Tanger Inc (SKT) 2007 Q3 法說會逐字稿

Good morning and welcome to Tanger Factory Outlet Center's third quarter 2007 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 trend, 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, October 31, 2007.

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.

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.

Good morning, everyone.

We are happy to share the third quarter results with you on today's call.

Frank will take you through our financial results, and Steve will follow with his 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 third quarter increased by 13.1% to $23.9 million compared to $21.2 million last year.

FFO per share increased 12.3% to 64 cents per share as compared to 57 cents per share last year.

Our third quarter year-over-year increase in FFO is the direct result of our continued ability to drive rental rates on renewals and released space, a 33% increase in percentage rental income as well as incremental FFO from our new development projects which opened during 2006.

This outstanding performance reflects the quality of our portfolio and continued strong demand for space in Tanger Centers by our tenants.

Our FFO payout ratio for the first 9 months of 2007 was 59% compared to 62% last year and our FAD payout ratio was constant at 83% for the first 9 months of 2007 and 2006.

We continue to believe we can maintain an FFO payout ratio around the 60% range and an FAD payout ratio in the mid-80% range during 2007.

We will continue to invest additional dollars in capital improvement and (inaudible) allowances during 2007 relating to our ongoing efforts to increase occupancy at select centers and attract new high-volume tenants to the outlet industry.

Net income available to common shareholders for the third quarter of 2007 was $7 million or 22 cents per share as compared to net income of $6 million or 19 cents per share of the third quarter of 2006.

On a consolidated basis, our debt to total market capitalization at the end of the third quarter was approximately 30.5% compared to 32.8% as of the end of the third quarter last year.

We also maintained a strong interest coverage ratio of 3.4 times by the third quarter of 2007 compared to 3.25 times in the third quarter of last year.

The only variable rate then on our balance sheet is $23.3 million outstanding on our $200 million in unsecured lines of credit.

As we stated during our second quarter conference call, we do not have any significant maturities until February of 2008 at that time or $100 million and 8% unsecured notes to mature, followed by the maturity of our $173.7 million 6.59% mortgage in July of 2008.

We have two forward treasury locks totaling $200 million at an average 10-year treasury rate of 4.62%.

It should mitigate our refinancing risk and expense associated with these 2008 maturities.

Given recent unsecured debt transactions and assuming stable market conditions during 2008, we continue to expect a significant savings in interest expense when these notes are refinanced.

I will now turn the call over to Steve.

Thank you, Frank and good morning, everyone.

I would like to begin today by highlighting our outstanding total returns to our shareholders during the relatively turbulent times we have seen thus far in 2007.

Tanger's year-to-date total return to shareholders was 6.8% compared to the (inaudible) equity index which posted a loss of 3.5%.

In addition, through the end of September, Tanger ranked 12th out of 120 equity REITs and first among mall REITs in the year-to-date total return.

We also ranked second among the 9 mall REITs in 1-year and 3-year total returns to shareholders.

This impressive performance is the direct result of the long-term efforts of the entire Tanger team.

They deserve the credit and we would like to thank them for making it happen.

From an operational standpoint, our fundamentals remain strong.

Producing an exceptional third quarter.

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

As of September 30, 2007, we have executed ORM process of approximately 77% of the 600,000 square feet of leases that come up for renewal throughout our portfolio this year.

Approximately 231,000 square feet or 15% of the space not renewed was at our option, so that we could continue to upgrade our cotenancy or expand existing successful tenant stores at a number of our locations.

Excluding the space which we took back, we have actually executed ORM process about 90% of the space coming up for renewal that we want to renew.

Year to date, we have achieved an average increase on the executed renewals of 13.2% on a straight-line basis compared to 11.6% last year.

Renewal spreads on a cash basis were up 10.2% compared to 8.5% in 2006 and 6.8% in 2005.

Over 598,000 square feet was retenanted during the third quarter of 2007, producing an increase in average base rent on a straight line basis of 37.6% compared to an increase of 22.3% last year.

Retenanting spread on a cash basis were up 28.7% compared to 16.3% in 2006 and 7.2% in 2005.

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

Our cost of occupancy is still about 7.4% which means stores in Tanger Centers are very profitable for our tenants.

Demand for space is robust and should allow us to increase rents over time.

Our leasing team has consistently performed on a very high level and this quarter is obviously no exception.

Same-store center and alike grew 6.2% during the third quarter and 3.9% for the first 9 months.

The overall occupancy rate of our wholly owned stabilized properties was 97.3% at the end of the third quarter 2007 up 1.3% since the third quarter of last 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 will be 97% to 98% by year-end.

We anticipate our same-center NOI will be about 4% for the year with continued improvements in 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 portfolio increased 1% for the rolling 3 months and for the rolling 12 months ended September 30, 2007 to $340 per square foot.

While sales in July and August were positive, record-breaking warm weather adversely affected traffic and sales in September.

In October, traffic and sales had responded positively to the colder, more seasonal cold weather patterns.

We expect that fourth quarter sales will be in line with our historical growth rate of 2% to 3%.

The old saying, in good times, people like a bargain and in not so good times, they need a bargain remains true today.

We are very comfortable with the positioning of our portfolio and our diverse tenant base.

Turning to our development pipeline.

Construction at our sites south of Pittsburgh continue during the third quarter of this year.

Tenant interest in this site remains strong.

In fact, we have decided to increase the size of the initial phase by 20%, from 308,000 square feet to 370,000 square feet and we have signed leases for approximately 61% of the first phase with an additional 20% out for signature.

We are still targeting a second quarter turnover to tenants with stores opening in the third quarter of next year.

We currently expect the first phase to have a total cost of approximately $86 million and generate a 9.5% to 10% return on costs.

Upon total build out of the 418,000 square feet, we expect the total project cost to be about $94 million and generate a 10% to 10.5% return on the cost.

We were delighted to learn on October 26th that vast clothes shops closed on the acquisition of 2 parcels of their development site adjacent to our center.

As for our new development site in Deer Park, Long Island, New York, site work and construction continues on an initial phase that will contain approximately 682,000 square feet including a 32,000 square foot Neiman Marcus' Last Call Store which will be the first and only on Long Island.

Other tenants will include Ann Klein, Banana Republic, BCBG, Christmas Tree Shops, Disney, Eddie Bauer, Reebok, New York Sports Club, and many more.

Regal Cinemas has also leased 71,000 square feet for a 16-screen cinemaplex, one of the few state-of-the-art cinemaplexes on Long Island.

Currently, we have signed leases or lease commitments for 64% of the initial phase.

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

From a return on investment standpoint, we expect the total cost of the Deer Park project to be approximately $298 million with an initial return on cost of 9.5% to 10%.

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

We also have, under construction, expansions of four of our existing successful centers which will amount to approximately 140,000 square feet in total.

These expansions are located in Barstow, California, Branson, Missouri, Gonzales, Louisiana, and Tilton, New Hampshire, and will be delivered in the fourth quarter of 2007 with stores opening in the first quarter of next year.

These expansions and the associated renovations of the entire centers, will be done to each of these centers and have a cost estimate of approximately $36 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 83,000 cars a day.

This site is located at exit 154 halfway between the research triangle of Raleigh, Durham and Chapel Hill, and the triad area of Greensboro, High Point and Winston-Salem.

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

We are also actively marketing the tenants to site located in Port St.

Lucie, Florida and this site is located at exit 118 on interstate 95 which sees approximately 64,000 cars daily.

Port St.

Lucie is one of Florida's fastest growing cities and located about 40 miles north of Palm Beach and one exit south the PGA Village and the Mets Spring training facility.

This center is currently expected to be approximately 350,000 square feet and initial reaction to this site from among the tenants has been very positive.

While tenant interest has been great, we are only in the early due diligence study periods on both of these sites.

Our goal is to deliver at least two new centers each year over the next three to five years.

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

Based on our initial budgeting process, our view of current market conditions and the strength and stability of our current portfolio -- core portfolio, we believe our estimated diluted net income per share for 2007 will be between 69 and 73 cents per share.

Due to our strong third quarter and year-to-date results and our favorable outlook for the fourth quarter, we are increasing our previous FFO guidance for 2007 to arrange a $2.44 to $2.48 per share.

The midpoint of this range represents an increase in FFO over the prior year of approximately 10%.

As we have done in the past, we will be providing 2008 guidance at the time of our year-end 2007 conference call.

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

At this time, if you would like to ask a question, please press star and the number 1 on your telephone keypad.

Your first question comes from Christine McElroy with Banc of America.

Good morning, guys.

Steve, you talked about expectations for continued improvement in same-store NOI next year from the 4% in 2007.

Should we expect growth somewhere in the 4% to 5% range in '08 or can you provide a more color on that comment?

Good morning, Christy.

I think that we are still comfortable with continued NOI growth in the range of about 4%.

So you don't see it rising much from that level next year?

Right now we are comfortable with 4%.

Okay.

Then as you look out over the next couple of years beyond your current redevelopment and expansion projects to be delivered this quarter, how much opportunity do you see for investing additional capital in redevelopment in your existing centers?

We have -- pardon me.

Speaking of expansion space.

Yes, expansion and redevelopment.

There is not a lot of room in the existing centers to continue to break up parking lots and continue to expand space.

However, the new centers that we have recently brought on line in Charleston, South Carolina and Dallas, Wisconsin, both have expansion opportunities for us and as we bring on line two new centers a year, they also will have expansion opportunities.

Okay.

Lastly, what would you say are the biggest drivers of demand for space in your centers today?

From what type of tenants are you seeing the greatest demand?

Demand for space is across all product lines.

We have been successful in creating in the outlet industry, a distribution channel which is extremely profitable for manufacturers in all areas of the economy.

Our properties with a very low cost of occupancy are extremely profitable for our tenants and the low cost of occupancy is, in essence, a shock absorber for us in case of some macro event that none of us know about today.

We will continue to be a very profitable distribution channel and part of the long-term growth strategy for our tenants.

Thank you.

Your next question comes from Jonathan Litt with Citi.

This is Ambika with Jon.

Can you talk about the estimated timing of the Mebane and Port St.

Lucie projects, you know, would it be like earliest in the beginning of 2010?

I know that you've outlined general developments pending per year, but I just wanted to get a sense of how far long these predevelopment projects are?

Good morning, Ambika.

Right now, we are looking at mid-2009 for these projects.

Based on tenant demand, we expect to be in the ground some time in late second quarter, third quarter of next year, and be able to deliver it probably third quarter of 2009.

Okay.

Then, can you talk about the impact of the dollar on tourist traffic and how that has impacted your outlet center sales?

We are seeing tourist traffic in several of our larger centers around the country, particularly Riverhead, New York, San Marcos, Texas, and on the West Coast and Barstow, California.

Obviously, the dollar is weak.

I said before that the United States today is the outlet center of the world.

We are finding foreign nationals and many more languages spoken at our properties.

They tend to buy multiples of brand name product and take them back home again.

I guess then, if the tourist traffic is benefiting your assets, why aren't we seeing stronger sales growth is closer to above 3%?

I think that in the fourth quarter, we will see growth back to our normal growth pattern of 3% to 4%, and we are looking forward to a good Christmas.

I think the month of September was probably an anomaly.

And we have seen October bounce back to normal growth patterns.

Okay, great.

My last question.

Is there any impact from Timberland closing their outlet stores?

I am not sure of the amount of Timberland that you have in your portfolio.

We have not received notice from Timberland that they intend to close a single outlet store in the Tanger portfolio.

Okay, great.

Thank you.

Your your next question comes from Jeff Spector with UBS.

Good morning.

Can you comment on how the luxury wing leasing is going at Deer Park?

Good morning, Jeff.

We are having great success anchored by the first and only Neiman Marcus Last Call on Long Island where the later stage of negotiating with another luxury department store for their outlet concept.

So, it is our plan to have two major upscale luxury department store outlets.

In addition, the upscale luxury brands are filling in around that once we have the anchors in place.

Okay, and then, just a question on Port St.

Lucie.

Any new feedback from tenants or concern about the Taubman's proposal to build a mall in that market.

I think the Taubman group is a fantastic site.

It's a couple of miles south of ours.

They do have some development and issues.

I think they have to put in a new interchange over the Federal Highway.

Our site is ready to go.

As we have done elsewhere around the country, we welcome the Taubman and their luxury upscale department store which brings upscale people to the proximity of our site and as we have done for 26 years, we have coexisted nicely with upscale regional malls.

Okay.

Then last question.

t ICS, we saw a lot of private developers announced new outlet locations, in this environment, are you seeing any of those private developers or any of those proposed sites fall by the wayside?

Over the past 26 years, we have seen that happened.

We deal with New York stock exchange, brand name manufacturers and very large single brand name tenants.

They set up the outlets as a distribution channel.

They want to be sure that the outlets are built by and managed by and marketed by professionals focused on this industry, that have done it for a period of time.

Fortunately, based on our long-term relationships with the senior management of our tenants, we have been successful in earning their trust and they are comfortable executing leases with our company.

To date, some, it is very difficult for a single individual to start to build outlet centers.

This is unlike some of the other boxes Wal-Mart, Target, Kohl's, whatever they are looking to increase their store chain and will give private developers a chance that they have the land.

Our tenants are not driven by increase in store counts.

They are manufacturers and the best brand names in the world, looking for separate distribution channel to enhance their brand and compliment their normal distribution channel which is through the department stores.

Okay.

Thank you.

Your next question comes from Jay Habermann with Goldman Sachs.

Good morning, everyone.

Here with Tom Baldwin, too.

I guess, Steve, a question for you in terms of the slight dip in occupancy.

It is very modest but obviously, 2 of your largest centers, Riverhead and Rehoboth, can you comment there?

Is that simply just seasonality and you expect that to pick up in Q4?

Good morning, Jay, and thank you very much for picking up coverage of our company.

You're welcome.

The slight dip in occupancy in two of our best centers is merely timing and I think at year end, you will see those bounce back.

I don't want to leave anyone with the misperception.

The overall occupancy in the Tanger portfolio at the end of the third quarter increased by 130 basis points to 97.3.

Okay.

Then in terms of, obviously the retenanting has been successful and the spreads there are significantly higher.

It seems like the third quarter was the first quarter or actually the retenanting, the amount of square foot exceeded simply the renewals, and I guess year-to-date percentage is roughly 78% versus 30% in terms of renewals versus retenanting.

Can you comment a bit on that trend?

I mean, do you expect to see the third quarter where again it is more 50/50 being the norm or do you think it is going to stay at the 70/30 range?

Jay, this is Frank.

lot of the renewals really get done in the first quarter and then it lowers each quarter thereafter as we pretty much get done with all the renewals for the year; whereas, retenanting is more consistent throughout the year, granted more in the first quarter, but you know, it consists of amount of square foot that gets retenanted each quarter, whereas again, renewals get more front loaded and done in the first half of the year.

What about just simply that being more of an objective or goal in terms of seeing that percentage grow?

I mean, I know it will grow over time, obviously, as you see more leases rolling in the next several years.

I think that's a fair statement.

Okay, and the New Jersey site obviously on hold, can you give us some more details there?

Is that something you expect to revisit?

Do you not expect to come back on that site?

As you know, we are cautious developers.

With this site, we knew that there were going to be development challenges.

And there was a master developer for the area.

Our transaction included buying a finished pad, permits in hand.

And all entitlements because the master developer had some issues that we're going to take more time than initially contemplated.

We put this site on the back burner.

It still is a fabulous site and may come back at one point.

But we do not risk capital on speculative land acquisitions and never have.

So, there is no write off for the site.

We did the initial exploration and hopefully, it will come back to us as a finished pad.

Okay, great.

In terms of overall tenant demands, it seems like it is fairly stable, but can you give us a sense of what retailers are thinking in terms of expansion plans, just given obviously the more modest growth we are seeing in retail sales?

The outlet stores continue to be either the most profitable or amongst the most profitable business units of virtually every corporation that we work with.

In my meetings with the chairmen and CEOs of these companies on a consistent basis, they highlight their love of the outlets as a distribution channel, their love of the outlets as a cash flow generator to pay for some of the other items that go into their budget which may not generate enough cash flow.

So we are very comfortable with the long-term prospects for demand in our centers.

As I mentioned, our low cost of occupancy continues to make stores in the Tanger centers very profitable for our tenants and we expect that to continue.

I know you hired someone to look at future development sites.

You obviously have the North Carolina and the Florida sites in the works for 2009.

Can you just give us a sense of what you are looking in terms of beyond that time frame?

We have hired now a full-time person and we are aggressively looking at tying up additional sites for new Tanger outlet centers.

We do have a shadow pipeline and the minute we get the land under control and feel the expectation for permitting is within a reasonable time frame, we will announce the site and start to market it to our tenants.

Tom has a question as well.

Good morning guys.

I know you saw the Boaz, Alabama site this quarter.

I was wondering if you would be one to provide a cap rate on that sale.

Then, a second part of my question is, just looking forward, should we expect further asset sales?

We have continued to sell assets over the past 10 years as we prune our portfolio.

Boaz was an extremely small property with an insignificant impact on our overall balance sheet and operating.

Thanks a lot.

Thank you.

Your next question comes from Greg Haendel with Transamerica.

Hi.

Just a few quick questions.

It might be hard to comment on this.

But, what percent lower is your occupancy cost versus the mainstream distribution for a lot of your tenants.

I think Chelsea property group which is a division of Simon announces that they have an 8% cost of occupancy.

I believe that David Simon announced in his conference call within the last week, that Simon's cost of occupancy is 13%.

The public company costs of occupancy are well documented.

It is more difficult with private operators to get an accurate number, so I hope that answers your question.

And then, you know, with a slowing consumer and higher gas prices, it is a little harder to get to your outlet centers and with lower retail inventories.

I just want to understand your thoughts of where the consumer is going and how this will help drive sales growth.

ell, in an inflation-adjusted basis, the cost of gas is $3.

It is about the same as when we had the gas crunch about 30 years ago, when gas prices spiked up, so on an inflation-adjusted basis, it is not a much larger part of the family's budget.

We have not reached in our opinion, the inflection point with gas where it has had an adverse effect on people traveling around the country and certainly not visiting our center.

Okay.

Then just two other questions.

What is your leverage target?

And I assume you plan on refinancing your debt coming due next year.

I mean, is that correct or are you going to pay it down with free cash flow?

We have earned, after 14 years of investment grade, credit rating from both agencies which allows us tremendous flexibility to refinance and ladder out maturities on approximately $275 million of debt that comes due next year.

So, it will be refinanced.

That's correct.

Okay.

Thank you.

But it will be refinanced in all probability, based on the current market conditions if they remain.

It will be refinanced with unsecured corporate level debt as opposed to property level debt.

Excellent.

Thank you.

Your next question comes from Nathan (inaudible).

Hi, good morning.

Most of my questions have been asked.

One last one.

Can you comment on where the signed leases and those out for signature, the lease rates are coming in versus your pro forma on Deer Park and Pittsburgh?

Right now, we have given the percentages that have been signed and out for signature in both of those sites.

And in the prepared remarks.

And our rental rates are in most cases above our initial pro forma which was said a year or two ago.

Okay.

Thank you.

At this time, if you would like to ask a question, please press star and 1.

At this time, there are no further questions.

I would now like to turn the call over to Stanley Tanger to conclude.

Thank you, ladies and gentlemen for participating today.

Have a great day, and watch out for (inaudible) tonight.

.

This concludes today's Tanger Factory Outlet third quarter financial results.

You may now disconnect.