Tanger Inc (SKT) 2003 Q3 法說會逐字稿

Good afternoon, and welcome to the Tanger Factory Outlet Centers third-quarter 2003 conference call.

Please note that during this conference call, some of management's comments will be forward-looking statements regarding the Company's property operations, leasing, tenant sales trends, development, acquisitions, expansion and disposition activities, as well as their comments regarding the Company's funds from operations, funds available for distribution and dividends.

These forward-looking statements are subject to numerous risks and uncertainties, and actual results could differ materially from those projected, due to factors including, but not limited to, changes in economic and real estate conditions; the availability and cost of capital; the Company's ongoing ability to lease, develop and acquire properties, as well as potential tenet bankruptcies and competition.

We direct you to the Company's filings with the Securities and Exchange Commission for a detailed discussion of the risks and uncertainties.

This call is being recorded for rebroadcast for a period of time in the future.

As such, it is important to note that management's comments include time-sensitive information that may be accurate only as of today's date, October 28, 2003.

At this time, all participants are in a listen-only mode.

Following management's prepared comments, it will be opened up for your questions.

I will now turn the call over to Stanley Tanger, the Company's Chairman and Chief Executive Officer.

Please go ahead, sir.

Thank you, Jeff, and good afternoon, everyone.

With me today are Steven Tanger, our President and Chief Operating Officer;

Frank Marchisello, our Executive Vice President and Chief Financial Officer;

Rochelle Simpson, Executive Vice President of Finance and Administration; and Virginia Summerell, our Treasurer.

We're pleased to report another quarter of growth for the Company.

Have you all received our earnings report that we sent out earlier today?

As you will note, our funds from operations increased by 15.3 percent in total, and by 3.6 percent per share, during the third quarter.

Also, 61.5 cents per share in dividends were distributed to our common shareholders, representing our 41st consecutive quarterly dividend paid since becoming a public company over ten years ago.

As a point of information, since our initial public offering in May of 2003, at 22.50 per share, we have paid $22.45 per share in dividends to our original shareholders.

Our financial performance was a result of our strong portfolio fundamentals.

In the third quarter, Tanger sales increased 3.6 percent to $3.03 per square foot, and we again achieved positive rent growth with our releasing activity.

Furthermore, we opened our seventh expansion in six years at our highly successful Sevierville, Tennessee outlet center, and we have begun construction on the third phase of our Myrtle Beach, South Carolina development.

Most of these projects should be accretive to earnings next year, and provide additional profitability for our shareholders.

As most of you know, on October 6th, we announced the signing of a definitive agreement for the acquisition of Charter Oak Partners' portfolio of nine factory outlet centers, totaling approximately 3.3 million square feet.

We plan to close this transaction before the end of the year.

In the meantime, we will maintain our focus on increasing traffic, sales, occupancies and rental rates at all of our existing Tanger centers.

Our Company, and the affiliate of Blackstone Real Estate Advisers, have formed a Limited Liability Company to acquire this portfolio as a joint venture.

We will own one-third, and Blackstone will own two-thirds of the joint venture.

A fee will be paid to us to provide operating, management, leasing and marketing services for the properties.

The purchase price of this transaction is $491 million, including the assumption of approximately $187 million of core collateralized debt with a 6.59 interest rate that matures July of 2003.

The existing mortgage represents a 38 percent loan-to-value ratio.

We expect that the transaction will be accretive to operating results from year one, and will be financed in a way that will allow us to maintain a strong balance sheet and our current financial flexibility.

The outlet centers being acquired are located at Rehoboth Beach, Delaware;

Foley, Alabama;

Myrtle Beach, South Carolina;

Park City, Utah;

Hilton Head, South Carolina;

Tilton, New Hampshire;

Lincoln City, Oregon;

Westbrook, Connecticut; and Tuscola, Illinois.

The centers have an average of 362,000 square feet.

They are currently 92 percent occupied, and generate average sales of $280 per square foot.

We are planning to increase the original return on our investment by filling existing vacancies, adding new sources of miscellaneous income, increasing the income from our existing sources and enhancing the marketing of the centers to increase traffic and sales over time.

In addition, we expect the synergies to provide additional profitability for our Company.

This portfolio is an excellent geographic fit for us, and it is in line with our strategy of creating an increased presence at high-end resort locations.

Adding the Tanger brand to these outstanding properties will take us to the next level, increasing the centers we operate from 36 centers totaling 6.3 million square feet to 42 centers with 9.6 million square feet.

This is a very exciting opportunity for our Company, and the entire Tanger team of professionals are excited about it.

The increased size of the Tanger portfolio will diversify our portfolio, build upon our management skills, solidify our position in the outlet industry and enhance the Company's shareholder value.

With that, I would like to turn the call over to Frank to take you through our financial results.

Thank you, Mr. Tanger, and good afternoon, everyone.

Please note all per-share net income and FFO calculations are on a diluted basis.

For the quarter ended September 30, 2003, net income was $3.5 million, or 33 cents per share, as compared to $2.3 million, or 22 cents per share, in 2002, representing a 52.5 percent increase in total net income and a 50 percent per share increase.

For the first nine months of 2003, net income totaled $8 million, or 72 cents per share, compared to $5.8 million, or 55 cents per share, representing a 37.1 percent increase in total net income and a 30.9 percent per-share increase.

Total funds from operations for the third quarter of 2003 increased by 15.3 percent to 11.9 million, compared to $10.3 million in 2002.

On a per-share basis, FFO increased by 3.6 percent to 87 cents per share, as compared to 84 cents per share in the third quarter of 2002.

For the first nine months of 2003, FFO totaled $33.1 million, or $2.47 per share, as compared to FFO of $28.6 million, or $2.38 per share, representing a 15.8 percent increase in total FFO and a 3.8 percent per-share increase.

As Mr. Tanger indicated, during the third quarter of 2003, we distributed 61.5 cents per share in common dividends, equating to an FFO payout ratio of 71 percent, as compared to 73 percent in the third quarter of 2002.

Our FAD payout ratio for the third quarter of 2003 was 82 percent, as compared to 78 percent for the third quarter of 2002, primarily as a result of higher second-generation tenant allowances during the third quarter of 2003, in connection with are successful re-merchandising program at our center in Barstow, California.

The occupancy in Barstow has increased from 62 percent on December 31st of 2002 to 87 percent as of September 30, 2003.

New stores include Polo/Ralph Lauren, Tommy Hilfiger, Coach Leatherwear and Nautica, to name a few.

Turning to our balance sheet, at September 30, 2003, our total market cap was approximately $825 million, with $327 million of debt outstanding, which equated to a 39.7 percent debt-to-total-market-cap ratio, as compared to 49.2 percent as of a year ago.

The improvement is primarily a result of a higher stock price, the issuance of additional common shares and the reduction of a approximately $20 million in debt outstanding since September of 2002.

As a result of lowering our outstanding out-standing debt and generating increased revenues, our interest coverage improved to 2.9 times for the third quarter of 2003, as compared to 2.6 times interest coverage in the same period last year.

Looking at our debt profile at September 30, 2003, roughly 81 percent of our debt outstanding was fixed-rate, long-term debt with a weighted average interest average of 8.55 percent and a weighted average maturity of 4.1 years.

In terms of our maturity schedule, we have no debt maturing until October of 2004, when our unsecured notes totaling 47.5 million, and bearing interest at 7.875 percent, mature.

With respect to our unsecured credit lines at September 30, 2003, we had 7.3 million outstanding on our lines, and have a total capacity of 85 million.

I will now turn the call over to Steve Tanger.

Thank you, Frank, and good afternoon, everyone.

As of September 30, our portfolio consisted of 33 factory outlet shopping centers which we own or operate, diversified across 20 states, totaling 6.3 million square feet.

After the Charter Oak acquisition closes, our portfolio will grow to 42 centers located in 25 states, totaling 9.6 million square feet.

In terms of rent growth, the average initial base rental rate for new stores opened during the third quarter was $20.32 per square foot, representing an increase of 24 percent over the rent paid by stores that closed during the same quarter.

In addition, we achieved a 1.2 percent increase in base rental revenues per square foot on a cash basis, associated with the space that was renewed and re-tenanted during the first nine months of 2003, as compared to the previous base rental revenue associated with the same space.

Our leasing activity this year continues to be very strong.

During the first nine months, we have renewed 78 percent of the 1,070,000 square feet associated with tenants whose leases were scheduled to expire in 2003, compared to 80 percent of the 935,000 square feet scheduled to expire last year.

At year end 2003, we expect about 80 percent of the square footage expiring in 2003 to be renewed.

Part of the square feet not renewed was due to tenant bankruptcies and our decision to not renew certain tenants in order to upgrade the tenant mix at a number of locations.

While our leasing activity has continued to be positive, our overall occupancy rate decreased slightly, from 96 percent as of June 30th to 95 percent as of September 30th.

This decrease was a direct result of the early closing, due to bankruptcy, of the only two Spiegel stores in our portfolio, totaling approximately 55,000 square feet.

We are talking to a number of tenants regarding these two spaces that are located in Dalton, Georgia, and San Marcos, Texas.

In fact, we have already obtained tenants to take both spaces through at least the end of the current year.

With respect to tenant productivity across our portfolio, same-space sales increased 6.3 percent for the three months ended September 30, 2003, as compared to the three months ended September 2002.

In addition, for the rolling 12 months ended September 30, 2003, sales were $303 per square foot, representing an increase of 3.6 percent compared to the 12 months ended September of last year.

These impressive increases in tenant sales were achieved despite a power outage in the Northeast and Hurricane Isabel, which negatively impacted sales in our largest outlet center in Riverhead, New York, during the quarter.

The continued strong tenant have contributed to our total occupancy cost of tenants, remaining at an industry low of 7.2 percent of tenant sales during the 12-month period ending September 30, 2003.

Turning to our investment activities, during the third quarter, we opened an additional 35,000 square foot, 100 percent leased expansion at our outlet center in Sevierville, Tennessee.

The estimated cost of the expansion was $4 million, with an expected return on our investment in excess of 13 percent.

Including this latest expansion, the Sevierville center now totals approximately 419,000 square feet.

The Sevierville center had 122,000 square feet when we originally purchased the property in 1997.

In addition, we are currently underway with a 79,000 square foot third expansion in our outlet center in Myrtle Beach, South Carolina.

The estimated cost of the expansion is $9.7 million, and the Company currently expects to complete the expansion with stores commencing operations during the summer of 2004.

The center, which has been developed and is managed and leased by us, is owned through a joint venture of which we own a 50 percent interest.

Accordingly, our capital investment for the third phase will be approximately $1.7 million, with an expected return on our investment in excess of 20 percent.

Upon completion of the expansion, the Myrtle Beach center will total approximately 403,000 square feet.

After the Charter Oak acquisition closes, we will own the only two outlet centers in the Myrtle Beach market, totaling over 834,000 square feet.

Looking ahead, we're always seeking new development and expansion opportunities.

Consistent with our long-term strategy not to build on speculation, we believe that strong business fundamentals must be in place for us to consider future new developments and expansions.

In terms of new development opportunities, we have started the early development and leasing of a site located on Interstate 79, south of Pittsburgh, Pennsylvania, and a site located in Deer Park, New York, on Commack Road, about five miles south of exit 52 on the Long Island Expressway.

We currently expect the Pittsburgh site to be 420,000 square feet at total build-out, with the initial phase scheduled for delivery in early 2005, and the Deer Park site to be 790,000 square feet at total build-out, with an initial phase scheduled for delivery in the summer of 2006.

We also continue to explore other potential acquisition opportunities, as well as opportunities to add revenue without incurring any significant outlay of capital or additional expenses, by performing leasing and management services for third-party owners.

As mentioned in previous calls, John Hancock Life Insurance Company retained us to manage their property located in Duro Beach, Florida.

We are pleased to report that John Hancock was successful in closing on the sale of this property during the third quarter.

The new owners have entered into an agreement with our Company to continue the management and leasing of this property.

With respect to FFO guidance, we believe our current FFO for the fourth quarter of 2003 will range between 97 and 99 cents.

Based on the actual nine-month FFO of $2.47, plus the anticipated fourth quarter, we believe our FFO for the current year will range between $3.44 and $3.46.

We expect to provide guidance for next year after the closing of the Charter Oak portfolio acquisition.

With that, we will be happy to answer any questions that you may have

(OPERATOR INSTRUCTIONS).

Fred Taylor, Fleet Securities.

Good afternoon.

I guess for anyone, but maybe Frank, I continue to be curious on the economics of the joint venture with Blackstone, and was wondering if you could provide some guidance on the likely full-year revenue, the management fee that Tanger would be receiving and the thought of the joint venture paying dividends to the shareholders.

Fred, as we mentioned in our conference call a couple of weeks ago, when we announced the transaction, we would be delighted, and we certainly will disclose the terms of the joint venture agreement with Blackstone and the full terms of the acquisition upon closing.

And we are not going to be able to provide any guidance until the closing, and at that time, we will have full disclosure of everything.

Any more guidance on the financing, or is that the same boat?

I wish I could give you more guidance, but at this time, we're not going to be able to.

Okay.

Then I'm changing the topic.

On Deer Park -- I missed a little bit of that.

That.

Is that a brand new development, or are you taking over a site?

I apologize;

I just missed it.

I hear Deer Park off the LIE.

Deer Park will be a new development that we plan to deliver in a couple of years.

We just closed on the acquisition of the property, which is essentially a sale-leaseback for a couple of years, while we finish getting all of our permits.

Jay Habermann, CSFB.

Good afternoon.

Steve, a question for you -- just wondering if you have a better sense of the timing for the Charter Oak portfolio.

We expect the acquisition to close before the end of the year.

That's as much as you can give?

I wish I could give you a more definitive date.

We just don't know it.

Second question -- you lowered the high end of guidance a bit.

Is that simply due to a lower occupancy assumption?

I know last year it was a difficult comp.

What we did is we just kind of fine-tuned the fourth quarter, Jay.

Consensus total year numbers were not adding up to the four quarters, if you will, so we provided some more specific guidance to get things to where the quarters would add up properly.

So it's really not a change in the range, as much as it is just narrowing the range from I think it was like 4 cents range to down to the 2 to 3 cent range.

But you're expecting in Q4, you could actually have slightly negative growth?

Last year, Q4 had about 3 or 4 cents' worth of out parcel sales in it.

This year, we're not anticipating out parcel sales, so that's most of the difference that you are seeing there.

Now, with Barstow 87 percent leased, is that asset for sale?

We do not have Barstow on the market at this time.

And just last question.

What is the total anticipated cost for the development pipeline?

I'm taking it at about 150 or 160 million.

Between the two properties, Deer Park and Pittsburgh?

Yes.

It's very early in the development stages right now, and I would be uncomfortable giving you guidance.

Give us a couple of months, and we will have a more definitive development guidance for you.

Harvey Shore , East-West Investments.

I was wondering if you could give us a little bit more information regarding the Pittsburgh development.

Is that a new center, or one that you're taking over?

It will be a new construction on Interstate 79 south of Pittsburgh.

79 south of Pittsburgh?

That's right.

Also, on your Barstow property, could you repeat again what you said the square footage that was still un-leased at this point?

I think we are 87 percent occupied, so that would be 13 percent vacant.

I see.

Okay, thank you.

Barb Houghland (ph), Green Street advisers.

Good afternoon.

I was wondering if you could provide an update on the four properties that you are marketing for sale?

What's the likely timing of those assets you're selling?

We have one property under contract that we hope to close before the end of the year.

The other three properties are still in the market, and we have no further guidance on that.

I think Greg has a follow-up.

This is Greg.

Hi, Steve.

With regard to Pittsburgh, I know that there was kind of a bit of a duel going on there with another proposed outlet development.

Has that fallen by the wayside, or is that still something that you are competing with, at this point?

I believe the one you might be referring to is the one 30 or 35 miles away in Wheeling, West Virginia?

Right.

I think you would have to speak to the people who were developing that.

But our understanding from the market is that it's currently on hold.

(OPERATOR INSTRUCTIONS).

David Fick, Legg Mason.

I'd like to follow up on the Pittsburgh question.

How did this project play out against the mills project under construction here?

This is on the complete other side of town from Pittsburgh.

We are due south.

I believe that the mill site is northeast.

Ours is -- I think you would have to assume that the mills property's going to be built and ours is going to be built.

They are different types of co-tenancies.

I think it's a little early to say how it's going to play out.

You are fairly close in on this project.

Are there any concerns about other malls in the area, in terms of sensitivity?

We are about 12 to 13 miles away from the nearest mall, and right now, we have not received any indications from significant tenants about sensitivity.

The Deer Park project -- when you first started talking about that, there was some discussion of potentially using some of it for non-outlet type uses.

Is this going to be a pure outlet center now?

The site is large.

I think you could assume that there will be at least one, if not more box and non-competing types of retail, such as consumer electronics.

We are also anticipating a multiplex theater.

The site has directly adjacent to, and will be part of the site plan, an existing, open-for-business Home Depot, Stop N' Shop and Kohls, already on site.

Can you talk a little bit about the financial structure?

You mentioned that it's sort of a land-lease structure.

What does that been?

What is your initial investment?

When are you really pregnant on this deal?

The deal is a tri-party joint venture.

We own one-third.

We have closed on the acquisition of the property with a -- it's, in essence, a sale-leaseback for two years.

And our return on that investment is around 11 percent.

I want to just split briefly to the outlet business.

You had extremely strong lease spreads this quarter, but your leasing velocity was a lot lower than we have seen.

So I am wondering if that is sustainable spread going forward, or what happened in terms of the amount of leasing compared to prior quarters?

Just to get -- you did 97,000 feet this quarter, and you had signed 676,000 and 307,000 in the first two quarters.

Is that just a seasonal thing?

Oh, I think if you're comparing it to the last two quarters, I think that's probably true.

We executed a large number of renewals in the first two quarters, and as historically happens, the third and fourth quarters' renewals tend to slow down.

Okay.

But this quarter, you had very, very -- what, 24 percent, I think, was the average roll-up on leases.

That's really what I'm trying to get out.

Is that a spread that is going to be normalized?

The 24 percent is the difference between leases that terminated and new leases that were signed.

Exactly.

And that, I think, was an all-time new high for you, in terms of spread.

It was a pretty good quarter.

I'm just trying to get to -- with the numbers being smaller in terms of square footage, and that spread being wider, where are we headed with that?

I think a better thing to do would be to look at it on a year-to-date basis.

Unfortunately, I don't have that in front of me, David.

But we'll certainly be sure to put that in at year end and give you a good feel for how we did through the entire year, because you are right; looking at one quarter, if you don't have a lot of leases, it could skew it one way or the other.

Last question.

Vero Beach -- do you have a long-term management contract there?

It's a one-year contract, and hopefully it will be renewed.

Are there any type of incentive terms, or is it a flat percentage of collections coming to you?

It's a fee to manage, a fee to lease, a fee to market.

It's basically a fixed fee.

Great.

Very nice quarter.

Thanks.

Steve Sakwa, Merrill Lynch.

I just wanted to follow up on Deer Park.

Steve, how far is that asset from Riverhead?

Deer Park is 35 miles west of Riverhead and 5 miles south of Long Island Expressway.

Riverhead, of course, is exit 73 on the Long Island Expressway, and Deer Park is about 35 miles from Manhattan.

And in terms of just the tenant mix, is it going to be a similar type project?

Is it going to be different?

Do you sort of worry at all about any type of cannibalization?

I don't think the tenants are concerned about cannibalization.

I think the mix -- our plan is to mix the center in a similar upscale co-tenancy, as we have in Riverhead, New York.

Long Island, certainly, if it can support probably 10 regional malls, can certainly support two outlet centers.

And have you started the leasing process for this, or when will you start the leasing process?

We've just started talking to some major tenants.

Actually, we just started about two weeks ago at our convention in Orlando.

It's very, very early in the process, but the initial indications are extremely strong.

Craig Schmidt, Merrill Lynch.

Sorry to tag team you.

I just wanted to know the square footage for the average initial base rental rates, and the square footage for the stores that closed during the same quarter.

Craig, I may have to get back to you on those numbers.

I don't have that schedule in front of me for the number of square feet that make up those two.

I'm showing no further questions at this time, so I'll turn the call back over to Stanley Tanger to conclude.

Thank you for participating today, and especially for your interest in our Company.

We have filed a Form 8-K with the Securities and Exchange Commission, which includes supplemental information for the third quarter of 2003.

This and all other public filings are available at our Website located at www.TangerOutlets.com.

In addition, Steve, Frank, Rochelle, Virginia and I are always available to answer any of your questions.

Thank you very much, and have a great day.

Bye, now.

Today's conference call will be available for replay beginning at 6 PM Eastern Time today through midnight, Friday, October 31st, 2003.

The conference ID number for the replay is 336-6303.

The number to dial for the replay is 1-800-642-1687 or 706-645-9291.

This concludes today's conference call.

You may now disconnect.