Tanger Inc (SKT) 2012 Q1 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 Factor Outlet Centers first quarter 2012 conference call.

Yesterday we issued our earnings release as well as our supplemental information package and our investor presentation. The information is available on our website under the Investor Relations tab. Please note that during this 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 operation, funds available for distribution and dividends. These forward-looking statements are subject to numerous risks and uncertainties. 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. During the call, we will also discuss non-GAAP financial measures as defined by FCC 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, April 25, 2012. At this time, all participants are in listen-only mode. Following management's comments, the call will be opened up for your questions. We ask that you limit your questions to two, so that we will have the opportunity to address all callers questions. We will address additional questions as time permits, so you may reenter the queue after your initial two 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 Steven Tanger. Please go ahead, Steve.

Thank you, Cindy, and good morning, everyone. Our ability to successfully increase rental rates and occupancy resulted in strong same-center net operating income growth of 6.2% in the first quarter of 2012. Continued positive comparable tenant sales allowed us to achieve a blended increase in base rental rates of 23.4% in the first quarter. Our tenant comparable sales are accelerating, up 5.1% for the three months ended March 31, 2012, compared to the first quarter of last year. Tenant comparable sales for the rolling 12 months ended March 31, 2012, increased 3.4%, to $371 per square foot. It is continued strong performance like this that builds shareholder value over the long-term.

Tanger ranked number two in total return to REIT and real estate operating company shareholders over the 15 year period ended March 31, 2012 as reported by REIT RAO on April 22 with an 18% compounded annual total return. We are pleased to announce that on April 5 that our Board of Directors approved a 5% increase in our annual cash dividend rate from $0.80 to $0.84 per share. We are very proud of the fact that we have raised our cash dividend in each of the 19 years since becoming a public company in 1993. I know that many of you want to learn more about the progress we are making on the two Tanger Outlet Centers currently under construction, our domestic development pipeline and a status update on our Canadian expansion through the co-ownership agreement with RioCan. Later in the call I will address these topics along with a summary of our operating performance and our current expectations for the balance of the year.

But first, let me turn the call over to Frank. He will take you through our financial results for the three months ended March 2012, and discuss the financing activity during the quarter that further strengthened our balance sheet. Please go ahead, Frank.

Thank you, Steve, and good morning, everyone. Total funds from operations, or FFO, for the quarter ended March 31, 2012, increased 20.3% to $35.6 million, compared to $29.6 million last year. Adjusted FFO of $0.37 per share surpassed last year and met the street's consensus expectations. Adjustments for AFFO during the first quarter of 2012 were related to our share of abandoned due diligence costs for the Halton Hills project, Hookstown acquisition costs, and the write-off of deferred loan costs in connection with the repayment of the Cookstown mortgage. On a consolidated basis our total market capitalization at March 31, 2012 was approximately $3.98 billion, including $1.04 billion of total debt outstanding, equating to a total debt-to-total market capitalization of approximately 26.1%. We also maintained a strong interest coverage ratio of 3.9 times for the quarter.

As of March 31, 2012 approximately 63.4% of our debt was at fixed rates. On February 24 of 2012 we closed on a $250 million, seven-year unsecured bank term line. The facility bears interest at LIBOR plus 180 basis points based on our current credit rating and is pre-payable without penalty beginning in February of 2015. Net proceeds were used to reduce the outstanding balances under our unsecured lines of credit. This transaction improved our liquidity significantly.

As of March 31, 2012, available capacity under our lines of credit was $398.9 million or 76.7% of the total committed amount. And we have no significant debt maturities until November of 2015. As Steve mentioned, our Board of Directors declared a dividend of $0.21 per common share for the first quarter ended March 31, 2012 payable May 15, to shareholders of record on April 30. As a result our analyzed cash dividend increased 5% and currently equates to $0.84 per share. We have paid cash dividends each quarter over the past 19 years since becoming a public traded entity in May, 1993.

We are one of only a handful of REITs who have raised their dividend each year since going public. And our dividend is well covered, our 2012 FAD ratio is expected to be less than it was in 2011, which was 64%. We will generate incremental cash flow over our dividend which we plan to help fund our new developments and reduce amounts outstanding on our lines of credit. We strive to maintain a conservative approach to every aspect of our business, which we believe continues to build value for all of our stake holders over time.

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

Thanks, Frank. I'm pleased to report that positive leasing momentum has continued into 2012. So far this year, we are producing significant positive rent spreads on the renewal and releasing of space throughout our portfolio. As of the end of March, we executed 248 leases totaling 1.141 million square feet throughout our consolidated portfolio with a blended average increase in base rental rates of 23.4%. Lease renewals for the quarter accounted for 921,000 square feet, or about 50.8% of the square footage coming up for renewal during 2012, and generated an increase in average base rental rates on the executed renewals of 14.5% on top of a 16% increase last year. In addition, during the quarter, we re-tenanted approximately 220,000 square feet with an increase in average base rental rates of 57.9%, up from 49.9% last year.

The blended rent increases on lease renewals and re-tenanted space was 23.4% compared to 25.3% for the first quarter of 2011, and 23.4% for calendar 2011. Our tenant comparable sales performance has continued in 2012, with a 5.1% gain for the three months ended March 31, 2012, compared to the first quarter of last year. This compares favorably to both the 4.9% increase reported last quarter, and the 4.8% increase in the first quarter of last year. Tenant comparable sales for the rolling 12 months ended March 31, 2012 increased 3.4% to $371 per square foot. These positive results were achieved without the benefit of extraordinarily high volume Apple Stores and other high-priced, high-volume luxury retailers often found in regional malls.

Same-center net operating income growth during the quarter was 6.2%, on top of the 6% growth reported in the first quarter of 2011. This growth was a result of continued increases in rental rates as well as higher occupancy rates. The overall occupancy rate for our consolidated, stabilized properties was 97.3% at the end of March 2012, up from 96.7% at the end of March in 2011. There is high demand for space in Tanger Centers, and virtually no excess supply. Tanger' s low cost of occupancy, and our tenants increasing sales have allowed us the opportunity to continue to drive up rents while maintaining a very profitable distribution channel for our tenant partners. Consequently, we anticipate that demand at favorable rents will continue as our properties continue to perform well.

Construction is progressing at the site of the next Tanger Outlet Center to be delivered to tenants and shoppers located in the Houston, Texas market. The $65 million project, which is being developed through a 50-50 joint venture with the Simon Property Group, will offer over 90 brand name and designer stores in the first phase of approximately 350,000 square feet, with ample room for expansion for a total build-out of 470,000 square feet. The site is in a fabulous location, 30 miles south of Houston and 20 miles north of Galveston in Texas City, along highly traveled Interstate 45, with a traffic count of approximately 100,000 cars per day. Houston is the fourth-largest US city and the beaches and resort hotels in Galveston host over 5 million tourists each year. Tenant interest for the project is strong. And we expect the center to be approximately 90% leased at opening. The tenant line-up for Phase I, which we expect to open in October 2012, will include Banana Republic, Brooks Brothers, Calvin Klein, Coach, Gap, Guess, Michael Kors, Nine West, Puma, Sketchers, Tommy Hilfiger, Under Armour, Zumiez, and many, many more.

And in mid-February we began construction on yet another project, Tanger Outlets Westgate, located in western Phoenix. The site is located just off I-10 on the 101 Loop and Glendale Avenue, adjacent to the Westgate City Center, Jobing.com Arena, University of Phoenix Stadium, and the Renaissance Hotel and Convention Center. We are developing the project through a joint venture with the current land holders. We were the first Company to announce an outlet site in this market, and we plan to open the $77 million center in November 2012, just in time for the holiday shopping season. Our tenants are delighted to be part of this exciting 330,000 square foot project, as evidenced by strong pre-leasing, with signed leases and commitments for approximately 60% of the space. The tenant line-up will feature some 85 brand name outlets and designer stores, including Banana Republic, Brooks Brothers, Chicos, Elizabeth Arden, Guess, H&M, J. Crew, Nike, Talbot's, Under Armour, White House Black Market, and many, many more.

In addition to these silts under construction, our pre-leasing and pre-development work continues for the previously announced sites in Scottsdale, Arizona and at National Harbor in the Washington, DC market. We do not anticipate permitting or entitlement issues for either site. These sites have received enthusiastic support from our tenant base and each one has excellent market potential for a new Tanger Outlet Center. Beyond these named sites, we have identified a shadow pipeline including several markets that are either under-served or not served at all by the outlet industry, where we intend to either develop or acquire properties. Our 50-50 co-ownership agreement with the RioCan Real Estate Investment Trust to open Tanger Outlet Centers throughout Canada has recently made great strides. In the fourth quarter of last year we acquired and rebranded the Cookstown Outlet Mall, now known as Tanger Outlets Cookstown, located approximately 30 miles north of Toronto, directly off Highway 400 in the town of Ennisville, Ontario.

On April 11, 2012, we and RioCan announced a strategic relationship with Orlando Corporation to develop a Tanger Outlet Center of approximately 312,000 square feet within Orlando's Heartland Town Center, Canada's largest power center, located in the western, greater Toronto area in the City of Mississauga, and easily accessible to Highway 401. Heartland Town Center totals 2 million square feet of retail space and features primarily big box tenants with approximately 150,000 square feet of highly-productive outlet space scattered throughout. Orlando Corporation is the largest commercial land owner in Mississauga, these tenants, the partners will work together with the existing and new outlet tenants to merchandise the new outlet center. Consequently, we have terminated our option contract on the previously-announced Haltton Hills project and written-off our share of the related pre-development costs, which was approximately $500,000. The Heartland site has nearly doubled the population of the Halton Hills site within a 30 mile radius, and is located approximately 10 miles closer to Toronto than the Haltton Hills site.

We and RioCan have also identified a pre-development site in Kannada, Ontario in the Ottawa market, and plan to expand Tanger Outlets Cookstown from 150,000 square feet to 320,000 square feet. Entitlement work is underway at both sites and pre-leasing continues with positive tenant response. In addition to these named sites, the co-owners have identified several other markets in Canada that we believe are prime locations for a Tanger Outlet Center. With these projects, RioCan and Tanger plan to offer a Canadian outlet platform to our tenants, rather than a single development site.

We remain very optimistic about the growth prospects for our Company and for our industry, as the tenant community continues to indicate the desire to expand their outlet divisions into new markets in the United States and Canada. With respect to earnings guidance for 2012, based on the positive trends in 2011, and in the first quarter of this year, and our current view of market conditions, we believe our estimated diluted net income per share for 2012 will be between $0.60 and $0.66 per share, and our FFO for 2012 will be between $1.57 and $1.63 per share. We have nearly 2,500 leases with good credit, brand-name tenants who have historically provided a continuous and predictable cash flow in good times and in challenging times. No single tenant accounts for more than 8% of our gross leaseable area, or 6.7% of our base and percentage rentals. In addition, approximately 91% of our total revenue are expected to be derived from contractual base rents and tenant expense reimbursements.

We plan to thoughtfully use our resources and to maintain a conservative financial position. We expect our solid balance sheet with no significant debt maturities until November 2015 and 92% of our consolidated gross leaseable area, unencumbered by mortgages, to provide the liquidity to execute our growth strategy in 2012 and beyond. The first quarter was a pace setter for the balance of the year. We are working hard to achieve the extraordinary results that the industry and our shareholders have come to expect.

I would now like to open the call for questions. Operator, please.

(Operator Instructions) Your fist question comes from the line Craig Schmidt with Bank of America. Your line is now open.

Steve, how will the leasing differ in your Canadian outlets from your US? Will there be different tenants or are some brands that don't translate well up there?

Good morning, Craig. It will be a blend of the best Canadian tenants with their outlet or other type of retail stores with American outlet stores that have Canadian distribution already. We are working with the co-owners, RioCan, and jointly leasing to Canadian and US tenants.

Great. And then in terms of when I look at the foremost recent US acquisitions, is it your expectation the NOI growth from those centers will grow faster than your overall portfolio, or in line?

Craig, we are in the process of Tangerizing those properties right now, rebranding them as Tanger Outlet Centers, providing appropriate marketing and generating the excitement that we hope will lead to higher sales and higher NOI. It is really too early to make that prediction. But early indicators, such as increasing traffic at the properties, in some instances dramatic increases in traffic, would lead me to believe that, that will add significant shareholder value, over time.

Okay, thank you.

Your next question comes from the line of Christy McElroy from UBS. Your line is now open.

Hi. Good morning, guys. Just regarding the new site in Toronto at Heartland Town Center, are you able to disclose any specifics on sort of expected costs, or yields, or timing, at this point? Or have you just sort of started the pre-leasing process?

Good morning, Christy. We are just in the early stages, having announced it literally days ago. And I think, in subsequent calls, we'll probably have more information for you.

And you would expect, consistent with previous projects, that you would start disclosing more information when you are about 50% pre-leased, is that about right?

That's correct.

And then just on Houston and Glendale, I noticed that you didn't mention expected yield. Should we just assume that they would be consistent with historical targets of 10% to 12% around?

I think you can expect 10% to 11%, 12% will be a reach. But probably 10% to 11% will be consistent.

Okay, thank you.

Your next question comes from the line of [Simet Kricks] from ISI. Your line is now open.

Hi. Good morning and thanks for taking my question. I wasn't sure if you could disclose this, but I wanted to know what percentage of your lease role is subject to renewal options versus market rent increases?

Good morning. This is Frank. We don't disclose that. But our rule of thumb that we typically tell people is, anywhere from 50% to 60% that rolls has an option, and that will vary obviously year-to-year. But that is a good range.

Okay. And then one asset I guess that you didn't comment on the development and redevelopment, at least I'm not sure if I heard it. I know you were doing rebranding at Ocean City Outlets. I was just curious if there was any update on any sort of capital spend you expect to do there and anything that is going on, period?

We are in the process of rebranding Ocean City and a total renovation. We anticipate spending around $3 million. We are under construction, and the, literally, the new center will open in time for Memorial Day. The change will be quite dramatic, we are happy to send you pictures, if you would like. We are in the process of leasing space to high-volume outlet tenants that are in other parts of our portfolio, and probably in the next call, we would be delighted to announce those tenants once they have opened.

I know it is a small center. Is there any ability to expand there?

There really is not an ability to expand.

Okay. Thank you.

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

Hi. Good morning, guys. Steve, you had a very good same-store result in terms of NOI in the first quarter. What do you see so far in the second quarter in terms of leasing and in terms of traffic at the centers?

Good morning, Rich. Traffic continues to be accelerating. We are delighted with the overall traffic increases throughout our, virtually, throughout our entire portfolio, which would lead normally increasing traffic leads to increasing sales, which leads to increasing NOI. We don't even have April figures in yet, as you know, we are one of the first to announce, so it is a little bit premature to give you any sort of guidance or look at the Q2.

Okay, good. Thanks. And then as far as new tenants go, I guess probably everyone is wondering when the first Apple Store is going to show up in an outlet center. But what are you seeing on the front for new tenants coming from the regional malls into the outlet center format?

Virtually every tenant, with few exceptions in the regional mall format, is looking at and considering an outlet distribution channel. We are delighted that H&M is expanding with Tanger in our portfolio. We have a store with them in Atlantic City and they have signed a couple of additional leases with us. So they seem to be rolling out pretty large format high-volume stores.

Okay. Great, thank you.

Your next question comes from the line of Ben Yang from KBW. Your line is open.

Hi. Good morning. Steve, one of your peers is starting construction today on an outlet center near your Heartland project in Toronto. So, just wondering if you can comment on how their plans could potentially impact your project there?

Well, I think you would have to ask our friends at Simon Property Group what their plans are. We have announced our plans to develop in a co-ownership with the Orlando Corporation, a site that's ten miles closer, literally cutting off that site from the Toronto metropolitan area, in a 2 million square foot, high-volume, well-known Heartland Center. So, I really can't comment on anything that our competitors are doing.

Okay. And then is Orlando going to take an equity stake in your outlet center with RioCan or are you guys just buying the land from them, at that project?

There will be an equity stake. We will be co-owners.

A-third, a-third, a-third? Is that how that is looking at this point?

We will announce that at an appropriate time. But they will be co-owners with us.

Okay. All right, thank you.

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

Good morning. I know your venture into Canada is pretty new at this point. Are you seeing any success in getting any of the Canadian retailers interested in opening outlet stores in your US centers?

We are in discussions with several of them. So far none of them have decided to move into the states. But, yes, Carol, there will be some synergy in bringing US tenants to Canada and some Canadian tenants to the United States.

Okay. And then earlier you talked about growing in under served markets either through development or acquisition. At this point is there anything on the market that you all have an interest in?

There is nothing that we are aware of, through a public process, with regard to an outlet center for sale.

Okay, thank you.

Your next question comes in a line of Todd Lukasik from Morningstar. Your line is open.

Hi. Good morning, and thanks for taking my questions. I was just curious on the releasing spreads and in particular the gap between the average rents you are able to charge for re-tenanted space versus renewed space? Just wondering if there is anything fundamentally different about those tenants, or if that is a gap that has the potential to close over time?

Well, there is several answers to that question. Unfortunately, it is a relatively small number. That we are able to mark-to-market our properties and the tenant suites when they do become vacant and we are able to recapture them. So the re-tenanting is the equivalent of our mark-to-real market. We expect that to narrow over time, because our current leases and lease renewals have a clause in there which increases rents each year, instead of waiting for five years for the renewal to come up. So I think you'll see, the re-tenanting number still be high, but not at that extraordinary level. We focus on the comp net operating income growth, which was pretty extraordinary, north of 6%, and that incorporates everything.

Okay.

This is Frank. I think the renewal spreads are less because we have contractual obligations in renewal terms when tenants have options. So we are unable to mark that space to market.

Right. Okay, so we can think about the rent on the re-tenanted space as sort of increasing with the market rent over time and then something additional on the renewed space as the options expire and as the impact of these new leasing terms take effect?

Correct.

That's correct.

Okay. And I'm just wondering, do you guys have any plans for further international expansion beyond Canada or any thoughts about the potential beyond Canada?

We continue to monitor opportunities and joint ventures at various countries around the globe. Right now, there is significant growth opportunity for our stake holders in the United States and Canada. So we are going to go where we think we can get the highest return on our invested capital with the least risk, which right now is in the United States and Canada.

Okay. Great, thanks for taking my questions.

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

Hi, good morning. First, a real quick follow-up on Westgate in west Phoenix. Is the $77 million expected cost, is that just Tanger's share? Or is that the overall expected project cost?

That is the overall project cost.

Okay. And any additional detail on what that co-ownership of that project will look like?

We are happy to announce it at some future date.

All right/ And then just in terms of - - occupancy, it ticked down a bit sequentially, which seems normal for the first quarter following the holiday season. But since demand for outlet space seems so strong, I was just wondering if you could help characterize and move out a bit, is it largely due to some select retailers being unprofitable or is it because of renewal rent negotiations that are taking place? Is there anything that you can - - add to that?

Well historically, - - during the fourth quarter of every year there are temporary seasonal tenants, in our portfolio and other retail space. We, at the end of the first quarter, were at, as far as I can recall, an all-time high occupancy for our Company. So let's put it in perspective. There really were no move-outs other than the temporary tenants.

All right, great. Thank you.

And your next question comes from the line of Michael Mueller from JPMorgan. Your line is now open.

Yes, hi. Steve, when you look at the organization and staffing, how many centers do you think you can comfortably handle going through the development process at one time, say in the US and in Canada?

Hi Michael, how are you?

Good.

We feel that we have an extraordinarily well-seasoned, well-trained, well-disciplined team of professionals. We have ramped up and hired appropriate professionals in various skill sets over the past several years. We feel, right now, that the team we have can support the additional development that we have contemplated, with very few additional staff.

Okay.

And remember the Canadian venture, RioCan, is doing a lot of the heavy lifting for us up in that area.

Sure. Got it. Okay. And then secondly, I'm not sure if you mentioned this before, but what is the occupancy cost to the portfolio?

Right now, about 8.4%. Let me put that also put that in perspective for you, four or five years ago it was 7.4%. We are executing leases now in new developments targeting 10% to 11% of projected cost of occupancy. So, over time, it is our goal to continue to increase the cost of occupancy, but still provide a very profitable distribution channel for our tenant partners.

Okay. Great. Thank you.

There appears to be no further questions at this time. I'll turn it back over to Steven Tanger for any closing comments.

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 and a tenured management team with a disciplined development approach. Our strong portfolio of geographically diversified operating properties provides significant returns for our shareholders and our pipeline of growth opportunities is enviable. Frank and I are always available to answer any other questions you may have. Thank you, again, and have a great day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.