Tanger Inc. — Q1 2016 Form 10-Q Summary
Business Context and Reporting Period
Unaudited results cover the three months ended March 31, 2016, for Tanger Factory Outlet Centers, Inc. and its operating partnership. Tanger is a self-managed REIT focused on developing, owning and operating outlet shopping centers in the United States and Canada. At quarter-end, the company operated 33 consolidated centers totaling approximately 11.5 million square feet and held interests in nine unconsolidated centers totaling approximately 2.8 million square feet.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $110.8 million | $105.9 million | +4.6% |
| Operating income | $34.8 million | $32.9 million | +5.8% |
| Operating margin | 31.4% | 31.1% | +0.3 percentage points |
| Net income | $28.6 million | $36.4 million | -21.3% |
| Net income attributable to common shareholders | $27.2 million | $34.5 million | -21.3% |
| Diluted EPS | $0.28 | $0.36 | -$0.08 |
| FFO available to common shareholders and OP unitholders | $54.7 million | $49.8 million | +9.8% |
| Diluted FFO per share/unit | $0.55 | $0.50 | +10.0% |
| AFFO available to common shareholders and OP unitholders | $55.8 million | $49.8 million | +12.2% |
| Diluted AFFO per share/unit | $0.56 | $0.50 | +12.0% |
| Net cash provided by operating activities | $54.0 million | $55.4 million | -2.5% |
Net profit margin was approximately 25.8% in Q1 2016 versus 34.4% in Q1 2015, primarily reflecting a lower property disposition gain. Same-center NOI on a cash basis increased to $65.6 million from $62.8 million, or approximately 4.4%.
Base rentals increased 7.4% to $72.6 million. Consolidated-center occupancy was 97% at March 31, 2016, unchanged from the prior-year period. The company declared dividends of $0.285 per common share in Q1 2016 versus $0.240 in Q1 2015.
Balance Sheet, Debt and Liquidity
- Total assets were $2.19 billion at March 31, 2016, compared with $2.31 billion at December 31, 2015.
- Total debt was $1.476 billion, down from $1.552 billion at year-end 2015. Debt consisted of senior unsecured notes, unsecured term loans, mortgages and unsecured lines of credit.
- Cash and cash equivalents were $18.9 million. The company reported $256.3 million of availability under its $520.0 million unsecured lines of credit.
- Unsecured borrowings represented 89% of outstanding debt, and 86% of the gross book value of the real estate portfolio was unencumbered.
- Debt maturities were $12.1 million in 2016, $73.3 million in 2017, $55.9 million in 2018, $517.1 million in 2019, $303.6 million in 2020 and $527.3 million thereafter.
- The company was in compliance with its debt covenants. Reported senior-note covenant metrics included debt to adjusted total assets of 49% versus a limit below 60%, secured debt to adjusted total assets of 6% versus a limit below 40%, and unencumbered assets to unsecured debt of 187% versus a requirement above 150%.
Material Changes Versus the Prior Comparable Period
- Revenue and operating income increased due primarily to higher rents from existing properties and contributions from new developments opened in 2015.
- Net income declined because Q1 2015 included a $13.7 million gain from the sale of the Wisconsin Dells joint venture interest, compared with a $4.9 million gain from the January 2016 sale of the Fort Myers center.
- Interest expense rose 14% to $14.9 million due to higher average borrowings, mortgage financing on Foxwoods and Southaven, and higher LIBOR.
- FFO and AFFO improved despite lower GAAP net income, reflecting the reduced impact of property-sale gains and increased operating performance.
- Operating cash flow declined modestly, while investing cash flow turned positive at $100.8 million, primarily because of the release of $121.3 million of restricted cash and asset-sale proceeds.
- Financing activities used $158.1 million, including $405.2 million of debt repayments, $49.9 million of distributions, and repayment of the $28.4 million Deer Park deferred financing obligation, partly offset by $327.3 million of debt issuances.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide explicit full-year earnings or FFO guidance.
- Management expects adequate liquidity to fund operating expenses, debt service, planned capital expenditures and dividends through the end of 2016, subject to continued access to capital markets and credit facilities.
- Daytona Beach, Florida, a 352,000-square-foot consolidated center with projected total cost of $91.3 million, was under development and expected to open during the 2016 holiday season.
- The Columbus, Ohio, joint venture center was expected to open in the second quarter of 2016. Tanger's 50% share of development funding was approximately $30.0 million as of March 31, 2016.
- In April 2016, the unsecured term loan was increased from $250.0 million to $325.0 million, its maturity was extended to April 2021, and the LIBOR spread was reduced from 1.05% to 0.95%. New swaps fixed LIBOR on $175.0 million of notional amounts at an average of 1.03% through January 2021.
- Approximately 43% of outstanding debt was variable-rate debt, excluding debt protected by interest-rate swaps. Management estimated that a 100-basis-point LIBOR increase would increase annual interest expense by approximately $6.4 million.
- Key risks include tenant closures or bankruptcies, renewal and re-leasing risk, consumer and travel trends, real estate valuation and impairment, development execution, joint-venture obligations, Canadian currency exposure, interest rates, debt refinancing and continued REIT qualification.
- The company provided guarantees on certain unconsolidated joint-venture debt with a reported maximum guaranteed amount of approximately $34.6 million, in addition to completion guarantees and customary non-recourse carve-outs.
- Management stated that there were no material changes to previously disclosed risk factors and that ordinary-course legal proceedings were not expected to have a material adverse effect.
Important Facts for Investors to Verify
- Reconcile the improvement in FFO and AFFO with the decline in GAAP net income and assess the effect of property dispositions and unusual adjustments.
- Review the 2019 and 2020 debt maturities and confirm refinancing, repayment or asset-sale plans.
- Monitor availability under the unsecured lines of credit, covenant headroom and exposure to variable interest rates.
- Verify leasing performance, including the reported 18% renewal rent increase and 32% re-tenanting rent increase, and whether these gains are sustainable.
- Track occupancy and stabilization of newer centers, particularly Foxwoods, Grand Rapids and Southaven.
- Assess construction costs, opening schedules and expected returns for Daytona Beach and the Columbus joint venture.
- Evaluate the extent of joint-venture debt guarantees and potential obligations if occupancy, construction or debt-service targets are not met.
- Review the subsequent $0.325 per-share dividend declaration and the company’s dependence on distributions from the Operating Partnership.