Tanger Inc (SKT) 2007 Q1 法說會逐字稿

Good morning and welcome to Tanger Factory Outlet Center's first quarter 2007 conference call.

Please note that during this conference call some of management's comments will 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.

Details on the Company's first quarter results are included in its press release and supplemental information that were filed with the Company's Form 8-K yesterday afternoon.

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, May 1, 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.

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

Then we'll have time for any questions you have.

I'll now turn the call over to Frank.

Thank you, Mr.

Tanger.

Good morning, everyone.

Our total funds from operations available to common shareholders for the first quarter increased by 12.8% to $21.3 million, compared to $18.9 million last year.

FFO per share increased 11.8% to $0.57 per share, as compared to $0.51 per share last year.

The year-over-year increase in FFO is a direct result of our adding our two new centers, located in Charleston, South Carolina and Wisconsin Dells, Wisconsin, during August of 2006, as well as our continued ability to drive rental rates on renewals and released spaced.

Our FFO payout ratio for the quarter ended March 2007 was 60%, compared to 63% last year, and our FAD payout ratio was 97%, as compared to 85% last year.

The FAD payout ratio in the first quarter includes $6 million in tenant allowances paid during the quarter.

Many of these allowances are related to our continued work on improving occupancies and adding key magnet tenants.

Adding these tenants to our centers will help us to continue to drive tenant sales and, in turn, achieve increases in percentage rent, base rent rates, and center NOI numbers, all of these resulting in an acceptable return on these investments over time.

Including the impact of the recently-announced dividend increase, 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 2007.

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

Net income available to common shareholders for the first quarter of 2007 was $1.9 million, or $0.06 per share, as compared to net income of $13.6 million, or $0.44 per share for the first quarter of 2006.

Net income for the first quarter of last year includes a $13.8 million gain on the sale of real estate associated with the sale of our non-core outlet centers in Pigeon Forge, Tennessee and North Branch, Minnesota.

On a consolidated basis, our total market capitalization at March 31, 2007, was approximately $2.3 billion, up $262 million, or 13.1% from a year ago.

Our debt-to-total market capitalization at the end of the first quarter was approximately 30%, compared to 32.5% as of the end of the first quarter of last year.

We also maintained a very strong interest coverage ratio of 3.18 times during the first quarter of 2007.

As a result of the sale of the $149.5 million of 3.75% exchangeable senior notes in August of last year, 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 of 9 1/8 % unsecured notes mature.

Based on current market conditions and our investment-grade rating, we expect a significant savings in interest expense when these notes are refinanced.

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

Thank you, Frank, and good morning everyone.

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

Continuing to build off the last couple of years of positive trends, we had an outstanding first quarter in 2007.

Once again, our shareholders have been rewarded with a 6% increase in our [common] dividend, from $1.36 per share to $1.44 per share, which was announced on April 12th of this year.

This marks the 14th consecutive year that we have increased our dividend since becoming a public company in May 1993.

In the past five years, we have raised our dividend by almost 18%.

During that time, our shareholders have received a total return on their investment in Tanger of over 294%.

From an operational standpoint, our fundamentals remain strong and we had an exceptional first quarter.

Our senior management team and our people on site in our shopping centers take pride in outperforming market expectations and our competitors.

I am pleased to report that the positive rent spreads we achieved the last few years have continued into 2007.

As of March 31, we had executed or in process approximately 57% of the 1.6 million square feet of leases as they come up for renewal throughout our wholly-owned portfolio this year.

We have achieved an average increase on the executed renewals of 13.3% on a straight-line basis compared to 11.7% increase last year.

Renewals spreads, on a cash basis, were up 9.5% compared to an 8.2% increase last year.

Approximately 203,000 square feet, or 13% of the space not renewed with the existing tenants, was at our option, so that we could upgrade our co-tenancy and expand existing tenants' stores at a number of locations.

Over 321,000 square feet was re-tenanted during the first quarter of 2007, producing an increase in average base rent, on a straight-line basis, of 37.4% over the rent that was being paid by the previous tenant prior to their vacating the space, compared to an increase of 21.2% last year.

Re-tenanting spreads on a cash basis were up 30% compared to a 16% increase last year.

Leases entered into ten to fifteen years ago are now coming to the end of their term.

The successful re-merchandising strategy implemented in the past five years has dramatically increased sales.

And now, together with our relatively low cost of occupancy, allows us the opportunity to mark our assets to current market with substantially higher rents.

The scarcity of this type of quality asset gives us the opportunity to add value for our stakeholders and our tenants.

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

We opened stores, or have signed leases, with the following new tenants during the first quarter of 2007 -- Build-a-Bear, Esprit, Lacoste, Underarmer, Giorgio Armani, and Torneau.

Same center NOI growth during the quarter was 3% and the overall occupancy rate for our wholly-owned stabilized properties was 95.1% at the end of the first quarter of 2007.

This is exceptional, given the fact that we recaptured 44 stores during the quarter that were occupied by three tenants, representing a gross leaseable area of approximately 134,000 square feet, or 1.6% of our wholly-owned portfolio.

We monitor the performance of every tenant in our portfolio.

If they start to falter, regardless of who they are, we work rapidly to get the space back.

In the case of these three tenants, which were Welcome Home, Bible Factory, and National Book Warehouse, they either filed for bankruptcy or were having financial difficulty, and we felt it was in our best interest to gain control of the space quickly.

The good news is our centers are so strong, that this space is being released to better tenants at much higher rental rates.

The results should be apparent as these new stores open later this year.

With respect to tenant productivity, reported tenant comparable sales within our wholly-owned portfolio increased 4.7% for the rolling twelve months ended March 31, 2007, to $344 per square foot, compared to a 4.3% increase last year.

Sales increased 6.3% for the three months ended March 31, 2007, compared to a 3.4% increase last year.

Consumer spending in Tanger Outlet Centers remains robust, even in the face of gas prices increasing about 14%.

Also, the weather was most unusual.

We experienced the warmest March since 1913 and the coldest Easter weekend in the past ten years.

We closed on the acquisition of the Pittsburgh development site land for $4.8 million on October 5, 2006.

The relocation of the power lines located on our property is complete and we have begun site work.

The TIF bonds have been issued, with net proceeds to Tanger expected to be approximately $16.8 million.

Tenant interest in this site remains robust, with about 78% of the first phase either signed or out for signature.

We are currently targeting a first quarter 2008 turnover, with stores opening before Memorial Day next year.

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

Site work has begun on an initial phase that will contain approximately 688,000 square feet, including a 16-screen cinema, the first Christmas Tree Shop on Long Island, a 32,000 square foot fitness center, and a mix of luxury and upscale outlet stores.

Currently we have signed leases, or lease commitments, for 52% of the initial phase.

We are targeting a first quarter 2008 turnover, with stores opening before Memorial Day next year.

I am very proud to announce that our center in Deer Park will be the first LEED-certified shopping center on Long Island.

We would like to invite each of you to our groundbreaking ceremony in Deer Park tomorrow, at 11:00.

Give us a call for more details if you can attend.

As we stated in our year-end conference call, 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; Gonzales, Louisiana; and Tilton, New Hampshire.

They will be delivered in the fourth quarter of 2007, with stores opening in the first quarter of next year.

Tanger has signed an option for a new development site located in Mebane, North Carolina, on the highly traveled Interstate 40/85 corridor, which sees over 83,000 cars daily.

This site is located at Exit 154, halfway between the Research Triangle Park area of Raleigh, Durham, and Chapel Hill, and the Triad area of Greensboro, High Point, and Winston-Salem.

More than 49 million visitors travel to North Carolina, ranking the state sixth behind California, Florida, Texas, Pennsylvania, and New York.

The center is currently expected to be approximately 300,000 square feet and initial reaction to the site from our magnet tenants has been very positive.

We are also in the process of negotiating options on two additional sites.

The actual announcement of these sites will be done upon execution of definitive option agreements, or in May of this year in conjunction with the ICSC convention to be held in Las Vegas.

We look forward to seeing many of you in Vegas and would be delighted to show you our development pipeline of exciting new Tanger Outlet Centers.

Based on our initial budgeting process, our view of current market conditions, and the strength and stability of our core portfolios, we currently believe our estimated diluted net income per share for 2007 will be between $0.77 and $0.85 per share, and our FFO for 2007 will be between $2.40 and $2.48 per share.

The midpoint of this range represents an increase in FFO over the prior year of about 9%.

We plan to continue to properly 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 accretably.

We are very excited about the execution of our strategy by our team and are looking forward to a successful 2007.

The 410 members of the Tanger team are passionate about what they do and are proud to work for our company.

Our team is strong, deep, and well trained.

We thank them for helping to make these superior results happen.

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

Thank you.

[OPERATOR INSTRUCTIONS.] Your first question is from the line of Jonathan Litt with Citigroup.

Hi, this is Ann Bici with Jon.

Given that your same store NOI guidance is 4 or 5% for the year, and you're trending at 3% as of the first quarter, do you still maintain that you'll reach that level?

Yes.

Okay.

And could you provide an update on the size and yield of Deer Park and Pittsburgh?

Pittsburgh's initial phase is around 310,000 feet, with a cost of approximately $90 million, and an initial return of between 9.5 and 10%.

Deer Park, the initial phase, I believe we mentioned, was around 830 to 840,000 square feet, with a cost of about $290,000, and a return of, again, between 9.5 and 10%.

Okay.

That was 290 million.

I wish it was 290,000.

Oh, I'm sorry.

290 million.

I just want to remind you that we have two partners in our Deer Park investment and the return Frank mentioned to you was on actual costs, not on investment.

Okay.

And would your new development in Mebane compete with the Burlington outlet center, which is close by?

It's pronounced Mebane.

It's M-e-b-a-n-e, Mebane, North Carolina.

And the Burlington site was one that Stanley Tanger developed is the first outlet center in the States in the early 1980s-- 1981, 1982.

Burlington now has been sold to a group and, from what we understand, they plan to redevelop it.

We will be building a new, state-of-the-art Tanger Outlet Center and I think that it will be very successful.

Thank you.

Your next question is from the line of Christy McElroy with Banc of America.

Hey, good morning.

Steve, just following up on your comments on releasing spreads, looking at the mark-to-market on the remaining expirations over the next year or two, can we expect spreads to remain in that 15 to 20% range on the GAAP basis, blended going forward?

Or can you give us a general sense for what you expect?

Good morning, Christy.

I think that's our goal.

We certainly would be fighting hard to get those ranges.

As we've mentioned to you over the past couple of years, these leases now are maturing at the end of their term.

We are able to bring them to market and the tenants over the past ten to 15 years have enjoyed the benefit of below-market rents, and I think that the success of our properties allows us now to get those type of increases and also be a profitable distribution channel for our tenants.

Okay.

And then, can you give us an update on Tuscola and West Branch.

Tuscola seems to be kind of the laggard in the portfolio from an occupancy standpoint, and then West Branch has kind of trended down a bit there.

Are these assets part of your kind of ongoing re-tenanting efforts?

Tuscola's occupancy has remained constant in the low 70's, high 60's since we purchased it as part of the Charter Oak acquisition in 1993, and we've stabilized that.

We're very pleased to tell you that we have signed leases with large magnet tenants that should be taking occupancy within the next six months.

And I think that you will find that occupancy of Tuscola going back up.

And we have an outstanding tenant mix there, with some of the finest names in the outlet industry.

West Branch is an anomaly this quarter.

We are repositioning some of our tenants to accommodate a much larger, high-volume outlet tenant and, when that store opens, we'd be delighted to announce the name.

Okay.

Then, just lastly, there was an article in the Pittsburgh Post Gazette a couple of weeks ago, talking about your recent approval to run two 10-hour shifts for construction workers at the site there.

Can you just discuss how you're running in terms of your original expectations for schedule there?

And I missed your answer to Ann Bici's question.

Are you staying on budget and what's the yield?

We will be on budget.

The yield will be, as Frank mentioned, between probably 9.5 and and 10.5%.

The costs have gone up and we've been able to, through the productivity of the rest of our portfolio, pass on substantially all those cost increases to our tenants.

We will be working two 10-hour shifts.

We had planned for that and our-- the local community has accommodated us.

Okay, great.

Thank you.

Your next question is from the line of Jeffrey Spector with UBS.

Good morning.

Hey, Jeff.

You mentioned several new tenants joining the portfolio.

Can you just comment on some of the locations and confirming if they are opening-- their desire to open and have the outlet clause in their contract, and are they manufacturing for the outlets, or this is just excess inventory?

Well, Jeff, as you know, each store is different and each business strategy is different.

We are pleased to announce that we have an executed lease with Torneau, and we understand from Torneau that this will be the first outlet store they will open, in the Tanger center in San Marcos, Texas.

They have an agreement, I believe it's public, with a large global manufacturer of watches, that's the major supplier to the Torneau stores, and they will be distributing these, and we are told, at outlet prices.

The other ones-- Underarmer is an outstanding public company, with a product type that's very popular today.

They are opening outlet stores around the country and it is an outlet chain.

Giorgio Armani, of course, is one of the most upscale, finest designers and we are proud to have them join our company, with the first store in the Tanger portfolio in Riverhead.

The same is true with Lacoste.

Lacoste has done a fabulous job of repositioning the brand and they have full-price retail, as you know, and they are opening several outlet stores, and they are true outlet stores.

So that's the long answer to a short question, but we--I think you'll see by the quality of the upscale and designer names that we are adding to the portfolio, the strength and power of the Tanger Outlet Centers and the performance that we've had to be able to attract these fine tenants.

And that speaks to the re-merchandising strategy that we implemented over five years ago.

Great.

Thank you for the comment.

And, I'm not sure if you already stated this so I apologize if you did, but did you talk about the recent performance of your latest openings?

Can you just talk about Wisconsin Dells and Charleston?

Both are performing on track with our expectations.

Both are in tourist locations and, as we've had in history over the past 25 years with tourist locations, the first-year people kind of happen on it by mistake, when there's a rainy day or there's no snow or they just get bored with whatever they're going to the resort to do.

The second year they plan to go outlet shopping and outlets in resort areas, at least our history for the past 25 years, have built year over year over year.

We are expecting both of these properties to be in our top probably 20%.

Great.

Thank you.

Your next question is from the line of Craig Schmidt with Merrill Lynch.

Good morning.

Good morning, Craig.

Hey, Craig.

The increase in second generation tenant allowances-- I wondered was that related to, maybe, Deer Park?

No, Craig, we would not include first generation tenant allowances, which would be the new development at Deer Park.

Oh, okay.

This is purely for releasing current space.

Okay.

Is this--then I guess it would be related to Steve's comments on the more upscale tenants that you're bringing in?

Or is it just--?

Yes, I think that's a fair assumption.

And, it's a relatively small investment and, as you can see, the return on that investment that we've been able to harvest over those investments that we've made over the past five years has been substantial.

Great.

And, given where you are with Deer Park now, where do you think you'll open in terms of occupancy?

We fully expect to open between 75 and 80% day one, and it should stabilize within the first year.

Keep in mind, this is the size of probably two to two-and-a-half normal Tanger Outlet Centers.

So it's a large project.

We're expecting it to be one of the top producing outlet centers in the world and can't wait for it to open, frankly.

We'd love to have you come to the groundbreaking, Craig, tomorrow.

Happy to give you a ride out.

I'd love to go.

There's a little thing called earnings' season.

But listen, good luck with that.

Thank you.

Thank you.

[OPERATOR INSTRUCTIONS.] Your next question is from the line of [Nathan Isbee] with Stifel, Nicolaus.

Good morning.

Hey, Nathan.

Hi, Nate.

The next three development projects that you guys were talking about-- are those wholly-owned or are any of those in JV's?

The one in Mebane will be wholly-owned.

At least one of the two that we're in final stages of negotiation will be a partnership.

Okay.

The other is undetermined right now.

Okay.

And can you just give me a ballpark what you think you're going to be spending on these three?

A little premature for that.

Okay.

The 134,000 square feet of space that you recaptured-- do you expect to have the new tenants in this year?

That space--the answer is yes.

And just to give you a scope, the average sales per square foot of those three tenants in the space we recaptured was only $150 per square foot.

It's about $200 a square foot under our corporate average.

Right.

And the average rent was about $17 per square foot?

We expect to capture at least 20 to 25% rent spread on those spaces when they're released.

Good.

Okay, and just a last question.

How much saleable land do you have at Wisconsin and Charleston?

Not a lot.

And whatever we have we're not really interested in selling.

For the out-parcels for the restaurants, we're discussing leasing the land to them, as opposed to selling it.

Okay.

Great.

Thank you.

There are no further questions at this time.

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

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

Thank you again and good day.

This concludes today's conference call.

You may now disconnect.