Tanger Inc (SKT) 2008 Q3 法說會逐字稿

Good morning and welcome to Tanger Factory Outlet Centers' Third 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 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 29, 2008.

(Operator Instructions).

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 Mr.

Tanger.

Please go ahead, sir.

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 will have an opportunity to answer any of your questions.

I will now turn the call over to Frank.

Thanks, Steve and good morning everyone.

Obviously, there are no easy answers to the turmoil in the financial markets and no clear vision for what lies ahead, but based upon our 27 years of successfully managing this business we know that a strong balance sheet is a must in turbulent market conditions like these.

We have worked hard to maintain a conservative financial position and a low leverage ratio since we went public 15 years ago.

It certainly looks like we've made the right decision.

In fact, just last week on October 23rd we received an upgrade from Standard and Poor's from BBB- with a positive outlook to a BBB with a stable outlook.

Tanger was the only REIT to receive an upgrade during this latest round of ratings actions by Standard and Poor's.

And we are one of only two REITs to be upgraded at any time so far this year.

As we mentioned last quarter, in June 2008 we closed on a $235 million unsecured three year term loan facility.

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

Subsequently on July 9th 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 until April 1, 2011.

We then followed that up on September 25, 2008 by entering into an additional interest rate swap agreement which converted the floating rate of interest on the remaining $117 million of the unsecured three year term loan facility to a fixed rate of 5.30%.

This interest rate swap agreement also expires on April 1, 2011.

We have now fixed the rate on the entire $235 million term loan at an average rate of approximately 5.25% through April 1, 2011.

On a consolidated basis, our total market capitalization at September 30, 2008 was approximately $2.5 billion and our debt to total market capitalization at the end of the third quarter was approximately 31.2%.

We also maintained a strong interest coverage ratio of 3.92 times for the third quarter of 2008.

Approximately 81% of our debt is now at fixed rates, our wholly owned portfolio properties is 100% unencumbered and we have no debt maturities until 2011.

As of September 30, 2008 we had $175.5 million available on our $325 million in unsecured lines of credit at an interest rate of 75 basis points over LIBOR.

As for our results this quarter, funds from our operations per share was $0.70 per share representing a solid 9.4% increase compared to last year.

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

FFO for the third quarter of 2008 also benefited from $646,000 or $0.02 per share in termination fees compared to $106,000 in termination fees last year.

During our second quarter conference call we mentioned that three tenants had announced plans to close stores during the second half of 2008 and early 2009.

The third quarter termination fees were a result of our negotiating early termination agreements with these tenants during the quarter.

Our FFO payout ratio for the quarter ended September 30, 2008 was approximately 54% compared to 56% last year.

And our FAD payout ratio was 119% for the third quarter as compared to 67% last year.

We are nearing completion of our capital improvement plans for 2008 including a $19 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 $13.8 million year-to-date, our FAD payout ratio would have been 76% for the third quarter and 78% for the first nine months of 2008.

We currently believe we can maintain an adjusted 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 our ongoing efforts to increase occupancies at select centers and attract new high volume tenants to the outlet industry.

We have been committed to achieving high quality, long-term earnings by consistently investing in our business.

In fact, over the last five years we have been planning for the future by making over $60 million in capital improvements throughout 11 properties.

The vast majority of our large capital improvement projects will be completed by year-end.

We are currently budgeting to spend very little in capital projects in 2009 which will bring our FAD payout ratio down substantially, most likely in the mid to low 70% range.

At these levels, our dividend is very well covered.

I will now turn the call over to Steve.

Thank you, Frank.

In spite of the current economic environment, outlet stores remain a very profitable channel of distribution for our tenants.

Tanger Outlet Centers represent an attractive defensive property type and growth opportunity during an economic slowdown.

In good times people like a bargain on brand name products and in tough times like now, they need a bargain.

From an operational standpoint, I am pleased to report that the rent spreads we achieved for the last few years have continued into the third quarter of 2008.

As of September 30, we have executed or in process approximately 79% of the square feet associated with leases coming up for renewal throughout our wholly owned portfolio this year compared to 77% last year.

During the first nine months of 2008 we have achieved an average increase on the executed renewals of 17.6% compared to 13.2% last year.

Over 480,000 square feet was re-tenanted during the first nine months of 2008 producing an increase in average base rent of 43.8% over the average rent that was being paid by the previous tenant prior to their vacating the space compared to an increase of 37.6% last year.

We are 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 which was 7.7% at the end of 2007 and demand for space from our tenants allow us to continue to increase rents while remaining a profitable distribution channel for our tenants.

The fundamental matrix of our business remains strong.

Same center NOI which does not include the $646,000 in termination fee income grew 4.7% in the third quarter as well as year-to-date, compared to 3.9% during the first nine months of last year.

The occupancy rate of our wholly owned stabilized properties was 96.7% at the end of the third quarter of 2008, up 50 basis points from the second quarter of this year.

As you may recall, earlier this year we recaptured 38 stores that were occupied by six tenants representing a gross leasable area of approximately 236,000 square feet, or 2.8% of our wholly owned portfolio.

Sales of these tenants averaged only $165 per square foot with an average base rent of $16.

Approximately 51% of this space has now been re-leased at base rental rates averaging 61% 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 middle of next year.

As Frank mentioned earlier, during the second quarter conference call we stated that we had three tenants announce plans to close stores throughout our portfolio for various reasons.

Within our portfolio, this represents 32 stores containing approximately 93,000 square feet of GLA.

Once again, these stores represent some of the least productive stores in our portfolio with average sales of approximately $197 per square foot and average base rentals of approximately $18.

While some stores closed, the majority of these store closings will occur toward the end of 2008 and the beginning of 2009 giving us time to work on re-tenanting 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 long-term plans to increase the number of outlet stores in their portfolio.

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

To date, only two tenants in our portfolio have filed for bankruptcy representing 7 stores and 52,800 square feet.

Of those stores in bankruptcy, only one was rejected totaling 7,000 square feet and the rest remain open and paying rent.

This year, we have executed leases and welcomed to our portfolio 29 new tenants including Stuart Weitzman, True Religion, Neiman Marcus Last Call, Restoration Hardware, Victoria Secret, Ann Taylor Loft, Williams Sonoma Home, Betsy Johnson, Optical Shops of Aspen and Wolford.

With respect to tenant productivity, reported tenant comparable sales within our wholly owned portfolio averaged $341 per square foot for the rolling 12 months ended September 30, up slightly from $340 per square foot for the same period last year.

Sales during the third quarter were impacted by the general weakness in the US economy as well as the number of hurricane watches and warnings which occurred along the Atlantic and Gulf Coasts, keeping vacationers away from their holiday destinations.

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.

It is important that even though sales are flat our low occupancy costs to tenants remain -- still provides us with the opportunity to raise rental rates on the re-leaseing and renewal space.

Percentage rents which are paid by tenants once their total sales exceed certain levels only represent 2.3% of our total revenues during the first nine months.

Approximately 92% of our total revenues were derived from contractual based rentals and tenant expense reimbursements.

Turning to our development pipeline, our wholly owned center located in Washington County south of Pittsburgh, Pennsylvania opened to tremendous crowds when we held a very successful grand opening celebration on August 29, 2008.

The first phase totaling 370,000 square feet was approximately 86% leased upon opening.

Last week on October 23rd, we held the grand opening for our new center in Deer Park on Long Island in New York.

Our Deer Park property is owned by a joint venture in which we and two other partners each have a one-third interest.

The property opened to huge crowds and parking lots filled beyond their capacity.

The retail space at Deer Park was approximately 77% leased upon opening.

Based upon the tremendous openings at both of these properties, we feel confident tenant interest in the remaining space will be high and additional signed leases will be completed over the next several months at both locations.

Upon stabilization, our initial return on costs in Washington County is expected to be approximately 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 Mebane, North Carolina and Irving, Texas.

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

However, we are still in the early due diligence study periods on these sites.

We also have several target markets in our shadow pipeline.

Our longstanding policy of only buying property and starting construction when at least 50% of the first phase is leased and when we have all non-appealable permits, remains in place.

We will not and never have, build on speculation.

In that regard, we announced in our press release that we have decided to terminate our purchase options with respect to our potential sites in Port St.

Lucie, Florida and Phoenix, Arizona.

Given current market conditions, we felt it was in our best interest to terminate these options and focus our efforts on the other development sites as well as the remaining space within our two newest centers.

As a result, we will be taking a charge of approximately $1.8 million relating to the predevelopment costs on these projects during the fourth quarter of 2008.

In the past seven years we have successfully pruned our portfolio by selling 13 of our poorest performing centers with little potential for future growth.

In doing so we've generated approximately $84 million in proceeds and have reinvested these in high return, new development assets.

Our goal remains to deliver at least one new center 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.

Our solid balance sheet should allow us to fund our development pipeline and drive 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 are adjusting our estimated diluted net income per share guidance for this year to a range of $0.63 to $0.69 per share and our FFO guidance for this year to a range of $2.35 to $2.41 per share.

Our guidance range reflects a number of variables such as the one-time charge of approximately $1.8 million relating to the write-off of the predevelopment costs which represents about $0.05 per share, the expected lead time necessary to re-lease the space vacated by certain tenants during January of this year, as well as the overall sales productivity of our tenants.

In the current economic environment, the uncertainties of our projected fourth quarter results are greater than normal.

The mid-point of this range is if adjusted for the one-time charge of approximately $1.8 million relating to the write-off of the predevelopment costs, as well as the $8.9 million treasury lock settlement and the $406,000 pre-payment penalty recorded in the second quarter represents an increase in FFO over the prior year of approximately 8%.

As we have done in the past, we will provide 2009 guidance at the time of our year-end 2008 conference call early next year.

While not immune from the effects of a slowing economy or possible recession, Tanger enters this challenging environment with high occupancy, many long-term leases ending with below market rents and a strong balance sheet with low leverage and no corporate level debt maturing in three years.

In closing, I would like to welcome Bridget Ryan Berman who will be joining our Board as an Independent Director effective January 1, 2009.

Bridget was formerly the chief executive officer of Giorgio Armani Corporation, a wholly owned US subsidiary of Giorgio Armani S.p.A.

one of the leading fashion and luxury goods groups in the world.

Previously she was vice president and chief operating officer of Apple Computer Retail and held various executive positions with Polo Ralph Lauren Corporation including group president of Polo Ralph Lauren Global Retail from 1992 to 2004.

Bridget has also served in various capacities at May Department Stores and Federated Department Stores from 1982 to 1992.

Bridget was a member of the board of directors and served on the audit committee of J.

Crew.

We are pleased to add to our Board of Directors someone with Bridget's credentials, her extensive experience and impressive background in the retail industry will add a tremendous value and perspective to our Board.

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

Operator?

(Operator Instructions) Michael Bilerman, Citigroup.

Hi, guys.

It's Quentin Velleley here.

Just a first question, given you've had such strong relating spreads over this quarter and over the year, what are your expectations for same store NOI next year?

I'm basically asking how much of this walked in and how much comfort you could have?

I think we're still comfortable with our previous guidance of 4% NOI growth in 2009.

And in terms of the styles which were relatively flat given your rents are heading up, I'm just wondering what level of comfort you have with your occupancy cost ratio.

What could that increase to in a weaker sales environment?

Our occupancy cost is amongst the lowest in the retail industry particularly among the retail publicly traded REITs.

It's about 7.7% which is a fabulous shock absorber for times like this.

Tenant sales flat still allow us to reasonably raise rents and remain profitable for our customers, the tenants.

And so far those increases in rents are reflected in the 4% NOI guidance.

In terms of your percentage rent, it looks like it's trailing about 25% lower so far this year.

In your guidance for the fourth quarter are you being conservative there and what are you assuming in terms of percentage rents?

We have historically converted percentage rental income to base rental income or variable rent to fixed rent as we renew leases and that continues to be our strategy.

And just on the rate capturing of space, you've previously said that you modeled the performance of all your tenants very closely and if anyone falters you'll look to rate capture it.

I'm just wondering if any tenants are in that position at the moment and, if so, what would your re-leasing expectations be?

We continue to monitor tenants.

We work with tenants that are not performing well to try to help them through marketing to increase their performance.

As of this point there are no additional tenants that we've decided or have been requested to take space back.

And just --

This will have to be your last question.

We've got many, many people on the line that I need to also get their point of views.

Sure.

Just quickly, on the development side, I'm just wondering if you have increased your return expectations for any new developments or redevelopments?

We still remain with the target of 10% to 10.5% on our development costs.

Our development -- based on -- 10% to 10.5% return on cost for our new developments.

Thanks, guys.

Thank you.

Christine McElroy, Banc of America Securities.

Hi.

It's actually Sumit here with Christy.

With regards to your sales growth in the third quarter, can you break that out between July, August and September and give us a sense of how it's trended going into October?

We historically have not broken out monthly sales trends.

Then on the two projects that you dropped in Florida and Phoenix, was this the result of weak initial tenant demand or was it more your own cautiousness over the local economies as you further did some due diligence?

I think it's a combination of both.

We felt it prudent at this time to terminate those agreements.

We will be focusing on, number one, protecting and enhancing our existing assets; and, number two, leasing the space in our new development sites in Mebane, North Carolina and Irving, Texas; and number three, filling the remaining space which can get us the highest and quickest return in our two new centers which opened in Pittsburgh, south of Pittsburgh, and in Deer Park.

And also you mentioned that you have several target markets in your shadow pipeline.

Could you provide maybe some color on what markets you are targeting and what type of opportunities you are seeing in those markets?

For competitive reasons I hope you'll understand that we're not prepared to announce those until we've actually signed and have that property under control.

Sure.

And just last question, you said you had $640,000 of termination fees in the third quarter.

Do you have any forecasts or guidance for what term fees will be for the remaining stores, maybe that are going to be closing in the fourth quarter?

The termination fees were related to the stores closing in the fourth quarter.

And, as you probably know, termination fees are very difficult to predict in advance.

To my knowledge, I don't think we've got much in termination fees already recorded for the fourth quarter.

This is the first quarter where we've actually had a termination fee amount greater than $0.01 per share.

Typically it's not a material number.

Thanks a lot.

Thank you.

Sloan Bohlen, Goldman Sachs.

I'm on with [Johanne Hemode], as well.

Just a question, kind of a follow on to a related question from earlier.

On the Port St.

Lucie and the Phoenix development project, could you guys give us a sense of how much the pre-leasing or how much levels of pre-leasing you had prior to terminating those projects?

It's a moot point.

It was less than 50% and we decided not to proceed.

And then a quick one with regard to the reconfiguration at Myrtle Beach.

I believe before you guys had looked for a $17 million expenditure there and now it's $19 million.

Could you explain what the bump was?

We decided to make some additional improvements and up the budget along the way particularly with regard to additional signage and things like that.

And what has that done to your return expectations?

Well, the return expectations in Myrtle Beach are it's a long-term play.

We're enhancing the value of the property in hopes that over time it will generate higher rents and higher percentage rent by attracting more customers and generating higher sales volumes for the tenants.

Great.

And I think Johanne has one question.

You guys mentioned the considerable interest you're seeing for your sites in North Carolina and Texas, would you be able to quantify your pre-lease straights on each of these projects as of the close of the quarter?

We don't quantify pre-leasing until we reach the 50% level and when we do reach the 50% level we'll break ground.

And then just as a follow-up to that 50% pre-lease requirement on new developments, could we expect that requirement to perhaps move upward for future projects just given the increasing challenges associated with development right now?

We have maintained the 50% discipline years for 27 years.

It seems to have worked and we see no reason to change that now.

Thank you.

I just want to point out one thing.

If leases are executed to the level with 50% there usually is substantial additional leases in process that we're negotiating that are un-yet signed.

Thanks for the color.

Thank you.

Jeffrey Spector, UBS.

Just a follow-up on development.

At this point, should we be assuming that in '09 you won't have any openings?

Does Mebane get pushed to '10 at this point?

Right now we're predicting Mebane toward the end of '09, November, December opening.

If that shifts we will certainly let you know.

And on sales, have you typically pulled out in the past renovations from your sales statistic?

We've never had a total renovation reconfiguration of a center and this is the first time we've done it and on two properties so they dramatically impacted traffic and sales volumes and it's inappropriate to include them.

And then last question, can you just talk about any recent trends in your meetings with tenants?

Are they asking for more concessions?

Is it taking a little bit longer to negotiate those deals?

It's basically, in our industry, business as usual.

Thank you.

Thank you.

Ben Yang, Green Street Advisors.

I know you guys don't break out the monthly sales figures but you have provided a quarterly sales number in the past.

Can you tell us what that number was for the third quarter?

Quarterly compensation number, Ben?

yes.

We were basically flat every quarter this year.

So the quarter was flat, as well.

And that excludes the major renovations that you are undertaking.

That is right.

Yes.

It does.

And then for the third quarter number as well, were there any lingering weather-related issues similar to what you saw in the second quarter?

Sure.

Yes, we had -- the hurricanes along the East Coast and in the Gulf certainly kept people from traveling to their vacation destination on a number of occasions.

And as you may recall one of the hurricanes that went through the Gulf created flooding all the way up to Missouri so, yes, we were impacted by weather.

And then finally in your supplemental it looks like you have 17 fewer Jones retail stores in your portfolio but the GLA is a bit higher.

Can you help me understand what's happening with this tenant?

We don't know that off the top of our head.

Why don't we get back to you on that?

Thank you.

Thank you.

(Operator Instructions) Nathan Isbee, Stifel Nicolaus.

On the Deer Park at Q2, if I remember correctly, you were 76% leased or committed and open at 77% three months later.

Can you just talk about any additional lease commitments you have in place now and what type of progress you saw, especially on the radius restrictions during the last 90 days?

We are still negotiating with many new tenants.

Several of the tenants did not make the opening like the health club and some of the other designer tenants that expect to open before year end and in the first quarter of next year.

With the opening and the fabulous sales created by the opening we have now received substantial interest from the tenant community that was waiting to see if the project would be proven particularly in this environment.

Thank you very much.

Thank you.

Jeffrey Randall, Black Creek Advisors.

I'm just trying to better understand the competitive landscape and, I guess, relative to Simon's Chelsea outlets was wondering what you attribute to Tanger's, I guess, substantially lower average sales per square foot metric.

How much of that difference would you attribute to location and how much to tenant mix?

Keep in mind some of the leases that are included in our low occupancy costs have been in existence for 10, 15 and some instances 20 years.

So as we execute new leases our target is anywhere, depending on the project, 10% to 12% cost of occupancy.

We have been fortunate in high renewals with existing tenants so that only a very small percentage of our portfolio actually rolls over each year and we've been fortunate in that our tenant sales have dramatically increased each year.

So it's really a fight to keep the cost of occupancy where it is and not going down.

Thank you.

Craig Schmidt, Merrill Lynch.

Do you have a targeted size for the Irving, Texas project?

We're looking at that project right now.

We have a land mass that can produce about 0.5 million square feet with some outparcels, but we really haven't decided on a footprint yet, Craig.

And given the addition that Chelsea is bringing to the Grapevine Mills, are you adjusting your mix in any way to compete against that?

I think Simon owns the Mills, not Chelsea, although they are sister companies.

We have not adjusted our mix yet.

We have, as I mentioned to you, we have not decided on a footprint and we have not decided on a tenant mix yet.

Thank you.

Thank you.

There are no further questions at this time.

I would now like to turn the call back over to Mr.

Tanger for closing remarks.

Steven Tanger.

Thank you, Operator.

I just want to thank everybody for your continued interest in our Company.

The call today had a record number of participants and we appreciate that.

Stanley Tanger, Frank and I are always available to answer any of the other questions you may have.

We look forward to seeing you out at NAREE.

Thanks, again.

And have a great day.

Goodbye.

Thank you for your participation.

This concludes today's conference call.

You may now disconnect.