TANGER INC. annual report, FY2014

Tanger Inc. 2014 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, 2014. Tanger is a self-managed REIT focused on developing, owning, operating and managing outlet shopping centers in the United States and Canada. The Company conducts its operations primarily through the Operating Partnership.

Consolidated portfolio: 36 outlet centers, approximately 11.3 million square feet, more than 2,400 stores and approximately 380 brands.
Consolidated occupancy was 98% at December 31, 2014, compared with 99% at December 31, 2013.
Unconsolidated joint ventures owned interests in nine outlet centers totaling approximately 2.6 million square feet, including four Canadian properties.
Average tenant sales were approximately $393 per square foot, up approximately 2% on a comparable basis.

Financial Performance and Key Metrics

Metric	2014	2013	Change
Total revenue	$418.6 million	$384.8 million	+8.8%
Operating income	$131.9 million	$127.7 million	+3.3%
Operating margin	31.5%	33.2%	Down
Net income	$78.2 million	$113.3 million	-31.0%
Net income attributable to Tanger	$74.0 million	$107.6 million	-31.2%
Diluted earnings per share	$0.77	$1.13	Down
Funds from operations	$183.8 million	$194.3 million	-5.4%
AFFO available to common shareholders and OP unitholders	$194.9 million	$186.0 million	+4.8%
Diluted AFFO per share/unit	$1.97	$1.88	+4.8%
Cash flow from operating activities	$188.8 million	$187.5 million	+0.7%
Capital additions to rental property, cash basis	$148.0 million	$47.4 million	+212.0%
Total debt	$1.443 billion	$1.328 billion	+8.7%
Cash and cash equivalents	$16.9 million	$15.2 million	+10.7%

Revenue growth was led by an $21.1 million increase in base rentals and a $12.9 million increase in expense reimbursements. Percentage rentals declined $0.9 million, primarily because higher contractual base rents increased tenant sales breakpoints.

Property operating expenses increased 14% to $137.4 million, while general and administrative expenses increased 14% to $44.5 million. The filing attributes the operating expense increase partly to higher real estate taxes, mall office costs and snow removal expenses. The increase in general and administrative expense included higher share-based compensation and payroll costs.

Material Changes Versus the Prior Comparable Period

Net income declined primarily because 2013 included a $26.0 million gain on the previously held Deer Park interest and approximately $7.8 million of unusual equity earnings from Deer Park transactions.
2014 included a $13.1 million loss on early extinguishment of debt associated with redeeming $250.0 million of 6.15% notes due November 2015.
2014 included a $7.5 million gain on the sale of the Lincoln City, Oregon outlet center for approximately $39.0 million of net proceeds.
Base rentals increased 8% to $274.5 million, while same-center NOI on a cash basis increased to $251.0 million from $244.9 million.
FFO declined because of the unusual 2013 Deer Park-related items, while AFFO increased because 2014 AFFO included adjustments for the debt extinguishment charge and abandoned pre-development costs.
Capital investment accelerated substantially, principally for Foxwoods, Grand Rapids, property renovations and expansions.
The consolidated portfolio decreased from 37 to 36 centers following the Lincoln City disposition, while unconsolidated centers increased from seven to nine.

Debt, Liquidity and Capital Resources

Debt was $1.443 billion at year-end, consisting principally of senior unsecured notes, unsecured term loans, mortgages and $111.0 million drawn on unsecured lines of credit.
In November 2014, Tanger issued $250.0 million of 3.75% senior notes due December 2024, generating approximately $246.2 million of net proceeds. The proceeds were used to redeem the $250.0 million of 6.15% notes due November 2015.
The interest rate on the $250.0 million unsecured term loan was reduced from LIBOR plus 1.60% to LIBOR plus 1.05% in July 2014.
Unsecured credit facilities provided total borrowing capacity of $520.0 million and generally matured in October 2017, with a one-year extension option. The syndicated facility included an accordion feature that could increase capacity to $750.0 million under certain circumstances.
Unsecured borrowings represented 81% of outstanding debt, and 74% of the gross book value of the real estate portfolio was unencumbered.
Management stated that operating cash flow, existing credit facilities and access to debt and equity markets were expected to fund planned 2015 capital expenditures, debt service, operating expenses and REIT distributions.
Debt maturities totaled approximately $32.3 million in 2015, $30.3 million in 2016, $146.7 million in 2017, $153.2 million in 2018 and $253.4 million in 2019.
Management reported compliance with all debt covenants. Actual total consolidated debt to adjusted total assets was 50%, versus a covenant maximum of less than 60%; total secured debt to adjusted total assets was 9%, versus a maximum of less than 40%.

Development, Outlook and Unusual Items

Projects under development included Foxwoods, Connecticut; Grand Rapids, Michigan; and Southaven, Mississippi, totaling approximately 973,000 square feet with projected aggregate costs of approximately $270.9 million.
Foxwoods was expected to open in the second quarter of 2015, Grand Rapids in the third quarter of 2015 and Southaven in the fourth quarter of 2015.
Unconsolidated joint venture projects included Savannah, Georgia, expected to open in April 2015, and a potential Columbus, Ohio project targeted for the first half of 2016.
The Company completed expansions at Charleston, Park City and Branson during 2014 and continued expansion activity at Westgate, Glendale, Arizona.
In February 2015, Tanger sold its interest in the Wisconsin Dells joint venture for approximately $15.6 million and expected to recognize a gain of approximately $13.9 million in the first quarter of 2015.
The Company recorded a $2.4 million charge for abandoned pre-development projects and a $486,000 casualty gain related to storm damage at West Branch, Michigan.
Management expected positive overall rent increases on leases expiring in 2015, but cautioned that individual renewals and re-leasing outcomes could be positive or negative.
Approximately 1.5 million square feet, or 13% of the current consolidated portfolio, was scheduled to expire in 2015. In 2014, 77% of expiring space was renewed with existing tenants at a 17% average base-rent increase, while space re-leased to new tenants achieved a 36% increase.

Principal Risks and Contingencies

Results depend heavily on rental income and the financial health of retail tenants. Tenant bankruptcies, store closures, e-commerce adoption, lower consumer spending or higher fuel costs could reduce occupancy, rents and percentage rentals.
Development and expansion projects face construction delays, cost overruns, permitting issues, tenant delays and the risk that projects may not produce expected returns.
Real estate values and operating performance are exposed to economic conditions, competition, local oversupply, changing market rents, insurance costs and potential impairment charges.
Joint ventures may require partner consent for financing, expansion, dispositions and other significant decisions. Tanger also provided guarantees and completion or repayment support for certain joint venture debt, with disclosed maximum guaranteed amounts totaling approximately $50.0 million.
Approximately $80.3 million of commitments remained for consolidated construction and capital projects, with an additional $33.5 million attributable to unconsolidated joint ventures.
The Company had approximately $25.7 million of commitments for executed but uncompleted tenant allowances; its share of unconsolidated joint venture tenant allowance commitments was approximately $7.8 million.
Approximately 27% of outstanding debt was variable-rate debt after excluding debt with interest-rate protection. A 100-basis-point increase in LIBOR was estimated to increase annual interest expense by approximately $3.9 million.
Canadian investments expose the Company to foreign currency, regulatory, economic and operational risks. Foreign currency translation produced a $10.0 million loss in other comprehensive income during 2014.
The Company depends on distributions from the Operating Partnership to fund dividends and other obligations. Failure to maintain debt covenant compliance could restrict distributions or accelerate debt maturities.
Management reported no material unresolved legal proceedings, no material control deficiencies and no identified impairment of real estate or equity-method investments at December 31, 2014.

Most Important Facts for Investors to Verify

Reconcile the decline in GAAP net income and FFO with the 2013 Deer Park gains and the 2014 debt extinguishment charge.
Assess whether the significant increase in development spending produces timely openings, leasing and incremental NOI at Foxwoods, Grand Rapids, Southaven and Savannah.
Review 2015 and 2016 debt maturities, credit facility availability and the Company’s ability to fund development while maintaining dividends.
Monitor occupancy, tenant sales, lease expirations and renewal spreads, particularly the approximately 1.5 million square feet scheduled to expire in 2015.
Evaluate joint venture debt, completion and repayment guarantees, partner consent rights and the potential effect of partner buy-sell provisions.
Compare AFFO and dividend distributions: 2014 dividends were $0.945 per share versus diluted AFFO of $1.97 per share.
Verify the effect of the Wisconsin Dells disposition and other properties classified as held for sale on 2015 earnings, asset values and liquidity.
Review exposure to interest-rate changes, Canadian currency movements, tenant credit deterioration, e-commerce competition and uninsured property losses.