Tanger Inc (SKT) 2011 Q3 法說會逐字稿

Good morning. I'm Cindy Holt, Assistant Vice President, Finance and Investor Relations, and I would like to welcome you to the Tanger Factory Outlet Centers third quarter 2011 conference call. Yesterday, we issued our quarterly earnings release as well as our supplemental information package and Investor presentation. This information is available on our website under the Investor Relations tab.

Please note that during this conference call, some of management's comments will be forward-looking statements including 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 demand. 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 bankruptcies and competition. We direct you to the Company's filings with the Securities & Exchange Commission for a detailed discussion of these risks and uncertainties.

During the call, we will also discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP measures to the comparable GAAP financial measures are included in our earnings release and in our supplemental information. 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 26, 2011.

(Operator Instructions).

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 Steven Tanger. Please go ahead, Steve.

Thank you, Cindy. And good morning, everyone. Tanger delivered robust growth of adjusted funds from operations during the third quarter of 2011, up 24.7% from last year. This accomplishment was a product of both the inclusion of recent acquisitions into our portfolio, and continued same-center net operating income growth within our existing portfolio.

Strong same center NOI growth of 5% during the quarter, which marks our 27th consecutive quarter of positive comps was a result of our ability to successfully increase rental rates and occupancy. Continued positive comparable tenant sales were up 3.5% to $362 per square foot for the rolling 12 months ended September 30, 2011. We achieved a blended straight-line increase in rents of 24.6% for the first nine months of 2011.

Highlights, since our last quarterly call, included our recent acquisition and rebranding of the outlets at Hershey to Tanger Outlet Center in Hershey, Pennsylvania, and the official ground-breaking ceremony for a new Tanger Outlet Center south of Houston near Galveston took place on August 30, 2011. Later in the call I will discuss these events further along with a summary of our operating performance and our current expectations for the balance of 2011. But first let me turn the call over to Frank, who will take you through our financial results for the quarter.

Thank you, Steve. And good morning, everyone. Total adjusted funds from operations or FFO for the quarter ended September 30, 2011, increased 24.7% to $38.9 million, compared to $31.2 million last year. Adjusted FFO per share increased 17.6% to $0.40 per share from $0.34 for the third quarter of last year.

On a consolidated basis our total market capitalization at September 30, 2011, was approximately $3.5 billion, and our debt to total market capitalization was approximately 27.8%. We also maintained a strong interest coverage ratio of 4.11 times for the quarter. As of September 30, 2011, approximately 67.2% of our debt was at fixed rates.

Our balance sheet strategy has always been conservative, targeting minimal use of secured financing and a manageable schedule of debt maturities. In fact we have no significant maturities on our balance sheet before November of 2013, except for the $150 million bridge loan which can be extended for two additional 90-day periods, and which we have ample capacity to repay under our lines of credit.

Our FFO payout ratio for the first nine months of 2011 was approximately 58%, and our FAD payout ratio was 70%. At these levels our dividend continues to be well covered, and we are able to generate incremental cash flow over our dividend which we plan to use to help fun our future growth. I'll now turn it back over to Steve. Go ahead, Steve.

Thanks, Frank. Our positive leasing momentum continued in the third quarter, producing robust rental increases on the renewal and releasing of space throughout our portfolio. As of the end of September we executed 419 leases, totaling 1, 844,000 square feet with a blended average increase in base rental rates of 24.6%. This execution far surpasses the blended average rental spread of 14.6% in the first nine months of 2010.

We have executed renewals and renewals in process for 1,766,000 square feet or approximately 79.4% of the space coming up for renewal during 2011. Average base rental rates on the executed renewals increased 13.8%, up from the 10.1% increase during the first nine months of 2010.

In addition, during the first nine months of the year, we retenanted approximately 521,000 square feet with an increase in average base rental rates of 51.3%. More than doubling our average retenanting spread for the first nine months of 2010, which was 25%.

Our average cost of occupancy was 8.3% of tenant sales, which has provided us with the opportunity to continue to raise rental rates on the renewals and releasing of space throughout our portfolio of outlet centers. Same center NOI growth during the quarter was 5%, compared to 3.6% in the third quarter of last year. Year to date, same-center NOI growth of 4.9% was more than double the 2.4% reported in the same period last year. This growth resulted from continued increases in rental rates as well as higher average occupancy in 2011, compared to 2010.

Our overall occupancy rate for the consolidated stabilized properties continues to climb, and was 98.3% at the end of the third quarter of 2011, compared to 97.8% last quarter and 98.1% last year. Reported tenant comparable sales were our wholly owned portfolio increased 3.5% for the rolling 12 months ended September 2011 to $362 per square foot.

On the heels of the three successful acquisitions we discussed during our last earnings call, we closed out the third quarter by completing yet another property acquisition on September 30, 2011. Tanger acquired substantially all of the economic interests in the outlets at Hershey, a popular outlet center located adjacent to Hershey Chocolate World and amusement park near Interstate 81 in Hershey, Pennsylvania. The $56 million purchase price consisted of approximately $24.6 million in cash, and the assumption of $31.4 million in mortgage indebtedness. As with other recent acquisitions, the property has been rebranded under the Tanger Outlet Center flag.

This fully leased 248,000 square foot center features an up scale tenant mix of nearly 60 designer outlets and brand name stores including Aeropostale, Brooks Brothers, Calvin Klein, Carter's, Chico's, Coach, Gap, J.Crew, Nautica, Nine West, OshKosh B'Gosh, Polo Ralph Lauren, Tommy Hilfiger , Under Armour and many more. 6 million tourists visit the Hershey Market annually, and the center also draws regional shoppers with a population of 1.3 million people within a 30-mile radius. We expect to recognize operational synergies with Tanger Outlets in Lancaster, Pennsylvania located approximately 30 miles away.

These four accretive transactions bring our acquisition total for 2011 to 1.3 million square feet, and completes the pipeline of viable acquisitions from the pool of potential transactions we announced earlier this year. Post acquisition, Tanger's balance sheet remains conservatively structured as 92% of our portfolio in terms of square feet remains unencumbered by mortgages.

Supplementing this opportunistic acquisition of assets, our development pipeline is healthy despite the current competitive landscape. Tanger has a 30-year proven track record of successful outlet development. Tenants know that we can both deliver what we plan to build and operate and market the center successfully after it opens.

On August 30, 2011, through a 50/50 joint venture with the Simon Property Group, we broke ground on the next Tanger Outlet Center that will be delivered to tenants and shoppers. The site located 30 miles south of Houston, and 20 miles north of Galveston in Texas city, Texas is on the highly traveled Interstate 45 with a daily traffic count of approximately 100,000 cars. Houston is the fourth largest US city and the beaches and resort hotels in Galveston host over 5 million tourists each year.

Preleasing has been strong with a phase one tenant lineup including Banana Republic, Brooks Brothers, Calvin Klein, Gap, Guess, Nine West, Perry Ellis, Polo Ralph Lauren, Puma, Tommy Hilfiger and Under Armour. When completed the center will play host to over 90 brand name outlets and designer stores in the first phase of approximately 350,000 square feet with ample room for expansion for a total build out of approximately 470,000 square feet. Opening of the center is currently scheduled to be in time for the 2012 holiday shopping season.

Preleasing activities are continuing for our previously named projects at National Harbor, in the Washington, D.C. metropolitan area and in the West Phoenix and Scottsdale, Arizona markets. These markets have received enthusiastic support from our tenant base and each one has an excellent market potential for an outlet center. In addition to these named markets, we are continuing the process of building our shadow pipeline of potential new developments in several markets across the country, where we intend to develop outlet shopping centers.

Outside the US, our efforts continue toward the launch of an outlet platform in Canada, a nation that we believe is under retailed and where the true outlet center format is under represented. The objective of our 50/50 joint venture with RioCan Real Estate Investment Trust is to develop and lease up to a dozen Tanger Outlet Centers across Canada over the next five to seven years. We offer tenants the scale of a broad Canadian platform rather than one single development site. All of the documentation for our joint venture has now been finalized and signed, and preleasing continues to the previously announced sites in the Halton Hills area of the Toronto market and in the Ottawa market.

Tony Grossi, Senior Managing Director of the joint venture is hard at work on these sites in developing our shadow pipeline of additional potential development sites in Canada. When Tanger achieves the minimum preleasing phase one threshold of at least 50% on any of these domestic and Canadian projects, we will purchase the property, then break ground and proceed with construction. Grand opening activities should take place about a year after the start of construction.

We remain optimistic about the growth prospects of our Company and for our industry. As shoppers remain value conscious and the tenant community continues to indicate their desire to expand into new markets in the United States and Canada.

Due to the positive trends through September 2011, we are increasing our earnings guidance based on our current view of market conditions and taking into consideration the accretive impact of the Hershey acquisition, and the reversal of the fault interest for the Deer Park joint venture, we have raised our internal forecast. As a result, we believe our estimated diluted net income per share for 2011 will be between $0.50 and $0.53 per share. And our FFO for 2011 will be between $1.41, and $1.44 per share.

Our 2011 guidance includes a projected increase in same-center net operating income of approximately 4% to 5%, which is up from our previous guidance of between 3% and 4%. This guidance also assumes that tenant sales will remain stable and year-end 2011 occupancy is budgeted at approximately 98%. Our 2011 earnings estimate does not include any additional rent-termination fees, the impact of any potential future refinancing transactions, the sale of any out parcels of land, or the sale or acquisition of any additional properties.

We are pleased to be able to deliver robust operating results through September 2011. The Tanger team is working hard to achieve the extraordinary results the industry and our shareholders have come to expect. We have over 2,000 leases with good credit brand name tenants who provide a continuous and predictable cash flow in good times and in the challenging times.

We plan to continue to thoughtfully use our resources and to maintain a conservative financial position. Our solid balance sheet with 92% of our portfolio unencumbered by mortgages, ample liquidity, and a manageable schedule of debt maturities puts us in a very strong position for 2011 and beyond. I would now like to open the call for questions. Operator?

(Operator Instructions). Our first question comes from the line of Craig Schmidt Bank of America Merrill Lynch. Your line is open.

Thank you. Good morning.

Craig.

Steve, I'm just going through some of your supplementals, and it seems like the average size of your shopping center from 2005 to the end of third quarter has grown from 262,000 to 306,000 square feet, and then I notice that Texas City you are opening with a 350,000 square foot center. I just wondered what you consider to be the optimum size for the outlet center and what has given you the confidence to continue to build your centers larger?

The averages reflect the sale of several small properties over the past five or six years. Those were original properties delivered and built in the late 1980s. The newer properties, our sweet spot is between probably 350,000 and 400,000 square feet depending upon the market for phase one.

As we mentioned Houston is the fourth largest market in the country, and the preleasing is going strong. We have the ability to expand that property to 470,000 square feet. The size of our properties today is a direct reflection of the positive feedback from our tenants and their willingness to expand and grow their outlet divisions.

Great. And just curious, do you have a sense of when you might hit that 50% hurdle on one of your Canadian projects?

We are hard at work trying to achieve that goal. We will not announce until we're actually at the 50%, but the tenant reaction has been strong. We continue to have tenants look at the site, and give us very favorable feedback. And Tony Grossi is doing a terrific job with all of our properties in Canada.

Great. Thanks a lot.

Your next question comes from the line of Rich Moore from RBC Capital Markets. Your line is open.

Yes, hello. Good morning, guys. If you were thinking, Steve, of taking out your bridge loan with unsecured debt, what are you guys hearing in the unsecured market right now? Is anything that would be attractive to you at this point?

Good morning, Rich. We closely monitor all of the markets. Fortunately we were the only REIT in the past two years to get an upgrade from both Moody's and Standard & Poor's, so we have lots of options available to us. I think the feedback from bankers both in your shop and virtually every other is that the market is choppy, but we're closely monitoring the markets, and when we feel it is a opportune time, we will take action.

Okay. Good. Thank you. And then I wanted to ask you guys for the second question a couple of metrics. The expense-recovery ratio was substantially higher this quarter as were second-generation TIs. Any thoughts on those two metrics?

Rich, it's Frank. [Expense inversions] were up this quarter over previous quarters. We did have a couple of grand openings, and we tend to push some additional marketing funds into those. And some of the previous quarters may have been. And Hilton Head which suppressed the recovery rates a little bit. Also what happened in this quarter is the properties that we acquired, a lot of them have fixed CAM, so we're basically recovering at a higher percentage of operating costs.

Going forward in the fourth quarter, I think we're looking at probably an 89%-ish recovery rate for a couple of reasons. One is operating costs in the fourth quarter are typically higher. And then depending on the winter the snow cost can impact that marginally as well.

Okay. Great then on the TI s, Frank.

TIs is just a factor of timing. We have done a lot of leasing lately and our second generation tenant allowance in our FAD per quarter count on a cash basis, so they may run a little bit behind the actual signing of the lease, so that's really just a function of our ramping up our occupancy rate, and signing leases would make tenant.

So that may come down a bit over the coming quarters?

Yes, I think for the year, we're still looking at around [16 million] second generation tenant allowance.

Thank you, guys.

Our next question comes from the line of Samit Parikh from ISI. Your line is open. Mr. Parikhyour line is open.

Yes, hello? Hello? Can you hear me.

Yes, we can hear you now.

Sorry. Okay. Thanks. Looking at your guidance, given last quarter, it was essentially 140 to 144 for the year. If you take out --

I was afraid that was going to happen because he moved me up --

Hello?

We're here.

Sorry things coming through. It was 140 to 144, excluding the default interest that was assumed in the guidance last quarter, and now you have increased it to 141 to 144, so just a small increase. Despite what seemed to be a pretty strong quarter, a beat to consensus and the modest accretion that you are expecting from your acquisition, I just want to get why you guys maybe weren't more positive on having a bigger increase in your guidance for the year?

I think to a certain extent we try to be conservative on our guidance. We do expect G&A is up more than our run rate because we are dealing with a lot of expenses relating to setting up our joint ventures and other items, so our legal fees and the like have been higher than expected. And the Hershey accretion, while it is there, is not much on a quarterly basis, and at the end of the day it takes over $1 million to make $0.01 for us.

So we are comfortable where we are with the guidance. I think it will depend on tenant sales and the like could make a difference as to whether we're at the high end or above.

And then just one question on your thoughts on the consumer. Maybe not in your tourist focus markets, but more of the middle markets. We're hearing that the consumer in these middle markets are trading down even further from the outlet space, maybe down instead of going to the outlets going to a Walmart and shopping instead. Are you seeing that type of trend, and do you think maybe that contributed a little bit to the deceleration in your sales growth pace versus what you had last quarter?

I don't think so. I think the major impact was -- as you mentioned, we're in tourist markets primarily on the East Coast, and as you may recall, we lost 16 days due to Hurricane Irene, and that impacted the third quarter sales increase. We were pleased to have a sales increase even in spite of that.

So we have not seen any indication of our traffic being affected. Traffic is up. You probably have different information than we do. Walmart, of course, is all over in every community, and we're in select communities.

So our traffic is up. Our sales are up, and we are cautiously optimistic going into the fourth quarter.

Okay. Thank you.

Our next question comes from the line of Carol Kemple from Hilliard Lyons. Your line is open.

Good morning. Frank going back to what you said on the G&A, would you expect the $7.9 million to be a good run rate going forward?

I believe it will be a little less than that, Carol. Like I mentioned, we had some organizational costs and the like to hit Q3 that we don't believe will be necessarily recurring in nature, or if anything it will at least be less. So we're looking at probably around the $7.5 million number before.

Okay.

Somewhere around there.

And then Steven I know you said that you all have completed substantially all of the acquisitions that were in your pipeline earlier this year. At this point, I know you won't comment on anything specific until it's done, is there really anything attractive on the market?

Hi, Carol. At this point, there is nothing that we're aware of that's on the market.

Okay.

And if there were, we would take a very close look at it and aggressively pursue it.

Okay. Thank you.

Our next question comes from the line of Todd Thomas from KeyBanc Capital Markets. Your line is open.

Hi, good morning. Thanks. Just a quick follow-up, actually on the acquisition pipeline. So if it's completed as it stands today, I think that means that about $100 million of acquisitions fell out of the pipeline. Can you just comment on what may have happened there?

We are a conservatively run company. We completed extensive due diligence on one asset and decided not to proceed.

Okay. And then on Hershey, can you just talk about how that deal was sourced? Was that a marketed deal?

No, it was not a marketed deal. I was aware of the two private entrepreneurs that owned the property and have been in discussions with them for several years. And when they decided to sell they gave me a call, and we completed the transaction rapidly.

Are there any planned upgrades or any expansion opportunities at that site or is that aside from some operational efficiencies is that a stabilized property in your view?

There's no room to expand the asset. Actually, I was there yesterday with our Board of Directors. We are in the process of upgrading the tenancy.

We have replaced Liz Claiborne with Under Armour and Guess. Ann Taylor filling the only remaining vacancy and will open shortly. The tenant mix is very strong, and we feel that we can add value by Tanger-izing it with our marketing and also the synergies in close proximity to our very successful property in Lancaster, Pennsylvania.

Okay. Thank you.

Our next question comes from the line of Quentin Velleley from Citi. Your line is open.

Good morning. Just in terms of the Hershey acquisition, I think that PA Outlet Management have control of Rockvale Outlets in Lancaster. I'm just wondering if that is an asset that you have looked at, Steve, or might look at in the future?

Quentin, good morning. As you know, we don't comment on any speculation. We are certainly aware of Rockvale having been there neighbor for the better part of 17 years, but it's not an acquisition we are considering at this time.

Okay. And then just lastly with Deer Park, the NOI dropped a little bit in the quarter. I'm just wondering whether that was anything seasonal or whether there is some tenant changes or anything occurring at the moment?

Frank, you want to comment on the actual NOI for Deer Park? I can tell you that occupancy is up now to about 89%.

Occupancy is up. I don't think the NOI drop was very substantial. Expenses were a little bit higher, so our leakage there was probably a little bit more on a dollar basis, and that's probably where the difference came about. But we believe that number will continue to go up over time.

Okay. Thank you.

Our next question comes from the line of Cedrik Lachance from Green Street Advisors. Your line is open.

Thank you. Steven, in the past you have talked about 17 markets where you could look at potential development in a portion of these or that you considered to be underserved. And now you typically use several markets. Are there fewer markets now that you think that might need a development site, or is there anything that has changed in your vision of those markets that you had considered in the past?

I wouldn't read too much into the change from 17 to several. Some of our competitors have announced in markets that we were targeting, and sites that may or may not work in that market. But we continue to look at multiple markets around the country, and we're in the process of building out Houston for delivery next year, and developing and getting the permits and leasing in Phoenix, and in National Harbor. And we expect over the next year or so to continue to announce new sites.

Okay. And in terms of the Hershey acquisition, are you able to share the sales productivity at the center as well as some of the [cap rate] metrics?

I'm sorry. Would you speak into the phone. I'm having trouble understanding you.

I'm about as close as I can. In terms of Hershey can you share anything in regards to sale productivity of the property as well as cap rate?

We don't announce cap rates on individual assets. We expect sales to continue under our ownership. The property does well. And we don't announce sales for individual property.

Okay. Thank you.

Our next question comes from the line of Michael Mueller from JPMorgan. Your line is open.

Yes. Hi. Going back to the term loan and the balance sheet for a second. In terms of looking at permanent financing for the acquisition,is it likely it's going to be a bond offering at some point as opposed to equity?

Well as you may recall, we issued $117 million of equity this summer, so we knocked that out immediately, and don't lose sight of that. We are looking at various different options to extend out the maturities of both the term loan and our line of credit, and thank heavens we have lots of options available to us, not only in the permanent market.

Okay. And second question on Deer Park. Occupancy ticked up, as you mentioned, about 100 basis points in the quarter. Any color you can give us heading into year end there?

We have opened successfully Brooks Brothers, J.Crew, New York & Company. The property is gaining traction. We are in discussions with many new tenants to continue to fill vacancy. Traffic is stable and rising, and the movie theater continues to be one of the most high-volume movie theaters on Long Island, so long term we are optimistic about Deer Park.

Okay. Thank you.

Your next question comes from the line of Ben Yang from Keefe, Bruyette & Woods. Your line is open.

Yes. Hi. Good morning. Steven, can you just remind us why the loan on Deer Park did not qualify for the original extension option? Maybe what performance hurdles you fell short of to exercise that option? And then also in hindsight if there was anything you could have done differently, so that it doesn't happen again with future developments?

Well, I don't think we would have opened a project in October of 2008, right in the middle of the perfect storm. It just opened at absolutely the worse time you could have possibly opened a shopping center in retrospect, and there was nothing we could have done about that. Frank, do you want to speak to the second part of the question?

Yes. The Deer Park venture did not qualify for the one year extension option because it did not meet the debt service coverage requirement that was within that option which is one of the reasons we had to renegotiate the loan with the lenders, and are getting close to being able to sign revised loan docs and then extend that for three years.

Obviously the timing wasn't great. But I also recall that you were very deliberate in your leasing strategy on the thesis that maybe the last 10% of space would garner higher-market rents as you lease the rest of that center, and here we are today and that space is still not leased up. Are you still holding to that strategy today for Deer Park, and is that going to be the same strategy you use for your future developments? -- holding for that last space in each center that you develop from this point on?

As we get to the last 5% to 10%, yes, we intend to raise rates. Obviously when we get to 90%, 95% of an asset, the remaining space is more valuable. As you know, our entire property averages 98% occupied, so we're able to do that over time, and have for the past 30 years, Ben. But to say that we held property off the market is not an accurate reflection. We are getting close to 90% in Deer Park, which is a tremendous performance in the last year to get to that level.

Okay.

Also I just want point out that Deer Park is about twice the size of our normal shopping center. It's a much larger asset.

Right, Steve, I was going to make the point and it may have been in our redevelopment of Hilton Head we used the same strategy, and we were able to get substantially higher rent in that last 10% to 20%.

Okay. Great. Thanks, guys.

And our last question comes from the line of David Leibowitz from Horizon Kinetics. Your line is open.

Good afternoon or morning, excuse me. Two unrelated items. One could you give us a little more detail about the Atlantic City property, and what turned you on to it? And then I'll ask a follow-up in another area.

Good morning, David. The Atlantic City asset is unique. We were able to purchase essentially the downtown redeveloped area of Atlantic City in direct proximity to the casinos.

Atlantic City, we feel, long term is extremely viable. The casino redevelopment authority is aggressively marketing Atlantic City to Europe and other parts of the world as a family resort. The state of New Jersey is fully in support of Atlantic City. The new Aria, the beautiful brand new hotel casino, is under construction and will be delivered shortly.

So this was a unique opportunity to buy a streetscape outlet center, but structured as effectively a downtown. The volume of the center would put it in the top five of our portfolio. And we feel with our brand name and with our marketing, we can continue to drive sales and continue to upgrade the co-tenancy.

Thank you. Second question, and I have never heard this discussed, do you have any idea what percentage of the merchandise that is being sold by your tenants is specifically manufactured for factory outlet versus their retail outlets?

That differs anywhere from 5% to 100%, depending upon the tenant. There is no average. There is no across the board number, but products manufactured for the outlets as a distribution channel are manufactured in the same factories to the same standards with the same brand name as manufactured for other distribution channels.

Most of the folks we do business with who run those companies are very sophisticated brand managers, and their job is to protect and enhance their brand in all distribution channels. So the product has been manufactured for the outlets for the better part of 25 years. This is nothing new.

Thank you very much.

There are no further questions at this time. I turn the call back over to the presenters.

Thank you all for participating today, and for your interest in our Company. Tanger is the only public REIT with a pure outlet portfolio. We have a conservatively structured balance sheet, high-brand recognition, a tenured management team and an enviable growth pipeline. Tanger has always had and will continue to maintain a disciplined investment approach. For 30 years we have consistently grown our Company and we are proud of our long track record of increasing value for our stakeholders.

Frank and I are always available to answer any other questions you may have. Thank you again. Have a great day, and think outlets, think Tanger.

This concludes today's conference call. You may now disconnect.