Tanger Inc (SKT) 0 Q0 法說會逐字稿

Good morning, and welcome to the Tanger Factory Outlet Center's second quarter 2004 conference call.

Please note that during this conference call some of management's comments may be forward-looking statements regarding the company's property operations, leasing, tenant sales trend, development, acquisition, expansion and disposition activity, as well as 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 bankruptcies and competition.

We direct you to the company's filing 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, Wednesday, July 28th, 2004.

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

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

I will now turn the call over to the Stanley Tanger, the company's chairman and CEO.

Please go ahead, sir.

Thank you, and good morning everyone.

With me today are Steven Tanger, president and COO; and Frank Marchisello, our executive VP and CFO.

We are very pleased to report that our second quarter 2004 results exceeded consensus estimates.

The sale of three land parcels during the quarter added 6 cents a share for our funds from operations, compared to no land parcel sales in the prior year.

The sale of land parcels is a component of our strategic plan, but they are often unpredictable in their occurrence.

We also saw two non-core assets during the quarter.

We generated an additional $2.1 million gain on the sale of these properties, which is included in our net income but is excluded from our funds from operations.

Our tenant sales continued to be strong during the second quarter, and our leasing activity remains robust.

Before I turn the call over to Frank and Steve, many investors and analysts have asked our thoughts on the recent announcement that Simon Property Group has signed a definitive agreement to acquire Chelsea Property Group.

We believe that this transaction has focused the attention of sophisticated investors on the outlet industry as a viable long-term channel of distribution that has brought to light what we have said for many, many years regarding the relatively high-cap rates used to value our company and our assets compared to other retail rates.

In fact, recently one well-respected analyst reduced the cap rate used to value our company from 9.75 percent to 9 percent, increasing their estimated net asset value almost 7 percent to $43.63.

Against this closing price of $38.60, Tanger is currently selling at a 11.5 percent discount to that net asset value estimate.

Frank will now take you through our financial results.

Steve will follow with a summary of our operating performance and future developments.

And then we'll have time for questions as you may have.

Thank you, Frank.

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

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

For the quarter ended June 30th, 2004, income available to common shareholders was 28 cents per share, as compared to 20 cents per share for the second quarter of 2003.

For the six months ended June 30, 2004, net income available to common shareholders was 35 cents per share compared to 38 cents per share for the first six months of 2003.

Comparative net income amounts were impacted by the allocation of income to our consolidated joint venture partners in 2004, as well as a $2.1 million gain on the sale of two non-core properties during the second quarter of this year.

For the quarter ended June 30, 2004, funds from operations was 94 cents per share as compared to 82 cents per share for the second quarter of 2003, representing a 14.6 percent per share increase.

For the six months ended June 30, 2004, FFO was $1.78 per share as compared to $1.60 per share for the six months ended June of 2003, representing an 11.3 percent per share increase.

Our FFO for the three months and six months ended June 30, 2004 included $1.2 million in gains on the sale of land parcels, which represented 6 cents per share, compared to no such gains in the prior year period.

Excluding these gains, FFO for the second quarter and six months ended June 30th, 2004, would have been 88 cents and $1.72 per share, respectively, resulting in a 7.3 percent increase in FFO per share for the second quarter, and a 7.5 percent increase in FFO per share for the six months.

Our FFO pay-out ratio for the second quarter of 2004 was 66 cents, as compared to 75 cents in 2003; and or FAD pay-out ratio was 92 percent, as compared to 87 percent in 2003.

As we stated in our first quarter 2004 conference call, we expect our FAD pay-out ratio will average above our historical rate of approximately 85 percent for the next few quarters as we work toward increasing occupancies, particularly within the Charter Oak portfolio, and as we complete a number of budgeted capital improvement projects as well.

For example, this year we completed the total renovation of our center in Sanibel, Florida, and work has commenced on the renovation of our center in West Branch, Michigan.

We currently expect our FFO pay-out ratio to be between 65 and 70 percent, and our FAD pay-out ratio to be between 90 and 95 percent for the year.

On a consolidated basis, our debt-to-total market capitalization at the end of the quarter was approximately 43.5 percent.

Our total market capitalization was approximately $1.2 billion, representing a 49.6 percent increase in total market cap from a year ago.

This increase is a result of the issuance of over 3.4 million new common shares during the last 12 months, and the consolidation of the Charter Oak assets onto our balance sheet.

We also saw continued improvement in our interest coverage, which was 3.46 times for the second quarter of 2004 as compared to 2.54 times interest coverage in the same period last year.

And our G&A cost as a percentage of total revenues improved from 8.5 percent in the second quarter of 2003 down to 6.6 percent in the second quarter of this year.

We're comfortable with our exposure to an increase in interest rates.

Variable rate debt accounted for only 10.6 percent or $53.5 million of our debt outstanding, and the remaining 89.4 percent of our debt was at fixed rates.

In addition, the only significant debt maturity we have over the next two years will occurred in October of this year when our unsecured notes totaling $47.5 million, and bearing interest at 7.875 percent mature.

Our current financial flexibility provides us with a number of refinancing options.

We're currently in the process of determining the best and most efficient way to refinance these notes at their maturity, including simply repaying them with amounts available under our unsecured lines of credit.

We have obtained commitments to extend the maturity dates on all of our lines for an additional two years until June 2007, and we have obtained a commitment for an additional $25 million unsecured line of credit from Citicorp North America, Inc., a subsidiary of Citigroup, that will expand our total line capacity from $100 million to $125 million.

We currently have no amounts outstanding on our line for credit.

We remain committed to our long-term strategic goal of earning an investment grade rating.

We are pleased to report that on April 8th, 2004, Moody's Investor Service affirmed our BA1 senior unsecured debt rating and concurrently raised our rating outlook to positive from stable.

This rating outlook change was a direct result of our ability to increase the size and market leadership of our outlets in our portfolio, reduce single asset concentration and improve our coverage ratios and apply prudent balance sheet management.

I'll now turn the call over to Steve Tanger.

Steve?

Thank you, Frank, and good morning, everyone.

As of June 30th, our portfolio consisted of 38 factory outlet shopping centers which we own and/or operate, diversified across 23 states, totally 9.3 million square feet.

From a leasing perspective, I am pleased to report that our positive rent spreads continued into the second quarter of 2004.

Through June 30th, 2004, we have already renewed over 58 percent of the 1.8 million square feet of leases scheduled to come up for renewal during the year, at an average increase in base rent on a cash basis of 7.5 percent.

We have also retenanted approximately 282,000 square feet, at an average increase in base rent on a cash basis of 2.1 percent over the rent that was being paid by the previous tenant prior to their vacating the space.

Some of the space retenanted during the second quarter of 2004 was retenanted with higher volume magna-tenants that tend to pay rental rates lower than other tenants.

Our overall occupancy rate at the end of the second quarter was 95 percent, up 1 percent compared to the first quarter 2004, but down 1 percent compared to the second quarter of 2003.

This 1 percent year-to-year decrease is due to the consolidation of the Charter Oak portfolio, which as of June 30, 2004, had an average occupancy rate of 94 percent, compared to the remaining portfolio average of 96 percent.

I think it is worth noting that the occupancy in the Charter Oak portfolio has actually increased 1 percent during the second quarter of 2004 from 93 to 94 percent.

I know that many of you are interested in hearing how the integration of the Charter Oak portfolio of nine outlet centers has been going.

So let me give you a few statistics on what we have accomplished in the six months since the acquisition closed.

The consumer reaction to the new Tanger marketing programs for these nine centers continues to be positive.

Same-space sales per square foot at these properties average $294 per square foot for the rolling 12 months ended June 30, 2004, an increase of 1.7 percent over the prior 12 months.

We have signed renewals for 55.5 percent of the 565,000 square feet of space coming up for renewal during 2004, and have achieved a 6.4 percent increase in base rental rates on these renewals.

There is a lot of interest from our tenants to rent space in these centers, and we expect the overall occupancy rate at these centers will continue to increase over time.

We are focused on filling vacant space across our entire portfolio with high-quality brand-name tenants.

And consistent with our experience over the past 23 years, we expect to see our overall occupancy rate increase by the end of the year.

During the second quarter we welcomed 10 new tenants to the Tanger portfolio.

New tenants opening stores included Tahari; d.e.m.o., a new division of Pacific Sunwear; and Justice, a new division of Limited Too.

We have leases executed with additional new tenants expected to open in the third quarter, such as Calvin Klein and Borders Books.

As a follow-up to the Phillips Van Heusen announcement on December 24th, 2003, that they intended to close 200 stores, we have now concluded most of our 2004 renewals, and can report that five of the nine stores that were originally slated to close in the combined Tanger and Charter Oak portfolio will remain open.

The other four stores, totaling 12,800 square feet, will close at the original expiration of their lease, on December 31, 2004.

In early 2004, Phillips Van Heusen announced a strategy to open Calvin Klein outlet stores.

We are pleased to report that we anticipate opening 10 new Calvin Klein outlet stores, totaling 57,000 square feet, before the end of the year.

With respect to tenant productivity across our consolidated portfolio, same-space sales increased 3 percent for the three months ended June 30, 2004, as compared to the three months ended June 30, 2003.

Sales increased 5 percent for the rolling 12 months ended June 30, 2004, to $309 per square foot.

Sales and traffic in the second quarter were strong across the entire portfolio, and appear to be continuing into July.

We have already seen positive results in the portfolio by continuing our plan to fill some of the existing vacancies, renew leases at increased rental rates, add new sources of miscellaneous income, and enhance the marketing of the centers to increase traffic and sales.

Continuing the execution of this strategic plan should provide additional profitability for our company over time.

From a development standpoint, we have completed the construction of a 79,000-square-foot third phase at our center located on Highway 17 North in Myrtle Beach, South Carolina.

New leases have been executed with Banana Republic, Gap, Calvin Klein, Ann Taylor, Puma, Guess, Jones New York and several others.

Stores started to open around Memorial Day, and will continue to open during the summer.

Including the recently purchased Charter Oak property located in Myrtle Beach, we now control the only two outlet centers in this high volume tourist resort market, which total approximately 830,000 square feet.

We have also started the early development and leasing of four new Tanger Outlet Centers.

We will own 100 percent of a site located at Exit 41 on Interstate 79 south of Pittsburgh, Pennsylvania.

We currently expect this center to be 420,000 square feet, at total build out with the initial phase scheduled for delivery in early 2006.

The total cost of developing the center is estimated to be approximately $66 million, and we anticipate at least a 12 percent return on cost on this project.

We own a site located in Deer Park, New York, on Comack Road about five miles south of Exit 52 on the Long Island Expressway.

This center is planned to be 790,000 square feet at total build out, with the initial phase scheduled for delivery in late 2006 or early 2007.

This site is owned in a joint venture in which we have a one-third ownership interest.

The total cost of developing the center is estimated to be $134 million.

Assuming leverage of about 65 percent loan to value, our one-third share of the equity would be about $15 to 16 million.

We anticipate at least a 12 percent return on cost, and a return on equity above 20 percent.

We also recently announced a new site in Charleston, South Carolina, located at the southwest quadrant of Interstate 26 and Interstate 526.

We currently expect this center to be 370,000 square feet and to be delivered in 2006.

We plan to own 100 percent of the Charleston site.

The total cost of developing this center is estimated to be about $45 million, and we anticipate at least a 12 percent return on cost on this project.

Our fourth site is located in Wisconsin Dells, Wisconsin, located at Exit 92 on Interstate 94 and Route 12.

We currently expect this center to be 300,000 square feet, and to be delivered in 2006.

We anticipate that the land owner of this site will enter into a joint venture partnership with us.

The total cost of developing the center is estimated to be approximately $43 million, assuming leverage of about 65 percent loan to value.

Our 50 percent share of the equity would be approximately $7.5 million.

We expect at least a 12 percent return on cost and a return on equity above 20 percent.

We also continue to explore other potential acquisition and disposition opportunities.

However, we have not projected any additional transactions to close in our earnings guidance for the remainder of 2004.

With respect to FOO guidance, based on current market conditions the strength and stability of our core portfolio, we currently believe our net income available to common shareholders for 2004 will be between 70 cents and 74 cents per share; and our FFO will be between $3.76 and $3.80 per share, representing an increase in FFO over the prior year of approximately 9 to 10 percent.

In closing, I believe that our core business fundamentals remain solid and that we are properly positioned for a successful second half of 2004.

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

The question-and-answer session will now begin.

If you are using a speaker phone, please pick up your handset before pressing any numbers.

Should you have a question, please press "*" then the number "1" on your telephone keypad.

If you would like to withdraw your question, press the "#" key.

Your questions will be taken in the order they are received.

Please stand by for your first question.

Your first question comes from David Fick, Legg Mason.

Good morning.

I was wondering if you could provide some further detail on a couple of sales metrics and NLI metrics.

What is your same-space NLI, I'm sorry, same-store NLI increase this quarter?

David, as you know, we have consistently only reported same-space information.

We have not reported same-store.

You won't do that for NLI either?

I know that that's an issue with sales for you, but why is that?

I mean, I know you have the information.

Every mall company in the country provides both same-store and same-space sales and NLI increases.

Well, we'll take another look at it, David, but I think most of the strip center people don't, and in our industry I know our major competitor did not.

But we're happy to review it again.

David, this is Frank.

For what it's worth, I will refer you to page 13 of our supplement, where we do do a weighted average gross leasable area comparison which kind of gives an idea of how the portfolio is performing as a whole, and you can compare operating income from one quarter to the next.

Okay.

All right, can you tell us what your out-parcel sales assumptions are in your remaining '04 guidance?

There are none.

Okay, and does that mean in reality you actually don't expect to do any, or if you had any that there would be some upside?

If we had any, there would possibly be some upside, but because they occur rather quickly when they do occur, it's hard to know exactly when they're going to close.

Okay.

Then, lastly, you've got a fair amount of the Charter Oak lease rollover in 2005.

Can you just briefly address what you're doing about that bubble and where you think that's going to come out?

Well, David, we've had great success, as I've mentioned, in the renewals for the Charter Oak portfolio so far this year at pretty good increases.

I see no reason for that to change.

We are in discussions with our major tenants on portfolio renewals, and we are extremely optimistic that our progress with rolling over the Charter Oak leases when they come up for renewal will continue.

Okay, great, thanks a lot.

The next question comes from Craig Schmidt, Merrill Lynch.

Good morning.

I know you spent some time talking about occupancy.

Do you have a target for occupancy by the end of '04?

Well, I think consistent with our previous years, our target would be in the range of 96 to 97 percent, for the combined portfolio at the end of the year.

Right.

Okay.

And then, specifically, Commerce I and Commerce II, it looks like you had some pretty good improvement this quarter in commerce two.

What's going on with Commerce I, and what are some of your plants to improve the occupancy there?

Commerce I is the original one that was built about 15 years ago.

About five years ago a super Wal-Mart was installed next door, and we are in the process of remerchandising this center.

We totally renovated the center about three, four years ago at a cost in excess of $2 million.

We are in discussions right now with a sit-down family restaurant, a multi-plex theater, a major brand-name linens company, a woman's apparel company and a junior department store.

So none of those leases, I want to be clear, are signed yet, but we are in active negotiations, and we hope before the end of the year to be able to announce specifics on our remerchandising strategy.

I mean, it sounds like it's going to be a more traditional community center, not an outlet center?

It may well be converted into that, which of course is appropriate next to a super Wal-Mart.

Would you sell it at that time once you've completed the conversion, or would you keep it in your portfolio?

We haven't gotten to that point yet.

Okay, thanks a lot.

Once again I would like to remind everyone in order to ask a question simply press "*" "1" on your telephone keypad.

Your next question comes from Eric Rothman, Wachovia Securities.

Good morning, gentlemen.

I just wanted to ask about pre-leasing at your development projects.

Where does that stand, in particular I guess on Deer Park, which if I recall I thought that was supposed to have been delivered initially the thinking was more '06, and it sounds as though it's looking more to '07.

Is that accurate?

We are talking right now '06, late '06, early '07 on Deer Park.

The leasing really is premature right now.

We are in the process of finalizing permits.

We're having discussions with anchor tenants.

We're not prepared to announce anything yet.

The reception in the tenant community has been very positive.

But right now it's a little bit too far out for our tenants to sign leases for '06, '07 delivery.

Typically I guess in terms of your pre-leasing or your development, at what point do you put a shovel in the dirt with pre-leasing?

In 25 years of doing business, Eric, we've never built a square foot on speculation.

We will not break ground and close on the property unless we have at least 50 percent of the leases actually signed, and at that point we will break ground on a phase.

And our experience has been during the construction period, which is anywhere from 8 to 12 months, depending on the site work necessary, that the balance of the leases come in.

Sure, sure.

In the case of South Carolina and then Wisconsin, Dallas, both of those are a little bit smaller.

Do you expect that you'll phase those as well, or are they going to kind of all be one phase?

We're studying that right now.

We just announced both of those sites at the ICSC Convention in early June, so it's only been about six, seven weeks.

The reaction to those has been strong.

We're conducting site visits right now with perspective tenants.

I suspect that both of those sites will be delivered before Pittsburgh and Deer Park, because there's very little development issues.

The property is ready to go, and we're having discussions, meaningful discussions, with our tenants right now.

Great.

Thank you very much.

Your next questions comes from Ed Turville, REMS Group.

Good morning.

I just have a question about the development.

Do you have an idea roughly of the amount of development sites that are underway in the United States by all factors in your industry?

Well, I think the Chelsea Property Group has announced four or five sites for the next two or three years.

We've announced four sites to be delivered in the next two or three years.

There may be one or two others, independent developers that may or may not be delivered.

So you would estimate that there's less than 20 new properties being developed in the United States?

In the next two or three years, I think that's probably a fair statement.

Okay, and then related to this, this group of development is all coming on in a fairly narrow space of time.

Would we expect then that it would be several years and then the same type of situation occurs again, or is this highly unusual that you have this number of developments occurring within, when they're completed, you mentioned 2006 for every one of them, I believe, and nothing in between.

Well, I believe some will probably be delivered in the early part of 2007, but we're seeing increasing tenant demand for space right now.

Our portfolio, as I mentioned, for 22 years we've never ended the year less than 95 percent occupied.

There's demand for space.

As long as our tenants will sign leases, and we can find high-volume locations where we can produce shopping centers, we will continue to build.

Again, we don't build on speculation.

No, I understand.

I was just wondering if this process occurs and that a group of developments, such as this, it's several years between the time which your company brings on a group of developments rather than having one or two a year.

You can draw whatever conclusion you might feel appropriate.

The base on which these new developments are being built, there's probably only 150 to 175 outlet centers today that are viable.

So I think to deliver two or three a year in the next two or three years is reasonable growth.

We are not looking at an over-built situation, and as long as there's rational growth, where we can open the properties at a good return on investment for our shareholders, and with high volume for our customers, the manufacturers and retailers who tenant are centers will all be happy.

Thank you.

Next question comes from John McDermott Post and Courier.

Good morning.

I was calling specifically about the Charleston site.

We're the daily newspaper here in Charleston.

I think I had a call into the company yesterday.

I never heard back.

But I was wondering, one, what attracts you to this city.

And, two, that site you're going on, I know it was previously positioned as a factory mall center and it was deemed at that time, that's about five or six years ago, it was too close to the two regional malls here.

I was wondering, one, what attracted you here.

And, two, do you see the proximity to the two malls as a problem for tenants or retailers?

Well, we happen to love Charleston.

As you well know, it's got a permanent population in the trade area of about half a million people, and attracts about 5 million tourists a year.

This site is at the confluence of two high traffic locations, Interstate 26 and Interstate 526.

There's a major development already in place with the road system, utilities.

The land is at grade, and there's a super Wal-Mart and a Sam's Club currently under construction.

With regard to what was proposed five years ago and what may have been the reaction from the tenant five years ago is really not germane today.

We're having discussions with very exciting tenants who have expressed an interest in coming to Charleston.

As I mentioned previously, we own the only two outlet centers in Myrtle Beach, South Carolina, with a very high volume tourist market two hours to the north by car.

And we own the only outlet centers in Hilton Head, two hours south by car.

So from our strategic plan, we feel this is a logical extension of our dominance on the South Carolina coast.

I noticed in your 10-K that you said you don't like to build within 10 miles of department stores.

Is this an exception just because of the site itself, because it's such a high-profile property?

The tenants will decide the sensitivity issues that are appropriate for their companies.

I think in the last five years those sensitivity issues may have changed, depending upon the particular manufacturer.

Great.

Thank you.

At this time I'm showing no further questions.

I will now turn the call back over to Mr. Tanger to conclude.

Thank you for participating today and for your interest in our company.

We have filed a Form 8-K with the Securities and Exchange Commission, which includes both our earnings release and substantive information for the second quarter of 2004.

This and all other public filings are available at our website.

And Steve, Frank and I are always available to answer any of your questions that you may have.

Thank you and have a good day.

Bye, now.

Thank you for participating in today's Tanger Factory Outlet conference call.

This call will be available for replay beginning at 1:00 p.m.

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