Tanger Inc. 2011 Form 10-K Summary
Business context and reporting period
The filing combines the annual reports of Tanger Factory Outlet Centers, Inc. and Tanger Properties Limited Partnership for the fiscal year ended December 31, 2011. Tanger is a self-managed REIT focused on owning, developing, acquiring and operating outlet shopping centers. At year-end, the consolidated portfolio comprised 36 centers totaling approximately 10.7 million square feet, with 99% occupancy, more than 2,300 stores and approximately 400 brands. The company also held interests in three unconsolidated joint-venture centers totaling approximately 1.1 million square feet.
Financial performance and key metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total revenue | $315.2 million | $276.3 million | +14.1% |
| Operating income | $97.9 million | $79.6 million | +23.0% |
| Operating margin | 31.1% | 28.8% | +230 bps |
| Net income | $51.0 million | $38.2 million | +33.3% |
| Net income attributable to Tanger | $44.6 million | $34.2 million | +30.4% |
| Diluted earnings per share | $0.52 | $0.32 | +$0.20 |
| Funds from operations available to common shareholders and OP unitholders | $138.5 million | $113.1 million | +22.4% |
| FFO per share | $1.44 | $1.22 | +18.0% |
| Adjusted FFO per share | $1.47 | $1.33 | +10.5% |
Revenue growth was led by a $28.7 million, or 16%, increase in base rentals, a $9.0 million increase in expense reimbursements and a $1.2 million increase in percentage rentals. Comparable tenant sales increased 3.5% to $366 per square foot. Fixed rents and expense reimbursements represented approximately 91% of total revenue, while contingent sources represented approximately 9%.
Cash flow provided by operating activities was $136.0 million, compared with $118.5 million in 2010. Investing activities used $361.1 million, primarily reflecting $266.2 million for acquisitions, $60.3 million of additions to rental properties and $25.3 million of contributions to unconsolidated joint ventures. Financing activities provided $227.2 million. Year-end cash and cash equivalents were approximately $7.9 million.
Total debt was $1.026 billion at December 31, 2011, compared with $714.6 million at year-end 2010. Approximately 89% of debt was unsecured and 90% of the gross book value of the real estate portfolio was unencumbered. The company had $520 million of unsecured revolving capacity, with $357.1 million outstanding at year-end. Approximately 35% of outstanding debt carried variable rates; management estimated that a 100-basis-point increase in LIBOR would increase annual interest expense by approximately $3.6 million.
Total assets increased to $1.622 billion from $1.217 billion, while total equity increased to $528.4 million from $421.9 million. The company paid common dividends of $0.7938 per share, compared with $0.7725 in 2010. Based on 2011 taxable income, the company was required to distribute approximately $54.7 million to maintain REIT status and distributed approximately $65.8 million.
Material changes versus the prior comparable period
- Consolidated square footage increased from 9.2 million to 10.7 million, and the number of consolidated centers increased from 31 to 36.
- The company acquired Jeffersonville, Ohio for $134.0 million; Atlantic City, New Jersey and Ocean City, Maryland for an expected total consideration of approximately $200.3 million; and Hershey, Pennsylvania for approximately $56.0 million.
- The Hilton Head I, South Carolina redevelopment was completed and reopened on March 31, 2011; the center was 98% occupied at year-end.
- Base rentals from acquisitions contributed $13.4 million in 2011, while base rentals from new developments contributed $9.4 million.
- Interest expense increased 33% to $45.4 million, principally because average debt outstanding increased from approximately $649.6 million to $870.1 million.
- General and administrative expense increased 23% to $30.1 million, partly because of higher share-based compensation, additional employees and costs associated with new joint ventures.
- 2010 included $6.1 million of derivative termination losses and $0.6 million of debt extinguishment costs; neither item was recorded in 2011.
- The company completed a $117.4 million net common share offering and used the proceeds primarily to repay revolving credit borrowings and for general corporate purposes.
- The unsecured credit facilities were increased from $400 million to $520 million, with maturity extended to November 2015 and an option for a one-year extension.
Guidance, outlook, commentary, risks and unusual items
Management stated that cash from operations, existing credit facilities and access to debt and equity markets were expected to fund planned 2012 capital expenditures, operating expenses, debt service and REIT distributions. Management also emphasized reducing construction and overhead costs, generating positive operating cash flow and reducing outstanding debt. The filing does not provide formal earnings or FFO guidance.
Planned growth included Tanger Outlets Westgate in Glendale, Arizona, expected to contain approximately 328,000 square feet and open in time for the 2012 holiday season. The company also pursued developments through joint ventures in Texas City, Texas; National Harbor, Maryland; and Canada with RioCan. The Canadian venture indicated a potential long-term development program of 10 to 12 centers, with an anticipated fully built-out investment of up to $1.0 billion, although the filing cautions that these plans may not be realized.
Key risks include tenant bankruptcies or store closures, short lease terms and renewal risk, increased outlet-center competition, development delays and cost overruns, real estate market weakness, interest-rate volatility, refinancing and capital-market access, environmental liabilities, uninsured losses and the company's ability to maintain REIT qualification. Approximately 1.6 million square feet, or 15% of the consolidated portfolio, was scheduled for lease renewal in 2012. In 2011, 82% of expiring space was renewed with existing tenants at a 13% increase in average base rent, while space re-leased to new tenants achieved a 50% increase; management cautioned that comparable increases may not continue.
Unusual or contingent items include the Deer Park Warehouse joint venture's $2.3 million mortgage, which was in default-rate interest accrual and lender negotiations at year-end, and a $0.9 million impairment charge recorded by that venture. Deer Park's refinancing also may require additional partner contributions if financial covenants are not met. At year-end, contractual debt maturities totaled approximately $639.4 million in 2015, including significant revolving facilities and senior notes.
Subsequent to year-end, the Operating Partnership closed on a $250 million, seven-year unsecured term loan at an initial rate of LIBOR plus 1.80% and used the proceeds to reduce revolving credit borrowings. The company also announced construction plans for the Glendale project. PricewaterhouseCoopers issued unqualified opinions on the financial statements and internal control over financial reporting for both registrants.
Important facts for investors to verify
- Reconcile reported net income, FFO and adjusted FFO, including the treatment of acquisition costs and other non-core adjustments.
- Review the $639.4 million of scheduled 2015 debt maturities and the company's refinancing plan.
- Confirm actual borrowings and remaining availability under the $520 million unsecured credit facilities.
- Monitor variable-rate debt exposure and the effect of changes in LIBOR on interest expense.
- Assess lease renewal volume, tenant sales trends, occupancy and rent spreads as 2012 expirations occur.
- Track the Deer Park Warehouse lender negotiations and any required partner contributions for joint-venture debt.
- Evaluate the execution, funding requirements and returns of the Glendale, Texas, National Harbor and Canadian development projects.
- Verify the impact of acquisitions on same-center NOI, leverage, depreciation and future cash flow.
- Review the company's continuing compliance with debt covenants and REIT distribution requirements.