsolidated centers totaling approximately 2.1 million square feet.
The financial statements are unaudited and presented for both the public company and its operating partnership. The Operating Partnership holds substantially all assets and debt; the Company’s primary material asset is its ownership interest in the Operating Partnership.
Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $91.0 million, versus $87.3 million | $179.7 million, versus $171.6 million |
| Operating income | $29.9 million, versus $25.7 million | $58.4 million, versus $48.4 million |
| Net income | $17.8 million, versus $12.5 million | $34.0 million, versus $21.3 million |
| Net income attributable to Tanger | $16.9 million, versus $11.7 million | $32.3 million, versus $19.8 million |
| Diluted earnings per share | $0.18, versus $0.12 | $0.34, versus $0.21 |
| FFO available to common shareholders and OP interests | $42.5 million, versus $38.6 million | $83.6 million, versus $74.2 million |
| Diluted FFO per share | $0.43, versus $0.39 | $0.85, versus $0.75 |
| AFFO available to common shareholders and OP interests | $43.1 million, versus $38.8 million | $84.5 million, versus $75.1 million |
| Diluted AFFO per share | $0.44, versus $0.39 | $0.85, versus $0.76 |
Operating margins were approximately 32.8% for the quarter and 32.5% for the six-month period. Net margins were approximately 19.5% and 18.9%, respectively. Consolidated occupancy was 98% at June 30, 2013.
Reported tenant comparable sales increased 2.3% for the rolling twelve months ended June 30, 2013, to $384 per square foot. Same-center NOI on a cash basis increased to $56.0 million for the quarter from $53.6 million and to $110.6 million for the six months from $106.1 million.
Cash Flow, Debt and Liquidity
- Six-month operating cash flow was $75.4 million, compared with $82.8 million in the prior-year period.
- Investing cash outflow was $70.6 million, including $26.1 million of rental-property additions and $41.0 million of investments in unconsolidated joint ventures.
- Financing cash outflow was $9.7 million after $300.2 million of debt proceeds, $266.6 million of debt repayments and $41.0 million of cash dividends.
- Cash and cash equivalents declined to $5.5 million at June 30, 2013, from $10.3 million at December 31, 2012.
- Total debt was $1.125 billion, compared with $1.094 billion at year-end 2012. Approximately 91% of debt was unsecured and approximately 90% of gross real estate book value was unencumbered.
- Unsecured lines of credit had total capacity of $520.0 million and outstanding borrowings of $213.1 million. Management stated that the Operating Partnership was in compliance with all debt covenants.
- Debt maturities included approximately $495.4 million in 2015, with $587.5 million due thereafter. The Company had no direct indebtedness but guaranteed certain Operating Partnership obligations.
- Approximately 41% of outstanding debt had variable interest rates. Management estimated that a 100-basis-point increase in LIBOR would increase annual interest expense by approximately $4.6 million.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 4.2%, while six-month revenue increased 4.7%, primarily from higher base rentals, expense reimbursements, tenant sales and fees from unconsolidated joint ventures.
- Quarterly net income increased 42.7%; six-month net income increased 59.7%. Higher operating revenue, lower depreciation and amortization and improved joint-venture results were the principal drivers.
- Base rentals increased 4% in both the quarter and six-month period. Percentage rentals increased 15% in both comparative periods.
- Property operating expenses increased 3% for the quarter and 5% for the six months, driven primarily by higher common-area maintenance and, year to date, snow-removal costs.
- General and administrative expense increased 14% for the quarter and 4% for the six months, partly due to higher share-based compensation and payroll costs.
- Interest expense increased 1% for the quarter and 3% for the six months because average debt outstanding increased to approximately $1.1 billion from approximately $1.0 billion.
- Equity earnings from unconsolidated joint ventures improved to $0.5 million from a loss of $0.9 million in the quarter and to $1.1 million from a loss of $2.3 million for the six months.
- During the first six months, approximately 1.3 million square feet was renewed at an 18.5% increase in average base rent, and approximately 386,000 square feet was re-tenanted at a 32.9% increase.
Guidance, Outlook, Risks and Unusual Items
- Management expected available operating cash flow, existing credit facilities and access to debt and equity markets to fund planned capital expenditures through the end of 2013 and anticipated adequate liquidity for operations, debt service and dividends.
- Planned growth included potential developments in Scottsdale, Charlotte, Columbus, Foxwoods and Clarksburg, although management stated that these projects might not proceed or generate accretive earnings or FFO.
- National Harbor was under development for an expected 2013 holiday-season opening. Joint ventures were also developing or expanding centers in Canada, including Ottawa and Cookstown, with expected openings in the third quarter of 2014.
- Deer Park, a 33.3%-owned joint venture, was placed in default after failing a debt-service-coverage covenant. The joint venture had $246.9 million of debt maturing in May 2014. On July 25, 2013, the partners made a $10.0 million principal reduction, of which Tanger funded $5.0 million, and entered into forbearance arrangements. Refinancing remained under discussion, with no assurance of favorable or timely completion.
- Tanger and its joint-venture partners jointly and severally guaranteed interest, but not principal, on Deer Park’s loans. The Company stated that its maximum exposure to loss from certain joint ventures could not be estimated at the filing date.
- On July 1, 2013, the Galveston/Houston joint venture obtained a $70.0 million mortgage loan and distributed $65.0 million of proceeds equally to the partners. Tanger used its share to reduce borrowings under its unsecured lines of credit.
- On July 11, 2013, the Board declared a $0.225 per-share dividend payable August 15, 2013, and a $0.90 per-unit Operating Partnership distribution.
- Management identified risks from tenant bankruptcies or early lease terminations, lease rollover, development execution, capital-market access, interest-rate increases, debt covenant compliance and joint-venture guarantees. No material changes were reported to the risk factors in the 2012 Form 10-K.
- The filing reported no material litigation and concluded that disclosure controls and procedures were effective as of June 30, 2013.
Important Facts for Investors to Verify
- Progress and refinancing outcome for Deer Park, including the effect of default interest, guarantees and the May 2014 maturity.
- Actual debt maturities and refinancing plans for the approximately $495.4 million due in 2015.
- Availability and utilization of the $520.0 million unsecured credit capacity and compliance with leverage and coverage covenants.
- Conversion of development activity at National Harbor, Ottawa and Cookstown into completed, leased and cash-flow-generating centers.
- Sustainability of the 98% occupancy rate, rent increases on renewals and re-tenanting, and 2.3% comparable-sales growth.
- Cash available for dividends after capital expenditures, joint-venture contributions and debt service; FFO and AFFO are supplemental measures and are not equivalent to discretionary cash flow.
- Exposure to variable-rate debt and the potential effect of higher LIBOR on interest expense and property valuations.