Tanger Inc. — Q1 2019 Form 10-Q Summary
Business context and reporting period
Tanger Factory Outlet Centers, Inc. is a self-managed REIT that owns and operates outlet shopping centers through Tanger Properties Limited Partnership. The filing covers the unaudited three months ended March 31, 2019, compared with the three months ended March 31, 2018.
At March 31, 2019, the company operated 32 consolidated outlet centers totaling approximately 12.0 million square feet and held interests in eight unconsolidated centers totaling approximately 2.4 million square feet, including four Canadian centers. Consolidated portfolio occupancy was 95.4%, compared with 95.9% a year earlier.
Financial performance and key metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenues | $123.2 million | $123.5 million | Down $0.4 million |
| Net income | $65.8 million | $23.7 million | Up $42.2 million |
| Net income attributable to Tanger | $62.3 million | $22.8 million | Up $39.5 million |
| Diluted EPS | $0.66 | $0.24 | Up $0.42 |
| FFO available to common shareholders | $55.9 million | $59.3 million | Down $3.5 million |
| Diluted FFO per share | $0.57 | $0.60 | Down $0.03 |
| Same Center NOI | $74.2 million | $74.6 million | Down $0.3 million |
| Net cash from operating activities | $33.2 million | $50.0 million | Down $16.8 million |
Net income was materially affected by a $43.4 million gain on the sale of four non-core outlet centers. Excluding this gain, operating performance was weaker: rental revenue declined $0.7 million, equity earnings from unconsolidated joint ventures declined $0.6 million, and interest expense increased $0.5 million.
Net income as a percentage of revenue was approximately 53.5% in Q1 2019 versus 19.2% in Q1 2018, but the comparison is distorted by the property-sale gain. Same Center NOI declined approximately 0.5%.
Balance sheet, debt, liquidity and cash flow
- Total assets were $2.35 billion at March 31, 2019, versus $2.38 billion at December 31, 2018.
- Total debt was $1.58 billion, down from $1.71 billion at year-end 2018. The decrease primarily reflected repayment of unsecured line-of-credit borrowings using property-sale proceeds.
- Debt consisted primarily of $1.14 billion of senior unsecured notes, $347.0 million of unsecured term debt, $86.6 million of mortgages and $12.1 million drawn on unsecured lines of credit.
- The unsecured credit facilities had $600.0 million of total borrowing capacity and approximately $584.8 million available after letters of credit. The syndicated facility includes an accordion feature that may increase capacity to $1.2 billion in certain circumstances.
- Cash and cash equivalents were $1.6 million at March 31, 2019, compared with $9.1 million at December 31, 2018.
- Operating cash flow was $33.2 million. Investing cash flow was $127.3 million, including $128.2 million of net proceeds from property sales. Financing cash flow was negative $167.9 million, primarily due to debt repayments and distributions.
- Capital additions to rental property were $9.9 million, compared with $19.7 million in Q1 2018.
- Approximately 95% of outstanding debt was unsecured and 92% of the gross book value of the real estate portfolio was unencumbered.
- Management reported compliance with debt covenants. Actual covenant metrics included total debt to adjusted total assets of 49%, secured debt to adjusted total assets of 3%, and unencumbered assets to unsecured debt of 196%.
Material changes versus the prior comparable period
- Four non-core centers were sold in March 2019 for gross proceeds of $130.5 million and net proceeds of approximately $128.2 million: Nags Head, Ocean City, Park City and Williamsburg. The properties represented approximately 6.8% of consolidated portfolio square footage.
- The property sales generated a $43.4 million gain and reduced the consolidated portfolio from 36 to 32 centers.
- Rental revenues declined primarily because of lower average occupancy, tenant bankruptcies, store closures and rent modifications.
- General and administrative expense increased approximately $1.0 million, primarily because ASC 842 required certain indirect internal leasing and legal costs to be expensed rather than capitalized.
- The company adopted ASC 842 on January 1, 2019 using the modified retrospective approach with no cumulative-effect adjustment. It recognized $87.7 million of operating lease right-of-use assets and $92.4 million of operating lease liabilities at March 31, 2019.
- Interest expense increased due to higher LIBOR rates and higher rates on certain interest-rate swaps. Interest-rate swaps had total notional amounts of $365.0 million.
- No shares were repurchased in Q1 2019, compared with 443,700 shares repurchased for approximately $10.0 million in Q1 2018. Approximately $100.0 million remained available under the repurchase authorization through May 2021.
- The quarterly dividend was $0.35 per share, and a $0.355 per-share dividend was declared for payment in May 2019.
Guidance, outlook, commentary, risks and unusual items
Management stated that it expects 2019 Same Center NOI to decline from 2018 because of tenant bankruptcies, store closures, brand restructurings and rent adjustments. Three tenants filed for bankruptcy protection during the first quarter, following five tenant bankruptcies in 2018.
Approximately 1.3 million square feet, or 11% of the consolidated portfolio at January 1, 2019, was scheduled for renewal during 2019, excluding the sold centers. Approximately 58% of that space had been renewed by March 31, 2019. In the trailing twelve months, renewals and re-tenanting covering 1.8 million square feet produced a blended 4.7% increase in average base rental rates versus expiring rates.
Management believes available operating cash flow, unsecured credit capacity and access to debt and equity markets are sufficient to fund operating needs, planned capital expenditures, debt service and dividends for at least the next twelve months. The filing provides no formal earnings or FFO guidance.
- Key operating risks include tenant bankruptcies, retailer sales declines, store closures, lease renewals and rent concessions.
- Interest-rate exposure remains relevant: a 100-basis-point increase in LIBOR was estimated to increase annual interest expense by approximately $0.5 million.
- Debt maturities include approximately $254.8 million in 2023 and $1.26 billion thereafter; the unsecured lines of credit mature in 2021, subject to a one-year extension option.
- The company guaranteed up to $19.4 million of unconsolidated joint-venture debt and remains exposed to standard guarantee and completion obligations.
- Canadian joint ventures create foreign-currency exposure, primarily to the Canadian dollar; the company generally does not hedge currency translation exposure.
- Legal proceedings arise in the ordinary course, but management does not expect them to have a material adverse effect. The filing reports no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether the anticipated decline in 2019 Same Center NOI develops as expected, particularly in light of additional tenant bankruptcies and rent modifications.
- Underlying recurring performance excluding the $43.4 million property-sale gain, including FFO, occupancy, rental rates and tenant retention.
- Renewal and re-leasing results for the remaining 2019 expiration schedule and the sustainability of the reported 4.7% blended rent increase.
- Availability and pricing of unsecured credit facilities, compliance with debt covenants and refinancing plans for 2021 and 2023 maturities.
- The effect of higher interest rates, LIBOR transition and changes in swap valuations on future interest expense.
- Whether property dispositions and reduced capital expenditures strengthen liquidity without impairing long-term portfolio growth.
- The company’s ability to maintain dividends while meeting REIT distribution requirements and funding capital needs.