Tanger Inc (SKT) 2006 Q2 法說會逐字稿

Good morning, and welcome to Tanger Factory Outlet Centers' second quarter 2006 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, July 27, 2006. [Operator Instructions] I will 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 on our call today are Steven Tanger, President and Chief Operating Officer, and Frank Marchisello, the Executive Vice President and Chief Financial Officer.

We are very pleased with our second quarter results, and are looking forward to the August grand openings of two of our newest outlet centers, one in Wisconsin Dells, Wisconsin, and the other in Charleston, South Carolina.

Frank will now take you through our financial results, and Steve will follow with a summary of our operating performance and future developments.

And then we should have time for any questions you may have.

I'll now turn the call over to Frank Marchisello.

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

Details on our second quarter results are included in our press release and supplemental information that were filed with our Form 8-K yesterday afternoon.

Net income available to common shareholders for the second quarter of 2006 increased 40.3% to $4.9 million, or $0.16 per share, as compared to $3.5 million, or $0.13 per share, for the second quarter of 2005.

Funds from operations available to common shareholders for the second quarter of 2006 increased 25.8% to $19.8 million, compared to $15.7 million in 2005, and increased 12.8% to $0.53 per share for the second quarter of 2006, compared to $0.47 per share in 2005.

Our FFO payout ratio for the second quarter of 2006 was 64%, compared to 69% in the second quarter of last year.

And our [FAD] payout ratio was 87%, as compared to 104% last year.

We currently believe we can maintain an FFO payout ratio in the low 60% range, and an FAD payout ratio in the mid to upper 80% range during 2006, as we now expect an increase in expected tenant allowances during the second quarter of the year relating to our ongoing efforts to increase occupancies and attract new tenants to the outlet industry.

Our G&A expenses have leveled off at approximately $4 million per quarter, as we have seen higher legal, accounting, and other professional fees compared to last year.

In addition, we've seen an increase in employee costs in 2006 compared to last year, some of which relates to a bonus plan we initiated this year for our senior management team to keep everyone energized and proceeding forward with all of our future growth plans, as well as an additional non-cash restricted share awards, some of which have performance-based vesting requirements.

On a consolidated basis, our debt to total market capitalization at the end of the quarter was approximately 33.8%, and our total market capitalization was approximately $1.9 billion, up over $527 million or 37.7% from a year ago.

We also maintained a strong interest coverage ratio of 3.08 times for the second quarter of 2006.

As of June 30th, 2006, our variable rate debt accounted for $103.3 million, or approximately 16% of our total debt outstanding.

In addition, during the second quarter, we received commitments from BB&T and Sun Trust Bank for additional unsecured lines of credit of $25 million each.

Since the end of the quarter, we closed on the BB&T line of credit, and are in the process of closing on the Sun Trust line of credit, which will bring our total line of credit capacity to $200 million, with only $49.8 million outstanding at the end of June.

We currently do not have any significant debt maturities until 2008.

At that time, our $100 million of 9-1/8% senior unsecured notes and our $178 million of 6.59% GMAT mortgage, which encumbers the Charter Oak portfolio, will both mature.

As we discussed on previous calls, we've entered into two forward treasury lots, totally $200 million at an average 10-year treasury rate of 4.62% in an effort to mitigate our refinancing risk associated with these 2008 maturities.

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

Steve?

Thank you, Frank, and good morning, everyone.

We had an outstanding second quarter of 2006, driven in part by robust same center NOI growth, healthy increases in rent, and strong tenant sales.

As of June 30th, our portfolio consisted of 29 wholly owned factory outlet shopping centers, diversified across 21 states, totaling 8 million square feet.

We also manage for a fee and own a 50% interest in one center which contains approximately 402,000 square feet, and we manage for a fee three centers, totaling approximately 293,000 square feet.

I am pleased to report that the positive rent spreads we achieved for the last few years as well as the first quarter of 2006 have continued into the second quarter.

Through June 30, 2006, we have executed or are in process over 78% of the 1,800,000 square feet of leases scheduled to come up for renewal throughout our wholly owned portfolio during the year, with an average increase on the executed renewals of 12.2% on a straight line basis.

We have also re-tenanted over 150,000 square feet during the second quarter, at an average increase in base rent on a straight line basis of 36.7% over the rent that was being paid by the previous tenant prior to their vacating the space.

Our leasing momentum remains strong, with tenants on waiting lists for several of our properties.

We have opened or will open the following new tenants this year: Gymboree, American Eagle, Kay Jewelers, Juicy Couture, Hollister, Lane Bryant, Abercrombie and Fitch, and Hot Topic.

Same center net operating income for our wholly owned portfolio increased 4.6% for the second quarter of 2006, compared to the same quarter last year.

And our overall occupancy rate was 96.2% at the end of the second quarter, compared to 96.5% at the end of June last year.

To put it in perspective, the slight decrease in the average occupancy rate represents only about 24,000 square feet of space in our portfolio.

We anticipate occupancy will be at the 97% level by year end.

With respect to tenant productivity across our consolidated portfolio, same space sales increased 7.4% for the three months ended June 30, 2006, as compared to the three months ended June, 2005.

Sales increased 4.1% for the rolling 12 months ended June of 2006, to $330 per square foot, which balances the shift in the Easter holiday.

Reported same store sales for the three months ended June 30 increased 5.3% compared to the same period in 2005, and increased 3% for the six months as compared to the prior year.

We feel that same space comparable sales is a better indication of our portfolio performance.

However, we report both same store and same space to provide our investors with complete information and transparency.

During the second quarter of 2006, we had one relatively small tenant, Book Warehouse, file for bankruptcy protection.

This tenant has 17 stores, with a total gross leasable area of slightly more than 54,000 square feet, or 0.07% of our wholly owned gross leasable area, so it is not a material amount of space.

Even though gas prices have bounced back to around $3.00 per gallon, our traffic continues to increase.

Traffic to the Tanger Centers nationwide was up 2% in the first quarter, and up 3% in the second quarter.

From a development standpoint, we are now -- we are nearing completion of our new projects in Charleston, South Carolina, and Wisconsin Dells, Wisconsin.

Both of these projects are located in high traffic tourist destinations, and we anticipate that they will be very successful centers for us.

We expect to have most of the space in both centers leased by the time stores begin opening by Labor Day.

In fact, we currently have executed leases and lease commitments for 79% of the 352,500 square feet of gross leasable area in the Charleston center.

Tenants include Gap, Banana Republic, Liz Claiborne, Nike, Adidas, Tommy Hilfiger, Guess, Reebok, and many more.

Our investment is expected to be about $64 million at cost, and we anticipate a stabilized return of between 11% and 11.5%.

We also have executed leases and lease commitments for 99% of the 264,900 square feet of gross leasable area in Wisconsin Dells, Wisconsin.

Tenants in this center include Polo/Ralph Lauren, Abercrombie and Fitch, Hollister, Gap, Banana Republic, Old Navy, Liz Claiborne, Nike, Adidas, Tommy Hilfiger, and many more.

Total cost is expected to be about $45 million, and we anticipate a stabilized return on cost of 10% to 10.5%.

Both of these projects are located in high tourist -- high traffic tourist destinations, and we anticipate that they will be very successful centers for us.

Once again, our determination and tenant relationships have paid off, as we are very excited to be adding Abercrombie and Fitch to our tenant list, and currently have signed leases with them to open four Abercrombie and Fitch outlet stores and four Hollister outlet stores throughout our portfolio.

In the months to come, we hope to work out additional deals with them for more stores.

Continuing to add exciting new tenants to our portfolio of properties keeps them fresh and exciting, and also reduces our exposure to any one tenant.

For example, ten years ago, Phillips-Van Heusen was our largest tenant, accounting for about 8.7% of our portfolio's gross leasable area.

Today, Phillips-Van Heusen accounts for 5.4% of our portfolio's GLA, and our largest tenant, The Gap Corporate, accounts for 7.1% of our total space.

Ten years ago, our top ten tenants accounted for 36.7% of our total GLA.

Today, our top ten tenants only account for 34.8% of our total GLA.

Turning now to future development sites.

With regard to our site south of Pittsburgh, we have commented on previous calls that the appeal which has been filed challenging the Taxing Authority's approval of the TIF plan has been dismissed.

Subsequent to the announced dismissal of the appeal, we executed a $2.2 million contract with Allegheny Power to relocate power lines currently located on the development site.

Including the $2.2 million paid to Allegheny Power, we now have approximately $5.4 million invested in this project, and expect to spend an additional $2.1 million between now and the end of 2006, at which time we plan to be in a position to close on the acquisition of the land and to begin construction.

Tenant interest in this site remains robust, with about half of the first phase either signed or out for signature.

Due to the slight delay in completing the relocation of the overhead power lines, we are currently targeting a first quarter 2008 opening.

Our investment is expected to be about $60 million at cost, and we anticipate a stabilized return of between 10.5% and 11.5%.

With regard to our site in Deer Park, Babylon Township, New York, we and our partners continue to work our way through the permitting process, which should be completed by year end.

Based upon advanced previews of the property, we have received commitments from several key magnet tenants.

Once the development and permitting process is complete, we will begin the demolition process and announce a turnover date to our tenants.

At that time, we expect to receive signed leases and begin construction immediately following the demolition of the existing buildings.

We and our partners have updated our demolition and development schedule, and based on the revised plan, we are now currently targeting a first quarter of 2008 opening date.

Our investment is expected to be about $185 million, and we anticipate a stabilized return of 10% to 11%.

We continue to look for and negotiate options for land on which to develop additional new Tanger Outlet Centers.

But we are in the very early stages of determining their viability, and are therefore not prepared to announce any specific locations at this time.

We will continue to explore other new development sites, potential acquisitions, and disposition opportunities.

Our solid balance sheet allows us to fund our healthy development pipeline and to grow accretively.

Based on current market conditions, the strength and stability of our core portfolio, we are maintaining our previously announced earnings guidance.

We currently believe our estimated diluted net income per share, excluding gains or losses from the sale of real estate, will be between $0.74 and $0.78 per share.

And our FFO for 2006 will be between $2.18 and $2.22 per share.

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

We are very excited about the execution of our strategy by our team in the first half of 2006, and look forward to a successful second half of 2006, and another great year.

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

[Operator Instructions] Your first question comes from Ross Nussbaum of Banc of America.

Hi.

It's Christine McElroy here with Ross.

Steve, following up on your last -- on your projected yields for Pittsburgh, you mentioned 10.5% to 11.5%.

Last quarter, you talked about 11.5% to 12.5%.

Is that because of the delay by a quarter?

Well, we've looked at the current cost of all the materials, the cost of the site work, and we've been able to update our current costs.

And that's the estimated yield that we're anticipating at this time, based upon our estimate of current costs.

So does it have more to do with construction costs, or more to do with the extra carry?

The extra carry on the amount we have invested is not a significant number.

I think it has more to do with the cost of construction.

Obviously, we're going to try to pass that cost on, but right now, we don't have the increase in rent put into our [pro forma].

Just the increase in costs.

So then in terms of construction costs in general, what you're seeing, are trends kind of going up there?

Well, it's highly publicized that the cost of steel is up.

The cost of concrete is up.

The cost of labor is up.

So yes.

All of those factors are put into those numbers.

Okay.

And then you've talked about before a 2% to 3% same store NOI growth assumption based into your '06 guidance.

In the first two quarters, you averaged about 4% to 4.5%.

Given that there's no change to your overall FFO guidance, is there anything else offsetting that?

Or do you expect the growth to come down a bit in the second half?

Well, as you know from following our company for many years, we like to under-promise.

Our current estimate is the guidance we've given you.

We are cautiously optimistic, but we have no idea of the impact of higher gas prices and rising interest rates on consumer spending.

So right now, we're staying with our existing guidance.

Sure.

That's fair.

And then lastly, are there any opportunities for acquisitions here?

Or is there just kind of nothing on the market?

To our knowledge, there's no factory outlet centers on the market.

Okay.

Thank you.

Your next question comes from David Fick of Stifel Nicolaus.

Good morning.

Hi, David.

Steve, can you talk a little bit more about the Hollister and Abercrombie trend?

Is that something that everybody in the industry is seeing?

Do you have a special relationship there?

And can you tell us a little bit about what they're demanding in terms of cap-X?

We've been working with Mike Jeffries and his group at Abercrombie and Fitch and Hollister for many, many years.

Actually, on September 11, 2001 -- I'll never forget that date, and neither will anybody else -- I was in their offices in Columbus, Ohio.

So this has been many years in development.

We, as you know, during our 25-year history, have been successful in working with major corporations and opening their first outlet stores, such as Liz Claiborne, the Gap, many, many more.

And we're delighted to open their first outlet stores with them.

I wouldn't classify our relationship as special.

We've just been successful in getting them to open with us.

Okay.

With regard to the transactions, we don't comment on individual transactions with individual tenants.

But with regard to the volume that we anticipate that they will do, we feel we're getting market rents.

Okay.

On the development projects, you've already talked a little bit about the reduced yield expectations and the timing.

I'm a little confused.

The Long Island project in particular, you've got $185 million budget there.

Did I hear that right?

[Since?] the equity portion -- don't forget, we only own a third of it.

Okay.

And so the gross construction cost is going to be how much?

Frank, you have the actual numbers, but I think it's going to be probably close to -- I don't know. $245 million, $250 million.

Okay.

And that project is going to officially start construction when in your current schedule?

We anticipate start -- the property has an existing 900,000 square foot office industrial building on the site.

We anticipate starting to demolish that building in the fourth quarter of this year.

Once that -- that's probably going to take three to four months to demolish.

And then we will start construction of the new shopping center.

Okay.

Which leads to my question.

I am confused about how you can deliver that in the first quarter of '08, given the scope of the project.

It seems to me to be very aggressive that you'll get that thing up and ready for a grand opening within 12 months.

That's the current schedule.

There are things that can shift.

We might be able to start demolition sooner.

But right now, that's the current schedule.

Okay.

In the vein of under-promise, over-deliver, how confident are you in that schedule?

That's what we're comfortable with right now.

Okay.

You said that you didn't want to talk about your future development pipeline in any detail.

When do you think you're going to be ready to start talking about additional projects?

It's our plan to have at least one, if not two, development sites in the market by the end of the year.

Okay.

How is the pre-leasing going on the two projects for '08 at this stage?

Are you into pre-leasing?

We are in pre-leasing.

As I mentioned, the Pittsburgh site we have shown to numerous tenants.

The reaction's been very strong.

We have either signed leases or commitments for space for at least half of the first phase of the project.

Okay.

Great.

Thank you.

Your next question comes from [Brad Kreitzer] of Merrill Lynch.

Good morning.

Most of my questions have been answered.

Just with regard -- I know you said you were cautiously optimistic on the in store NOI growth.

I was just wondering with the rental spreads if you think you -- if it's pretty sustainable at this high level.

It's been a dramatic increase over the past few years.

If you think you can sustain it throughout the rest of '06 and into '07.

You and your team at Merrill Lynch have published a good report today, which identifies our leasing spread history.

And just to quote from your report, our leasing spreads were 1.1% in 2002, 1.3% in 2003, 5.5% in 2004, 6.3% in 2005.

We've been able to continue that ramp up to 9.6% in the first quarter of '06 and 16.9% in the second quarter.

Now we are being blessed with increased traffic.

Our tenants have been very successful in the merchandising and the sales in their stores in Tanger Centers.

And that permits us to raise rents responsibly and still allow our tenants to have a profitable distribution channel.

So you think you can sustain it going forward, pretty much?

I doubt that we can sustain the 17% rent spread.

I think it's probably going to go back to a more stabilized level.

But we are working closely with our tenants to maintain a fair return for our company and a fair return for their company.

Okay.

Thank you very much.

[Operator Instructions] Your next question comes from Alan Calderon of European Investors.

Good morning, guys.

Question.

Again, the one bankrupt tenant was National Book Warehouse, I think you said?

That's correct.

What was the visibility on that potential bankruptcy prior to the filing?

It was very visible.

We get monthly sales reports.

We have -- we were aware that their sales were trending down for some time.

We aggressively pursued the payment of their rents.

And I believe -- Frank, correct me if I'm wrong, but I believe that our pre-petition amount is only one month of rent.

That's right.

That's correct.

And I think you said they have 17 locations.

How many are you anticipating they potentially close?

We have no transparency as to what the bankruptcy court will do.

In conversations with the current owners of the company, they would like to continue keeping the stores open.

Right.

But I don't feel that if they close their stores, that we'll have much problem re-leasing them.

Right.

I guess my next question was what's their average rent relative to market for the locations they're in?

I would suspect that they're either at or below market rents.

Okay.

And I guess the final question, I guess you guys probably update a potential watch list monthly or a regular basis or so.

How did your watch list look today?

How does it look relative to where it has been in the past?

You're correct.

We do have a watch list.

Rents are due on the first of the month.

If they're not paid by the second of the month, we put tenants into default.

We have been successful in limiting our pre-petition exposure in the event of bankruptcies.

I just want to reiterate, as I've said in previous calls, in most instances, when a tenant goes bankrupt, we have paired down our exposure to them over many years, based upon their sales trend and conversations with their management to downsize our exposure to them.

So our risks have been limited.

In most instances, a bankruptcy occurs because either financial manipulation or the stuff they produce doesn't sell.

If it doesn't -- if it's due to a backup in inventory, we are the channel of distribution that they own to dispose of excess inventory.

Right.

In most instances, bankruptcy trustees don't want the stores to close, although we might want them -- we might want the stores to close because they are under market in rent.

Right.

I guess if there's a way to quantify your percentage of annual base rent that you might have on your watch list, whether it's 2%, 3%, or even less than that?

Frank can give you the number of our bad debt, but it's very low.

It's very, very de minimus.

I don't know that we have any tenant on our watch list at this point.

And typically, at any one time, there wouldn't be more than one or two, just because of the national brands, national tenant base that we have.

Right.

And I guess a final question in this line is whether your -- I guess it's another of asking the question I asked before.

Whether your current kind of watch list relative to where it's been in the past, is it lower today, or relative --

Relative to the past, it's lower.

Lower.

Okay.

Okay.

Thank you very much for your time, guys.

There are no further questions at this time, sir.

Do you have any closing remarks?

This is Stanley Tanger again.

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

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

Thank you again.

Have a great day, and God bless you.

Bye now.

Ladies and gentlemen, this concludes today's Tanger Factory Outlet Centers' second quarter 2006 conference call.