Tanger Inc (SKT) 2008 Q2 法說會逐字稿

Good morning and welcome to Tanger Factory Outlet Centers second quarter 2008 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.

This call is being recorded for rebroadcasts 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, July 30, 2008.

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

(Operator Instructions).

On the call today will be Steven Tanger, President and Chief Operating Officer, and Frank Marchisello, Executive Vice President and Chief Financial Officer.

I will now turn call over to Steven Tanger.

Good morning everyone, and thank you for participating on our call today.

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

Then we we'll have time for any questions.

I'll now turn the call over to Frank.

Good morning everyone.

Our funds from operations per share for the second quarter of 2008 was $0.40 per share.

Adjusted for the previously announced $8.9 million treasury lock settlement and the $406,000 prepayment penalty, our total funds from operations available to common shareholders for the second quarter increased by 10.3% to 24.4 million compared to 22.1 million last year.

Adjusted FFO per share increased 10.2% to $0.65 per share as compared to $0.59 per share last year.

The year-over-year increase in FFO continues to be driven by our ability to drive rental rates on renewals and re-leased space, as well as incremental revenues from our four expansion projects which opened during the fourth quarter of 2007.

Our adjusted FFO payout ratio for the quarter ended June 30, 2008 was approximately 59% compared to 61% last year.

And our FAD payout ratio was 119% for the second quarter as compared to 92% last year.

We're continuing our plan to invest additional dollars in capital improvements during 2008.

Including the $17 million reconfiguration project currently underway at our center located on Highway 501 in Myrtle Beach, South Carolina.

Excluding this reconfiguration project on which we have spent $7.2 million year-to-date, our FAD payout ratio would've been 79% for the second quarter and 78% for the first six months of 2008.

We currently believe we can maintain an FFO payout ratio in the 60% range, and an FAD payout ratio of approximately 100% during 2008.

Excluding the Myrtle Beach reconfiguration project, our FAD payout ratio for 2008 is expected to be in the mid to low 80% range.

In addition we will continue to invest in our ongoing efforts to increase occupancies at select centers and attract new high-volume tenants to the outlet industry.

We're committed to achieving high-quality long-term earnings by consistently investing in our business.

During the second quarter 2008 we closed on a $235 million unsecured three-year term loan facility.

The syndicated facility was jointly rearranged by Bank of America Securities and Wells Fargo Bank.

The amount of the facility was originally set at 200 million but was upsized to 235 million based upon strong demand for participation.

In total, nine banks participated in this syndication, of which five were new relationships for our company.

Even in this extremely tight credit market with very little liquidity, our strong balance sheet and long-standing relationships allowed us to access capital at very attractive rates.

The facility bears a floating interest rate at a [160] basis point spread over LIBOR.

Subsequently on July 9 we completed a three-year swap transaction which converted the floating rate to a fixed interest rate of 5.21% on $118 million of the term loan facility until April 1, 2011.

On June 26, 2008 we prepaid our only remaining mortgage loan which had a principal balance of $170.7 million.

Our entire wholly-owned portfolio of 29 properties totaling about 8,450,000 square feet is now unencumbered, providing us even more financial flexibility at a time in the cycle when it is needed the most.

On a consolidated basis our total market capitalization at June 30, 2008 was approximately 2.2 billion and our debt to total market capitalization at the end of the second quarter was approximately 34.8%.

We also maintained a strong interest coverage ratio of 3.56 times for the second quarter of 2008.

Taking into consideration the interest rate swap transaction, 67.8% of our debt as of June 30th was at fixed rates.

At this point we have no debt maturities until 2011.

As of June 30th we have $196.7 million available on our $325 million in unsecured lines of credit at an interest rate of 75 basis points over LIBOR.

A strong balance sheet is a strategic advantage and will protect our franchise, especially in turbulent market conditions like these.

No matter what happens in the economy we have access to the capital, liquidity, and the overall strength to continue to invest wisely in our business.

I'll now turn the call over to Steve.

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.

Continuing to build off the positive trends of the past couple of years, we had an outstanding second quarter of 2008.

From an operational standpoint, I am pleased to report that the robust rent spreads we achieved the last few years have continued into the second quarter.

As of June 30, 2008, we have executed or in process approximately 76% of the square feet associated with leases that come up for renewal throughout our wholly-owned portfolio this year compared to 71% last year.

During the first six months of 2008, we have achieved an average increase on executed renewals of 18.3% on a straight line basis compared to 13.6% last year.

Over 403,000 square feet was a re-tenanted during the first half of 2008, producing an increase in average base rent on a straight line basis of 43.1% over the rent that was being paid by the previous tenant compared to an increase of 40.1% last year.

We're continuing to capture the embedded growth in our portfolio as leases entered into 10 to 15 years ago come to the end of their term.

Our low cost of occupancy, sales growth and demand for space from our tenants allows us to continue to increase rent while remaining a profitable distribution channel for our tenants.

The fundamental matrix of our business remains strong.

Same center NOI growth during the quarter was 3.9% compared to 2.3% during the second quarter 2007.

Year-to-date our same center NOI grew by 4.8% compared to 2.7% during the same period last year.

We continue to be comfortable with our comp center NOI growth assumption of 4% this year.

The occupancy rate for our wholly-owned stabilized properties was 96.2% at the end of the second quarter of 2008, up 100 basis points from the first quarter of this year.

As we stated on our first quarter conference call, we recaptured 38 stores that were occupied by six tenants, representing a gross leaseable area of approximately 236,000 square feet or 2.8% of our wholly-owned portfolio.

Sales of these tenants averaged only $167 per square foot with an average base rental rate of $16 per square foot.

Approximately 48% of this space has already been re-leased at base rental rates averaging 60% higher than the $16 average rent being paid by the previous tenants.

Our goal is to have most of the remaining space re-leased by the end of this year.

During the second quarter we had four additional tenants announce plans to close multiple stores throughout their outlet portfolio for various reasons.

Within our portfolio this represents 34 stores containing approximately 109,000 square feet, or 1.3% of the gross leasable area.

Once again, these stores represent some of the least productive stores in our portfolio, with average sales of approximately $178 per square foot and average base rental rates of approximately $17.60.

The majority of the store closings will occur toward the end of 2008 and the beginning of 2009, giving us ample time to work on retenanting this space with higher volume tenants.

These tenants are certainly the exception to the rule.

In fact, the majority of our tenants have in their 2008 plan to increase the number of outlet stores in the portfolio.

The good news is that we do not have a single store with retailers that have recently announced bankruptcies, including Steve & Barry's, Linens & Things and Sharper Image.

We have now executed leases and welcome to our portfolio the following new tenants.

Steward Weitzman, True Religion, Neiman Marcus Last Call, Restoration Hardware, Victoria's Secret and Wolford.

Outlet stores remain a very profitable channel of distribution for our tenants.

Tanger Outlets centers represent an attractive defensive property type and growth opportunity during an economic slowdown.

While not immune from the effects of the slowing economy or possible recession, Tanger enters this environment with high occupancy, many long-term leases ending with below market rents, and a strong balance sheet.

With respect to tenant productivity, reported tenant comparable sales within our wholly-owned portfolio decreased 3.8% for the rolling three months ended June 30 compared to June 30, 2007.

And were up less than 1% compared to the previous year, averaging $340 per square foot further rolling 12 months.

Sales during the second quarter were impacted by the general weakness in the US economy, the shift in the Easter holiday season to the first quarter, as well as severe weather and flooding in the Midwestern United States during the second quarter of 2008.

In addition, two of our centers are currently undergoing major renovations during this peak vacation season, which has adversely affected the average tenants' sales at these two centers on a short-term basis.

As most of you know, the majority of our centers are located in areas that attract domestic tourists.

We have not benefited materially from the extraordinary sales volume generated by international tourists taking advantage of the weak dollar.

Turning to our development pipeline, construction in our development in Washington County, south of Pittsburgh, continued during the second quarter of this year.

We have signed leases for approximately 81% of the 370,000 square foot first phase with an additional 5% under negotiation or out for signature.

When the center celebrates its grand opening on August 29, we expect to be 86% to 90% occupied.

As for our 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.

Currently we have signed leases for approximately 69% of the first phase with an additional 9% under negotiation or out for signature.

We are committed to the environment and pleased to report that the Tanger Outlets center in Deer Park will be the first [Lead Certified] shopping center on Long Island.

We have currently scheduled a grand opening for October 23rd of this year.

Both developments will be delivered on budget.

Upon stabilization, our initial return on cost in Washington County is expected to be 10% to 10.5%, and in Deer Park it is expected to be 8.5% to 9.5%.

We currently have signed purchase options for new development sites in the Mebane, North Carolina; Port St.

Lucie, Florida; Irving, Texas and most recently Glendale, which is a suburb of Phoenix, Arizona.

Initial reactions to these sites from our magnet tenants have been very positive.

However we're still in the early due diligence study periods on all of these sites.

We also have several target markets in our shadow pipeline.

Our long-standing policy of only buying property and starting construction when at least 50% of the first phase is leased remains in place.

We will not build on speculation.

Our goal remains to deliver one to two new centers each year over the next three to five-year period.

Though mindful of the current economic environment, we are long-term optimists about the future of the United States economy and our company.

Current market challenges create opportunities for companies with strong balance sheets and access to capital.

Our solid balance sheet should afford us -- and allow us to fund our healthy development pipeline and drive good strong growth in our business for years to come.

Based on our internal budgeting process, our view of current market conditions and the strength and stability of our core portfolio, we're adjusting our estimated diluted net income per share guidance for 2008 to a range of $0.65 to $0.71 per share, and our FFO guidance for 2008 to a range of $2.40 to $2.46 per share.

Our guidance range reflects a number of variables, such as the expected leadtime necessary to release the space vacated by certain tenants during January of this year, our projected opening dates for our two new centers, as well as the overall sales productivity of our tenants.

The midpoint of this range, as if adjusted for the 8.9 million treasury lock settlement and the $406,000 prepayment penalty, represents an increase in our previous FFO guidance of approximately $0.04 per share and an increase in FFO over the prior year of 8.1%.

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

(Operator Instructions).

[Sumit Harik], Bank of America Securities.

Good morning, I'm here with Christy McElroy as well.

Can you elaborate on the comment in your press release regarding flooding in the Midwest?

Which specific centers are impacted?

And are there any damages not covered by insurance?

Also, if you can quantify the resulting impact on sales growth and percentage rent in the quarter?

Let me take them one at a time.

We have a center which we opened last year, in Wisconsin Dells, Wisconsin, highly publicized at Lake Delton, which created the Wisconsin Dells.

The dam the created the lake broke.

It was highly publicized in that area, and affected traffic.

In Branson Missouri, Lake Branson flooded.

Branson of course is a very popular tourist area in the Midwest.

And finally we have a center in Williamsburg, Iowa, and regrettably Iowa was subject to considerable flooding for most of the second quarter.

I'm pleased to tell you that none of our centers had any significant damage, and any damage we had was covered by insurance.

I guess then taking that, do you have any idea exactly maybe how much of that impacted your percentage rent and the sales growth in the quarter?

I think about 10% our portfolio was located in the Midwest.

We can certainly quantify it for you, and if you want to call us after the call we can try to give you an estimate, but we don't have that estimate right now.

And lastly, do you have any sense that maybe it there is becoming some slowing customer traffic driven by fewer people making the drive out to your centers given higher gas prices?

Or is really some of that or most of that offset as consumers trade down to more discounted merchandise given the current environment?

I think I agree with both your statements.

Everybody -- every business is affected by higher gas prices, which are a direct relation to higher oil prices.

We're pleased to see that oil is now back down, although still high by historic levels, back down to $120, $122 a barrel which is off 17% this month alone.

So hopefully that has already started to reflect in lowering gas prices.

But yes, our traffic was down in the second quarter, and yes it was probably a result of, in some areas, higher gas prices.

Offsetting that, the old adage still remains true.

In good times, people like a bargain and in not so good times they need one.

Outlet centers outlet centers remain the distribution channel where consumers can buy brand-name products direct from the manufacturer.

They cut out the middleman and get the largest assortment of brand-name products, and the best values.

So we still remain a very profitable distribution channel for our tenants, and we have long-term leases with sophisticated retailers that continue to do well.

Most of them continue to do well even in tough economic times.

Okay, thank you.

Michael Bilerman, Citigroup.

It's Manny here with Michael and Ambika.

Question for you on the yields at Deer Park and Pittsburgh.

In the call about a year ago you gave yields for Deer Park that were about 50 to 100 BIPS higher than they were today.

What causes that -- those yields to fall?

Well, there's higher construction costs, costs of materials has gone up significantly, and -- I think those are basically the two reasons.

When you said the costs were not in line, those are two of your most recent estimates rather than a year ago?

That's correct.

And how long to stabilize those projects?

We expect stabilization within a year after opening.

And in terms of the new development projects planned for St.

Lucie, Irving and Phoenix, there's competing developments in each of those markets.

How those change your plans, and do you think your centers will go forward?

There always seems to be competing center us whenever we announce.

So in 27 years that's really nothing new.

In each market we feel that we have the best location for an outlet center or we would not have put it under contract.

And we're in the process right now of talking to tenants.

In Port St.

Lucie, there is not another outlet center that has been identified in the trade area, so I don't really know what you're referring to there.

The Dallas market has at least one competing center, 15 or 20 miles away.

Our Dallas site, which is in Irving, Texas across from the Texas Stadium, is located in an area that sees about 400,000 cars a day through three major road systems.

It is a terrific retail site.

If the outlet tenants don't support it, we're in conversations with a well-known retail developer, and we may do kind of a hybrid site.

So we really haven't finalized our plans there.

And then my last question.

For your development in Charleston, it seems like that's still off your occupancy scheduling that was delivered about two years ago or a year and a half ago.

Why hasn't that stabilized yet?

It's actually -- it was not off of our occupancy in the second quarter of '08 nor the first quarter of '08 (multiple speakers).

It was only for actually the June and September '07 calls.

Thanks very much.

I don't want to leave anybody with the wrong impression.

Charleston is 95% occupied.

Jay Habermann, Goldman Sachs.

This is [Johanna Modam] with Jay Habermann as well.

Just on the 29 stores that you mentioned are sort of expected to close over the last half of this year, and then into 2009, can you give us some sense whether these are sort of concentrated in particular regions, or is spread fairly evenly across the portfolio?

And then also you mentioned (inaudible) about 1.3% of your [GLA] and if you could quantify the sort of percentage of annual based rent that they approximately represent?

First of all, the stores are spread across our entire portfolio.

There is no concentration, and by simple math you can see that the average size store is only 3000 square feet.

So we're not looking to fill any big boxes like some of the other folks who unfortunately did Steve & Barry type deals.

What was the second part of your question, please?

Just basically trying to quantify the impact -- the annual base rent that these stores would approximately represent.

As Steve mentioned in the call, it was about 109,000 feet with an average base rent of $17.60.

So you can do the math and get close to $2 million.

Okay, great.

And my second question being -- since your sales were sort of weaker in the quarter and you outlined the reasons behind that, and I'm just trying to get a sense for what impact, if any, the fiscal stimulus earlier in the quarter might have helped to sort of offset the shift in timing that you were impacted by in the quarter.

I could only speculate.

I suspect that a rather large percentage of it went to pay for gasoline, and I suspect part of it went to pay down consumer that went to pay down consumer debt.

But that's sheer speculation on my part.

We don't survey our customers to find out what they did with the rebate check.

Nathan Isbee, Stifel Nicolaus.

Steve, can you talk about specific progress in the fashion tenant portion of Deer Park, and specifically if tenants have been able to mitigate any (technical difficulty) [re-lease] restriction issues from Woodbury?

Sure.

We have actually just yesterday received three more signed leases in the designer wing -- Juicy Couture, Kate Spade and Lucky Brand Jeans.

We have in the quarter signed Wolford, which is a very upscale ladies' lingerie and hosiery store.

We have BCBG signed and we have letters of intent which are unsigned with several more.

We've signed letters of intent but unsigned leases which I'm not prepared to announce.

And we expect that designer wing upon stabilization to be virtually completely full.

What would you expect occupancy to be on October 23rd in that portion?

It's really too early to say, and I don't want to speculate because we're in the process of finalizing deals with some tenants that have committed that they will open.

We're still talking about 90 days away.

These are -- designers tend to wait until the last minute.

They only open one or two stores a year, and we're going through that exercise now.

Okay, thank you.

And you said earlier you're still -- I think you said early stages of the diligence on the four future projects.

What would you say is the drop dead date to get started now for '09 delivery?

It takes about a year to 14 months to build depending if there's site work involved, and I don't think any of these sites have the extraordinary site work.

So we need to be in the ground in the next 90 days to make fourth quarter next year delivery.

Do you still think that's possible?

Depends if the leases are signed.

We're standing by our policy of never building on speculation, and we feel that these sites are outstanding retail sites and outstanding factory outlet center sites.

But your policy is, if I remember correctly, 50%.

Where would you say between leases signed and in process are you on the top two sites that you're looking at in terms of timing?

In Mebane, North Carolina, we're between signed leases and those in final stages of negotiation; we're at about 31%.

And in Port St.

Lucie we're at about 23%.

However we're in discussions with a couple of large tenants that each might represent 8% to 10% of the GLA.

And those deals are not signed yet.

But obviously that can change it rapidly.

Okay, thank you very much.

(Operator Instructions).

[Ben Wang], Greenstreet Advisers.

Most of my questions have been asked already, but I actually wanted to get a little bit more color on the 34 store closures.

Could you tell us who those retailers are?

Good morning Ben.

I hope that you and your families out there were not adversely affected by the earthquakes yesterday.

No, we hung through there.

Thanks.

The tenants that let us know that they intend to close stores are Camp Coleman, Geoffrey Beene, Big Dog and a couple of Pepperidge Farm stores.

Why are these particular stores closing at the end of the year as opposed to making plans to shutter at this point?

Each company has a different reason.

I think they're working with us to -- we are a disposal system for excess inventory, so they're using the opportunity to phase out these stores and turn the excess inventory into cash between now and the end of the year.

For instance Geoffrey Beene was licensed by Philips-Van Heusen, and that relationship has ended.

There's orderly closings scheduled as there is with Big Dog.

That's helpful, thank you.

There are no further questions at this time.

I will now turn the call back over to Mr.

Steven Tanger for any closing remarks.

I would just like to thank all of you for your continued interest in our company.

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

Please feel free to give us a call.

Each of you and all of you are invited to our grand opening in Washington County outside of Pittsburgh for Labor Day weekend, if you would like to share that with us.

And also on October 23rd, in Deer Park, New York, which is an exit 52 on the Long Island Expressway.

Just let us know and we would be happy to arrange a site visit for you.

Thank you all and God bless you.

Thank you for participating in today's conference call.

You may now disconnect.