Tanger Inc (SKT) 2013 Q3 法說會逐字稿

Good morning. This is Cyndi Holt, Vice President Financing and Investor Relations and I would now like to welcome you to the Tanger Factory Outlet Centers' third 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 link.

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 and expansion activity, 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.

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 30, 2013. At this time, all participants are in listen-only mode. Following management's prepared comments, the call will be opened up for your questions. We ask you to limit your questions to two, so that all callers will 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 now turn the call over to Steven Tanger. Please go ahead, Steve.

Thank you, Cyndi, and good morning, everyone. The acquisition of a controlling interest in Tanger Outlets Deer Park on August 30, 2013, was a major highlight of the third quarter. Located on Long Island, Deer Park is an irreplaceable asset that we are pleased to add to our consolidated portfolio. The center generates the most traffic in our portfolio and sales are above our consolidated portfolio average. Over time, we expect to add value by increasing occupancy and enhancing the tenant mix of this high-volume property.

The third quarter of 2013 benefited from consistent internal growth and incremental NOI related to our increased ownership in Deer Park, for one month, and the addition of new developments in Houston and Westgate and acquisitions in Bromont and Saint-Sauveur, Canada, in the fourth quarter of last year. Same-center net-operating income growth of 4% during the quarter extends our streak to 35 consecutive quarters of internal growth, dating back to the first quarter of 2005 when we first began tracking this metric. I know many of you are interested in an update on our development projects, but first, let me turn the call over to Frank to take you through a discussion of our financial results and balance sheet.

Thank you, Steve, and good morning, everyone. Our reported third-quarter funds from operations for FFO increased 34.1% to $56.2 million compared to $41.9 million last year. Adjusted FFO per share increased 16.7% to $0.49 per share from $0.42 per share for the third quarter of last year and beat consensus estimates by about $0.03. For the first 9 months of 2013, AFFO per share increased 13.4% to $1.35 per share from $1.19 per share for the same period of 2012. As Steve noted, our growth is attributable to both internal and external initiatives.

On a consolidated basis, our total market capitalization at September 30, 2013, was approximately $4.6 billion, up 7.8% from $4.2 billion last year. Our debt-to-total-market capitalization of approximately 29% at September 30, 2013, was best in class for the mall REIT group. We also maintained a strong interest coverage ratio of 4.71 times for the third quarter of 2013, up from 4.37 times for the third 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 September 30, 2013, there was $261 million of capacity under our unsecured lines of credit, or 50.2% of the total commitment.

Approximately, 86% of our consolidated GLA is unencumbered by mortgages and we have no significant maturities on our balance sheet before November of 2015. 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 approximately 55%. At these levels, we are able to generate significant incremental cash flow over our dividends, which we plan to use help fund our future growth, or to reduce amounts outstanding under our lines of credit.

Since our last earnings call, we've completed a number of financing transactions. Last week, on October 24 of 2013, we completed the recast of our unsecured lines of credit, extending the maturity, reducing the overall borrowing cost and improving the related debt covenants. The maturity was extended approximately 2 years to October 24 of 2017, and we retain the ability to extend the maturity by an additional 1 year at our option. The interest rate spread over LIBOR was reduced 10 basis points to LIBOR plus100, and the facility fee, which is payable on the full $520 million commitment, was reduced 2.5 basis points to 15 basis points annually. In conjunction with the Deer Park restructure in August, we took the opportunity to improve the property's leverage profile and the applicable interest rates. As of September 30, 2013, the outstanding debt was $150 million and the applicable interest rate was LIBOR plus150 basis points. Prior to the refinancing, the outstanding debt balances totaled $246.9 million and the non-default rates were LIBOR plus 350 basis points for the senior loan and LIBOR plus 500 basis points for the meds loan.

To reduce Tanger's overall floating-rate exposure, as a percentage of total outstanding debt, we entered into interest rate swap agreements to block the rate on the $150 million Deer Park mortgage on October 28 of 2013. As a result of the effective interest rate for the Deer Park mortgage will be fixed at 2.8% through August of 2018. At June 30, 2013, our floating-rate debt represented 41% of total debt outstanding. On a pro forma basis, as if the Deer Park interest rate swap agreements had been in place at September 30, 2013, the floating-rate debt represented 39% of total debt outstanding and 11.3% of total enterprise value. Based on market conditions, we may complete additional financing transactions by year-end with the objective of further reducing our floating-rate debt exposure, extending the average term of our outstanding debt and increasing the unused capacity under our lines of credit.

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

I'm pleased to report that we continued to see positive base rent, rental rate spreads for space renewed and released during the third quarter of 2013. This is in part a reflection of the performance of our tenant partners. For the 9 months ended September 30, straight-lined lended rental rates increased 23.4% on the renewal and releasing of space throughout the consolidated portfolio. Lease renewals accounted for 1.457 million square feet or about a 74.6% of the space coming up for renewal during 2013 and generated a 17.9% increase in average base rental rates. The remaining 510,000 square feet was released at an increase in average space rental rates of 37.8%.

Positive leasing spreads, together with contractually embedded rental rate increases and higher occupancy, resulted in same center net operating income growth during the third quarter of 4% with a consolidated portfolio. For the first nine months of 2013, same-center net operating income growth was 4.1%, on top of the increase of 6.5% last year. At September 30, 2013, consolidated portfolio occupancy was 98.7%, up 10 basis points from 98.6% at September 30, 2012. And 40 basis points from 98.3% at June 30, 2013. Comparable tenant sales increased approximately 1% to $384 per square foot with the 12 months ending September 30, 2013, and increased approximately 1% for the 3 months ended September 30. This performance is in line with our initial expectation that tenant sales would remain stable or increase modestly in 2013. Feedback from our tenant partners indicates that current sales do not impact their long-term expansion plans within the outlet channel.

We continue to succeed in negotiating increased rental rates as a result of the low cost of occupancy for tenants doing business in Tanger Outlet Centers. With the lowest average tenant occupancy cost in our mall peer group at just 8.4% of our consolidated portfolio in 2012, our average occupancy cost ratio was well below market. Under these conditions, we were able to raise rents while maintaining a very profitable distribution channel for our tenant partners. And a demand for outlet space, coupled with our reputation within the industry of having refined a skill set for developing, leasing, operating, and marketing of high quality outlet centers, has afforded Tanger a robust external growth pipeline throughout the United States and Canada.

Currently, we have five projects under construction. During the quarter, we completed one project and late in the third quarter we commenced construction on two others. A small expansion of Tanger Outlets Sevierville in Sevierville, Tennessee opened during the third quarter. The project added approximately 20,000 square feet to the center, increasing its total gross leasable area to approximately 438,000 square feet.

On September 20, 2013, Tanger, and its 50/50 joint venture partner, broke ground on a new outlet Center in Charlotte, North Carolina. The center will be located 8 miles from Southwest -- 8 miles southwest of uptown Charlotte at the interchange of Interstate 485 and Steele Creek Road. The two major thoroughfares for the city. The approximately 400,000 foot project will feature about 90 brand name and designer stores and is expected to open during the third quarter of 2014.

On September 26, 2013, we broke ground on Tanger Outlets in Foxwoods in Mashantucket, Connecticut, at Foxwoods Resort Casino. Tanger owns a controlling interest in the project, which will be consolidated for financial reporting purposes. The center will feature about 80 brand name and designer tenants, including American Eagle Outfitters, Ann Taylor, Banana Republic, Calvin Klein, Coach, Fossil, GAP, Loft, Michael Kors, Nikes, Sketchers, Steve Madden, Tommy Hilfiger and many more. Unlike any existing Tanger Outlets Center, this approximately 314,000 square foot project will be suspended above ground to join the Casino floors of the MGM Grand hotel and the Grand Pequot hotel, which attract millions of visitors each year. Due to the complexity of the project, the overall budget and the construction period are expected to exceed Tanger's typical new development.

As a result of the increased cost, we are currently projected a stabilized year-one un-leveraged return at the low end of our targeted range which is per approximately 9% to 11% for domestic development projects. However, based on the demographics of this market, we believe the property can generate increased returns over time. We currently expect the property to open in the second quarter of 2015.

Despite more than 60 days of rain since last November, when we broke ground on the Tanger Outlets National Harbor, we and our 50/50 joint venture part their are finalizing plans to open on November 22, 2013, just in time for the holiday shopping season. Located within the National Harbor Waterfront Resort in Washington, D.C. metropolitan area, the center will be accessible from Interstate 95, Interstate 295, Interstate 495 and the Woodrow Wilson Bridge. The nation's capital welcomes approximately 33 million tourists annually. When complete, the center will include approximately 340,000 square feet and feature about 80 brand name and designer outlet stores. We currently expect to open the center approximately 97% leased.

Construction continues in Canada, both in the Ottawa and Toronto markets. In May 2013, we and our 50/50 co-owner broke ground on the Tanger Outlets Ottawa in Kanata. And on a major expansion and renovation of Tanger Outlets Cookstown, located north of Toronto. Currently, both projects are expected to be completed in time for the holiday 2014 opening.

Tanger has a robust pipeline of other developments sites that are currently in the pre-development stage. In Columbus, Ohio, we have secured the necessary zoning approvals subject to a voter referendum in early November. In Clarksburg, Maryland, we expect to have more clarity on the (inaudible) status of the project by year-end. Pre-development activities are also ongoing for a potential new development site in Scottsdale, Arizona, and from planned expansions of existing assets in Park City, Utah, Saint-Sauveur in the Montréal, Québec market. We remain optimistic about the growth prospects for our company and for our industry as shoppers continue to see 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. Based on our current view of market conditions and trends, we are raising our guidance for 2013.

We currently expect our estimated diluted net-income will be between $1.10 and $1.12 per share. Our FFO will be between $1.90 and $1.92 per share. And our AFFO will be between $1.84 per share and $1.86 per share. On an AFFO basis, at the mid-point, this represents a $0.07 increase or approximately 4% compared to our original 2013 guidance. Our estimates do not include the impact of any rent termination fees, any potential refinancing transactions, the sale of any out-parcels of land, or the sale or acquisition of any additional 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 G&A expenses of approximately 9.5% 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, both in good times and in challenging times. Those single tenant accounts for more than 6.6% of our base and percentage rental revenues, or 7.9% of our GLA. In addition, approximately 90% of our total revenues are expected to be derived from contractual base rents and tenant expense reimbursements.

And now, I'd be happy to turn the call over to questions.

(Operator instructions)

Your first question comes from Todd Thomas with KeyBanc Capital Markets.

Jordan Sadler's here with me as well.

First question -- I was wondering if you could talk about the outlet development in Columbus a little bit. I noticed that the expected delivery date was pushed back a bit and I know that there's some competition in that market. Any update that you could provide on the progress at that site?

As we mentioned, the permits and the approvals have been obtained, subject to a referendum of the people in early November. If the referendum is approved, we expect to break ground probably in the first quarter. The Columbus site is a competitive market. There are at least two other highly qualified developers proposing sites. The tenants will decide which is the best site when they sign leases. If we are approved and decide to go forward with this site, we are optimistic that the tenants will choose our site.

Question -- looking at the leasing activity for the quarter on page 10 of the supplement, I was wondering, was the leasing activity this quarter -- was it concentrated in one or two of the centers a little more heavily, in particular? It seemed like the rents on the re-tenanted space were a bit higher than in the last couple of quarters. I was just wondering if you could talk about that a bit?

It's just a mix, as I mentioned. We've got over 2,000 leases. It just a matter of which ones come due in that particular quarter. We were very pleased with the spreads that we're still continuing to be able to achieve, and the high occupancy -- approximately 99% occupied -- allows us to continue to raise the rents and with the low cost of occupancy for our tenant, at 8.4%, it's a very profitable distribution channel. I would not get too hung up on the quarter-to-quarter analysis of the leasing spreads.

That's helpful.

The last question, for Frank -- just a clarification -- the revision to guidance this quarter. I just want to confirm -- going forward now through the end of the year, you're adjusting for the acquisition expenses and unrecovered development costs; whereas the previous guidance did not account for that add back; is that correct?

That's correct. We decided to give FFO and AFFO guidance because we had a lot of the nonrecurring items that were still FFO items that we really didn't want to create a lot of noise in our guidance numbers. So, if you look at the front of the press release, you'll see where we took out a large adjustment for the unconsolidated JV -- the annual early extinguishment of debt and the litigation costs. So that's why we decided to give both numbers.

That's helpful.

Your next question comes from Tayo Okusanya from Jefferies.

Yes. Good morning, everyone. First of all, congrats on a really solid quarter. That was really nice to see.

The development schedule -- I noticed that for some of the developments you've pushed out the projected opening by a quarter; specifically, Columbus, Kanata, and also the Cookstown expansion. Just hoping we could get a little bit more color on why the push-out for a quarter?

It's not a significant move.

Okay.

One quarter could be one month, actually.

Right. Exactly.

In the two developments in Canada, as we continue to move forward under construction -- and you might imagine these are weather related, also, it could possibly be. So we're giving you the best view of the projected development at a particular point in time; and that's where we think it'll be today.

That is helpful. And then just a follow-up question.

Occupancy cost, the 8.4%, as you mentioned, much lower than the mall peers. Is there still a lot of confidence in the ability to push that to become a double-digit number by the course of the next 3 years?

That's our goal. As sales continue to trend up, we are able to get a little bit more rent while our tenants continue to find this a very profitable distribution channel. I might point out that our targeted returns for our tenants are between 9% and 11% on new developments in the United States, with a midpoint of 10%. So that's our goal on new developments.

And it is also our goal on lease renewals and re-tenanting, which you can see -- we've still been able to achieve very large rental spreads. So over time, I believe you'll find this 8.4% to trend up. I might point out, 5 years ago our cost of occupancy was about 7.4% to 7.5%. So it's a pretty significant increase, while our tenants still find it very profitable.

That's helpful.

And then just a last question -- just from a retailer perspective. Any new outlet concepts out there that you believe could generate meaningful demand for outlet space?

We love all the new outlet concepts that are coming. We're doing business -- there are several that we are finding that have announced plans to expand, such as Francesca's, Asics, Talbots, Vince Camuto, Cachet. We're also working with folks like Helzberg Diamonds, Joe's Jeans, Max Studio, Theory, Andrew Marc. There seems to be an ever-increasing list of high-quality designer and brand names that want to enter or expand in the outlet space.

That's very helpful. Thanks again, and congrats on the quarter.

Thank you very much. We appreciate your saying that.

Your next question comes from Carol Kemple, Hilliard Lyons.

Historically, you've put any property that you don't have 100% interest in, in the unconsolidated portfolio. Is Deer Park in consolidated, now? Because there's visibility that you all may control 100% in the future. I guess I'm trying to figure out how we should think of any property that you own more than 50% interest in, in the future -- if it'll be unconsolidated or consolidated?

Carol, this is Frank.

The real deciding factor is whether we have control of the asset. And now that we own two-thirds of Deer Park, for accounting purposes, we control the asset and therefore it has to be consolidated on our balance sheet. Typically, if it's a 50/50 you're not going to have control and, therefore, you would not consolidate. Once you have over 50% ownership, then you have to look a little deeper. But in some circumstances you'll end up consolidating because of the amount of control you have over the asset.

So will Foxwoods be consolidated, then?

Yes. Foxwoods will be a consolidated entity because of our control of the assets.

And then, with occupancy as high as it is, how many properties do you have currently that you think you could do expansion projects at without taking away too much parking?

We are constantly looking at that. We created a lot of very wealthy people in surrounding land by not land-speculating and land-banking. So, we do not have excess property to expand. A couple of the announced expansions are in places like Branson, Missouri, and some of the other ones. But there's not a lot of expansion space left.

Congrats on the nice quarter.

Carol, I just want to mention that some of the newer properties like Houston and Westgate, we have some expansion space available. And when those properties stabilize, we probably will be expanding them.

Your next question comes from Daniel Bush with Green Street Advisors.

You know, the consolidated leasing activity and the spreads continue to be quite solid, or pretty strong. I'm just curious, can you give us a little color on the unconsolidated assets? Are the releasing spreads there? Or the releasing activity just as strong? I'm just trying to get a little context on the consolidated versus the unconsolidated.

Yes. This is Frank.

Our spreads on the unconsolidated properties are going to be similar to the consolidated. But realize that the majority of our unconsolidated properties are newer, and therefore there's not near as much lease rollover. You are not missing a whole lot of the picture, currently, with regards to releasing or renewals when we're just showing you consolidated. The vast majority of unconsolidated have been built within the last couple of years, or even within the last year; so there's not any real lease rollover to speak of.

And on the unconsolidated assets, obviously, Deer Park was the big news of the quarter. Was that a unique situation? Or is that an opportunity in the future as gaining controlling interest, or gaining100% interest in some of your joint-ventured assets as they stand currently?

Well, I will remind you that one of our properties in Myrtle Beach, South Carolina, was a partnership and we were able to buy out our partner after several years. The acquisition of the Charter Oak portfolio, which was 9 properties -- I think, basically, 10 years ago we bought it in a joint venture with Blackstone and 2 years later we bought out Blackstone's interest.

So we have, over time, consistently had a strategy to buy out partners. Partners sell out for numerous reasons, amongst them, their investment horizon timetable has been met, or they want to invest in other properties. We are always interested in buying out our partners. But while the properties are operating, we operate as good business partners with them.

And maybe one last question.

Steve, you've talked a lot about how disciplined outlet development has been over the last, call it decade, as far as a lot more announcements than, actually, deliveries. Currently, it seems like retailers are becoming more comfortable with outlet developments coming closer to the CBD. And it suggests that there may be more opportunities or sites available than there were a couple of years ago.

Do you think that the sector, or the properties, that will stay disciplined in the development over the next couple years? How do you see that unfolding?

I have no crystal ball as to what other folks will do. I'm really comfortable that we will continue our strategy that's been consistent over 33 years of being disciplined developers. We can only speak to ourselves and what we intend to do. There's lots of conversation about sites coming closer to market. We're not really seeing it yet. So we'll see. Time will tell.

Obviously, we're in the business. We go look at new projects that are announced. We go to look at new projects that opened. And we try to analyze, really, what they've done and talk to our tenants about their long-term plans. Candidly, the tenants are the ones that make the decision where they want to go. We don't.

Your next question comes from Wes Golladay with RBC Capital Markets.

When you look at your future pipeline, how many of your future sites would you expect a potential competing site, in particular from a viable competitor such as a Simon?

Hard to tell, Wes. Good morning.

We have lots of respect for the Simon Property Group. They are extremely good operators. We are in a marketplace that is competitive today. I don't know what that marketplace will look like in 3 to 5 years. I have a high expectation that Simon and Tanger will still be in this market. We announce a site which we feel is the best site in the market. And if our competitors want to announce competing sites, the tenants once again will decide where they want to go.

And sticking with that, do you foresee any pressure on yields from future projects, or from the rent site with the increased competition?

We're 99% leased. And with new developments coming on, we have portfolio discussions with all of our tenants, not just isolated discussions about one project versus another. We are disciplined. We've given you the range of 9% to 11% returns. If we can't meet those returns, there is a high expectation that we will not proceed.

Thanks. Nice quarter.

Thank you very much, Wes. We appreciate it.

Your next question comes from Yasmine Kamaruddin from JPMorgan.

Just one question on Deer Park. Can you give us an update on what's left to lease? And does it seem like it just continues to grind higher, or do you see any catalyst for the pace to pick up?

Deer Park is a terrific asset located mid-island on Long Island in New York. We're about 94% or so occupied. We're in discussions with numerous tenants about filling whatever vacant space there's left. And, hopefully, as every quarter goes on we'll be announcing additional occupancy. There's no large tenant we're talking to, to take a large block of space, if that's what you're referring to.

And, also, for the Columbus project, can you give an indication of what returns would be?

We have a partner in that transaction. We feel comfortable that the returns will be within the 9% to 11% that's stated on our supplement.

(Operator instructions)

Your next question comes from Ben Yang with Evercore.

Steven, in your prepared remarks you said that current sales do not impact retailers' long-term expansion plans. But sales are tied to profitability. So I was hoping that you can elaborate on some of the other things retailers take into consideration when they do sign leases and talk about their expansion plans with you guys?

We do have extended ongoing conversations with a lot of our retailers. Short-term sales results for sophisticated retailers, brand name, and designers, don't impact their long-term strategy. There's lots of noise around existing sales, as you know -- secular shift from durable to nondurable, government shutdowns, weather -- this, that, and the other. And there'll be some challenges going into the fourth quarter with one week less selling time between Thanksgiving and Christmas.

But, the retailers we deal with are sophisticated. They do have long-term strategies. The outlet distribution channel still continues to be either the most profitable or amongst the most profitable business unit they have. So they're continuing to allocate capital to that. And we've seen these slowdowns before. But it still increases. There's no decreases in sales.

So, we remain optimistic. The leasing volumes in the new properties we've announced are still extraordinarily high, as evidenced by National Harbor opening at least 97% occupied. We're very excited about the future. We have a robust pipeline of terrific sites and the tenants have embraced it.

Makes a lot of sense. And I understand how over the short-term there might be some noise. But, is it your sense that maybe over the longer term these retailers are forecasting a flattish sales environment, or maybe even a potential decline in their businesses?

Ben, you'd have to ask the retailers. I can't speak for them. We're not anticipating that right now. One quarter, or four quarters, doesn't really make a trend. We continue to monitor it. We continue to have conversations with our tenant partners. But I believe you'd have to speak to them about their thoughts.

And maybe just a final question -- just curious if you had any updated thoughts on what's going on with Coach, given the fact that they're obviously a key outlet retailer? It just seems like the whole brand dilution issue is maybe more of an issue today than it was even just a few months ago.

Coach has been a very valued tenant partner since the late 1980s when we opened the store with them in West Branch, Michigan. They have new management coming in, which we're very excited about. And they plan to revitalize the brand -- which is still doing well, by the way. Coach remains the highest volume, or amongst the highest volume, tenants in our portfolio.

I will tell you that when we open new shopping centers, there's a line outside of Coach to get in. So we're optimistic that Coach's new merchandising will resonate with their customers. That particular segment of retail, women's accessories, has other brand names now, such as Michael Kors and Kate Spade, that are doing very well. So the category is increasing in our portfolio.

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

Again, thank you all for participating in our call today and for your interest in our company. Frank, Cyndi, and I are always available to answer any questions you may have. God bless you. Thank you. And have a very happy and healthy holiday season.

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