Tanger Inc (SKT) 2006 Q3 法說會逐字稿

Good morning and welcome to Tanger Factory Outlet Centers' third quarter 2006 financial results 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 these 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, October 25, 2006.

[Operator Instructions]

I will now turn the call over 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, 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.

Then we should have time for questions you might have.

We are very pleased with our third quarter results.

Our properties continue to perform at a very high level and tenant sales have continued to increase, averaging over $336 per square foot for the rolling 12 months ended September 30, 2006.

I'll now turn the call over to Frank.

Thank you Mr. Tanger and good morning everyone.

Details on our third 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 third quarter of 2006, increased 36.1% to $6 million or $0.19 per share, as compared to $4.4 million or $0.15 for the third quarter of 2005.

Excluding the impact of a non-recurring charge for the early extinguishment of debt of approximately $917,000, which has been included in interest expense, funds from operations available to common shareholders for the third quarter of 2006 increased 27.4% to $22.1 million, compared to $17.3 million in 2005.

An increase of 20% to $0.60 per share for the third quarter of 2006 compared to $0.50 in 2005.

Our results for the third quarter were positively impacted by a number of other income items, including $323,000 in leasing and development fees recognized upon the opening of our center in Wisconsin Dells, additional interest income of $153,000 associated with the remaining proceeds from our August offering of our 3.75% exchangeable senior notes, as well as a $177,000 gain on the sale of one land parcel during the quarter.

Our FFO payout ratio for the third quarter of 2006 was 60%, compared to 65% in the third quarter of last year.

And our FAD payout ratio was 77% as compared to 79% 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 the remainder of 2006, as we continue to expect an increase in tenant allowances during the remainder of the year relating to our ongoing efforts to increase occupancies and attract new tenants to the outlet industry.

Same-center NOI for the first nine months was up 2.8% and was up 0.1% for the third quarter.

Third quarter same-center NOI comparisons were impacted by a short term decrease in average occupancies at a number of our centers as we continue our ongoing strategy of replacing low volume tenants with higher volume magnet tenants.

In addition, a number of tenants have, in fact, increased the size of their stores from 2006, which for various reasons has resulted in the shift in the expected payment of percentage rent from the third quarter last year to the fourth quarter this year.

Taking all of this into consideration, we expect our same-center NOI increase for the fourth quarter to be between 2 and 3%, which equates to an annual increase of approximately 3%.

Our overall recover rate on operating expenses for the third quarter was adversely impacted by an increase in non-reimbursable expenses, such as additional estimated franchise taxes, personal property taxes, and other items totaling approximately $640,000 in the aggregate.

Excluding these items, which we do not expect to recur, our overall recover rate for the third quarter would have been more consistent with the first six months of the year at around 86%.

On a consolidated basis our debt to total market capitalization at the end of the quarter was approximately 32.8%, and our total market capitalization was approximately $2.1 billion, up over $709 million or 51.9% from a year ago.

We also maintained a very strong interest coverage ratio of 3.25 times for the third quarter of 2006.

In August of 2006, we issued $149.5 million of 3.75% exchangeable senior notes due 2026.

Proceeds from the offering were used to repay two mortgage lines totaling $15.3 million with interest rates at 8.8%, and amounts outstanding under our unsecured lines of credit and other variable rate debt with a weighted average interest rate of approximately 6.3%.

As a result of the early repayment of these loans, we recognized a nonrecurring charge for the early extinguishment of debt of approximately $917,000.

As I mentioned earlier, the nonrecurring charge was included in interest expense for the third quarter and consisted of a prepayment premium of approximately $609,000 and the write-off of deferred loan fees totaling approximately $308,000.

As a result of the sale of the exchangeable notes, we currently do not have any variable rate debt and we do not have any amounts outstanding on our $200 million in unsecured lines of credit.

And we do not have any significant debt maturities until 2008.

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

Thank you Frank, and good morning everyone.

We had an outstanding third quarter of 2006, driven in part by healthy increases in rent and strong tenant sales.

The public markets have noticed the successful execution of our long term strategic plan.

The equity in market capitalization of our company as of September 30, 2006, was $1.4 billion, which is a 50% increase from the same time last year.

The total market capitalization of our company is about $2.1 billion, which is a 52% increase from last year.

As of September 30, our portfolio consisted of 30 wholly owned factory outlet shopping centers diversified across 21 states totaling 8.4 million square feet.

We also manage for a fee and own a 50% interest in two centers which contain approximately 667,000 square feet, and manage for a fee three centers totaling approximately 293,000 square feet.

In total, we own and or manage 35 shopping centers in 23 states totaling 9.3 million square feet.

I am pleased to report that the positive rent spreads we achieved the last few years have continued into 2006.

Third quarter leasing spreads looked at alone do not tell the story, as many of the re-tenanting done during the quarter represents our continued effort to replace low volume tenants with higher volume brand name tenants.

In doing so we often give up a higher rental rate being paid by a lesser named tenant in order to improve the long term value of the shopping center.

Combining this with the fact that only 55 leases totaling about 200,000 square feet out of the 1,830,000 square feet coming up for renewal this year were executed during the quarter created this anomaly.

Through September 30, 2006, we have executed or in process about 80% of the 1,180,000 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 11.6% on a straight-line basis.

Renewal spreads on a cash basis were also up 8.5%, compared to a 6.8% increase for the nine months ended September 30, 2005, and a 6% increase for the nine months ended September 30, 2004.

We have also re-tenanted over 448,000 square feet during the first nine months at an average increase in base rent on the straight-line basis of 22.3% over the rent that was being paid by the previous tenant prior to their vacating the space.

Re-tenanting spreads on a cash basis were also up 16.3%, compared to a 7.2% increase on a cash basis for the nine months ended September 30, 2005, and a 4.2% increase for the nine months ended September 2004.

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

We have opened, or will open, several new exciting tenants this year including Gymboree, American Eagle, Kay Jewelers, Juicy Couture, Hollister, Lane Bryant, Abercrombie and Fitch, Heartland Luggage, White House Black Market, Uggs and Hot Topic.

The overall occupancy rate for our wholly owned stabilized properties was 96.0% at the end of the third quarter, compared with 96.4% at the end of September last year.

To put it in perspective, the slight decrease in an average occupancy rate represents only about 34,000 square feet of space in our portfolio.

We continue to believe that our year-end occupancy will be approximately 97%.

This will be the 25th consecutive year that we have achieved a year-end occupancy level of at least 95%.

With respect to tenant productivity across our consolidated portfolio, same-space sales increased 6.9% for the three months ended September 30, 2006, as compared to three months ended September 2005, and increased 6.1% for the rolling 12 months ended September 30, to $336 per square foot.

Reported same-store sales for the three months ended September 30, increased 5.1% compared to the same period in 2005, and increased 3.7% for the nine months as compared to the previous year.

In addition, traffic to Tanger Centers was up 2% in the third quarter and up over 7% in the month of September alone.

Traffic and sales for the quarter were positively impacted by the relatively light hurricane season and our aggressive back to school marketing plans.

During August, we opened our two newest centers located 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 currently have over 83% of the space open and lease commitments for another 12% of the 352,000 square feet of GOA in the Charleston Center.

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

We also have 100% of the space open within the 265,000 square feet of GOA in the Wisconsin Dells.

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

With regard to our future development site south of Pittsburgh, we had commented on previous calls that the appeal, which had been filed challenging the taxing authorities approval of the tip, has been dismissed.

Subsequent to the announced dismissal of the appeal we executed a contract with Allegany Power to relocate power lines currently located on our development site, which should be completed by November 17, 2006.

On October 5, we closed on the acquisition of the development site land for $4.8 million.

Including the amount paid to Allegany Power and the cost of the land we now have approximately $11.6 million invested in this project and expect to spend an additional $600,000 between now and the end of 2006, at which time we plan to be in a position to begin construction.

Tenant interest in this site remains robust with about 64% of the first phase either signed or out for signature.

We are currently targeting a first quarter of 2008 opening.

With regard to our new development site in Deer Park, Long Island, New York, we have worked our way through the permitting process and begun the demolition of the existing buildings and parking lots during the third quarter of 2006.

Based upon advanced previous of the property, we have received commitments from several key magnet tenants and we expect to receive additional signed leases as the development process continues.

We are currently targeting a first quarter of 2008 opening date.

Based on current market conditions, the strength and stability of our core portfolio, we are raising our estimated diluted net income per share guidance to a range of $1.01 and $1.05 per share.

And we are raising our guidance for 2006 FFO by about 2% to a range of $2.22 to $2.26 per share.

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

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

We are very excited about the execution of our strategy by our team in 2006, and look forward to a successful 2007.

As we have done in the past, we will be providing 2007 guidance at the time of our year-end 2006 conference call.

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

[Operator Instructions].

Ross Nussbaum, Banc of America Securities.

Hi, it's Christi McElroy here with Russ.

How long would it expect you to burn through the excess cash on your balance sheet as it relates to interest income?

This is Frank.

The excess cash that's remaining from the exchangeable notes is about $20 million and we expect that we'll be through that by year-end.

Okay.

And then on other income as well, you had a leasing fee for Wisconsin Dells in Q3, were there any leasing fees from that development in prior quarters that will go away?

Yes, they came in in very small amounts over the last year as the project was leased up so it's really not a material number.

Okay.

And then can you comment on any additional developments that you may have in the pipeline, or just kind of generally speaking without necessarily referring to any specific projects but just your plans to build up the pipeline or geographically where you might be targeting.

Christi, this is Steve.

We are continuing our search for appropriate development sites to build A shopping centers.

We expect and hope to by the end of the year announce at least one.

Our plan is to deliver two centers, as we've mentioned, in 2008.

We feel that we can continue that development pipeline into several years into the future after that with at least one and possibly two new sites a year.

In addition, we are working on leasing and developing some additional space in several of our properties around the country.

In terms of expansion?

Yes.

Okay, that's helpful.

Thank you.

And then just lastly, can you comment on construction costs in general?

We've been hearing just over the last couple of months that growth has started to abate somewhat as the single-family construction has slowed.

Well, I think there's more reasons than just cost of construction why single family housing has started to back up but that's more research by the analyst community.

The construction costs have come down as a result.

With regard to construction, our sites are one level, built on slab, with not a lot of concrete and not a lot of steel.

Those are the commodities that have gone up dramatically in price over the past couple of years.

So I think on balance our costs have gone up slightly but not dramatically.

Okay, thank you.

David Fick, Stifel, Nicolaus.

Morning.

The Long Island project, can you help us understand that project a little bit more in terms of how it's flushing out now that you are apparently into the design phase of the project?

I know it had some mix uses elements, some big box elements.

Does it still have some factory outlet elements also?

Absolutely.

Hi Dave, how are you?

The answer is yes.

We have signed a lease for the 16-screen cinema.

We have signed a lease for another 50,000-foot box, which will be the first of its type on Long Island.

There will be maybe one or two more boxes of that size.

This center will be somewhere between 750,000 and 800,000 square feet and probably about at least a half will be factory outlet tenants.

We are also talking to some exciting new restaurant concepts.

This project of 800,000 feet is contiguous with another 300,000 of retail made up of Home Depot, Stop and Shop and Kohl's so we will have about 1,100,000 feet regional shopping destination located at this site.

What are you seeing from tenants in terms of sensitivity to nearby retail and sort of the old department store resistance to outlets going inboard like this?

We're seeing to a great extent that sensitivity going away.

Of course, it depends upon the specific tenant but we feel we'll be able to deliver an exciting upscale cotenancy that will get a lot of attention when we start opening stores about 18 months from now.

Are you seeing a significant rent differential there, compared to say River Head, given that this is a much more dense location?

We never publish rents but I will tell we're getting certainly appropriate rents for the marketplace in the density.

A couple of little details.

Frank, you mentioned that some of these one time expenses, you had some franchise and property tax expenses that weren't reimbursable, and that it won't reoccur.

Why is that?

What happened there?

There's a number of states, a few in particular, that are attempting to change their laws with regard to the franchise taxes and based on how some of those are playing out we made the internal decision to increase some of our accruals.

And it just so happens that we made that decision in the third quarter so I think we're more on track with that.

And that's not something that we think will recur now that we have kind brought our accruals up to where we think they--

So there was sort of a catch-up element to that.

Little bit of a catch-up element yes.

Okay, and that wouldn't be recoverable?

Not a franchise tax.

You know, property taxes are fully recoverable.

Typically we-- while we may be able to attempt to do so we don't feel comfortable based on our lease language to try to push franchise and excise taxes through to the tenant.

Okay.

Then I guess my last question is for Steve.

Steve, can you comment, apparently you're trading rent for quality, upgrading, which should reduce the cap rate implicit in your portfolio.

Can you give us some examples of tenants you've taken out and tenants you've put into similar space and your view of how that changes the value of the asset.

Dave, I'd love to give you the names of the tenants we've taken out but you'll get me in a lot of trouble.

I'd rather give you the names of some of the new high volume tenants that we've put in such as American Eagle.

We're proud to have opened the first Abercrombie &Fitch and Hollister outlet stores, White House Black Market, Chico's.

Over the years we've been at the forefront of opening new concepts and introducing these exciting high volume brand name tenants to the outlet industry and it's worked beautifully.

You can see our metrics over the past several years as to how it's added value to our shareholders.

Okay, and the same store numbers were obviously impacted by that because you're trading down in rent but up in quality.

How much longer do you think that trend is going to go?

Well I think you're looking at a short-term anomaly in the third quarter.

In your note you focused on the nine months, which we focus on, and the trend, as I mentioned in our prepared remarks, is pretty extraordinary.

If you look at the nine-month increase from '04 to '05 and '05 to '06 and today, we're continuing to drive rents and the long-term strategy of upgrading our portfolio has added significant value for our shareholders.

We agree with the strategy, thank you.

Jim Sullivan, Green Street Advisors.

Hi, it's Greg Andrews with Jim Sullivan.

Could you give us a little feel for how tenant sales are doing at your new projects at Wisconsin Dells and Charleston?

Hi Greg, congratulations on your new position.

The sales-- the initial sales for both new properties are above plan for virtually all of our tenants.

We get terrific feedback from them both on the cotenancy and on the traffic and the subsequent sales.

But how would the sales compare to say the overall corporate average?

It's tough to tell on a first two or three months.

We'll let you know a year from now when things get stabilized how those two development sites compare.

Okay.

And then following up on Pittsburgh, I know there's a racetrack near your site that was seeking to get a gaming license.

It struck me that that would be a real boost for your project if they did get that.

What's the update there?

Have they received that?

We found this site and committed to this site before Governor Rendell submitted paramutual betting to the legislature.

And we are excited about this site.

The good news is the racetrack has now been granted and received a license for paramutual betting and they're-- pardon the pun, but they're racing to get the machines in operation to begin the paramutual betting hopefully before the end of the year.

So the answer is yes, the license has been approved and received.

Great, thank you very much.

[Operator Instructions].

At this time, Mr. Tanger, we have no further questions.

Thank you.

Thank you all 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.

Thank you very much and have a great day.

This concludes today's Tanger Outlets conference call.

We appreciate your participation.

You may now disconnect.