Tanger Inc (SKT) 2013 Q2 法說會逐字稿

Good morning. This is the Cindy Holt, Vice President, Finance and Investor Relations, and I would like to welcome you to the Tanger Factory Outlet Centers' second quarter 2013 conference call.

Yesterday, we issued this quarter's 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 know 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 trend, development, acquisition and expansion activities, as well as their comments regarding the Company's funds from operations be and 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 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 re-broadcast for a period of time in the future. As such, it is important to note that management's comments including time-sensitive information that may be accurate only as of today's date, July 31, 2013.

At this time, all participants are in listen-only mode. Following management's prepared comments, calls will be opened up for your questions. We ask that you limit your questions to two so all callers have the opportunity to ask 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 turn the call over to Steven Tanger. Please go ahead, Steve.

Thank you, Cindy, good morning, everyone. High tenant demand for outlet space has again resulted in positive Tanger metrics for the second quarter of 2013. As of June 30, the average occupancy within our consolidated portfolio was 98.3%. Same-center and operating income growth of 4.5% during the quarter extends our streak to 34 consecutive quarters, dating back to when we began measuring it in the first quarter of 2005.

This internal growth, combined with the incremental growth from four properties added to the portfolio late last year, resulted in FFO per share of growth of 13.3% during the first half the 2013. This double-digit growth did not come at the expense of our balance sheet.

According to KeyBank's leadership report, as of the end of June, our low leverage was best in class for the mall sector in terms of debt to total market capitalization, total debt to recurring EBITDA and recurring EBITDA to interest expense. And during the quarter, Tanger's credit rating was upgraded by both Moody's Investor Services and Standard & Poor's.

I will now turn the call over to Frank to take you through our financial results and to discuss the balance sheet. And then I will follow up with a discussion of our operating performance, our development pipeline and our current expectations for the balance of 2013.

Thank you, Steve, And good morning, everyone. Our reported second quarter funds from operations or FFO increased 10.3% to $42.5 million compared to $38.6 million last year.

Adjusted FFO per share increased 12.8% to $0.44 per share from $0.39 per share for the second quarter of last year and beat consensus by a penny. For the first half of 2013, AFFO per share increased 11.8% to $0.85 per share from $0.76 per share the same period in 2012.

This year-over-year increase is a direct result of our opening two developments in the U.S. and acquiring two centers in Canada in the fourth quarter of last year and our ability to continue to drive rental rates and grow same-center NOI. The lowest average tenant occupancy costs in our mall peer group at just 8.4% for the consolidated portfolio in 2012, we believe opportunities to increase rents will continue. On a consolidated basis, our total market capitalization at June 30, 2013, was approximately $4.4 billion, up 5.2% from $4.2 billion last year.

Our debt to total market capitalization was approximately 25.3% at June 30, 2013 compared 25% last year. We also maintained a very strong interest coverage ratio of 4.15 times second quarter of 2013, up from 4.08 times during the second quarter of 2012. Our balance sheet strategy continues to be conservative, targeting minimal use of secured financing and a manageable schedule of debt maturities.

As of June 30, 2013, there was $306.9 million of available capacity under our unsecured lines of credit or 59% of the total commitment. Approximately 92% of our consolidated gross leasable area is unencumbered by mortgages and we have no significant maturities on our balance sheet before November of 2015.

As Steve mentioned, Tanger's credit ratings were upgraded during the quarter to Baa1 by Moody's Investor Services and bbb-plus by Standard and Poor's. The Company has paid cash dividends each quarter and has raised its dividend each of the 20 years since becoming a public company in May of 1993.

Our dividend is well-covered with an expected FAD payout ratio for 2013 of between 55% and 60%. At these levels, we are able to significantly generate significant incremental cash flow over our dividend, which we plan to help fund our future growth or to reduce amounts outstanding under our lines of credit.

We have been continuously monitoring the interest rate environment. Historically, it has been our practice to term out balances under our lines of credit when the outstanding amounts reach the index eligible levels of approximately $250 million. As we approach that threshold, we are focused on evaluating various options for terming out and locking down a portion of our short-term variable rate debt.

We take the health of our balance sheet seriously and do not intend to risk any of our hard-earned investment-grade ratings. I will now turn the call back over to Steve.

Thanks, Frank.

I am pleased to report that we continue to see positive base rental rate spreads for space renewed and released during the second quarter of2013. This is in part a reflection of the performance of our tenant partners. Through the first half of 2013, straight line blended rental rates increased 22.1% on the renewal and releasing of space throughout the consolidated portfolio. Lease renewals accounted for 1,288,000 square feet, or approximately 66% of the space coming up for renewal during 2013, and generated an 18.5% increase in average base rate rental rates.

The remaining 386,000 square feet was released at an increase in average base rent rate rates of 32.9%. Positive leasing spreads, together with contractually embedded rental rate increases in higher occupancy, resulted in same-center net operating income growth during the second quarter of 4.5% for the consolidated portfolio. For the first half of 2013, same-center net operating income growth was 4.2% On top of the increase of 5.3% last year. At June 30, 2013, consolidated portfolio occupancy was 98.3%, up 30 basis points from 98% at June 30, 2012 and at March 31, 2013.

Comparable tenant sales increased 2.3% to $384 per square foot for the 12 months ended June 30, 2013, and increased 1.3% for the three months ended June 30, 2013. This performance is in line with our initial expectation that tenant sales would remain stable or increase modestly this year.

Excluding the eight consolidated properties impacted by Hurricane Sandy in the fourth quarter of last year, consolidated comparable tenant sales increased 3.1% for the 12 months ended June 30, 2013. This level of growth is consistent with the long-term compounded annual growth rate for Tanger tenant sales of about 3%.

As evidenced by our occupancy rate, there's there is high demand from the tenant community for space in Tanger centers. Tanger's low cost of occupancy of 8.4%, along with continued growth and tenant comparable sales over the long-term, have allowed us the opportunity to continue to increase rents while maintaining a very profitable distribution channel for our tenant partners.

This demand for outlet space, coupled with our reputation within the industry of having refined a skill set for developing, leasing, operating, and marketing high-quality outlet centers has afforded Tanger a robust, external growth pipeline throughout the United States and Canada. We currently have four projects under construction.

During the quarter, we and our 50/50 co-owner, RioCan Real Estate Investment Trust, broke ground on two Canadian developments, both of which are expected to open in the third quarter of 2014. On May 15, construction commenced on Tanger Outlets Ottawa.

Located in suburban Kanata off the Trans-Canadian Highway Number of 417 at Palladium Drive. Ottawa is the nation's capital and the fourth largest city in the country. With 1.2 million residents and 7.5 million annual visitors. The 303,000 square foot center will with our first ground-up development in Canada, and will feature approximately 80 brand name and designer outlet stores.

On May 16, 2013, construction commenced on a major expansion and renovation of Tanger Outlets Cookstown, located 30 miles north of the greater Toronto area, directly off highway 400 at highway 89, the gateway to the highest concentration of vacation homes in southern Ontario's cottage country. 156,000 square foot property was acquired in December 2011, and this project will nearly double its size to approximately 310,000 square feet, adding about 35 new brand-name and designer outlet stores to the center.

Because its sales productivity exceeded original expectations, the co-owners increased the property's budget to about $10 million to renovate the existing property in conjunction with the expansion. Although the going-in yield is below our targeted range, we believe that over time the incremental investment will be money well spent for such a highly productive asset.

Domestically, we plan to complete two projects by year end. Despite more than 60 rain days since last November when we broke ground on the National Harbor project, we are currently on track for a planned holiday opening in November 2013.

The project budget was increased by $5 million to cover the costs associated with opening the center on time and to include more upscale amenities than originally contemplated. Our projected yield, which is based upon occupation of 95%, was reduced by 50 basis points as a result of these additional costs.

However, leasing has exceeded expectations, and we expect to be close to 100% leased at opening. The other domestic project that we plan to open this year is a small expansion of our highly productive center in Sevierville, Tennessee by the end of the third quarter.

In the pipeline of various stages in the predevelopment process, we have good visibility on four new developments and two expansions that we plan to deliver in the next 24 months.

These include domestic projects at Foxwood Resort Casino in Mashantucket, in Connecticut, Charlotte, north Carolina, in Columbus, Ohio, in Scottsdale, Arizona, and a small expansion of our Center in Park City, Utah, as well as a small expansion of our Canadian Outlet Center in Saint Sauveur, Quebec in the Montreal market.

In addition, earth early in the second quarter, we announced our plan to form a partnership with the Peterson Group, with a proposed development of a new Tanger Outlet Center in Clarksburg, Maryland, located 27 miles northwest of Washington, D.C. and 36 miles of Baltimore.

This project is proceeding through the predevelopment stage. We remain optimistic about the growth prospects for our company and our industry as shoppers continue to seek branded value.

We believe the tenant community continues to indicate its desire to expand into new markets in the United States and Canada with Tanger as a preferred partner. With respect to earnings guidance, based on our current view of market conditions and trends, we are raising the low-end of our previous guidance for 2013.

We currently expect our estimated diluted net income will be between $0.78 and $0.81 per share, and our FFO will be between $1.78 and $1.81 per share. Our estimates do not include the impact of any rent termination fees, any potential refinancing transactions, the sale of any outparcels of land, or the sale or acquisition of any properties for the balance of the year.

Our guidance includes a projected increase in same-center net operating income of approximately 4% and is based on average general and administrative expenses of approximately $9.5 million to $10 million per quarter. We have over 2,700 leases with good credit, brand-name tenants that have historically provided a continuous and predictable cash flow in good times and in challenging times.

No single tenant accounts for more than 6.6% of our base and percentage rental revenues or 7.9% of our gross leasable area. In addition, approximately 90% of our total revenues are expected to be derived from contractual based rents and tenant expense reimbursements. And now, I would like to open the call for questions.

(Operator Instructions). We'll pause for just a moment to compile the Q and A Roster. Your first question comes from the line of Carol Kimple with Hilliard Lyons. Your line is open.

Good morning. Was there anything specific in the acquisition cost line item that you often talk about?

Hey, Carol, this is Frank. Those were just some minor professional fees associated with various projects that we've been working on during the year, nothing specific.

Okay. And then it looks like your Fort Myers center, the occupancy dropped to 88% in the quarter from 94% in the first quarter. What tenants was that related to, or was there anything special going on at that center?

We had basically -- it's a very small center, as you know, so only one tenant, and I'm not going to mention the name, but one tenant moved out and we're in discussion with other tenants to move in. This is just an anomaly. In a small center, the occupancy rate can go up or down depending on one tenant.

Okay. Thank you.

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

Hi, good morning. I'm on with Jordan Sadler as well. First question, just wanted to dig in a bit on some of the changes with regard to the assumptions on the development schedule.

I think you touched on Cookstown, but was just wondering about National Harbor, the increased costs, the slightly lower yield there, you know, the what the driver of the changes were at that site.

As I mentioned previously, we had 63 days of rain, so a small percentage of that was soil stabilization and other costs, unexpected costs, associated with the weather so that we could still meet the November opening date and generate the revenue. Second, the major increase in the costs, which weren't that great, but the major increase was additional more upscale amenities.

We've been very successful in attracting more upscale and designer tenants than we had originally contemplated, so we wanted the environment for our shoppers, for these upscale tenants, to reflect that type of designer and brand names. And also, I want to point out that our original expectations and original yield was based on 95%. Based on the leasing velocity right now, we expect to open close to 100%.

Okay. That's helpful. And then a question for Frank, with regard to the floating rate debt, sounds like the plan is to term the line balance out soon. What kind of pricing is reasonable to expect for that?

I think based on current environment, we're hearing 10 year and around a four handle.

Okay, great. Thank you.

Your next question comes from the line of Daniel Busch with Green Street Advisors. Your line is open.

Thank you. This morning, RioCan reported that you guys are under contract for a land parcel in Calgary. Can you talk a little bit about what that project may be and where it's at in the predevelopment phase?

We're in the very early predevelopment stage, and we have just started to show it to some of our anchor tenants. So it's premature to have further discussion about it.

Okay. And then I guess, just looking forward, obviously, you know, it seems like you're happy with that partnership. How do you see your next several projects? I guess, said differently, where do you see the best growth for ground-up development, whether it be a domestic or in Canada?

As we stated many times, there's a long runway to grow, in our opinion, in the United States, and there's a limited number of centers that will be built in Canada. We, our expectation hasn't really changed.

We expect to be able to deliver one to two new centers in the United States, and our plan is to deliver one new ground-up center a year in Canada.

Okay. Thank you again.

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

Hi, good morning, guys. On that same line, Steve, if I could, I heard also this morning that maybe you've got something going in Vancouver with RioCan. Is there anything to talk about there?

We're not in the position to announce anything other than what's been announced publicly.

Okay. Gotcha. And then Frank, on the line, I got in a little bit late on the call, it sounds like you've going to trim that out with a bond. Is there any thought of issuing any equity in there as well?

You know, Rich, I don't see a need to raise any equity, given our current leverage position and our funding requirements going forward. Particularly given that a lot of that is going to be equity in joint ventures which will have their own property level financing. So right now we're the not really focused on an equity need.

We think the bond market will be available when we're ready to push that button, if and when, . And look, the rates are still 200 basis points plus points less than our next maturity, that comes up in a 6.125%. We still think there's good opportunity to get some long-term money out there.

The yield is bouncing a little bit higher this morning. The last thing I had, guys, on the joint ventures. Will all of those be unconsolidated, I guess? You have one that may, but is most of that unconsolidated as you go forward? The developments I'm thinking.

The vast majority are going to be unconsolidated. I think there's probably one in the pipeline could end up on the balance sheet completely.

Okay. Great. Thank you, guys.

(Operator Instructions). Your next question comes from the line of Caitlin Burrows with Goldman Sachs. Your line is open.

Hi. We were wondering as you're in a number of JV's right now, how do you think your fee income will the trend over time?

Our fee income is going to probably increase next year. We haven't issued any overall guidance, but you can expect our fee income will probably go up by $500,000 to $1 million.

Okay. Great. Thanks. That's it.

Your next question comes from the line of Todd Lukasik with Morningstar. Your line is open.

Good morning. Just a question about Canada.

Is the story really there just about bringing the international retailers to the Canadian consumers or has incremental development spurred interest from Canadian retailers there for the outlet channel, and is there an opportunity to get more Canadian retailers for demand for your U.S. portfolio as well?

I think the answer is yes, yes, and yes.

Okay. Thank you.

Your next question comes from the line of Yasmine Kamaruddin with JPMorgan. Your line is open.

Hi, just a question on the Columbus development. Any commentaries there? Because last quarter Simon raised concerns about Columbus going forward, so what are your thoughts on this?

We are still very optimistic about Columbus. We think it's a terrific market. And there is no outlet center present there as of yet. And we're convinced we have the best site in the market, which is on the north going towards Cleveland.

There will be a -- we are totally approved by the local community and the township. The local community has a quirk that if 100 citizens sign a refer -- sign a petition that the challenge to the government's permits that we've received will go to referendum in November. We -- they -- there were more than 100 signatures on a petition, and we will go to referendum, which we expect to win.

Shortly after the referendum, we hope to break ground. The tenant demand is exceedingly high in Columbus, and we're looking forward to delivering with our joint venture partner, Simon Property Group. A very successful high volume center.

Okay, great. Thanks. Do you have a sense in how visible the shadow pipeline is, and how many markets are you going head to head with other competitors?

Well, since it's a shadow pipeline, it's obviously not been announced yet. It's not our intention in our shadow pipeline to go into markets behind other developers that have already announced, so I wouldn't expect that. Although in the past the opposite has occurred.

We, as we continue to break ground, we expect to break ground this year on Foxwood's and Charlotte. As we break ground there, we would intend to announce additional new sites.

Okay. Great. That's it. Thanks.

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

Yeah, hi, good morning. Thanks. Steve, there was an article in The Journal recently on Coach and its outlet strategy.

They're now more dependent on outlets than full-price and the challenge, it sounds like for them, is balancing growth versus maintaining exclusivity of the brand. I know you don't like talking about specific tenants, but maybe in general over the longer-term, do you think this is a concern for your business? Are you in any way sensing that maybe certain key outlet retailers be close to saturation based on that?

First, we highly respect Lou Frankfurt. We were -- we are good friends with the management group that, as of yesterday, announced that they are moving on.

We have great expectations that the new group that's coming in will seek profitable distribution channels, of which the outlet is a very profitable distribution channel. I don't think that Coach has reached saturation, but you certainly would have to speak to the management of Coach about that.

There are other very high quality, high volume valued tenants in that category such as, Kate Spade, Michael Kors, et cetera. The Women's Accessory category is well-represented in the outlet space, and well-represented in the Tanger portfolio.

Okay. So maybe it's mores specific to them than overall, and it sounds like you're not having any discussions about maybe slowing down the expansion, you know, in your portfolio at least, in some of your recent conversations. Is that kind of a fair assumption?

I think you can draw the conclusion you want. We value Coach, and as of today, they're committed to going into several of our new developments.

Great. Thank you.

There are no further questions in queue at this time. I turn the conference back over to our presenters.

Thank you all for participating in the call today and your interest in our company. Frank and I are always available to answer any questions you may have. We hope to see you soon. Good-bye and have a great day.

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