Tanger Inc (SKT) 2005 Q2 法說會逐字稿

Good morning and welcome to Tanger Factory Outlet Centers' second quarter 2005 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 trends; development; acquisition; 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 tenant 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, Wednesday, July 27, 2005.

(OPERATOR INSTRUCTIONS). I will now turn the call over to Stanley Tanger, the Company's Chairman and Chief Executive Officer. Please go ahead, sir.

Good morning everyone. With me today are Steven 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 then we will have time for any questions you may have. I'll now turn the call over to Frank Marchisello.

Good morning everyone. Please note all per share net income and FFO calculations are on a diluted basis. FFO for the second quarter and six months ended June 30, 2004, excluding land parcel gains, was $0.44 and $0.86 per share respectively, resulting in an increase of 6.8% for the second quarter of 2005, and 4.7% for the six months ended June 30, 2005.

For the three months ended June 30, 2005 net income was 3.5 million, or $0.13 per share as compared to net income of 3.7 million, or $0.14 per share for the second quarter of 2004. For the six months ended June 30, 2005 net income was 551,000, or $0.02 per share, compared to 4.8 million, or $0.18 per share, for the first six months of 2004.

Net income for the six months ended June 30, 2005 included a $3.8 million loss on sale of real estate incurred during the first quarter of 2005, while net income for the six months ended June 30, 2004 included a 2.1 million gain on the sale of real estate incurred during the second quarter of 2004.

Our FFO payout ratio for the second quarter of 2005 was 69% compared to 66% in 2004. And our FAD payout ratio for the second quarter of 2005 was 104% as compared to 82% in 2004. The higher FAD payout ratio in the second quarter relates to $2.3 million in second generation tenant allowances, and $2.2 million in capital improvements paid during the quarter. These amounts relate to our continued work on improving occupancies and the tenant mix within the Charter Oak portfolio, as well as adding key magnet tenants to many of our other centers.

For the year we expect our FAD payout ratio will be in the mid 80% range. 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, our debt to total market capitalization at the end of the second quarter was approximately 34.6%, compared to 43.5% last year. Our total market capitalization increased 20% to approximately 1.4 billion at the end of the second quarter, compared to 1.2 billion last year. We also saw continued improvement in our interest coverage, which was 3.71 times for the second quarter of 2005, as compared to 3.42 times interest coverage in the same period last year.

On April 10, 2005 we repaid at maturity one secured loan with New York Life having a face amount of 13.7 million and an interest rate of 9.77%. The repayment of this loan unencumbered our 255,000 square foot 99% occupied center in Lancaster, Pennsylvania. A second secured loan with New York Life for the face amount of 7 million and an interest rate of 9.125% matures on September 10 of this year. And we expect to repay this loan with amounts available under our unsecured lines of credit. The repayment of this loan will unencumber our 186,000 square foot 86% occupied center in Commerce, Georgia.

As of June 30, 2005 our variable rate debt accounted for 21%, or $98.8 million, of our debt outstanding. And the remaining 79%, or $382.3 million of debt, was at fixed-rates. With respect to our unsecured lines of credit, at the end of the second quarter we had 45.3 million outstanding, with a total capacity on our lines of credit of $125 million.

We're also very pleased to report that on June 27 Moody's raised our unsecured debt rating to an investment grade of BAA3. Moody's press release announcing the upgrade stated that we had improved our coverages, had begun to improve the performance of the Charter Oak portfolio, in which we acquired a stake in late 2003, increased our unencumbered asset pool, and decreased our secured debt. These actions have allowed us to boost our fixed charge coverage ratio and reduce our overall leverage. Moody's also noted that we have successfully executed our multiyear operating strategy to improve the quality of our assets, increase our acquisition and development activities, and boost debt protection measures. Obtaining an investment-grade rating has been an important goal and part of our long-range financial plan for many years.

I will now turn the call over to Steve Tanger to bring you up to date on our operating results and new development sites.

Good morning everyone. As of June 30, our portfolio consisted of 33 factory outlet shopping centers, which we own or operate, diversified across 22 states, totaling 8.7 million square feet. I am pleased to report that same center net operating income increased 4.3% for the second quarter of 2005, compared to the same quarter last year.

As we discussed in previous conference calls, we have been successful in increasing rents as sales increase, and as a percentage of our portfolio no longer has renewal options each year. During the last couple of years we have renovated several of our centers and upgraded the overall co-tenancy in our portfolio. We're now seeing an acceptable return on these investments as we continue to increase rents.

In 2002 rents increased 1.1%. In 2003 rents increased 1.3%, and in 2004 rents increased 5.5%. The positive rent spreads we achieved during the first quarter of 2005 have continued into the second quarter.

Through June 30, 2005 we have executed, or in the process, over 67% of the 1,821,000 square feet of leases scheduled to come up for renewal during the year, with an average increase on the executed renewals of 7.9% on a cash basis. This compares with last year when as of the same time we had executed or in process approximately 70% of the 1,790,000 square feet of leases expiring, with an average increase on the executed renewals of 7.5% on a cash basis.

We have also re-tenanted over 322,000 square feet at an average increase in base rent on a cash basis of 4.1% over the rent that was being paid by the previous tenant prior to their occupying the space. Our overall occupancy rate at the end of the second quarter was 97%, up from 95% as of June 30, 2004, and 95% as of March 31, 2005.

As Frank mentioned, we continue to invest in second generation tenant allowance 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 3,500 square foot Polo Jeans store to a larger 12,150 square foot Polo Ralph Lauren outlet store, filling three previous vacant spaces in the process. Occupancy has improved in Commerce from 92% at the end of the first quarter in 2004 to 99% today.

In addition, we have continued the repositioning of our original outlet center in Commerce, Georgia. The 17,400 square foot multiplex movie theater opened Memorial Day, and has been doing very well. We signed a lease with Goody's, who has taken 20,100 square feet of vacant space, improving the occupant -- the centers' occupancy from 68% in June 2004 to 86% at the end of June 2005.

In Foley, Alabama we relocated an existing Gap store into an 11,960 square foot of vacant space, and converted the existing Gap store into a 20,000 square foot Old Navy store. In Fort Myers, Florida we opened a 10,815 square foot Polo Ralph Lauren outlet store, and have subsequently added three other new tenants. Occupancy on July 31, 2004 immediately prior to Polo's opening was 83%. As of today the occupancy in Fort Myers is 91%.

In our 301,000 square foot center located in Park City, Utah we have opened or have leases in negotiation with Aeropostale, Izod, Ann Taylor, Calvin Klein, Limited Too, Levi's, adidas, Naturalizer, NordicTrack, American Eagle, and Sunglass Hut among others. Occupancy in Park City is now 100%, up from 97% a year ago. We have successfully remerchandised 61,000 square feet, or about 20%, of the center in the past year. Same-store sales are up 5% year to date, even though several high-volume tenants have not comped yet.

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 brand-name magnet tenants will continue to 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 2% for the three months ended June 30, 2005 compared to the three months ended June 2004, and increased 3% for the rolling 12 months ended June 2005 to $316 per square foot. Reported same-store sales for the three months ended June 2005 decreased 1% compared to the same period 2004 due to a shift in Easter from April 2004 to March 2005, and were up 1% for the first six months of 2005.

In addition, sales at our 535,000 square foot high-volume center in Foley, Alabama are down almost 20% in the first six months of 2005, as the area continues to struggle from the direct hit it incurred during last year's devastating hurricane season. Excluding the Foley Center, same space sales were up 4% in the three months ended June 2005, and were up 4% for the rolling 12 months ended June 2005.

Same-store sales, excluding the Foley Center, were actually up 1% in the second quarter of 2005, and up almost 2.5% for the first six months of 2005. We fully believe this area will recover, but it will take some time. Sales and traffic in the second quarter were strong across the entire portfolio and appear to be continuing into July.

From a development standpoint we're building a 46,400 square foot expansion at 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, The Children's Place and others. Stores are expected to start opening this fall.

We have also begun construction on a 21,000 square foot expansion to our center in Foley, Alabama. Leases have been executed with Ann Taylor, Sketchers, Tommy Hilfiger and others. Stores are expected to start opening during the fourth quarter of this year. Upon completion of the expansion the Foley center will total approximately 557,000 square feet.

The predevelopment and leasing of our four previously announced new sites, including Pittsburgh, Pennsylvania; Deer Park, Long Island, New York; Charleston, South Carolina; and Wisconsin Dells, Wisconsin, are proceeding on schedule. Tenant interest remains strong for our new sites in Charleston, South Carolina and Wisconsin Dells. There do not appear to be any extraordinary development or permitting issues which would delay the planned fourth quarter 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. At this time we have lease commitments for over 50% of each of these two projects. Our Leasing Group is continuing the process of converting tenant commitments into signed leases. We're on target to begin construction of both these projects before year end 2005, and plan to open before the end of next year.

As for our sites south of Pittsburgh, we were advised by Bass Pro Shops that they now control the option on the land adjacent to our site. We have met with the senior management of Bass Pro, and they are coordinating site plans with us in order to maximize the potential for both of our companies. In addition, Bass Pro is actively -- has been actively participating with us in the TIF approval process.

Bass Pro has announced plans for a 200,000 square foot Bass Pro Shop, a 200 room lodge surrounding the store, a spa, 26 cabins, and a driving range. The Bass Pro site is about 211 acres, and also has room for restaurants and an aquarium. Tenant interest for space in our center remains robust, and we anticipate opening stores in the fourth quarter of 2007.

With regard to our site in Deer Park, New York, which is on Long Island, we are proceeding with the permitting process which should be completed by year end. Based on advanced previews of the property, we have received commitments from several key magnet tenants. Once the development and permitting process is complete, we will announce a turnover date to our tenants. At that time we expect to receive signed leases and to begin construction. We remain comfortable with our previously announced opening in the fourth quarter of 2007.

Our solid balance sheet allows us to fund our healthy development pipeline and to grow accretively. We also continue to explore new development sites, potential acquisitions and 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 our FFO guidance, based on current market conditions, the strength and stability 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 $0.56 and $0.60 per share.

And our FFO for 2005 will be between $1.93 and $1.97 per share. The midpoint 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 excited about the execution of our strategy for growth by our team in the first half of 2005, and look forward to another great year. With that we would be happy to answer any questions you may have.

(OPERATOR INSTRUCTIONS). Michael Bilerman with Smith Barney.

Steve, I was wondering maybe if you can talk a little bit about the acquisition environment? Maybe talk a little bit about Lightstone's acquisition of those two Belk centers back in May, and if there is anything else on the market that you may be looking at?

As you reported, the Lightstone Group announced the acquisition of the two Belk centers in Orlando, with an approximate cost of $200 per square foot. We were delighted to see that pricing. I believe that we purchased the Charter Oak portfolio at about $150 a foot, somewhere in that area.

I hope that Lightstone can upgrade the co-tenancy and upgrade the physical plan. As far as future acquisitions, there are probably a handful of stand-alone privately owned outlet centers, but it is not a large universe of potential acquisitions.

Were these two centers something that you looked at as well? And where were you comfortable in pricing if you looked at it?

We look at everything that comes on the market. And needless to say, we were not willing to pay the price that Lightstone paid.

Can you talk a little bit about where the TIF process is? What the key hurdle dates are going to be in getting that for that project?

We expect, as previously announced, by Labor Day that the three taxing authorities will have voted publicly on either accepting or not accepting the TIF plan. It is now on schedule. These public meetings have been scheduled -- public hearings have been scheduled. So we should know hopefully by Labor Day where we stand.

And then just a question on the occupancy. Obviously with occupancy up to 97% I think you can make the assumption that demand is strong. Where are you seeing the most demand from? Which types of retailers, or even which retailers may have aggressive expansion plans in coming into outlet?

We continue to see demand from all sectors. As you may now, the substantial portion of our co-tenancy is apparel and footwear, and that continues. But we are seeing demand from tabletop, home furnishing, all sorts of other products coming in.

Is there anything that you see on the front where you may be able to push occupancy even further this year?

As sales increase, and as our remerchandising plans actually take shape in these various properties, sales increase and tenant demand increases. We would be delighted to maintain the 97% at year end, but in previous years we have been higher.

My last question is just in terms of the balance sheet. Now that Moody's went to investment grade, but S&P still notches your debt from an issuance standpoint, would you consider issuing unsecured on a split rated basis?

If we have an accretive opportunity to invest the funds, we would look at all sorts of financing opportunities that may be available to us.

Craig Schmidt with Merrill Lynch.

I was just wondering on the second generation tenant allowances if it has come down from the first quarter? I know that you still have an effort in terms of bringing in some of these new tenants. Is that second quarter number a good run rate for the rest of the year?

The second quarter run rate is much likely a good run rate for the rest of the year. The first quarter was exceptionally high because of a few particular tenant deals that we had done. So I think the second quarter is probably a more realistic of a run rate.

Do you know how much of the 46,000 square feet at Locust Grove is leased at this point?

We will open up probably close to 90, or a little bit more than 91 -- 90% occupied.

That is just on the 46,000?

On the expansion.

Craig Andrews with Green Street Advisers.

You obviously had some strong same property NOI growth for the quarter. I am wondering does that come from any particular centers, or is it something that was pretty widespread across the portfolio?

I think it is widespread across both our portfolio and the portfolio that we acquired. As you know, we have been investing in our assets. These are long-term assets, and we continue to invest in them. We have announced merchandising plans that are now in place. And we're reaping the benefits of those plans for the past several years.

What do you think same center NOI in the next say 12 months?

I find that hard to ball park. As you can tell from previous announcements, our same center NOI has continued to increase up over the last couple of quarters. I can't crystal ball what it is going to be going forward.

Would the current quarters a pace of 4.2% probably be a bit on the high side for kind of forward year estimate?

It may be. Although we're doing everything we can to continue the momentum.

A question for Frank. On the Myrtle Beach loan, I guess is that a floating-rate loan? And can you talk about the terms, and whether you might fix that at some point?

The Myrtle Beach loan on our Highway 17 joint venture, we did do permanent financing on that with a five-year rate. And we did lock in the rate on that loan with a swap. I believe the all in cost is around 5% or so.

When did that happen?

First quarter.

(OPERATOR INSTRUCTIONS). David Fick with Legg Mason.

What is the actual preleasing level on your predevelopment projects? You said you are over 50% committed, but where are you in terms of signed deals?

In Charleston, we're about 25% signed and about 25% committed. The ones that are committed are with existing tenants. We have leases actively under negotiation, and we fully expect them to be executed. In Wisconsin Dells we are about 20% signed, and we have I would say another 35 to 40% in addition to that that is under negotiation and committed. So we are -- I think we are in pretty good shape.

What would you predict, if you had to say today, how far off you are from ordering steel on these two projects?

We have announced that we're going to start construction before the end of the year. You have trained to under promise and over perform. I would rather send you an invitation to our grand opening -- to our groundbreaking.

Do you have any thoughts on how slots getting approved near your Pittsburgh site would affect your project?

It certainly won't hurt. The racetrack is not active now. The slots will bring people to the area. I think the combination of the Bass Pro Shop development -- all-encompassing development on their 200 or so acres and the Tanger Outlet Center on our acreage will create a regional tourist destination. Between the slots, Tanger, and Bass Pro, three pretty powerful draws.

As you may now, Racetrack Road is a full diamond interchange, four lanes in front of our site already in place, which is -- I won't say unique -- but certainly a major advantage on I79 south of Pittsburgh. But the slots have been approved. It is my understanding that the challenges to the Supreme Court in Pennsylvania have sustained the slots. And I am told that they are going to open next year.

Looking at this Pittsburgh Post Gazette article it looks like you basically -- you've got a thirty-day window for final approvals. Is that correct? And if so, would you be getting in the ground almost immediately thereafter?

I don't know exactly the context of the article. I have seen several articles in all the papers out there. We are moving forward with the TIF process. Once all of the TIFs have been approved, which we're hopeful they will be approved, and whatever period of time the challenges may be issued have expired, we plan to move as fast as we can.

G&A was up about 700,000 this quarter. Is this a new run rate, and what constituted that increase?

Some of that increase is due to some restricted shares and stock option compensation that we -- were approved the first quarter, so it had a full effect in the second quarter. That was probably $300,000, I would say. And then we did have a few non-recurring items, but I would suggest maybe about 3.5 to 3.6.

So close to a new run rate. Okay. Frank, while I have you, straight line rents were way up. What drove that?

Straight line rents were up. We had begun to compute straight line rent this year with the -- by the turnover date, based on the SEC letter that was sent out earlier this year. We're picking up just incremental straight line rent, because our turnover period is relatively low, but we felt like we should go ahead and comply with this request. So we're picking up 30 to 60 days worth of straight line rent between turnover and opening day.

Lastly, what are your full year rent spreads projected in your guidance?

On the renewals and releasing?

Yes.

I believe we have about a 7%, between 7 and 8.

Steve, you know we have written a number of times about you guys pushing rents. And we are seeing the shopping center guys just accelerate here -- the standard sort of in-line shopping center business is now solidly into the double-digits. Kimko yesterday was above 13%. The mall guys are closer to the high teens. At what point do you think you're going to gain traction with your tenants at those levels?

We are gaining traction. As I mentioned, our increases in rents have gone from 1% to 5% to 7%. I think that we are -- as leases continue to expire, or the options burn off, we can continue to mark-to-market. Candidly, we are satisfied with the 7 to 8% rent increase in this area. The cost of goods, the margins in the outlet environment are less than the margins in the mall environment or the strip center environment. So we're happy with the occupancy where we are. We're happy with the rent spreads where we are. And we're happy with the NOI growth where it is.

I don't mean to down play that by any means. I think David Simon over at Chelsea would say they're not happy with that. Are you hearing any push back from tenants in terms of what Chelsea is doing on their releasing process?

I would be happy to give you the names of several of our key tenants, and you could talk with them directly. Anything that I would tell would simply be anecdotal.

There are no further questions at this time. Do you have any closing remarks, Mr. Tanger?

Thanks for participating today and for your interest in our company. Steve, Frank and I are always available to answer any of your questions you may have. Thanks again, and have a great day.

This concludes today's conference call. You may now disconnect.