Tanger Inc (SKT) 2009 Q3 法說會逐字稿

Good morning, and welcome to Tanger Factory Outlet Centers' third-quarter 2009 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 28, 2009.

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.

On the call today will be Steven Tanger, President and Chief Executive 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 time for questions.

I'll now turn the call over to Frank.

Thanks, Steve, and good morning, everyone.

Our current year and prior-year comparative results have been adjusted to include the impact of a number of new accounting pronouncements, most materially of which is FSP APB 14-1, Accounting For Convertible Debt Instruments That May Be Settled In Cash Upon Conversion Including (Partial Cash Settlement).

Net income available to common shareholders for the third quarter of 2009 was $0.06 per share compared to $0.26 per share in the prior year.

Adjusted funds from operations for the third quarter of 2009 increased approximately 4.5% to $0.70 per share compared to $0.67 per share for the third quarter of 2008.

While adjusted funds from operations for the nine months ended September 30, 2009 increased approximately 8.5% to $2.04 per share compared to $1.88 per share for the first nine months of 2008.

The increase in adjusted FFO was driven in part by same center NOI growth during the quarter, incremental FFO from our new wholly and center in Washington, Pennsylvania and our joint venture property located in Deer Park Long Island, New York, both of which opened during the third quarter of 2008, as well as the acquisition of our property located on Highway 17 in Myrtle Beach, South Carolina in January of this year.

Termination fee income for the third quarter of 2009 amounted to only $93,000 compared to $646,000 during the third quarter of last year.

Our FFO payout ratio for the first nine months of 2009 was approximately 58% and our FAD payout ratio was about 64%.

At these levels our dividend is well covered.

We will generate incremental cash flow over our dividend which we plan on using to help fund our new development in Mebane, North Carolina or to reduce our outstanding lines of credit.

Our balance sheet strategy has always been conservative.

With that in mind, we have completed two successful equity issuances so far this year.

On May 11 we completed an exchange offer on our 3.75% exchangeable notes.

In the aggregate the exchange offer resulted in the retirement of approximately $142.3 million principal amount of the notes and the issuance of approximately 4.9 million common shares to the Company.

Subsequently on August 14 we completed a public offering of 3,450,000 common shares at a price of $35.50 per share, including 450,000 common shares issued and sold upon the exercise of the underwriters overallotment option.

The net proceeds to the Company from the offering after deducting underwriter commissions, discounts and offering expenses were approximately $116.8 million.

As a result of these two equity transactions our balance sheet has never been stronger.

On a consolidated basis our total market capitalization at September 30, 2009 was approximately $2.4 billion and our debt to total market capitalization was approximately 24.3%.

We also maintained a strong interest coverage ratio of 4.63 times for the quarter.

As of September 30, approximately 90.6% of our debt was at fixed rates.

Our floating rate debt totaled only $54.8 million of which $54 million was outstanding on our $325 million in unsecured lines of credit.

Our wholly-owned portfolio of properties was 95% unencumbered and we had no outstanding debt maturities until June of 2011 including extension options.

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

Thank you, Frank, and good morning, everyone.

I'm pleased to report that our low cost of occupancy, or put another way, the highly profitable stores for our tenants, has proven to be an excellent shock absorber in this difficult market.

While tenants look at the base rent amount they are focused on their total cost of occupancy.

Our team continues to work hard to reduce the non-rent component of the occupancy costs by reducing CAM, appealing real estate taxes, renegotiating insurance rates and efficiently and effectively spending our marketing funds to drive traffic.

We are making great progress in completing two of the remaining 2009 renewals throughout our wholly-owned portfolio.

As of the end of September we have obtained executed renewals and renewals in process for approximately 77% of the space coming up for renewal during 2009 with an average increase in average base rental rates on the executed renewals of 10.1%.

This compares to 79% this time last year with an increase in average base rental rates on the executed renewals of 17%.

In addition, during the first nine months of 2009 we re-tenanted approximately 319,000 square feet with an increase in average base rental rates of 37.4%, compared to last year at this time when we had released approximately 481,000 square feet with an increase in average base rents of 43.8%.

We have made significant leasing progress and continue to creatively re-tenant our portfolio.

In a tough market we are getting leases signed.

Same center NOI growth during the first nine months was 1.8%.

Our overall occupancy rate for our wholly-owned stabilized properties was 95.6% as of September 30, 2009, up almost 1% compared to the end of the previous quarter.

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

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

Our operating portfolio continues to perform at a very high level.

Reported tenant comparable sales within our wholly-owned portfolio decreased 2% for the rolling 12 months ended September 30, 2009 to $335 per square foot.

Importantly, comp sales increased 5.1% for the three months ended September 30, 2009 compared to the same period last year.

Historically percentage rents, which are paid by tenants once their total sales exceed certain levels, represent less than 3% of our total revenue.

No single tenant accounts for more than 8.4% of our gross leasable area or 5.4% of our base and percentage rents.

We are also very pleased to announce that we have closed on the land for and have begun construction of our center to be located in Mebane, North Carolina.

We currently have over 66% of the space either leased or with leases out for signature including -- Saks Off 5th, Banana Republic, Coach, Gap, J.

Crew, Michael Kors, BCBG, Nike, Tommy Hilfiger and many more factory outlet stores.

We have decided to begin construction now because we feel the economy is improving.

Being in a position to tell tenants that they can open in time for the 2010 holiday season has created additional excitement among our retail partners to proceed now to sign leases.

Tenant interest continues to be strong and additional leasing momentum is building for this fabulous site located on the heavily traveled Interstate 85/40 corridor in North Carolina.

With respect to earnings guidance for 2009, based on our view of the current market conditions we believe our estimated diluted net income per share for 2009 will be between $1.39 and $1.45 per share and our FFO for 2009 will be between $2.62 and $2.68 per share.

This represents an increase of approximately 7% from our previous FFO guidance.

Our operating assumptions used in our guidance are consistent with those used at the end of the second quarter.

We are assuming that same center NOI grows by approximately 1% to 2%.

In our guidance we have also taken a conservative view and assume our tenants will be challenged to maintain sales as increased discounting and price deflation will most likely continue during the remainder of the year.

We are projecting percentage rental revenues to decrease, which is a direct result of lower sales.

The midpoint of our new guidance range equates to an annual increase in FFO over the prior year of approximately 8%.

This is an impressive number, particularly considering the fact that during 2009 we executed two dilutive common equity transactions which raised over $255 million and increased our common share outstanding by over 8 million shares or approximately 23%.

As we have done in the past, we will be providing 2010 guidance at the time of our year-end 2009 conference call.

We plan to continue to thoughtfully use our resources and to maintain a conservative financial position.

These are unprecedented times, but our company is positioned to get through the headwinds successfully.

Our solid balance sheet with no upcoming debt maturities in the next two years puts us in a very strong position for the rest of this year and into 2010.

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

(Operator Instructions).

Quentin Velleley, Citi.

Good morning, everyone.

Steve, just a question.

Given where your balance sheet is and how low your leverage is -- I know you've spoken about this before, but could you maybe speak about some of the acquisition opportunities or maybe the other development projects outside of Mebane that you are looking at?

Good morning.

We are in a position with our strong balance sheet and liquidity to be opportunistic and competitive should an acquisition become available.

With regard to development properties, we are very happy to have started construction on our site in Mebane, North Carolina with an accretive expected return between 10.5% and 11%.

At this time we're in the process of our development and real estate group going around the country identifying markets with our major tenants that could support a new Tanger Outlet Center.

And we're in the process of tying up appropriate land and hopefully before the ICSC convention in May we'll be announcing additional new sites.

Okay.

And just in terms of [utilizing] spreads, I noticed that for the third quarter they were much weaker than what you have had for the earlier part of the year and also last year.

Is this something which -- it could be a trend running into 2010, slightly weaker leasing spreads?

I think it's too early to establish any sort of trend.

As you can see from our supplement, we re-tenanted only 16 leases and we renewed only 18 leases at a 230 year to date.

In managing the business we focus on the year-to-date number as opposed to just one quarter's number.

Perfect.

And just the last question.

With Deer Park occupancies sequentially flat at 80%, are you close to doing any leasing running into the holiday period and maybe whether you're looking at putting temporary tenants into that asset as well?

We are in discussions putting temporary seasonal tenants into Deer Park.

And we are also in discussions with several tenants about opening permanent stores.

Okay.

Thank you.

Jay Habermann, Goldman Sachs.

Good morning, it's Jehan.

I'm here with Jay as well.

Just going back for a second to Mebane and the decision to close on the land, could you speak maybe a little bit more broadly to land costs today, how much costs have changed and maybe the impact that pricing had on your decision to actually move ahead here?

This land was not in a distressed situation.

It's prime property located at an interchange on a very highly traveled road system in North Carolina.

So we were pleased with the price, we thought it was fair, we're pleased with the return on our property on the proposed development and that's how we decided to move forward.

All right.

And then I guess just staying on development for a moment, you've mentioned your goal of one to two projects a year in the past.

Do you see yourself as moving back to that model or was Mebane more for a one-off opportunity that made sense just given the attractive returns that you're anticipating?

Mebane made sense because not only the attractive returns but the outstanding tenants that have executed leases in this property.

We are working with our tenant community, as I mentioned before, to identify high-volume locations together that will support new outlet centers.

And as I mentioned, it's our intention to announce additional sites hopefully before the May ICSC convention.

Great, thanks.

And then just a last one, sorry if I missed this, but did you quantify what occupancy costs were in the quarter?

Frank, do you have that exact number?

No.

We typically only calculate and report occupancy costs after the end of the year.

Because from quarter to quarter it could be skewed just because of the seasonality in sales.

Great, thank you.

Christy McElroy, UBS.

Good morning, guys.

Can you walk us through the different components of the increase in guidance?

I know $0.07 of it was the gain on sale, but can you break out what's driving the remaining $0.10, especially since you kept same store NOI guidance unchanged?

Hey, Christy, it's Frank.

To be honest with you we pretty much just beat our number on every line item.

I think everything came in better than we had anticipated in Q3 base rent, percentage rent.

Our specialty leasing income was very strong, our other income was strong, our JV income was higher because of lower interest rates and better performance.

So really if you just go down the income statement you could add a penny or two to each line; expense reimbursements was better than anticipated, partially because of higher occupancy.

So the $0.07 pickup, if you include Q3, was all across the board on the lines.

And then we did up fourth quarter by about $0.03, although we're not ready to jump it up any further than that just because of the uncertainty of the holiday season.

So that's why you kept the same store NOI guidance unchanged?

I mean, should we assume that it would probably be at the higher end of that 1% to 2% range?

We're just not in a position to say until we really get a good handle on how the holiday turns out.

Fourth quarter is the highest percentage ranked quarter (multiple speakers)

Right.

-- (multiple speakers).

So it has the most uncertainty included in it.

Okay.

And then just a follow-up on the releasing spread question.

Your re-tenanted spreads are obviously higher, have been running higher than your renewal spreads.

That's kind of a reversal of what we've seen from other retail landlords which have had a much tougher time re-leasing vacant space.

Is that a function of older leases that your 20-, 30-year tenants that are vacating that space and you're putting new tenants in there?

Or is it the type of new tenants that are now occupying that space?

Christy, I think you're correct.

It is a function of leases that are 10 and 15 years old coming to the end of their term.

And we're able now to mark to market these assets appropriately.

Okay.

And then on the renewals.

I know that there was very low leasing volume in the quarter and we probably shouldn't read anything into those negative numbers.

But are you finding that you need to give rent breaks in order to keep tenants in the spaces?

I know in the past you've always managed for occupancy, so I'm just trying to get a little bit more color on what's going on there?

I think in view of the absolute perfect storm and the tsunami of an economic downturn our folks have done a magnificent job in working with our tenants in getting fair rents so that the tenants can maintain profitability and so can we.

Okay.

And then just regarding the occupancy increase quarter over quarter.

Did that reflect some of the re-tenanted leasing that you did earlier this year actually taking occupancy?

Actually taking the space?

It includes everything.

Yes, it was that and additional new leases in the third quarter.

Okay.

All right, thank you.

Craig Schmidt, Bank of America Merrill Lynch.

Thank you.

Given probably the feasibility study that you did on Mebane, three years out is that suggested that the center would be above your $335 per square foot average or at the average?

I'm just wondering, i.e.

where do you expect this center to fall in your portfolio once it gets stabilized?

Craig, we wouldn't have started construction if we felt it was not going to be at least our average or above.

Okay.

And is there anything about the demographics that skew a certain way that might impact I believe in further leasing in the center?

The Raleigh, Durham, Chapel Hill market and Greensboro, High Point, Winston-Salem market represent a very large percentage of the population in the state of North Carolina, stable government jobs, University jobs, high-tech jobs.

We felt that the demographics were appropriate as did our tenants -- was a good match for our tenants long term.

Also the two nearest outlet centers of significance are 90 miles in different directions.

So this filled what we perceived as a hole in the outlet distribution channel in North Carolina.

Great.

Thanks a lot.

Michael Mueller, JPMorgan.

Good morning.

Steve, I was wondering if you could just comment a little bit about expectations for net square footage openings or net store openings for the retailers and what you're hearing from them as you think about 2010 compared to what we saw -- what we're seeing this year in '09?

In our meetings with CEOs of our major tenant partners, they continue to tell me that the outlet distribution channel is either their most profitable or one of their most profitable business units.

When they go into planning for 2010 and 2011 their expectation or tenant's expectation is that the outlets will provide the highest and fastest return on their invested capital.

They tell us if that trend continues that their plan is to open more outlet stores.

Okay.

So basically the expectation per tenant is greater openings compared to '09?

Assuming the market continues to recover, we don't expect a rapid recovery.

But if it continues to move forward at this pace we are optimistic, cautiously optimistic going into 2010.

Okay.

And what are your thoughts on sales heading into the fourth quarter considering the pretty sizable pickup in Q3?

The consumers continue to be very cautious and deliberate in spending their disposable income.

I think you've heard me say it numerous times, but in good times people like a bargain and in tough times like these they need a bargain.

The outlets are the distribution channel where they receive bargains day in day out on brand-name products.

So we are, as I said, cautiously optimistic going into the holiday season.

The comps in the fourth quarter of last year were very difficult and not a good quarter for most of our retailers, so this year's comps are relatively low.

And we're hoping for very positive results in the fourth quarter of this year.

Okay.

And last question.

Your guidance -- I think, Frank, you mentioned the expectation as percentage rents are down.

So implicitly in your guidance you have flat to maybe slightly down sales, is that a fair statement?

We have estimated flat sales throughout the year.

And that is part of the reason that Q3 was better than expected.

Okay.

Okay, appreciate it, thank you.

Carol Kemple, Hilliard Lions.

Good morning.

On the acquisition market are you all aware of any outlet centers that are for sale or any that will be coming to the market soon?

To our knowledge there's nothing on the market -- publicly on the market.

Okay, thank you.

David Leibowitz, Horizon Asset Management.

Thank you and good morning.

A couple of questions.

After the new construction is complete how much cash will still be on the balance sheet?

And how much of that might be considered excess to your operating needs?

We typically do not hold any cash on our balance sheet.

What we would do would be to pay down our lines of credit as cash comes in and then use our lines to fund the construction.

Net-net we have enough internally generated cash in a rolling 12-month period to pay for a good portion of the Mebane location.

But we will have some incremental borrowings on our lines to complete.

And in terms of your strategy going forward, is there much room to expand existing centers at this time?

We have very little excess land at this point in time, David.

We have 25 acres attached to our successful property in Myrtle Beach, South Carolina.

There are some small expansion opportunities in several of our newer properties, but nothing of any significance.

And do you have any options on other property at this time?

I'm sorry, let me retract that.

We have an ongoing option on a site in Irving, Texas where we intend to build a new center at some point in the future.

And how large a property might that be?

We've announced it could be as much as 0.5 million square feet.

But that's not imminent.

And it may be two or three years down the road.

And lastly, given your druthers would you prefer to buy existing distressed property or would you prefer to go out and do something from scratch on your own?

We would prefer to buy existing successful properties.

We're not in the business really of turning around distressed properties.

And we also aren't in the -- we are developers and have for close to 30 years successfully developed property.

The site in Mebane we hope is an indication from our tenant community that they will support new centers.

And as we've mentioned, we're in the process of going out and finalizing options on various parcels of land around the country and hope to announce new sites in the future.

And lastly, is there any size in terms of dollars that are either too small or too large for you to look at?

As far as an acquisition or to develop?

Yes, to acquire a distressed but successful property or buy a successful property from a distressed owner, how does that sound?

We would look at buying successful properties from owners regardless of whether they're distressed or not.

And due to the strength of our balance sheet we have investment-grade ratings from both agencies; we have received upgrades from both agencies in the past year.

Our debt to market cap is less than 25%.

So we have a lot of capacity to fund internally acquisitions of almost any size.

Very good.

Thank you so much.

Nathan Isbee, Stifel Nicolaus.

Hi, it's Dave Fick with Nate.

Steve, I know you're sometimes hesitant to do this.

I'm wondering if you can talk a little bit about the tenant commitment line-up at North Carolina.

Good morning, Dave, how are you doing?

We -- I did mention in my opening remarks that tenants that have already signed leases, they include Saks Off 5th, Banana Republic Factory Store, Coach Factory Store, Gap Outlet, J.

Crew Factory Store, Michael Kors, BCBG, Nike, Tommy Hilfiger and we have many, many more.

I apologize for missing that.

No problem.

Did you, at this point, bid out any of your construction costs?

And what are you anticipating in terms of the cost per foot on this project?

The construction costs have come in lower than they were a year ago.

We are anticipating about a $200 per square foot or 315,000 square feet at $61 million in cost and an estimated return of 10.5% to 11%.

And the physical characteristics of this, is this going to be another platinum plated project like the Dells?

Well, thank you for your compliment on our site in the Dells.

We feel that all of our new developments are platinum plated.

This will be an upscale environment and an architecture that's suitable for the North Carolina Piedmont.

Great.

You mentioned additional permanent tenants at Deer Park.

Are those going into the luxury wing that's taken a little bit longer to lease than you had hoped?

They'll go in various parts of the center, Dave.

Okay.

You said that you're not aware of any significant portfolios on the market.

Do you anticipate or are you sensing that there's a buzz that there may be significant transactions in the offing over the next say 12 to 24 months?

It's never been our policy to comment on speculation or rumors.

Okay.

Then lastly, you've talked about the yield on Mebane.

Can you tell us where your targeted anticipated stabilized yields are on the most recent three projects that you opened at Dells Pittsburgh and Long Island?

I think we previously announced they should come in stabilized between 10% and 10.5% -- 10% to 11%.

I think Deer Park will take longer and the anticipated returns probably, Frank, what do we estimate, 9% to 9.5%?

On Deer Park, yes.

Yes.

So you haven't hurt value there, but probably not created a whole lot at this point.

Well, we've created (multiple speakers).

I don't mean to be repetitive in terms of asking the question, but I just wanted to see if anything has changed from what you said previously.

Thanks.

Jim Sullivan, Green Street Advisors.

Good morning, this is Andrew.

Steve, you mentioned earlier you see the outlook for the economy improving and that helped you get comfortable with breaking ground on Mebane maybe a bit earlier than you had previously planned.

Can you maybe expand on that comment and, specifically, what you're seeing in the economy that tells you things are improving?

We're looking at an economy a year from today, not next weekend.

Our reading of the economic indicators, I'm sure the same as you, just led us to that conclusion, that it's not just one indicator, it's a whole range of indicators.

We just sense that our retailers have cut a tremendous amount of G&A out of their overhead, have cut their inventories down to appropriate levels so that if they gain traction with sales they should be very profitable and should generate a lot of cash flow.

As such and if that is what happens, they will be looking to invest that excess cash and the outlet stores, we're led to believe, are the fastest and highest return on invested equity.

As far as the overall macro environment, everybody draws different conclusions from the same set of numbers.

We drew the conclusion that a year from today we feel consumers, although they are cautious and deliberate today, may be more apt to buy or there may be more consumers to buy or more disposable income to spend in the outlet distribution channel.

Thank you.

(Operator Instructions).

Rich Moore, RBC Capital Markets.

Hello, good morning, guys.

On the Accounts Payable line, that kind of bounced upward this quarter.

Any thoughts on that, Frank?

Rich, give me half a second, I'm (multiple speakers).

Yes, that's all right if I caught you off guard.

I noticed it and I was curious if it was going to continue or if there's anything special you guys are holding up.

oh, I'm sorry, yes.

Part of that is due to Stanley Tanger's severance which is not -- was not all payable at his retirement.

So we had to accrue it and it's in that line item.

I got you, good, thanks.

And then on tenant allowances, I noticed those were down for the quarter, kind of unusually down.

Is that reflective of the amount of leasing or, again, is there anything special going on with what you guys are doing as far as offering tenant allowances?

I think it's a timing issue.

We're still looking to spend about $8 million for the year in tenant allowances, second generation.

Okay, okay, thanks.

And then on the mortgages you guys have coming due, you obviously don't have many mortgages to begin with, but on the ones -- the two that are getting closer, do those just go on the line of credit, is that what you're thinking currently?

The one mortgage that we have that's wholly-owned is the Myrtle Beach 17 mortgage, that actually has an extension option that we can pull the trigger on and we most likely will do that all things being considered if we get to April of '10 and have not done anything else.

The answer is, yes, we could put it on the lines, but given that it's at a fairly decent rate we may just end it.

The other mortgage that we have is in a joint venture in Wisconsin Dells.

We have gotten a commitment for a three-year extension on that with -- it's actually a 3 plus 1 plus 1.

So that will be rolling into that new mortgage.

Okay, great.

Thanks.

And then last thing on -- where was that land sale gain -- that parcel?

Washington County, south of Pittsburgh.

Okay.

And where was that in there?

What happens with that?

Is there plans for something to be put in there, do you know?

We sold it to a developer who's going to put in a Marriott hotel at the entrance to the center.

Got you.

I've seen the center, it's a nice center.

Great, thank you, guys.

Thank you, Rich; appreciate it.

There are no further questions at this time.

I want to thank everybody for joining us and, as usual, Frank and I are available to answer any questions you may have, so please call us.

Again, happy holiday season; I guess we won't be talking to you before then.

Goodbye, now.

This now concludes today's conference call.

You may now disconnect.