Tanger Inc (SKT) 2015 Q2 法說會逐字稿

Good morning. I am Cyndi Holt, Vice President, Investor Relations, and I would like to welcome you to the Tanger Factory Outlet Centers Second 2015 Conference Call. Yesterday, we issued our earnings release as well as our supplemental information package and our investor presentation. This information is available on our Investor Relations Web site, investors.tangeroutlet.com.

Please note that during this conference call, some of management's comments will be forward-looking statements. These forward-looking statements are subject to risks, numerous risks and uncertainties, and actual results could differ materially from those projected. 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 most directly 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 only be accurate as of today's date, August 5, 2015. At this time, all participants are in listen-only mode. Following management's prepared remarks, the call will be opened for your questions. We ask that 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, Frank Marchisello, Executive Vice President and Chief Financial Officer, Tom McDonough, Executive Vice President and Chief Operating Officer, and Jim Williams, Senior Vice President and Chief Accounting Officer.

I will now turn the call over to Steven Tanger. Please go ahead Steve.

Thank you, Cyndi, and good morning everyone. The second quarter of 2015 was an outstanding quarter for Tanger Outlets. For the quarter, adjusted funds from operation per share increased 14.9% to $0.54 per share, compared to $0.47 per share for the second quarter of 2014. This growth exceeds all other mall REITs that have reported second quarter earnings to date. In addition, same center net operating income increased 4.6% during the quarter. Any of you, who are interested in updates on the two new Tanger Outlet Centers that have opened since our last call, and the two new Tanger Outlet Centers, that are currently under construction -- first, let me turn the call over to Frank, who will take you through our financial results. I will then follow-up with a discussion of our operating performance, our external growth opportunities, and our outlook for the balance of the year.

Thank you, Steve, and good morning everyone. As Steve mentioned, second quarter AFFO increased 14.9% to $0.54 per share from $0.47 per share for the second quarter of 2014. For the first half of 2015, AFFO per share increased 13% to $1.04 compared to $0.92 per share for the same period of 2014.

Our balance sheet strategy remains conservative, targeting minimal use of secured financing, and a manageable schedule of debt maturities. Our debt to total market capitalization ratio was 32%, and we also continue to maintain a strong interest coverage ratio for the quarter of 4.67 times.

As of June 30, 2015, there was $343.7 million of available capacity under our unsecured lines of credit, and approximately 85% of our consolidated square footage was unencumbered by mortgages. The next significant debt maturity on our balance sheet is in October 2017, when our unsecured lines of credit mature, but which we can extend by one year at our auctions.

We have paid a cash dividend for 88 consecutive quarters, and have raised our dividend, each of the 22 years since becoming a public company in May 1993, resulting in our inclusion in the S&P High Yield Dividends Aristocrat Index.

Cumulatively, we have increased our annualized dividend by 35.7% over the last three years, the equivalent of a compound annual growth rate of 10.7%. Our dividend is well covered, with an expected FAD payout ratio for 2015 in the mid-50% range. At these levels, we expect to generate more than $100 million in excess cash flow over our dividend, which we plan to continue to invest in our business, by upgrading our properties and funding most of the equity required to complete our current development pipeline.

In addition, we and our Board of Directors remain focused on maintaining a balanced capital allocation strategy. We continue to consider alternatives, including the possible use of internally generated cash flows to repurchase our common shares.

I will now turn the call back over to Steve.

Thanks Frank. As I mentioned earlier, same center net operating income increased 4.6% during the quarter, exceeding last year's second quarter increase of 3.3%. On a year-to-date basis, same center net operating income increased 4.3% compared to 3.3% in the first half of 2014.

We were able to achieve this growth with occupancy of 96.8% as of June 30, 2015. Although this occupancy level exceeds that reported by each of the eight other mall REITs, it is slightly lower than is typical for Tanger, due largely to a disproportionate amount of store closings during the second half of 2014, and the first half of 2015. This quarter's increase in the same center net operating income extends our streak to 42 consecutive quarters of same center net operating income growth, dating back to the first quarter 2005, when we first began fracking this metric.

One of the key drivers of this year's same center net operating income increase is the addition of high volume tenants in 2014, that are now comping, and as a result, are producing higher average rents.

Other major driver of our same center net operating income growth, is leasing spreads. I am pleased to report, that our leasing spreads continue to grow in the second quarter. Our blended base rental rates increased 25.8% during the first half of 2015, on top of a 24% increase for the first half of 2014. We believe our ability to drive rents higher is a function of retailer demand for outlet space, and our leases being at below market rents on average.

With the lowest average tenant occupancy cost ratio in the mall peer group at just 8.9% of our consolidated portfolio in 2014, we have been successful in raising rents, while maintaining a very profitable distribution channel for our tenant partners. These renewals, during the first half of 2015 accounted for 1,059,000 square feet or about 68% of the space coming up for renewal during 2015, and generated a 22.9% average increase in base rental rates. Retenanting activity accounted for an additional 369,000 square feet of leases executed during the first half of 2015. This space was released at an average increase base rental rate of 33%.

After a soft April, tenant sales rebounded in May and June. For the trailing 12 months ended June 30, average tenant sales within our consolidated portfolio increased 2% to $391 per square foot. Traffic into our centers continues to comp positively compared to 2014, up 1% from the second quarter, and 2% for the first half of 2015. Feedback from our tenant partners indicates that sales at any given week, month, or quarter, have virtually no impact on their long term expansion plans, and their overall demand for space in our centers. Tenants are telling us, that traffic is up, the number of transactions is growing, and it appears that the consumers are returning.

This quarter's supplemental information, includes enhanced disclosure about the productivity of the assets in our consolidated portfolio from top to bottom. All properties, open for at least 12 months, were ranked and grouped in tiers of five centers. Our five most productive assets generated average tenant sales of $542 per square foot for the trailing 12 months ended June 30, 2015. They were 97% occupied and are expected to contribute 25% of our 2015 net operating income. In addition, 75% of our projected 2015 NOI is attributable to centers averaging $440 per square foot in tenant sales. We believe this data illustrates the strength of our portfolio and support a stronger valuation.

We expect to recapture a total of approximately 214,000 square feet by the end of 2015, related to bankruptcies and brand-wide store closing announcements. The retailers vacating this space generated average tenant sales of only $231 per square foot. As of June 30, we had executed leases with new tenants, representing approximately 45,000 square feet, or 21% of the total space expected to recapture, at a 40% increase in average base rents. In addition, another 13,000 square feet or 6% of the total square foot expected to be recaptured, is committed with leases currently in negotiation.

The combination of our low cost of occupancy and more vacant space available to lease, provides us with what we consider to be a perfect opportunity to upgrade the tenant mix, increase average tenant sales within our portfolio over time, provide the consumer with an even better overall shopping experience, raised rents, and ultimately create incremental value for our shareholders.

As we are recapturing space from these bankrupt or underperforming tenants, demand for space in Tanger Outlet Centers is being generated by retailers such as Rag and Bone, TaylorMade, Alex and Ani, Mountain Warehouse, Yves Delorme, OROGOLD, Lululemon, Armani A|X and West Elm, just to name a few. Tenant demand for outlet space, coupled with our reputation within the industry of having a high quality portfolio of outlet centers, and a refined skillset, for developing, leasing, operating and marketing them, has afforded us a robust external growth pipeline. We are on track to deliver four new Tanger Outlet Centers in 2015, totaling 1,400,000 square feet, which will increase our total portfolio by 10%.

After opening the Tanger Outlet Center at Savannah, Georgia, in April 2015, Tanger Outlet Centers and Foxwoods opened on May 21, at the Foxwoods Resort Casino, in Mashantucket, Connecticut. The 312,000 square foot center, features about 80 brand name and designer outlet stores and is suspended above ground to join the resort's two casino floors, which along with Foxwoods other various on-site entertainment venues, attract millions of visitors each year. As of June 30, the center was 93% leased.

Last week on Friday, June[sic] 31, the newest Tanger Outlet Center opened in the Grand Rapids, Michigan market -- 350,000 foot center, which also features about 80 brand and designer outlet stores, was 89% leased at the opening. The shopping turnout for the opening was so strong, that we backed up the interstate and we had to utilize off-site overflow parking lots to accommodate the high volume of shopper traffic. Construction is well underway in the Memphis, Tennessee market to complete the next new Tanger Outlet Center, which we plan to open in November of 2015.

The total project cost for these four new developments is about $388.7 million. As of June 30, our remaining equity contribution necessary to complete these projects, net of construction loan proceeds, was only about $49.4 million, which we plan to fund with internally generated cash flow. We believe, these developments will extend our proven track record of creating high quality outlet centers that yields well above our cost of capital, and should create significant long term shareholder value.

In addition to the projects that we expect to open this year, we and our joint venture partner, Simon Property Group, commenced construction of a new Tanger Outlet Center in the Columbus, Ohio market on June 25. We currently expect to complete construction, in time to open the 355,000 square foot center during the second quarter of 2016. We continue to work on a number of pre-development stage sites in our pipeline. They will be announced upon successful completion of our underwriting process. As I have mentioned on previous earnings calls, we plan to deliver one to two new centers in each of the next two to three years.

Based upon our success in the first half of 2015, we are raising our same center net operating income guidance for the year, to 3.5% to 4%, an increase of 50 basis points. In addition, we are increasing our annual FFO guidance for 2015 by $0.07 per share. The components of this increase include, $0.02 per share related to stronger than expected operations and lease termination fees during the second quarter of 2015, $0.01 per share due to the elimination of dilution during the second quarter of 2015, related to the previously proposed sale of certain assets, $0.01 per share related to better projected operating results in the second half of 2015, compared to our previous forecast, and $0.03 per share to eliminate dilution during the second half of 2015, related to the previously proposed sale of assets.

We currently expect our 2015 estimated diluted net operating income to be between 121 and 127 -- excuse me, $1.21 and $1.27 per share, and our 2015 FFO to be between $2.16 and $2.22 per share. Our guidance assumes, average general administrative expense of appoximately to $12 million per quarter, and does not include the impact of any potential refinancing transactions, or the sale of any outparcels of land or outlet centers.

We remain optimistic about the growth prospects for our company and for our industry, as shoppers continue to seek brand names direct from the manufacturer. The tenant community continues to indicate its desire to expand into new markets where Tanger is a preferred partner. The resiliency of the outlet channel has been proven over the past 34 years through many economic cycles. We had nearly 3,000 long term 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 4.8% of our base in percentage rental revenues, or 7.8% of our gross leasable area. 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 delighted to turn the call over to any questions.

(Operator Instructions). Your first question comes from Samir Khanal with Evercore ISI. Your line is open.

Hey Steve, thanks for the disclosure on the asset-by-asset breakdown. I mean, that was certainly helpful to us. Just taking it one step further, can you provide any color on transactions that have happened recently or just to get a better idea maybe what cap rates to use for the various buckets now? Maybe there hasn't been any transactions, which complicates things even further. But just wanted to kind of make sure, we are not missing any kind of data points out there on transactions, that you are kind of hearing about or that have kind of taken place? Any color on that would be helpful.

Samir, there really haven't a lot of transactions that have occurred. I don't know, it's not a public company, so it's difficult to get the actual pricing. But we understand that, the Palm Beach Outlet Center by was sold by New England Development, and you may want to contact them to get the pricing on that transaction. But I think you will find that the cap rate was pretty low.

Do you have any idea on kind of what the sales productivity on that asset was, or --

It's not one of our assets. So I think it's probably best for you to contact them directly.

Okay. And then, for one of your projects in the development side, I think the yield went up about 50 bps. What was the change or that matter?

That's a good thing, Samir, right?

Yes. I know it is.

We were able to get better execution on the leases than we originally budgeted, and the project appears to be doing well.

Okay. And then, just on some of the space that you're capturing from retailers, which kind of gives you the opportunity to re-tenant with better credit, as you kind of look forward in the next six months, are there other retailers that you're anticipating, that you can -- for the right examples, that are looking to close stores, that would also -- maybe you would get sort of an occupancy dip on that, but an opportunity to get better tenant in there?

Normally, these tenant bankruptcies and corporate changes in retail strategy occur late in the year or in the first quarter. We are not aware of any additional ones that may come back to us during the balance of this year.

Okay.

In addition to providing better credit quality tenants, I am sure you realize that the average sales of these people, of these tenants that are leaving or have left was only $239 per square foot, well below the average in our portfolio close to $400 a square foot. So it obviously provides us the opportunity to continue to upgrade the tenant mix in our centers, upgrade the sales per square foot productivity in our centers, and provide the consumers coming to visit our centers with a more robust and exciting shopping experience.

Okay. Thank you.

Your next question comes from Tayo Okusanya with Jefferies. Your line is open.

Yes, good morning. Just a quick question, in regards to backfilling some of the vacant space from the tenant bankruptcies. Typically by the time you do end up signing a new tenant there, just how much time does it typically take from, kind of signing the lease from when you kind of construct and recognize the revenue? I mean, is it like six months, is it nine months?

Good morning Tayo.

Good morning.

It depends obviously on how much notice were given by the vacating tenant, and the new tenant going in. But I think your frame of six to nine months is probably close to being accurate.

Okay. That's helpful. And then, in regards the development pipeline and additional projects possibly going forward, I mean, there has been some talk you might be interested in, more urban markets like San Francisco and things like that. Could you just talk a little bit about that, and kind of, if there is any preference, where you would like to kind of put up the Tanger logo next?

We want to put the Tanger name up in the most productive markets in the country. There are lots of markets we are looking at right now. We have a robust shadow pipeline. We historically have not announced sites until we are ready to close on the land and begin construction. So we are looking at sites that one might call closer to urban centers, but we have just opened a fantastic center in Western Michigan, in Grand Rapids, Michigan, which probably will be amongst our most productive centers.

Okay. Helpful. Thank you very much. Good quarter.

Thank you.

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

Hi, thanks. Good morning. Just back to some of the square footage that you have recaptured. So 110,000 square feet of incremental space, and you mentioned DKNY, Kasper's, Hartstrings, account for some of that GLA. Are those taking place at expiration or ahead of expiration, and who initiated those discussions?

Well, these discussions were initiated by the tenants. And we can get you a breakdown of which ones are leaving at the end of the term, and which ones we have negotiated in exit. But we are very optimistic, because as I mentioned in my remarks, they are less productive, significantly less productive than the balance of our portfolio, and allow us to put in much higher volume tenants.

Okay. And just following up on Tayo's question then -- so 21% of the space, I guess we should expect that to largely start paying rent before the end of the year. Any additional space though, that you are projecting will be re-leased and come online by year end, or should we start thinking more towards 2016? I mean, what's in the model for 2015, essentially?

Right now, we are looking at probably -- I would say, a little over half of the 21% that we re-signed leases to open by the end of the year. And the balance of it to open -- I am sorry, I made a mistake. About 12% is open now, and the balance of the 21% or another 9% should be open by year end. We also have leases under negotiation and proposals out for another 16% to 20% of the space. That probably will be open in the fourth quarter or early next year.

Okay. Got it. And then, in terms of Wisconsin Dells, now that that's behind us -- so I was curious, are you able to share with us what the sales were at that center? Maybe what sales cohort that center would have fit in?

I don't think that's appropriate since we don't own it anymore. And if you want information on Wisconsin Dells, you can feel free to call the current owner.

Okay. Thank you.

Your next question comes from Christy McElroy with Citi. Your line is open.

Hi, thanks. Good morning. Just going back to Frank's comment on a potential share buyback, do you have a current authorization in place? And can you discuss the circumstances under which you would execute a buyback? So is your stock at a level today, where you would do so? And how do you think about using free cash flow to buy back stock versus investing capital into future development projects?

Our board continues to study share repurchases, in addition to other cash allocation strategies. We do not have an authorization now, nor has management sought an authorization now. If we were to buy back stock, our objective would be to take advantage of any volatility in the market to buy back stocks opportunistically, when we feel the stock is creating a significant discount. It's interesting that one of the most or probably the most respected sell-side -- buy-side analysts lists Tanger shares as trading at the steepest discount to NAV, or their NAV. But we continue to look at that. Fortunately, we have a very robust pipeline of new development opportunities, at yields in excess of 10%, that will create significant long term value for our shareholders. And we try to balance -- and we want to be able to use part of our capital that we internally generate, to upgrade our properties through refurbishing the assets, renovating the assets, and putting the right tenants in the right space, to continue to produce more sales per square foot and a better shopping experience.

So we are looking at all the components of capital allocation, and we just wanted to reply to several people's questions about a share buyback in advance. So the short answer is, we do not have a share buyback authorization now, but we are studying it.

With regards to your new sales disclosure, in which group was the four assets that you were previously looking to sell, that were under negotiations? And maybe you can talk about the process and why that four asset deal fell through, and maybe also the potential for selling additional assets in that kind of bottom tier?

Thank you. As I am sure you can appreciate, we are in a very competitive market. If the asset sales had closed, we would have been delighted to disclose the name of those assets. But we also were very happy to continue to own them. They are substantially, probably 93% or more occupied, with no debt attached to them and cash flow positive. So, we are going to continue to upgrade those assets, and we have right now, as of today, we are happy to keep them as part of our portfolio.

And just specifically, what happened in the process that resulted in a deal not happening?

We gave full disclosure and a press release that went about a month or so ago, and as far as we are concerned, that's behind us. We have had a great quarter, we are going to have a great year, and we are looking into the future.

Thank you.

Your next question comes from the line of Jeremy Metz with UBS. Your line is open.

Hey, good morning. I am on with Ross. I was just wondering if we could talk same store guidance a little bit. Obviously, you have put up some good results here in the first half of 2015, despite the elevated bankruptcies. But this 3.5% to 4% guide assumes a deceleration here in the year end. And then if I am looking at the right numbers and I look the year-over-year comps in second half 2014, they weren't particularly strong, at just about 2%. So I am just wondering if we can talk about second half, or what maybe is going to drive you towards the low end of that range?

Well, our 2% increase in sales, was comparable to the largest most respected mall rate's increase in sales of 2%. So in this market, we are pleased with that. We think that we have the right tenants in place and velocity, so that hopefully those sales will improve in the second half.

We want to be conservative in our guidance with regard to comp NOI increases, and we feel that in the second half of the year, the fourth quarter, we realized a tremendous amount of percentage rent, based on our tenants' performance. And we don't have visibility in that until probably early in the fourth quarter. So if you look at the high point of the range, 4%, we would have a second half of the year, 3.7% increase in NOI, which by the way was beyond the range we initially guided at the beginning of the year. So we are hopeful that we will beat the range, but right now this is where we are comfortable guiding it.

Okay. And yes, and the 2% wasn't necessarily the sales, obviously it was just more looking at the second half of 2014 on a same store basis? It looked like, you weren't coming up against some really strong comps. But just the second question, I was just wondering, if we look at South Haven, I think you are actually going to have a higher economic interest there than the stated 50% ownership. I think that's largely from funding some of your partner's equity. I think you had the same situation at Savannah and Foxwoods. So I was just wondering, if you can kind of talk us through how that works, is this really more of a carried interest versus a partner loan, and then how do you get paid back on those?

This is Frank. They are all different, but they all do that some type of preferred equity that we have contributed to the partnerships. I think the easiest thing to do is, just to have you read the 10-Q, to be honest with you, since they are all different, but we spell it out in the 10-Q, which we have to file later today in fact.

And just in terms of how do you get paid back? I mean, I assume in some of those, is it just from selling additional pad sites, or does it get -- but they are not partner loans, I guess, just to be clear?

They are not partner loans. It's another layer of equity that gets a preferred return through a waterfall provision. Some of the preferred equity dollars get paid back from cash flow, some get paid back from capital type transactions. Like I said, they are all different. So the best way to get your arms around it, will be to read the disclosures.

Okay. Thanks.

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

Hi, good morning guys. I'd like to echo my thoughts on adding that disclosure to the supplemental, I think it's terrific. Did you, just so I understand, did you include the assets that you had held for sale, are they included in your disclosure here?

All of our assets are included in the disclosure, as long as we had them for at least 12 months.

Okay. And then, did you include the four you sold -- the four that you were trying to sell in the same store NOI pool as well, or had those been excluded from that?

They have been included all along.

Okay, great. And --

They were never excluded, to put it another way.

Okay, I got you. Good, thanks. And then, are you guys marketing any assets at this point, or is that whole process finished?

We have not, as we have disclosed, we are not actively marketing any assets.

Great. And the last thing guys, what percent of your leases now have built-in rent bumps? I know you have been working on that.

Are you talking about fixed cam --

No Frank, like contractual rent bumps on an annual basis or multiyear basis, that kind of thing?

Well I would probably say 65% to 70%.

Okay. All right great. Thank you guys.

We have a question from Christy McElroy with Citi. Your line is open.

Good morning. It's Michael Bilerman with Christy. Steve, I have a question on Canada, and how are those assets performing? I notice you excluded and I do also appreciate the sales disclosure, but you excluded Canada and the unconsolidated from the analysis. How are those four centers performing relative to your portfolio average, and I guess, what's your thought overall on Canada expansion versus contraction of your investment?

Well I know you're a Canadian, Michael. We like it up there, actually. Our team is going up next week to Toronto, to visit with our joint venture partners RioCan. We have just only had open for less than a year, we opened last November. Our first ground-up property in Ottawa, Canada, and the doubling the size of our asset in Cookstown. So it's really too early to give an indication. Once the weather warmed up in early March, the consumers flocked to the centers, and both Ottawa and Cookstown are above plan. But it's really too early. Until they're open at least a year or so, it would be premature to give you any sort of guidance.

All right. And I think just coming back to a couple of questions that have been asked, and Samir asked about sales of centers in the marketplace, Todd asked about where Wisconsin Dells would have fit, Christy asked about where the four assets would have fit in the sales disclosure. I think all of it is trying to gain some confidence about where the market may be.

I appreciate you talking about where you think the stock is relative to the NAV. I think consensus on the sell side right now is about $37, or about 12.5% discount. It's the confidence in that NAV that I think people are trying to get with their questions, and so -- I think, you had owned Wisconsin Dells last year, being able to tell us what the sales productivity of it under your ownership, I don't think is that far. Trying to provide a little bit on these four sales, was it price, was it financing, was it sales, what occurred,again would give the investment community more confidence about trying to achieve that NAV and what that NAV is. So I don't know if you are able to, just provide a little bit color to those questions?

Michael, I appreciate your patience with us, and you have been a friend for a long time. I will tell you though that, Wisconsin Dells would have been at the very bottom tier, 31 to 36, as far as volume. I don't know what else I can tell you. The potential buyer had signed off on all of the due diligence, and came to us at the last minute, and said based on -- keep in mind, there was a huge global disruption with the credit markets with the Greece and the China situation, when the end of their, their due diligence was over and there came a time to close, and they told us that they were not able to get acceptable financing. I could just tell you what they told us.

Right. Would you have considered providing them some seller financing to bridge the gap for a period of 12 to 18 months, as you move forward, or would be not even a consideration for you?

We are not in a business of providing financing. We would have preferred a clean transaction, and candidly, we are just as happy owning the assets. And we were -- we are getting good response leasing them, and we are continuing to add value to these assets. So I don't know what's going to happen in the future. But I really, I don't know what else to tell you. We are just parroting what the potential buyer told us. And when we knew the transaction was over, we put out a press release immediately to provide transparency. And I don't know -- I am happy to continue to answer questions, but I don't know what else to say.

Well I think its helpful color to understand the drivers. Did they ever tell you, what level of financing they were looking for? 75%, 60%, was it -- or did they not share that with you?

They really didn't share it with us. I mean, we gave you the information, they completed their due diligence on the assets which was clean, and that didn't show up with the money.

Right.

That's it.

All right. Thank you so much, Steve.

There are no further questions at this time.

Thank you all for participating in our call today, and for your interest in Tanger Outlet Centers. We are very pleased with our second quarter results, and believe we are well positioned to continue the momentum in the second half of 2015. Frank and I are always available to answer any questions you may have. Have a great day, and enjoy the rest of the summer. Goodbye.

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