Tanger Inc (SKT) 2007 Q2 法說會逐字稿

Good morning.

And welcome to Tanger Factory Outlet Centers' second 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 operation, leasing, and its 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 second 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 the management's comments include time-sensitive information that may not -- that may be accurate only as of today's date, August 3rd, 2007.

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

Following management's prepared remarks, the call will be opened up for your questions.

On the call today will be Stanley Tanger, the company's Chairman and Chief Executive Officer; Steven Tanger, President and Chief Operating Officer; and Frank Marchisello, Executive Vice President and Chief Financial Officer.

I will now turn the call over to Stanley Tanger.

Please go ahead, sir.

Thank you, and good morning, everyone.

We're happy to share our second quarter results with you on today's call.

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

Thank you, Mr.

Tanger, and good morning, everyone.

Our total funds from operations available to common shareholders for the second quarter increased by 12.1% to $22.1 million, compared to $19.8 million last year.

FFO per share increased 11.3% to $0.59 per share as compared to $0.53 per share last year.

Our second quarter year-over-year increase in FFO is the direct result of our continued ability to drive rental rates on renewals and release space and 19% in percentage rental income and a 6% increase in other income as well as incremental FFO from our new development projects that opened in 2007.

Our FFO payout ratio for the second quarter of 2007 was $0.61 compared to $0.64 last year, and our FAD payout ratio was 92% as compared to 87% last year.

The FAD payout ratio in the second quarter includes $5.3 million and tenant allowances paid during the quarter.

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

For example, we have added a five screen cinema at our center in Terrell, Texas, and we have recently opened additional stores with Nike, Coach, Guess, Hollister, and Abercrombie & Fitch and other high volume tenants throughout our properties.

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

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 second quarter of 2007 was $5 million or $0.16 per share as compared to an income of $4.9 million or $0.16 per share in the second quarter of 2006.

On a consolidated basis, our debt to total market capitalization at the end of the second quarter was approximately 31.7% compared to 33.8% as of the end of the second quarter last year.

We also maintained a strong interest coverage ratio of 3.25 times for the second quarter of 2007, compared to 3.08 times for the second quarter of last year.

The only variable rate debt on our balance sheet is the $7.9 million outstanding on our $200 million in unsecured lines of credit.

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

At that time, our $100 million, 9.125% unsecured notes mature, followed by the maturity of our $174.6 million, 6.59% mortgage, which matures in July of 2008.

We have two forward treasury locks totaling $200 million at an average tenure treasury rate of 4.62%, which should mitigate our refinancing risk and expense associated with these 2008 maturities.

We continue to expect a significant savings and interest expense when these notes are refinanced.

With regards to a share buyback plan, we do not currently expect to pursue share buybacks in the foreseeable future.

Given our development pipeline and capital requirements relating to our 2008 maturities, we think it is in the long-term best interest of our company and our shareholders to keep as much of our powder dry as possible.

In addition, should CNBS markets and the related high leverage transactions continue to show weakness, it could ultimately provide a window for investment-grade companies such as ourselves to be opportunistic.

I'll now turn the call over to Steve.

Thank you, Frank.

And good morning, everyone.

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

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

I'm pleased to report that the positive rent spreads we achieved the last few years have continued into the second quarter of 2007.

As of June 30, 2007, we have executed or in process approximately 71% of the 1.6 million square feet of leases that come up for renewal throughout our wholly owned portfolio this year.

Approximately 217,000 square feet or 14% of the space not renewed was our option, so that we could upgrade our cotenancy and expand existing tenant stores at a number of locations.

Excluding this space, we have actually executed or in process 82% of the space coming up for renewal that we want to renew.

Year-to-date, we have achieved an average increase on executed renewals of 13.6% on a straight line basis compared to 12.2% last year.

Rental spreads on a cash basis were up 10.2% compared to 8.7% in 2006 and 7.9% in 2005.

Over 429,000 square feet was retenanted during the first half of 2007, producing an increase in average base rent on a straight line basis of 40.1% over the rent that was being paid by the previous tenant prior to their vacating the space compared to an increase of 27.7% last year.

Retenanting spreads on a cash basis were up 30.4% this year compared to 21.7% in 2006 and 4.1% in 2005.

Leases entered into ten to 15 years ago are now coming up to the end of their term.

The successful remerchandising strategy implemented by our senior executives in the past five years has dramatically increased sales for tenants in Tanger centers, together with our relatively low cost of occupancy of approximately 7.5%.

Increasing tenant sales allows us the opportunity to mark our assets to current market with substantially higher rents, adding value for our stakeholders and our tenants.

Since our average in place base rental rate is about $17 per square foot, we feel that there is substantial embedded additional upside in rents when leases mature in the next five years.

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 half of 2007: Build-a-Bear, Esprit, Lacoste, Under Armour, Michael Kors, Giorgio Armani, Tourneau, and many others.

Demand for space in Tanger centers by tenants is robust.

Same center NOI grew 2.3% during the second quarter and 2.7% for the first 6 months.

The overall occupancy rate for our wholly owned stabilized properties was 96.6% at the end of the second quarter of 2007, up 400 basis points since the second quarter of last year and up 150 basis points since March of this year.

In the past 26 years, we have managed through many economic cycles while never ending the year less than 95% occupied.

We expect that our overall occupancy rate will be between 97 and 98% by year end.

We closely 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.

During the first quarter of this year, we recaptured 44 stores that were occupied by three tenants, representing a gross leasable area of approximately 134,000 square feet or 1.6% of our wholly owned portfolio.

In the case of these three tenants, which were Welcome Home, Bible Factory, National Book Warehouse, they either filed for bankruptcy or were having financial difficulty.

We felt that it was in our best interest to gain control of the space quickly.

The average sales for these three tenants was only $150 per square foot with an average rental rate of about $17 per square foot.

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

Approximately 35% of this space has been released with new tenants now open.

An additional 17% of the space has been released with tenants expected to open during the third and fourth quarters during this year.

We expect the remaining 49% of the space will be leased during the second half of the year.

As such, we anticipate our same center NOI for the second half of the year should trend upward, averaging between 3 and 4% the rest of this year with continued improvements into 2008.

Our internal growth will continue to be driven by rental rate increases and by filling vacancies.

With respect to tenant productivity, reported tenant comparable sales within our wholly owned portfolio increased 3% for the rolling 12 months ended June 30, 2007 to $340 per square foot.

Every indication is that higher fuel prices and lower housing values have not reduced consumer spending in Tanger Centers.

The consumer confidence index rose in July to 112.6, which is the highest level in almost 5 years.

Robust consumer confidence usually leads to increased consumer spending.

Turning to our development pipeline, construction at our development site south of Pittsburgh continued during the second quarter of this year.

Tenant interest in the site remains strong with about 91% of the 308,000 square foot first phase either signed or out for signature.

The local community agreed to our request to work two ten-hour shifts.

However, we have had to discontinue this schedule within the last 30 days as some local residents convinced the local town supervisors to revoke our permit allowing us to work extended hours.

Given our reduced daily working schedule of one ten-hour shift, we are currently targeting a second quarter 2008 turnover to our tenants with stores opening in the third quarter of next year.

We currently expect the first phase to have a total cost of about $75 million and generate about a 9.5 to 10% return on cost.

Upon total buildout of 418,000 square feet, we expect the total project cost to be about $92 million and to generate a 10 to 10.5% return on our cost.

As for the new development site in Deer Park, Long Island, in New York, site work and construction has begun on the initial phase that will contain approximately 685,000 square feet, including a 16-screen cinema, the first (inaudible), a 32,000 square foot fitness center, and a mix of luxury and upscale outlet stores.

Currently, we have signed leases or leased commitments for 62% of the initial phase.

Our partners have done a tremendous job navigating through the permitting process and now the construction process.

When bids on some of the trades and raw materials exceeded our budget, we value-engineered the scope of work and successfully brought the bids down to the initial budget numbers.

This process saved us millions of dollars but caused a one quarter shift in the expected opening of the center.

We are currently planning a second quarter 2008 turnover to tenants with stores opening in the third quarter of next year.

From a return on investment standpoint, we expect the total cost of the Deer Park project to be approximately $297.5 million with an initial return on cost of approximately 9.5 to 10%.

The return on our net equity of approximately $4.5 million, however, is expected to be about 25 to 30%.

We also have underway expansions of four of our existing successful centers, which will amount to an approximate 140,000 square feet in total.

These expansions will be located in Barstow, California; Branson, Missouri, Gonzalez, Louisiana; and Tilton, New Hampshire.

They will be delivered in the fourth quarter of 2007 with stores opening in the first quarter of 2008.

These expansions and the associated renovations to be done to each of these centers have a total cost estimate of approximately $35.8 million and will generate an initial return on cost of approximately 8 to 9%.

We have also 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.

The 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 visitors traveled to North Carolina last year, ranking the state sixth in tourism between 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 have been very positive.

During the ICSC convention held in Las Vegas this past May, we announced two additional sites, which we have under control and on which we have started the initial predevelopment and leasing process.

These sites are located in Burlington, New Jersey, at exit 47 on Interstate I-295 and Port St.

Lucie, Florida, on exit 118 on Interstate I-95.

While tenant interest has been very positive, we're in the early due diligent study periods on all three of these sites.

As such, there can be no insurance that any of these locations will ultimately be developed.

We are planning to deliver at least two new Tanger Outlet Centers each year over the next three to five year period.

Based on our internal budgeting process, our view of current market conditions, and the strength and stability of our core portfolio, we currently believe our estimated diluted net income per share for 2007 will be between $0.68 and $0.76 per share.

We are maintaining our previous FFO guidance for 2007 of $2.40 to $2.48 per share.

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

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 and are looking forward to a successful second half of 2007.

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

Operator, we're ready for questions.

The question and answer session will now begin.

(OPERATOR INSTRUCTIONS) Your first question comes from Jonathan Litt with Citigroup.

Hey, guys.

This is Manny [Korschman] here with Jon and Ambika.

First question I had for you was what caused your 2007 outlook for same store NOI to drop to 3 to 4% from your initial 4 to 5%?

A lot of that had to do with the three tenants that we recaptured their space on, which we spoke about in the call.

We're in the process of re-leasing that space.

And we believe that our same center NOI will ramp-up in the third quarter of this year, as Steve mentioned, and give us the opportunity to get into the 4 to 5% range come 2008.

Okay.

And can you comment on shopping center traffic recently?

Have you seen any kind of declines or pickups?

No, we have not.

Traffic to Tanger Centers is still growing.

We're looking at increases in the 2 to 3% range, and it has continued in the first 6 months.

We have not seen any impact as I mentioned in our prepared remarks for higher gas prices or lower housing values.

The consumer spending in Tanger Centers is still very robust.

And on your -- and so your guidance on expense reimbursements, is that still at 88%?

Yes.

Whatever it's been for the first six months should continue for the rest of the year.

And guidance for G&A still at $18.8 million for the year?

Yes.

Thanks.

Your next question comes from Jeffrey Spector with UBS.

Good morning.

Hey, Jeff.

Steven, considering the strong releasing spreads you mentioned you hope to achieve over the next five years, what do you think you can achieve on the same center NOI growth rate over the next few years?

What range?

I don't think we're prepared to go out more than a year.

And Frank just mentioned that with re-leasing the 130,000 or so square feet that we took back at our option in the first quarter, we expect to ramp-up in the range of 4 to 5% next year.

Okay.

And just had a question about tourism this summer.

How does it compare to prior years?

And are there any differences between regions in the country?

The United States today is the outlet center of the world.

The dollar is very inexpensive.

We're seeing foreign travelers from all over coming and shopping in Tanger Centers.

One of the biggest problems we have is cleaning up the empty shoe boxes in our parking lots at the end of the day.

They'll come and they'll buy -- well years ago they used to come with empty suitcases and fill them up with whatever brand they liked the most and buy 30 or 40 pair of shoes and fill the suitcase up.

Now the dollar is so weak and the values in outlet centers are so great, they don't even bring empty suitcases anymore, they'll buy 30 and 40 pairs of whatever their favorite shoes are or whatever their favorite product is and then go down the hall and buy a suitcase at one of our travel outlet stores and fill it up and bring it back.

Of course, they leave the empty boxes in our parking lot.

You have any color on how the U.S.

consumer -- I guess this summer U.S.

tourism at your centers -- how that's changed?

It's robust.

Okay.

With the dollar strong, Americans continue to take their vacations as they've earned.

And we're finding people continue to drive as a family to Tanger Outlet Centers and the family resorts where we're located.

And that spending continues.

And last question.

Can you provide an update on Deer Park -- the luxury wing, how the leasing is progressing there?

We have announced the signing of the first Neiman Marcus on Long Island.

It'll be a Neiman Marcus Last Call.

And that has led to significant interest.

We don't have any signed leases we're prepared to announce yet.

But we are in discussions with a whole group of luxury tenants that will complement Neiman Marcus.

Thanks, guys.

Your next question comes from David Fick with Stifel Nicolaus.

Morning.

Most of my questions have actually been answered.

Just the one for Steve.

Steve, can you comment -- at ICSC and actually over the last year or so, you guys have said you've had a fair amount of success in helping create new tenant formats and attract nontraditional outlet tenants to the centers.

Can you just give us an update on that trend and maybe some of the new names that you're hearing and seeing?

Sure, Dave.

And by the way, happy birthday to you.

Thank you very much.

We just opened the first Tourneau watch store outlet in San Marcos, Texas.

It's been a huge success.

I think as you know in the first quarter of this year, we opened and have continued to open the first Abercrombie & Fitch and Hollister outlet stores.

We've opened Build-a-Bear, UGGs, Under Armour, all different product categories continue to open outlets.

We are in discussion with some very high profile tenants that are not currently located in the outlet industry.

Unfortunately, none of the leases are signed yet so I really don't want to mention their names.

But it will get the attention of the retail press when they are announced.

Great.

Thank you.

Thank you, David.

You have a follow-up question from Jeffrey Spector with UBS.

Just a follow-up on Abercrombie.

Can you give us total store count at this point in some of the latest markets they've joined and their performance?

I don't have that in front of me, Jeff.

But if you'd like to call back, I'd be happy to give it to you after the call.

Okay.

Great.

Thank you.

And then I had just one last question on the development.

I think you're saying at this point two centers a year.

And what is the go, no-go, I guess timeframe on some of the sites you discussed earlier?

Can you just talk about that?

Sure, Jeff.

For 25 years, 26 years now we've maintained an internal discipline, which has led to our success -- that being we will not close on land and start construction unless we have 50% of the first phase with signed, fully executed leases.

Not promises, but leases.

That's our discipline.

And that's the go, no-go decision.

Obviously we have to have all the permits, but we need the leases signed.

Thank you.

You have a follow-up question from Jonathan Litt with CitiGroup.

Hey, guys, a follow-up to Jeff's question.

Is there any idea of when the earliest timing could be on those developments?

We're still looking for probably first half of 2009 for delivery of those three.

Okay.

And any idea on guidance for percentage rents?

What was that question?

Percentage rents guidance for the year?

We have typically not given line by line guidance.

You can see that it's up year-over-year.

Our hope is that trend will continue through the year.

Internally -- we always forecast flat sales on our percentage rent forecast.

But obviously we've been obtaining pretty substantial increases.

And my last question was, at the Deer Park project, it looks like the prelease is going a little slower than at Pittsburgh, any particular reasons why?

It's twice the size of Pittsburgh.

Okay.

(OPERATOR INSTRUCTIONS) I'm showing no further questions at this time.

I will turn the call back over to Stanley Tanger to conclude.

Thank you very much for participating today.

Our prayers extend to our friends and colleagues in Minneapolis, the terrible tragedy they had there yesterday.

We appreciate your interest in our company.

Have a great day.

Bye now.

This concludes today's Tanger Factory Outlet Centers' second quarter 2007 conference call.

You may now disconnect.