Tanger Inc (SKT) 2006 Q4 法說會逐字稿

Good morning, and welcome to the Tanger Factory Outlet Center's fourth quarter and year ending 2006 conference call.

Please note that during this conference call, some of Management's comments regarding the Company's operation, leasing, tenants' 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, February 21, 2007.

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

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

I will now turn the call over to 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.

Thanks to the entire Tanger team that produced truly exceptional results for our shareholders in the fourth quarter of the 2006 of the entire year.

We will now take you through the financial results, and Steve will follow-up with a summary on our operating performance and future developments, and then we will have time for any question you may have.

I will turn the call over to Frank.

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

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

Net income available to common shareholders for the fourth quarter of 2006 increased to $0.23 per share, as compared to a net loss of $0.01 per share for the fourth quarter of 2005.

While net income available to common shareholders for the year ended December 31, 2006, increased 543.8% to $1.03 per share, compared to $0.16 per share for the previous year.

Our financial results for the year-end December 31, 2006, were reduced by a $1.5 million charge, $944,000 of which was incurred in the fourth quarter for the abandonment of acquisition due diligence costs which were incurred in connection with structuring, diligencing, and submitting a proposal to acquire a significant portfolio from a public REIT that was exploring its strategic alternatives.

Our management team and our Board of Directors agreed it was important for us to participate in this process, to learn as much as we could about the asset, and to provide a written strategic alternative to the public REIT to sell specific assets to us.

The bid was requested but ultimately not accepted by the public REIT.

Our comparative results for the fourth quarter and year-end were also reduced by a charge for the early extinguishment of debt of $9.9 million in the fourth quarter of 2005, and a similar charge of $917,000 in the third quarter of 2006.

Excluding these charges and the abandoned acquisitions due diligence costs, FFO for the quarter ended December 31, 2006, would have increased 6.6%, from $0.61 in 2005 to $0.65 per share in 2006.

And FFO for the year would have increased 14.9%, from $2.01 per share to $2.31 per share.

Our FFO payout ratio for the year ended December 2006 was 60%, compared to 74% last year.

And our FAD payout ratio was 81%, as compared to 86% last year.

We currently believe we can maintain an FFO payout ratio in the low 60% range, and a FAD payout ratio in the mid to upper 80% range during 2007.

We will continue to invest additional dollars in capital improvements and tenant allowances during 2007, relating to our on going efforts to increase occupancies at selected centers and attract new high volume tenants to the outlet industry.

On our third quarter earnings call, I mentioned we expected our same-center NOI increase for the fourth quarter to be between 2% and 3%.

I'm happy to report that our actual results were better than expected, as same center NOI for the fourth quarter was up 4%, resulting in an increase of 3.1% for the year.

Also as expected, our overall recovery rate on operating expenses for the fourth quarter reverted back to our historical trends at approximately 89%, compared to 88% in the fourth quarter of 2005.

On the consolidated basis, our debt-to-total market capitalization at the end of the year was approximately 30.8%.

This compares favorably to 37.4% as of year-end 2005, and 35.1% as of year-end 2004.

Our total market capitalization at year-end 2006 was approximately $2.2 billion, up over $427 million, or 24% from a year ago, when our total market capitalization was $1.8 billion.

And it's up 61.5% from 2004 when our total market capitalization was $1.4 billion.

In fact, we've increased our total market capitalization by a compound average rate of approximately 30% over the past five years.

We also maintained a very strong interest coverage ratio of 3.13 times for the year ended December 31, 2006.

As a result of the sale of $149.5 million of 3.75% exchangeable senior notes in August of 2006, we currently do not have any variable rate debt.

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 February of 2008.

At that time, our $100 million, 9 1/8% unsecured notes mature.

Based on current market conditions and our investment grade ratings, we expect a significant savings in interest expense when these notes mature in 2008.

I will turn the call over to Steve.

Thanks.

Thank you, Frank.

Good morning, everyone.

The outlet industry continues to be a profitable channel of distribution for our tenants, and we are excited to be a major player in a growing industry.

We had a great fourth quarter and a terrific year in 2006.

Once again, our shareholders have been rewarded with outstanding returns on their investment.

During 2006, our shareholders received a 41.5% total return, up from 14.3% in 2005, and 38.1% in 2004.

We have outperformed the S&P 500 for the seventh consecutive year, and the main REIT, all equity REIT index for the fifth consecutive year.

In fact, over the five year period ended December 30, 2006, Tanger ranked number 1 among nine mall REITs, and 5th out of approximately 104 equity REITs in total return to shareholders, with a total return to shareholders of 413.5%, and a compounded annual return of approximately 39% per year.

The equity market capitalization of our Company as of December 31, 2006, was over $1.5 billion, which is a 37% increase from the same time last year.

And the total market capitalization of our Company is about $2.2 billion, which is a 24% increase from last year.

From an operational standpoint, we had an exceptional year in 2006, driven in part by healthy increases in rent, strong tenant sales, and the execution of our strategic plan by the entire Tanger team.

Our other income line also continues to grow as we find new ways of adding incremental revenue to our portfolio.

We are beginning to expand the resale of electricity, internet services and [inaudible] services throughout our portfolio wherever possible.

Vending, coupon book sales, and other forms of additional income were all up over previous years.

In addition, our gift card sales increased over $6 million in 2006, an increase of 16% over last year.

Gift card sales are a great way of creating customer visits and extending holiday sales for our tenants into January.

I'm also pleased to report that the positive rent spreads we achieved the last few years continued into 2006.

Through December 31, 2006, we have executed or in process approximately 86% of the 1.8 million square feet of leases that come up for renewal throughout our wholly-owned portfolio during the year, with an average increase on the executed renewals of 11.4% on a straight line basis.

Renewal spreads on a cash basis were up 8.2%, compared to 6 % last year and 5.6% in 2004.

Approximately 190,000 square feet of the space not renewed with existing tenants was at our option so that we could upgrade our co-tenancy or expand existing tenants stores at a number of locations.

Excluding this space, we actually renewed 96% of the space that came up for renewal in 2006.

We also have retenanted over 465,000 square feet during 2006, at an increase in average base rent on a straight line basis of 22.9% over the rent that was being paid by the previous tenant prior to their vacating the space.

Retenanting spreads on a cash basis were up 16.6% compared to 7.1% last year.

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

We opened stores with the following new tenants during 2006: Gymboree, American Eagle, Kay Jewelers, Juicy Couture, Hollister, Lane Bryant, Abercrombie & Fitch, Hartmann Luggage, White House Black Market, UGGs, and Hot Topic.

We have also executed leases with Lacoste, Under Armour, and Armani to open stores in the Tanger portfolio in the first quarter of this year.

We have already made great progress on our 2007 renewals.

As of the end of January, we have obtained executed renewals for 613,000 square feet, or about 40% of the space coming up renewal during 2007, with an increase in average base rental rates of 13.4% on a straight line basis, compared to 856,000 square feet, representing 47% of the square feet up for renewal at this time last year, with an average increase in rental rates of 11.3% on a straight line basis.

In addition, during 2007, we retenanted -- I'm sorry, in addition, during January 2007, we retenanted over 225,000 square feet, with an increase in average base rental rates of 26.6% on a straight line basis.

The overall occupancy rate of our wholly-owned stabilized properties was 97.5% at the end of the year, compared to 97% at the end of last year.

This marks the 26th consecutive year that we have achieved a year-end occupancy level of at least 95%.

With respect to tenant productivity across our consolidated portfolio, reported tenant comparable sales, which represent approximately 82% of the occupied space square-footage within our wholly-owned portfolio, increased 4.8% for the rolling 12 months ended December 2006, to $338 per-square-foot, compared with the 3.4% increase in 2005, and a 3.2% increase in 2004.

For many years now, we have been strategically improving the tenant mix at many of our locations by moving tenants, replacing tenants, and bringing in higher volume brand name tenants.

We like to call this process the Tanger shuffle.

The Tanger shuffle is working as a number -- at a number of our centers.

We saw tremendous increases in sales from 2005 to 2006.

For example, Barstow, California saw a 34% increase in sales thanks to the addition of tenants such as Coach, Polo Ralph Lauren, and Guess.

Sales at our center in Foley, Alabama , we were up over 19% with the addition of Old Navy, Tommy Hilfiger, and the Gap.

Our Locust Grove, Georgia center experienced a 17% increase in sales thanks to the addition of Polo Ralph Lauren, The Children's Place and others; and our center in Tilton, New Hampshire saw sales increases of 10% thanks to tenants such as Pacific Sunwear and Starbucks, as well as large increases in sales at Coach Leather Wear and Banana Republic.

During August, we opened our two newest centers located in Charleston, South Carolina, and Wisconsin Dels, Wisconsin.

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

We currently have over 89% of the space open within the Charleston center.

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

We also have 100% of the space open within the Wisconsin Dels center.

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

With regard of our future development sites south of Pittsburgh, we closed on the acquisition of the development site land for $4.8 million on October 5, 2006, and have completed the relocation of the power lines located on the property.

The tiff bonds have been issues with net proceeds to Tanger expected to be approximately $16.8 million.

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

We are currently targeting a first quarter 2008 opening.

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

Based upon advanced previews of the property, we have received commitments from several key magnet tenants, and we currently have signed leases or lease commitments for about 61% of the initial 630,000 square feet per space.

We expect to receive additional signed leases as the demolition process continues, and as we begin construction on the initial phase during the first quarter of 2007.

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

We also have plans to expand four of our existing centers which will amount to approximately 140,000 square feet in total.

These expansions will be located in Barstow, California;

Branson, Missouri;

Gonzalez, Louisiana; and Tilton, New Hampshire, and will be delivered in the fourth quarter of 2007.

We have recently signed an option on one potential new development site, and are in the process of negotiating options on two additional sites.

The actual announcement of these sites will be done in May this year in conjunction with the ICSC Convention to be held in Las Vegas.

With respect to earnings guidance, based on our internal budgeting process, our view of current market conditions, and the strength and stability of our core portfolio, we currently believe that our estimated diluted net income per share for 2007 will be between $0.95 and $1.03 per share, and our FFO per share for 2007 will be between $2.40 and $2.48.

The mid point in this range represents an increase in FFO over the prior year of approximately 9%.

Our earnings guidance -- in our earnings guidance, we have assumed that same center NOI growth to be approximately 4% to 5%, which will be driven by continued increases in renewal and releasing spreads during 2007.

In our guidance, we also assumed tenant sales remained stable in 2007 at approximately the same level as 2006.

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

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

Operator, we are available for questions.

[OPERATOR INSTRUCTIONS].

Your first question comes from Jonathan Litt with Citigroup.

Hi, this is Ambika Goel with John.

Giving your same center NOI growth of 4% to 5% and guidance and the impact from new center openings, are there any specific negative variances that are holding your 2007 guidance back?

I think a 9% increase at the midpoint is not being held back.

I think that's a pretty significant increase for any REIT.

And certainly we are very comfortable with that guidance.

There are no negatives.

They're all positives.

Do you have any -- do you have the G&A guidance for 2007?

G&A we're estimating to be about $4.7 million per quarter next year.

Okay.

And then on the redevelopments you mentioned, 140,000 square feet, do you have the estimated investment and yield on those expansions?

First of all, Ambika, they are not redevelopments.

They are expansions of four of our very successful shopping centers.

Right, we're just adding additional square-footage.

It's going to cost around $35 to $36 million in total for those expansions.

And our average yield most likely will be in the teens, probably the mid to low teens.

Remember, we already have the land and basically the site work done.

Right.

And then given that you've been working on several other income initiatives, what could you expect other income growth to be in 2007?

I think we're currently looking at about a 3% to 5% increase in other income for the year.

Okay, thank you.

Your next question comes from Christy McElroy with Banc of America Securities.

Morning.

I'm here with Ross Nussbaum as well.

I'm not sure if I missed it, but I don't think you mentioned the mill specifically.

Can we assume you they hold the portfolio you are looking to acquire?

We are subject to a confidentiality agreement.

Feel free to assume whatever you'd like.

Can I ask, then, a theoretical question?

What would potentially attract you to a portfolio of enclosed outlet centers with an entertainment focus, given it would be a fairly big strategic change?

We have always looked at -- pardon me.

We always look at every portfolio that becomes available, particularly in an area that might be closely aligned with ours where we feel we can add value.

We feel that's our responsibility to our shareholders and also to ourselves.

Would you ever consider developing enclosed outlet centers in the future, or possibly adding any kind of entertainment components to any of your existing centers?

Anything is possible.

Right now, we haven't announced any plans to do that.

Okay.

And then the $944,000 of charges that you took in Q4, had these been in your guidance previously?

No.

Okay.

And are you anticipating any additional charges relating to acquisition abandonment costs in Q1?

No.

Okay.

Thank you.

[OPERATOR INSTRUCTIONS].

Your next question comes from David Fick with Stifel, Nicolaus.

Good morning.

Good morning, Dave.

I'm struggling a little bit with your really strong NOI same-store numbers.

I know you are conservative and wouldn't be over-projecting, but you've only got 13% of your leases expiring this year, so you must be anticipating incredibly strong rent spreads given your 97 1/2% current occupancy.

Is that the case?

Yes.

We think that our rent spreads in '07 will be higher than they were in '06.

And Dave, we've announced in this conference call through the end of January our performance on 40% of the amount that's already come due for releasing.

So it's essentially in the bag.

And I just want to make sure I heard that last question right.

You do not anticipate any additional abandon deal costs in 1Q?

You're done with your efforts in last year by the end of the year.

The costs were incurred in 2006, and they were written off in 2006.

And you were out of the game by year-end?

Virtually.

Okay, great.

Thank you.

[OPERATOR INSTRUCTIONS].

We will pause again for just a moment.

At this time, gentlemen, there are no further questions.

Before we close the call, I would like to take a moment and give special thanks to our entire management team, the Board of Directors for their available assistance in making 2006 a great year.

Thank you all for participating and your interest in our Company.

Steve, Frank and I are always available to answer any other questions you may have.

Thanks again.

Have a great day.

Bye.

Ladies and gentlemen, this concludes today's Tanger Factory Outlet Center's fourth quarter and year ending 2006 conference call.

You may now disconnect.