Tanger Inc. 2013 Q1 Form 10-Q Summary
Business context and reporting period
Tanger Factory Outlet Centers, Inc. is a self-managed REIT that operates through Tanger Properties Limited Partnership. The filing covers the unaudited three months ended March 31, 2013, compared with the three months ended March 31, 2012. At March 31, 2013, Tanger operated 36 consolidated outlet centers totaling approximately 10.8 million square feet in 24 states and held interests in seven unconsolidated centers totaling approximately 2.1 million square feet.
Financial performance and key metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenues | $88.7 million | $84.2 million | +5% |
| Operating income | $28.5 million | $22.6 million | +26% |
| Operating margin | 32.1% | 26.9% | +5.2 percentage points |
| Net income | $16.2 million | $8.8 million | +84% |
| Net income attributable to Tanger | $15.4 million | $8.1 million | +90% |
| Net margin | 18.3% | 9.7% | +8.6 percentage points |
| Diluted EPS | $0.16 | $0.09 | +78% |
| FFO available to common shareholders and OP noncontrolling interests | $41.0 million | $35.6 million | +15% |
| Diluted FFO per share | $0.42 | $0.36 | +17% |
| AFFO available to common shareholders and OP noncontrolling interests | $41.4 million | $36.3 million | +14% |
| Diluted AFFO per share | $0.42 | $0.37 | +14% |
Revenue growth was driven by a 4% increase in base rentals, a 16% increase in percentage rentals, a 7% increase in expense reimbursements and higher fees from unconsolidated joint ventures. Reported comparable tenant sales increased 2.3% to $380 per square foot for the rolling twelve months ended March 31, 2013. Consolidated portfolio occupancy was 98%, compared with 97% a year earlier.
Cash provided by operating activities was $35.3 million, down from $42.6 million, primarily because of unfavorable changes in accounts payable and accrued expenses. Investing cash outflow was $17.7 million, including $8.5 million of rental-property additions and $9.8 million invested in unconsolidated joint ventures. Financing cash outflow was $25.3 million. Cash declined to $2.7 million from $10.3 million at December 31, 2012.
Total debt was $1.088 billion at March 31, 2013, compared with $1.094 billion at December 31, 2012. Debt consisted principally of $548.1 million of senior unsecured notes, $259.5 million of unsecured term loans, $105.3 million of mortgages and $174.9 million drawn on unsecured lines of credit. Approximately 90% of debt was unsecured and 90% of the gross book value of real estate was unencumbered. The $520 million unsecured credit facilities had $345.1 million of available capacity before other borrowing limitations. Management stated that all debt covenants were satisfied.
Material changes versus the prior comparable period
- Operating income increased $5.9 million, reflecting higher rental revenue, expense reimbursements and lower depreciation and amortization.
- Net income increased $7.4 million, aided by a $2.0 million improvement in equity earnings from unconsolidated joint ventures, lower general and administrative expense and lower depreciation.
- Interest expense increased $0.5 million because average debt outstanding rose from approximately $1.0 billion to approximately $1.1 billion.
- Property operating expenses increased $2.0 million, primarily because of higher common-area maintenance and snow-removal costs.
- Depreciation and amortization decreased $3.2 million as certain shorter-lived assets and lease intangibles became fully depreciated during 2012.
- FFO and AFFO per share increased despite higher interest expense and capital spending.
- The Gonzales, Louisiana expansion was completed during the first and second quarters of 2013, increasing the consolidated portfolio to approximately 10.8 million square feet. The company also expanded its Cookstown, Ontario joint venture plans through a $13.9 million adjacent-land acquisition.
Outlook, risks, contingencies and unusual items
The filing does not provide quantitative earnings or FFO guidance. Management stated that it expects adequate cash to fund operating expenses, regular debt service, dividends and planned 2013 capital expenditures, based on operating cash flow, existing credit facilities and access to debt and equity markets. Management also expects to remain in compliance with existing debt covenants, while noting that access to affordable capital cannot be assured.
Management reported approximately 1.9 million square feet, or 18% of the consolidated portfolio, scheduled for renewal during 2013. During the first quarter, approximately 1.1 million square feet was renewed at an 18.0% increase in average base rent, and approximately 294,000 square feet was re-tenanted at a 32.2% increase. The filing cautions that these increases may not recur and that unsuccessful renewals or re-leasing could materially affect results.
The most significant contingency involved the Deer Park, New York joint venture. Its $246.9 million mortgage and mezzanine debt was placed in default on March 22, 2013, after the lender determined that a debt-service-coverage covenant was not met. The lenders indicated that approximately $14.2 million of principal repayment could cure the test, although the joint venture disputes that calculation. Default interest continues to accrue, and Tanger and its partners jointly and severally guarantee interest payments, but not principal. Tanger could not estimate its maximum exposure to loss. A property-management termination notice from the joint venture was also disputed by Tanger.
Approximately 39% of outstanding debt carried variable interest rates. Management estimated that a 100-basis-point increase in LIBOR would increase annual interest expense by approximately $4.2 million. The next significant consolidated debt maturity was approximately $457.3 million in 2015, including the $250 million senior notes due November 2015 and the unsecured credit facilities expiring in November 2015, subject to an extension option.
Other notable items included $179,000 of costs related to an unsuccessful acquisition, $2.5 million of share-based compensation expense, a new 2013 Outperformance Plan covering up to 315,150 performance shares, and a March 2013 sale of the Deer Park Warehouse for approximately $1.2 million with no reported joint-venture net-income impact. Management stated that there were no material changes to previously disclosed risk factors and no material litigation beyond ordinary-course matters.
Important facts for investors to verify
- Reconcile reported GAAP earnings with FFO and AFFO, and review the company-specific definitions of these non-GAAP measures.
- Monitor Deer Park’s covenant default, potential principal contribution, default-rate interest and the status of Tanger’s interest-payment guarantee.
- Assess refinancing and liquidity plans for the approximately $457.3 million of 2015 maturities and the November 2015 credit-facility expiration.
- Verify the sustainability of 98% occupancy, comparable-sales growth and the reported rent increases on renewals and re-tenanting.
- Evaluate exposure to variable-rate debt, including the estimated $4.2 million annual interest-cost sensitivity per 100 basis points of LIBOR movement.
- Review planned developments and joint-venture commitments, including National Harbor and the Cookstown expansion, for funding requirements and execution risk.
- Confirm dividend coverage, REIT distribution requirements and compliance with debt covenants, including restrictions tied to funds from operations.