Tanger Inc (SKT) 2015 Q3 法說會逐字稿

Good morning. This is Cyndi Holt, Vice President Finance and Investor Relations, and I would like to welcome you to the Tanger Factory Outlet Center's third-quarter 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 page, www.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 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 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 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 and may only be accurate as of today's date, October 28, 2015.

(Operator Instructions)

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; 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. With FFO per share up 13.5% over the third quarter of last year, this was another outstanding quarter for Tanger Outlets. In addition, we improved the quality of our portfolio and strengthened our long-term growth profile with the recent completion of the sale of five non-core outlet centers. Yesterday, we announced that effective January 1, 2016, we will expand and enhance our Board of Directors with the addition of Dave Henry as an Independent Director upon his retirement as Vice Chairman and CEO of Kimco Reality.

I will now turn the call over to Frank who will take you through our financial results. Then I will follow up with a brief overview of the recent asset sales and 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, third-quarter AFFO per share increased 13.5% to $0.59 from $0.52 for the third quarter of 2014 and was $0.02 per share above First Call consensus. For the first nine months of 2015, AFFO per share increased 13.9% to $1.64 compared to $1.44 per share for the same period in 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% as of September 30, 2015, and we continue to maintain a strong interest coverage ratio for the third quarter of 4.68 times. As of September 30, 2015, there was $324.2 million of available capacity under our unsecured lines of credit, and approximately 87% of our consolidated square footage was unencumbered by mortgages. The next significant debt maturity on our balance sheet is the October 2017 maturity of our unsecured lines of credit, which we can extend for one year at our option.

We have paid a cash dividend for 89 consecutive quarters and have raised our dividend each of the 22 years since becoming a public company in May of 1993. 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 reinvest in our business by upgrading our properties and funding most of our development needs.

On September 30, 2015, we closed on the sale of four outlet centers for $44 million, representing an estimated capitalization rate of 10.4%, and recognized the gain of $20.2 million in the third quarter. Two of these centers are located in Kittery, Maine, and the others are located in Tuscola, Illinois and West Branch, Michigan. Combined, they total 439,000 square feet and accounted for approximately 1.9% of our 2015 property level net operating income forecast as of June 30. As of September 30, 2015, they were 89% occupied on average, and they generated average sales per square foot of $[252] for the trailing 12 months ended August 31, 2015.

On October 5, 2015, we closed on the sale of 171,000 square foot outlet center located in Barstow, California for $106.7 million, representing an estimated capitalization rate of approximately 5.8%. We currently expect to recognize a gain on the transaction of approximately $86.4 million in the fourth quarter of 2015. The center accounted for approximately 2.5% of our 2015 property level net operating income forecast, generated tenant sales of about $803 per share -- per square foot and was 100% occupied as of September 30, 2015. These centers had an average age of approximately 24 years compared to Tanger's remaining portfolio average of 16 years.

Because of the potential upcoming capital expenditures necessary to maintain and enhance these centers, as well as changes within each market, we no longer felt these assets could produce the growth in long-term internal cash flow and tenant sales we expect within our remaining core portfolio. While the Barstow center was performing at a high level, we believed its future growth opportunities could be negatively impacted as a result of its age, small size, remote location and its exceptionally high reliance on foreign tourism.

We continue to analyze the most efficient use of net proceeds from the recent asset sales, which we have placed with a third-party qualified intermediary to facilitate potential future reinvestment in a tax-efficient manner. Currently we estimate the total combined tax gains related to the sale of these five assets and the sale of our ownership interest in the Wisconsin Dells joint venture earlier this year to be approximately $90 million to $100 million.

So if we are unable to identify and acquire qualified replacement property that fits into our strategic framework such as a wholly-owned development project and/or 100% of the ownership interest in a current joint venture as is sufficient to defer all the tax gains, we plan to use some of the proceeds to pay a special dividend, if required, and the remaining proceeds to pay down outstanding debt balances. Our current expectations are that we will be able to defer approximately 80% to 90% of the estimated gains I will now turn it back over to Steve.

Thank you, Frank. While eliminating the properties sold from our portfolio does not have a significant impact on our current operating metrics, we believe these transactions improved our overall portfolio quality and strengthened our long-term growth profile. Excluding all five of the recently sold properties, same center net operating income increased 3.3% during the quarter, exceeding last year's third-quarter increase of 1.4%, extending our streak to 43 consecutive quarters of same center net operating growth dating back to the first quarter of 2005 when we first began tracking in this metric. On a year-to-date basis, same center net operating income increased 3.9% compared to 2.6% for the first nine months of 2014.

I am pleased to report that our blended leasing spreads for the first nine months of the year continued to outpace those achieved in 2014. Blended base rental rates increased 24.6% during the first nine months of 2015 on top of a 24.2% increase for the same period last year. We believe our ability to drive rents higher is a function of retailer demand for outlet space and our legacy leases being at below market rents on average. With the lowest average tenant occupancy cost ratio in our 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.

Lease renewals during the first nine months of 2015 accounted for 1.132 million square feet or about 75% of the space coming up for renewal during 2015 and generated a 21.8% average increase in base rental rates. Retenanting activity accounted for an additional 430,000 square feet of leases executed during the first nine months. The space was released at an average increase in base rental rates of 31.1%.

For the trailing 12 months ended September 30, 2015, average tenant sales within our consolidated portfolio increased 1% to $394 per square foot. In order to be more comparable to our mall REIT peers, our tenant sales metric now excludes tenants occupying suites 20,000 square feet or larger. As a result, 16 leases were excluded, representing 465,000 square feet or about 5% of the total reporting square feet for the trailing 12 months ended September 30, 2015. Calculating tenant sales including this space as we have historically, tenant sales for the trailing 12 months also increased 1% to $386 per square foot.

Occupancy increased 40 basis points during the quarter to 97.2% from 96.8% at the end of last quarter. Again this quarter, our occupancy is higher than any mall REIT that has reported to date. Bankruptcy-related and brand-wide store closings during the second half of 2014 and the first nine months of 2015 totaled 152,000 square feet throughout our consolidated portfolio, 30,000 square feet of which closed during the third quarter.

In addition, we currently expect an additional 37,000 square feet to close during the fourth quarter of 2015, bringing the total space we expect to recapture to approximately 189,000 square feet, which represents only about 1.5% of our total consolidated square footage. Currently we expect occupancy to increase by approximately 40 basis points to approximately 97.6% at year end.

On average, the retailers vacating this space generated tenant sales and rent well below our consolidated portfolio average. These closings present us the unique opportunity to upgrade our overall tenant mix, increase tenant sales over time, mark rents to market and in some cases benefit from lease termination fees.

Through September 30, 2015, we had executed leases with new tenants for approximately 46,000 square feet or 24% of the total space expected to be recaptured at a 49% average increase in straight line base rents or 30% on a cash basis. As we are recapturing space from these bankrupt or underperforming tenants, demand for space in Tanger Outlet Centers is being generated by tenants that are new to the outlet channel or to our portfolios, such as rag & bone, TaylorMade, Alex and Ani, Mountain Warehouse, Yves Delorme, OROGOLD, lululemon, Armani AX and West Elm, and food tenants like Zoes Kitchen, 1000 Degree Pizza, I Love Grilled Cheese and Schlotzsky's Deli, just to name a few.

Tenant demand for outlet space totaled with our reputation within the industry of having a quality portfolio of outlet centers and a refined skill set for developing, leasing, operating and marketing them has afforded us a robust external growth pipeline. We're now on track to deliver four new Tanger Outlets centers in 2015 totaling 1.4 million square feet, which represents a 10% increase to our footprint at the beginning of the year.

During the quarter, we opened the third of these new centers in Grand Rapids, Michigan, on the heels of the successful openings in Savannah, Georgia in April 2015 and at Foxwoods Resort and Casino in Mashantucket, Connecticut in May of 2015. Tanger Outlets Grand Rapids opened to record crowds on July 31, requiring us to utilize overflow parking lots to accommodate the high volume of shopper traffic. The 351,000 square foot center which also features about 80 brand name and designer outlet stores was 93% leased as of September 30. Construction is ongoing four miles south of Memphis, Tennessee in Southaven, Mississippi as we approach our November 20 scheduled grand opening date.

Currently, we expect the average year-end occupancy for these four new centers to be approximately 95%. The total projected cost for these four new centers is about $388.7 million, and we currently expect them to generate a weighted average stabilized yield of approximately 10%. Our required equity contribution is expected to be $153.5 million, substantially all of which has been funded as of September 30. We believe these developments will extend our proven track record of creating high-quality outlet centers at yields well above our cost of capital and should create significant long-term shareholder value.

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. We expect to open a new 355,000 square feet Tanger Outlets Center in Columbus, Ohio in partnership with the Simon Property Group during the second quarter of 2016. Construction of the project is well underway, and we currently believe this targeted opening date is achievable.

In addition, we expect to break ground on a new project in Daytona Beach, Florida within the next couple of weeks. We recently achieved our pre-leasing threshold and pending final permitting progress will begin construction. Expected grand opening is in November 2016. Work is ongoing on a number of pre-leasing development sites in our pipeline, which we plan to announce upon the successful completion of our underwriting process.

We are narrowing our 2015 FFO guidance to $2.16 to $2.20 per share. The components of this FFO per share revision include a $0.02 per share increase related to stronger than expected operations and lease termination fees during the third quarter 2015 compared to our previous forecast, offset by $0.03 per share dilution during the fourth quarter of 2015 related to the recent asset sales. We currently expect our 2015 estimated diluted net income to be between $2.19 and $2.23 per share. Our estimates are based on full-year same center net operating growth of 3.5% to 4%, assumed average quarterly G&A expense of approximately $11.5 million to $12 million, and do not include the impact of any potential refinancing transactions or the sale of any out parcels of land or any additional outlet centers.

I would like to make an announcement regarding our management team now. Frank Marchisello, our long-term CFO, will be retiring in May of 2016 for personal reasons and to spend more time with his family. It is hard to overstate the contributions that Frank has made to our company. I know I speak for everyone when I say that we will be sorry to see him go. As many of you know, Frank has been involved with the Company since its inception in 1981 and helped to structure and implement our initial public offering in May of 1999. Throughout it all, his contributions have been immeasurable during this period of extraordinary growth. Frank has been an exceptional CFO and an even better friend for more than 30 years. On behalf of our Board of Directors and all of our Tanger team, we accept his resignation with regret but are happy that he is in good health and that he will be able to enjoy his retirement with his family.

Through our robust succession planning process, we are well positioned and able to promote within our company. Jim Williams, our Chief Accounting Officer who has been with the Company for over 22 years, will become our new CFO at the time of Frank's departure in May. Having Frank available for the rest of 2015 and into 2016 through the next audit cycle will help ensure a smooth transition.

We remain optimistic about the growth prospects for our company and our industry as shoppers continue to seek brand name products direct from the manufacturer. Our tenant community continues to indicate its desire to expand into new markets with Tanger as a preferred partner.

The resiliency of the outlet channel has been proven over the past 34 years and through many economic cycles. We have 3000 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 represents more than 6% of our base in percentage rental revenues or 8.1% 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.

Our team's top priority remains to continue growing our earnings, continue raising our dividend and to execute our long-term strategic plan.

Now I would be happy to turn the call over to any questions.

(Operator Instructions)

Jeremy Metz, UBS.

I had one on the asset sales and the estimated cap rates you provided when you announced the deals. I was wondering if you can give us some more detail on your NOI assumptions there, just are these backwards-looking or forward-looking.

And then is this a cap rate to the buyer or based on NOI to Tanger? I'm thinking of Barstow in particular given your length of ownership there and the Prop 13 tax reset.

The cap rates that we're quoting are forward-looking NOI, and the really is not a whole lot of difference between what the buyers' estimate of NOI would have been and ours. It is purely just looking forward what we believe the property would produce for the rolling 12 months.

Okay, so no real estimate for Barstow then necessarily?

And, what I'm sorry?

In terms of Barstow in the Prop 13 tax asset, there's no real estimate on that one to get to that 5.8% cap rate?

This is Tom McCullough. That was not in our numbers. Presumably the buyer was taking into account the Prop 13 and looking at theirs, but we do not have the exact number that they used on their NOI.

In terms of the reinvestment of proceeds, I was wondering if you have anything under LOI today? And then I assume some of that will be used for your new Daytona Beach project. So just -- is that going to be a wholly owned development?

Daytona Beach will be wholly owned, and we are not under a letter of intent to acquire any assets at this time.

[Leena Wartochevsky], JPMorgan.

I was wondering, there was a dip at the Foley property, about 3%. I was wondering if anything in particular happened there or if you could provide some more color?

The dip in occupancy in Foley from 96% to 93% from a year ago, it is basically only 17,000 square feet, and that includes Jones New York and a few other tenants that have closed based on their strategy to close store. And that is in the number we quoted earlier of space we're getting back. Over time, we fully expect to get back to the 96%, 97% occupancy in Foley.

Andrew Rosivach, Goldman Sachs.

This is Caitlin Burrows. You've opened three new outlet centers in 2015, and like you mentioned, your year-over-year FFO growth in the third quarter was over 13%. So with your Memphis center additionally slated to open in November, do you think this FFO growth rate in the teens could continue into 2016?

We would be happy to give guidance for 2016 as we have done historically in the early part of next year, think in February or so of next year. But we're not prepared to give guidance at this point.

Was there any single line item in operating -- like G&A, financing, development timing, that made the third quarter particularly strong versus 3Q 2014?

Just the increase in the new development, returns from new developments in our leasing spreads on renewals and retenanting and space.

Christy McElroy, Citi.

With regard to the dispositions, presumably this is the same buyer that you had worked with earlier in the year that fell out. What changed there that the deal was ultimately consummated?

I'm pretty sure on last quarter's call, you referenced financing considerations, but did the price change at all? Just trying to get a sense for what changed.

When we -- basically they said they were not prepared to close and didn't show up, and we said fine. We pulled the transaction. When we put the press release out, they came back and they said they wanted another chance and they closed. That is basically what happened.

So no change in the price at all? And they were able to get the financing that they had originally wanted to get?

Yes, there is no change in the price.

I just wanted to follow up on Jeremy's question on the cap rates. The blended cap rate was 7.1%. If you take that 4.4% of NOI that the five assets comprised and you apply that to a reasonable estimation for your 2015 portfolio NOI, consolidated portfolio NOI, that gets me to about $11.5 million of NOI in the assets which implies closer to a 7.7% cap.

I guess what we're trying to figure out if there is a difference in how you are calculating the NOI for the cap rate and the NOI that comprises the percentage of portfolio NOI. Just trying to reconcile the 7.1% cap versus the 4.4% of NOI.

It is somewhat apples and oranges. You are looking at our expectations since -- the percentage of NOI that we quoted was our forecast of 2015 NOI for centers that are open all year. It is defined based on the same definition we use for same center NOI, so it does not include GAAP rent or market rent adjustments or any of those things. It is very difficult for you to try to compare one number to the other.

So open all year meaning you would not include the contribution from the four properties that -- the development properties that are opening this year?

That is correct because they are not in our tiered sales reporting.

But what is included is the five assets that you sold or at least the contribution of NOI as long as they were in your portfolio. The five assets are included in that portfolio NOI cap?

The percentages of NOI we're quoting on the assets sold relate to the percentages of portfolio NOI that we used on page 8 of our supplemental. That will only include the NOI of the centers that are open for 12 full calendar month.

So it would not include the new properties nor any of the NOIs on this property. There is a footnote on the press release we issued on that that says all that.

I did see that. I was just trying to do the math and get to the numbers, but we can follow up.

Carol Kemple, Hilliard Lyons.

It looks like you all have a pretty good handle on what bankruptcies you will have in fourth quarter. Do you have a number you're expecting for lease term fees in the fourth quarter?

Lease termination fees?

Yes.

Maybe another $200,000. It is not significant.

It looks like your equity and earnings of unconsolidated joint ventures grew a lot from the second quarter as well as year over year. Were there any of your joint ventures that were performing a lot better in the third quarter, or what contributed to that gain?

Equity and earnings was up because a couple of the new developments were within joint venture arrangements. The Savannah JV which opened was a unconsolidated joint venture, and then I think that is really probably the majority of that change.

That would have been most of the change from second quarter to third quarter too, you think?

We had some increases in NOI in our joint venture properties that would have made that increase.

This is Jim Williams, by the way. Year over year we had -- Charlotte opened in July 31 of last year, so they were in for the full quarter of this quarter compared to last year. And also the Cookstown expansion that we did in fourth quarter of last year was again for full quarter this year.

Rich Moore, RBC.

Congratulations, Jim and Frank. It's a little hard to imagine Tanger without you, but I'm sure you will have some fun in retirement.

Steve, I have a question for you on new development. It seems a bit like the cupboard is bare because you have had so many projects underway, and I am curious if the slowdown in terms of number of new projects is any indication that new developments aren't as highly supported by retailers as they had been in the past.

I don't come to the same conclusion. The growth rate that we are anticipating next year -- we just announced this morning the Daytona Beach project as our second for next year in addition to the one in Columbus. So we have historically delivered one to two new centers each year, and our guidance is we will be able to deliver one to two new centers in each of the next two to three years as we have historically have.

We are very strict underwriting criteria and will not build on speculation. The tenants continue to support what we do.

Just as a frame of reference, a year ago there were 51 centers announced, and we were getting questions about overbuilding. And 11 were delivered in 2015, three by Simon, four by Tanger and four by other people. So only 11 out of 51 were delivered.

It is very hard -- it is easy to announce a center, but it is hard to get one built. We plan to deliver what we announce, and that is our strategy going forward. Tenant demand as you can see, the four centers we have opened this year will be north of 95% occupied by year end in the first year of operation, which is pretty extraordinary when you look at any other property type or any other retail type.

On the potential 1031 exchange, I think some of that could be the purchase of partner interest. Is that -- I think you mentioned that, right?

That is right, Rich. If you end up owning 100% of the joint venture at the end of the day, then the acquisition of your partner or partners qualifies for 1031 exchange.

Frank, can you give us an idea of which ones are the ventures? I can't imagine Simon is one for example, but that you guys might be looking at as potential purchases?

Simon is not one that we are talking about, but there are other partnership transactions we are in discussions. We're not prepared to announce anything at this time.

And I just want to be clear, there is no guarantee that we will be able to defer the taxes. We're working on various strategies. It is complex as you might imagine, and hopefully before year end, we should have more clarity on what the plans are.

Todd Thomas, KeyBanc Capital Markets.

Question for you on your floating rate debt exposure. I am curious -- you have the line balance is close to $200 million, and you have a $250 million term loan that is also floating.

What are your thoughts on terming out the line and/or fixing some of that floating rate debt. Just curious if you can talk about what your threshold for risk on the floating rate side is all together.

Hello Todd. Right now, we have about 11% of our total market capitalization is floating rate debt, which we think is manageable. As we have mentioned, we did conclude the asset sales. We are studying various strategies to defer the tax, and once those studies have been completed or concluded, we will know the net proceeds that we will have to be able to invest, and we will probably use some of it to pay down some of our debt.

Does your current guidance assume any additional capital raising activity throughout the end of the year here? Thinking about a bond deal or something like that.

We have no plans to issue additional long-term debt, and we have no plans to issue any equity in 2015.

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

I want to thank everybody for participating today and for your interest in Tanger Outlets. Frank, Cyndi and I are always available to answer any of your questions.

We look forward to seeing many of you in a few weeks in Vegas at the NAREIT. Thank you.

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