Tanger Inc (SKT) 2005 Q1 法說會逐字稿

Good morning and welcome to Tanger Factory Outlet Centers First Quarter 2005 Conference Call.

Please note that during the conference call some of management’s comments may be forward-looking statements regarding the company’s property operations, leasing, tenant sales trends, development, acquisition, expensing and disposition activities as well as their comments regarding the company’s funds from operation, funds available for distribution and dividend.

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 tenant bankruptcies and competition.

We direct you to the company’s filings with the Securities and Exchange Commission for a detail discussion of the risks and uncertainties.

This call is being recorded for rebroadcast for 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, April 27, 2005.

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’ll now turn the call over to Stanley Tanger, the company’s Chairman and Chief Executive Officer.

Please go ahead Sir.

Thank you and good morning everyone.

With me today are Steve Tanger, President and Chief Operating Officer and Frank Marchisello, Executive Vice President and Chief Financial Officer.

Frank will take you through our financial results and Steve will follow with a summary of our operating performance and future developments and they will have time for any questions you may have.

We are pleased to announce on our year-end earnings conference call on March.

That on February 28 our board of directors approved a 3.2 % increase of the annual dividend on our common shares from $25 per share to a $29 per share.

The increase is effective for the quarterly cash dividend payable on May 16, 2005, totals of record on April 29 2005.

This March, the twelfth consecutive year, we have increased our dividend since becoming a public company, May 1993.

I will now turn the call over to Frank Marchisello.

Thank you, Mr. Tanger and good morning everyone.

Please note our first share net income in FFO calculations are on a diluted basis.

During the first quarter 2005, Tanger recognized a previously enough lock on the sale of real estate associated with the sale of our outlet center in Seymour, Indiana.

As a result, we have reported a net loss for the first quarter of 2005, of $2.9 million for 11 cents per share as compared to net income of $1 million for 4 cents per share in the first quarter of last year.

Total funds from operations for the quarter increased by 4.6% to $14.5 million compared to 13.9 million in 2004.

On a per share basis, FFO for the quarter was in line with first call consensus estimates, increasing by 2.4% to 43 cents per share as compared to 42 cents per share in 2004.

Our FFO pay-out ratio for the first quarter of 2005 and 2004 was 73%.

Our FAD pay-out ratio for the first quarter of 2005 was a 116%, as compared to 96% in 2004. 116% FAD pay-out ratio in the first quarter relates to $4.5 million intended allowances paid during the quarter.

Many of these allowances relate to our continued work on improving occupancy and the tenant next within the charter of portfolio as well as adding key magnet tenants to many of our other centers.

Steve will be elaborating on this in more detail later in the call.

For the year we expect our FAD payout ratio will be in line with our historical rate of approximately 85%.

We plan to continue to invest in our assets to increase occupancies and to upgrade the tenant mix, particularly within the Charter Oak portfolio.

On a consolidated basis, the capital utilization at the end of the quarter was approximately 39.5% and our total market capitalization was approximately $1.2 billion.

We also saw continued improvement in our interest coverage which was 3.5 times for the first quarter of 2005 compared to 3.2 times interest coverage in the same period last year.

As of March 31st, 2005, our variable rate debt accounted for 18% or 87 million of our debt outstanding, and the remaining 82% or 397.4 million of our debt was at fixed rates.

During 2005, we have two secured loans maturing with New York Life Insurance Company, totaling $20.9 million and paying an average interest rate of 9.5%.

On April 10, 2005 we repaid at maturity one of these loans with a base amount of 13.7 million and an interest rate of 9.77%.

The second loan with a base amount of 7.2 million and an interest rate of 9.125% matures on September 10th, 2005, and we expect to repay this loan with amounts available under our own secured lines of credit.

With respect to our unsecured credit lines we currently have 43.5 million outstanding on our lines after the repayment of the 13.8 million loan with New York Life.

We have a total capacity on our lines of credit of a $125 million.

I will now turn the call over to Steve Tanger.

Thank you, Frank and good morning everyone.

As of March 31st, our portfolio consisted of 33 factory outlet centers, which we own or operate diversified across twenty two states totaling $8.7 million square feet.

I am pleased to report that the positive red spreads we achieved last year has continue into the first quarter of 2005.

Through March 31, 2005 we had executed own process over 47% of the 1,821,000 square feet of leases scheduled to come up from the roll during the year with an average increase on the executed renewals of 8.6% on a cash basis.

This compares favorably with last year and as of the same time we had executed our process approximately 54% of the 1, 790,000 square feet of leases, expiring with an average increase on the executed renewals of 7.9% on a cash basis.

We have also rented over 200,000 square feet, an average increase in basement on a cash basis of 3.9% over the rentals been paid by the previous tenant prior to their vacating the space.

Same center and our net operating income increased 1.1% for the first quarter of 2005 compared to the same quarter last year and our overall occupancy rate at the end of the first quarter was 95% which was up 1% compared to the first quarter of 2004.

As Frank mentioned, we invested approximately $4.5 million during the first quarter of 2005 and second generation tenant allowance to continue our re-leasing efforts to upgrade our tenant mix and to increase occupancy at a number of our centers.

For example in commerce Georgia we have recently converted a 3500 square foot Polo Jeans store to a larger 12,150 square foot Polo Ralph Lauren store, filling three previous basin spaces in the process.

Occupancy has improved at this center from 92% at the end of the first quarter in 2004 to 96% to date.

In addition, we have continued the repositioning of our original center in commerce Georgia and have recently signed all these goodies to take 20,100 square feet of currently vacant space, upon the opening of this store, as the 17,400 square foot multi-plex movie theatre currently under construction and expected to open on the model date.

The original commerce center's occupancy will increase from 76% to 88%.

In fully [inaudible] we are relocating an existing GAAP store into a 11,960 square feet of currently vacant spaces and converting the existing GAAP store into a 20,000 square footage store.

In Fort Myers Florida, we have opened a 10,815 square foot Polo Ralph Lauren store and have subsequently added three new terms.

Occupancy on July 31, 2004 immediately acquired a Polo's opening in Fort Myers was 83%.

Add to that today, the occupancy in Fort Myers is 92%.

These types of long-term investments are appropriate and necessary to keep our centers fresh and exciting to our customers.

Filling vacant space with major name brand magnet terms will increase the traffic, sales and net operating income generated at each of these centers.

With respect to tenant productivity across our consolidated portfolio, same space sales increased 6% in the three months ended March 31, 2005 as compared to the three months ended March 2004.

An increased 3% for the rolling 12 months ended March 2005 to $315 per square foot.

Reported same store sales for the three months ended March 31, 2005 increased 3% compared to the same period in 2004.

Sales and traffic in the first quarter were strong across the entire portfolio and appear to be continuing in April.

From a development stand point, we are building a 46,400 square foot expansion to our center in Locust Grove, Georgia.

Upon completion of the expansion, the Locust Grove center will total approximately 294,000 square feet.

New leases have been executed with Polo/Ralph Lauren, Sketchers, Children’s Place and others.

Stores are expected to start opening during this summer.

But predevelopment and leasing of our four previously announced new sites including Pittsburg, Pennsylvania, Deer Park, New York, Charleston, South Carolina and Wisconsin Dells, Wisconsin is proceeding on schedule.

Tenant interests remain strong for our new sites in Charleston, South Carolina and Wisconsin Dells, Wisconsin.

There does not appear to be any extraordinary development or permitting issues which would delay the 2006 opening of these centers.

Our long standing corporate policy prohibits starting construction of a new development project until at least 50% of the leases are fully executed.

Our leasing group is continuing the process of converting strong tenant commitments into sign leases.

At this time, we are on target to begin construction of both projects before year end 2005 and plan to open both projects next year.

As for our site, south of Pittsburg we were advised by Bass Pro Shops they now control the option on the land adjacent to our site.

We have met with their senior with the senior management of Bass Pro and they are coordinating site plans with us in order to maximize the potential for both our companies.

In addition, Bass Pro has been actively participating with us in the tip approval process.

And then interest for space remains robust and we anticipate openings to us in 2007.

With regard to our site in Deer Park, Babylon township, New York we are proceeding with the permitting process which should be completed by year end.

Based upon advance previews of the property we have received commitments from several key magnet tenets.

Once the development and permitting process is complete, we will announce the turn over date to our tenants.

At that time we expect to receive signed leases and begin construction.

We remain comfortable with our previously announced opening in 2007.

Our balance sheet allows us to fund a healthy development pipeline and to grow [agreeably].

We also continue to explore other new development sites, potential acquisitions and dispositions - disposition opportunities.

However, in our earnings guidance for 2005, we have not projected any of these transactions or projected any land parcel sales to close this year.

With respect to FFO guidance, based on current market conditions this strengthens ability of our core portfolio.

We currently believe our estimated diluted net income per share excluding gain or loss on the sale of real estate for 2005 will be between 56 cents and 60 cents per share.

And our FFO for 2005 will be between $1.93 and $1.97 per share.

The mid point of this range represents an increase in FFO over the prior year of approximately 3% and excluding the land parcel gains in 2004, an increase of approximately 5%.

We plan to continue to thoughtfully use our resources and to maintain a conservative financial position.

We are very existed about the execution of our strategy by our team in the first quarter of 2005, and look forward to another great year.

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

The question-and-answer will now begin.

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

If 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 that there are received.

Please stand by for your first question.

Your first question comes from Ross Nussbaum of Banc of America Securities.

Hi, it's [Kristina Clark] here with Ross.

Given the high TI's in the quarter, where should we be thinking about that number going forward on the square footage basis, will the level start to come down based on focusing on raising occupancy in another areas of the portfolio?

Hi, this Frank.

We are still focused on raising occupancies, we did mention that our FAD –should be about 85% for the year, the amount that we see in the latter three quarters of the year should be lower than the first but still relatively even with what you see in prior years.

Okay, thank you.

Your next question comes from Michael Bilerman of Smith Barney.

Good morning.

Another question on the tenant allowances.

How much of that 4.5 million was Charter Oak versus the wholly owned portfolio?

Michael, I don't have the break down with me, but I certainly can get that for you.

Okay and then -- the what ever you are baking in for Charter Oak, that would be your share or is that consolidated?

They are fairly consolidated numbers.

Right, but the FFO is a tax of the minority interest for the income.

So wouldn’t you have to back out the minority interest for the tenant allowances that your partner is paying?

No, the way that that works, our partner gets allocated a fixed return on equity.

So regardless of what we spend in tenant allowances or what we share for FFO, the amount that we back out for their minority interest is basically the same.

So the answer is no, technically you do not back out their share.

But who is actually paying for the CapEx?

Are they not allocated their 66% share?

Well the properties pay for the CapEx and we distribute available cash flow after tenant allowances and other CapEx.

They get a 10% return from operating cash flow and then we get a 10% return from operating cash flow.

If there is not enough operating cash flow to pay with 10%, they get theirs and we would have a short fall which we will make up in future years.

So, technically we are getting allocated the entire allowance against our return until there is enough cash flow to repay us and or until we split up the partnership in order to do it right out of Blackstone

You are effectively funding all the CapEx today because you are not meeting the total rates to get your 10%.

Well we are meeting our hurdle rate to get our 10 currently.

It's just there is no, there is not as much additional cash flow above 10% that could be distributed which we would get two-thirds of and that we would get one third of.

And just remember, as we are in investing in the tenant allowances and increasing the value of the properties, we get two-thirds of the up in that value upon liquidation or buy-out of the partnership.

So, it's in our best interest to make these investments regardless of whether it is coming out of our pocket or not.

Okay, it will be helpful to get the break-up whenever you get a chance.

I was wondering the expansion; is there other potential expansion that you are looking at that will drive growths as well?

Michael, Good morning.

This is Steve Tanger speaking.

We are about to begin construction on our relatively small expansion on our center in Foley, Alabama and where we are going to add a couple of great new tenants to the property and also try to modify and enhance the traffic flow.

We have assigned lease for Ann Taylor to come into the property and Sketchers and we anticipate greatly expanding the existing Tommy Hilfiger store.

So that project is triggered under way and that’s about 26,000 square feet.

Other than that, there is no expansion planned.

Steve, I was wondering may be if you can talk a little bit about the acquisition and the disposition market currently and what you are seeing out there?

Well, as most of you know on the call, the outlet industry has consolidated faster into a greater extent than any other property type particularly in the public markets.

Chelsea and Tanger are the dominant players in the market and Chelsea of course is recently purchased by Simon (phonetic).

Prime retail stores are I think by last count about 10 million square feet of outward space and they are a privately held so I don’t anticipate anything happening there.

The other small owners, not small - other people that own 1 or 2 properties, we don’t anticipate any opportunity to buy them at prices that we would like to pay at any time in the future.

So I guess the acquisition market is pretty limited at this time.

And I guess that means may be the disposition market for you could be more attractive?

Is that there to say?

It may be, as you know we have over the past 6 or 7 years executed successfully a strategy of disposing our bottom 5% - the bottom 5% of our portfolio or other 9 core assets over time on an orderly basis which is generating cash that we've reinvested in expenses of our better centers and we will continue that strategy.

Okay and then just one question on the FAS141 income, Frank is that effectively burned off at this point or is that something seasonal going on with that amount, the below market line adjustments?

The below market line adjustment on Charter Oak has not burned off.

Its going to take 5 or around 5 years for it to completely go away as that’s at the average lease term and acquisition it will buffer round a little bit up and down but just because the number is relatively small this quarter its just a function of--what leases were above and below market and what remaining terms there were.

So it's slow on posting, but that number is just going to bounce around until it does finally go away.

And do you have a sense of what that amount would be for the last three quarters of 2005?

I suspect it's going to be less than it was last year.

It’s probably going to be more in line with this quarter.

But I can’t say that it's going to be 46,000 in a quarter.

Right.

Certainly shouldn’t be as high as what we saw last year.

So I think that’s you know we’re looking sequentially if that would pace in further for the top line rent.

It would’ve cost a penny differential sequentially if you were just straight lining the top line?

Definitely though I have an impact negatively if you look at the market rent adjustment by itself, but in essence we're getting rent increases and we're getting higher rents on new leases.

So that kind of point out the point that proves the point that in fact the leases were below market.

Alright .And you start converting it that’s an uniquely income (ph.)in the income rather than

Actually past income.

Exactly.

Okay guys.

Thank you so much.

Your next question comes from Craig Schmidt of Merrill Lynch.

Good morning.

I was wondering, sounds like you are active with Polo Ralph Lauren lately.

I was wondering if you knew what your number store count would be by the end of this year.

Good morning Craig.

We’ve been proud, very proud to work with Polo Ralph Lauren for almost twenty five years.

We opened one of their first two or three stores many, many years ago.

And we have a strong relationship with the firm.

As of the end of the first quarter we had twenty three Polo Ralph Lauren stores totaling a 187,569

And then you are going to having the comforts something that probably in commerce or is that part of the commerce already in that number.

That’s already in the number.

Okay, great.

And then on c mode, do you have a rust sense of the like the I think it is 31 acres of the additional land might be worth when you get around to sowing it.

We haven’t reached that long enough quite to $ 5 million.

Great, thanks a lot.

Your next question comes from David Fick of Legg Mason.

Good morning.

Steve you gave me the cash increases on west or was it GAAP increases?

David, we don’t have that handy with us.

We kind of like to look at cash in versus cash out.

I understand, but just from an earnings perspective, I would like to know how to model it.

We are going to be that the new rent could be higher because some of them do have stepped.

Sorry.

Through this.

So lets work -- we will work that up and see what we can do.

Okay, I appreciate it.

Steve, you talked about a lot of specifics tenant movements.

Can you comment generically as to what you are seeing with the Nationals, particularly companies like the Gap which sort of announced the net -- no new store strategy.

The Gap may have announced globally.

I no new store strategy.

I don’t know particularly what you are referring to.

I mean net.

They are going to open stores, they are going to close stores but basically hold where they are.

We have a very close relationship with the Gap.

They are our largest single tenant corporation.

We are in the process of working on a growth strategy with the Gap.

They are continuing to open new concept stores in the Tanger portfolio, so I believe that their strategy, you can certainly feel free to call them but we are led to believe that their strategy is to continue to grow in the outlet sector, which we're led to believe generates the highest return on investing capital for their corporate entity.

Okay, have you had any conversations recently with the folks at Prime Retail or their lenders?

Other than seeing them in their conferences, I haven’t had any conversations with them in quite some time.

We've heard a rumor that potentially it was you know, some opportunity to get some, some of that facts to the market.

Okay, the-- are you seeing any effect from Signer's (phonetic) acquisition of Chelsea in terms of tenant comments or on you know, sort of rent pressures out of, you know, the land lords in general other than you?

You know, we've received anecdotal comments which we are going to take with a grain of salt.

We are running of our business as we always have.

I think, I hope you'll agree that the increases that we're getting on the renewals and the velocity of the renewals speak to a healthy Tanger portfolio and a healthy industry.

Okay, and lastly can you break out your current accumulated pre-development costs by the project?

You know, Dave, if you don’t mind let us get that to you in specifics.

Lets us get back to you after the call, so we can be sure we are recording in the right information.

Okay great, thanks a lot guys.

You bet.

Your next question comes from Greg Andrews, of Green Street Advisors.

Morning Steve.

Morning Greg.

I wanted to just follow up on this [inaudible] expansion, is that something that’s being driven by the tenant desired to get into that center, I mean, were they the ones who kind of asked for that there?

Well it has historically maintained a relatively high occupancy, we were able to attract follower up as the anchor of this sort of – the magnet tenant of this particular phase, which is a new phase being built in the parking lot.

And subsequent to that we have attracted other tenants, this center is doing well.

Henry county where we are located is one of the fastest growing counties not only in the Atlanta market but in the country.

Lot of roof tops going in and this is a very robust market and we felt it appropriate to cement our position as the dominant outlet center in that area.

Is there any room to add even more there at some point?

Not a significant amount.

Okay, in terms of the tenant allowances that you mentioned.

Are those type, the leases that extend for longer terms than you know your typical sort of 5 year lease?

No they are mostly 5-year leases.

Okay.

And on the numbers the baseline for the quarter was relatively flat whereas the expense reimbursements were up quite a bit.

Could you just speak about what is underlying the difference?

Hello Greg, this is Frank.

The expense reimbursements were up because of our operating expenses was up so the recovery rate was very similar in last year and this year.

What happened was you had Easter in March this year compared to April so you spend a lot more advertising dollars in March in '05 than we did last year.

Plus we had, I believe it was three quarters of million dollars and [slow] renewal this year that was over and above what we had last year.

So that’s why the occupancy cost numbers higher and being relatively speaking to that the expended reimbursement number would be higher.

Based on that clear view on the 400,000 and really on difference there isn't a whole lot of square footage difference there that was purely from increases on new and releasing of some space as a number of our centers

Okay yeah that makes some sense there and then lastly can you just comment on I mean it sounds like from the occupancy stat and the leasing stat, it's a very robust leasing environment.

Could you just comment more specifically on tenant bankruptcies say this year compared to prior years?

Good morning Greg, we had virtually no bankruptcies this year.

We had the Spiegel (phonetic) bankruptcy at WestPoint Stevens.

But we have been fortunate it is an environment where the retailers are healthy for most part we are diligent in our credit review of every tenant that we do business with regardless of the name or how long with them business with them.

We are constantly updating our credit review and appropriately protecting ourselves.

But as we mentioned before our portfolio has tremendous -- there's more demand for space in our portfolio than space available, that’s why we've been able to keep the occupancy for the better part of 23 years.

We've never closed the year at less than 95% occupied.

When a tenant goes bankrupt, we try aggressively to get the space back from the trusty, however, in most instances, bankruptcies occur because the product they produce don’t sell or financial mismanagement.

If the products don’t sell, the outlook is a -- the outlook stores are a distribution channel already existing where they can liquidate the excess inventory and turn it into the cash instantly as opposed to dealing with third party people that may adversely affect the quality of the brand.

So, in bankruptcies, we lose very little money if at all and unfortunately, we don’t get the space back.

Okay.

Thank you.

At this time, I am showing no further questions.

Alright, gentlemen thank you for participating today with every interest this in our Company.

Steve, Frank and I are always are available to answer any of your other questions.

Thank you and have a great day.

Bye now.

Ladies and gentlemen, that concludes the Tanger Factory Outlet Centers first quarter's 2005 conference call.

We appreciate your time.

You may now disconnect.