Tanger Inc (SKT) 2017 Q4 法說會逐字稿

Good morning. This is Loren Dargan, Investor Relations Manager. And I would like to welcome you to the Tanger Factory Outlet Centers Fourth Quarter and Year-end 2017 Conference Call.

Yesterday, we issued our earnings release as well as our supplemental information package and investor presentation. This information is available on our Investor Relations website, investors.tangeroutlets.com.

Please note that during this conference call, some of management's comments will be forward-looking statements that are subject to numerous risks and uncertainties and actual results could differ materially from those projected. We direct you to our 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 including funds from operations, or FFO; adjusted funds from operations, or AFFO; same-center net operating income; and portfolio net operating income. 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, February 14, 2018.

(Operator Instructions) On the call today, we will have Steven Tanger, Chief Executive Officer; Jim Williams, Senior Vice President and Chief Financial Officer; and Tom McDonough, President and Chief Operating Officer.

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

Thank you, Loren, and good morning, everyone. We are proud of several accomplishments during 2017 that should not be overlooked. We expanded our overall footprint by more than 3% and grew portfolio NOI by 6.8% for the consolidated portfolio on top of an 8.4% growth rate in 2016 while cutting our corporate overhead expense.

Our G&A expenses were 5.8% lower in 2017 than the prior year. This past year marked our 37th consecutive year with year-end occupancy of 95% or greater, our 14th consecutive year of same-center net operating income growth and our 24th consecutive year of dividend increases which we believe is a feat accomplished by no other REIT. We achieved these milestones despite unprecedented retail headwinds.

Although we expect 2018 to be adversely impacted by the 22 bankruptcies and brand-wide retailer restructurings during 2017, we are beginning to see some signs of stabilization and even a few green shoots that make for a more promising outlook today than we had just 90 days ago.

Tom will give you some examples of how we're starting to see positive changes in the leasing environment, after Jim takes you through our financial results and a brief balance sheet recap. Then I will discuss our operating performance and our 2018 outlook before opening the call to questions.

Go ahead, Jim.

Thank you, Steve. 2017 AFFO available to common shareholders was $2.46 per share, an increase of 4% over 2016. AFFO for the fourth quarter was $0.66 per share, an 8% increase over prior year and $0.03 above first call consensus. Our portfolio NOI, which includes NOI for noncomparable centers, increased 6.8% throughout the consolidated portfolio during 2017, and during the fourth quarter increased 3.6%. Over the last 5 years, our portfolio net operating income has grown about 28% cumulatively. Excluding the 5 centers that underwent major remerchandising projects, same-center NOI increased 1.4% during 2017 and 0.6% during the quarter. Including these centers, same-center NOI decreased 0.5% -- I'm sorry, same-center NOI increased 0.5% for the year and decreased 0.4% during the fourth quarter. We are straightly proud to have grown the same-center NOI for 14 consecutive years. It is also important to note that our top 15 properties, which generate nearly 60% of our portfolio NOI, had a same-center NOI growth rate of 3% during 2017.

Lease termination fees, which are not included in same-center and portfolio NOI, totaled approximately $3.6 million for the consolidated portfolio during both 2017 and 2016, including $800,000 in the fourth quarter of 2017 and $100,000 during the fourth quarter of 2016. In addition, our share of lease termination fees in our unconsolidated joint ventures, which is included in the equity and earnings of unconsolidated joint ventures line, was $914,000 during 2017, $52,000 of which was in the fourth quarter and that compares to $1.7 million for 2016, $338,000 of which was in the fourth quarter.

Following our timely conversion of $525 million of floating-rate debt to fixed interest rates in 2016, we continued to successfully execute liability management strategies in 2017, while completing a $300 million offering of 10-year notes at 3.875% in July and using the net proceeds and borrowings under our lines of credit in August to redeem $300 million of 6.125% bond debt due June 1, 2020.

In addition, we entered into 4 starting interest rate swaps in December of '17 to hedge our variable interest rate exposure on notional amounts aggregating $150 million. These interest rate swap agreements take the base LIBOR rate effective August 2018 through January 2021 at an average of 2.2%.

As of December 31, 2017, approximately 94% of the square footage in our consolidated portfolio was not encumbered by mortgages and only $208 million was outstanding under our unsecured lines of credit, leaving 60% unused capacity or approximately $306 million.

We maintained a strong interest coverage ratio during 2017 of 4.46x and net debt-to-EBITDA of approximately 6x at year-end. Our floating rate exposure represented only 15% of our total debt or 6% of total enterprise value at year-end. The average term to maturity and weighted average interest rate for outstanding debt as of year-end was 6.3 years and 3.3%, respectively. We have no significant debt maturities until April of 2021.

Last month, we completed amendments to our line of credit agreements to extend maturity about 2 years, increasing our borrowing capacity to $600 million from $520 million and reduced the interest rate spread to 87.5 basis points over LIBOR from 90 basis points.

While we did not repurchase any of our common shares during the fourth quarter, we did acquire 1.9 million common shares during 2017 at a weighted average price of $25.80 per share for a total consideration of $49.3 million, both of which was funded by asset sales. This leaves $75.7 million remaining under our $125 million share repurchase authorization.

In April, we raised our dividend by 5.4% on an annualized basis. This was the 24th consecutive year we have increased our dividend or every year since becoming a public company in May of 1993. Our current annualized dividend of $1.37 per share is more than double our 2006 dividend, which was $0.68 per share on a split adjusted basis. Over the last 3 years, our dividend has grown at a 13% compounded annual growth rate. Tomorrow, we will pay our 99th consecutive quarterly cash dividend of $0.3425 per share to holders of record on January 31, 2018.

We expect our FFO to exceed our dividend by more than $100 million in 2018, with an expected AFFO payout ratio under 60%. Our dividend is well covered. With no new center openings planned for next year and annual capital expenditures and lease-up costs expected to be approximately $34 million combined, we should have ample internally-generated cash that may be used to increase our common share dividend, complete the residual funding of our 2017 development projects, naturally delever our balance sheet and further reduce floating rate debt exposure and/or repurchase additional common shares as market conditions warrant. The strength of our balance sheet will allow us to take advantage of opportunities that arise as the cycle turns more positive.

Now Tom will discuss some of the early signs we are seeing. As Steve indicated, this may be starting to happen. Go ahead, Tom.

Thanks, Jim. 2017 was a challenging year for retailers, characterized by multiple bankruptcies and brand-wide closing announcements, including 22 of our tenants. Faced with these market conditions, we decided to execute short-term renewals for about 15% of the renewal space that commenced during 2017 to provide the flexibility necessary to preserve upside opportunity, while accommodating our tenant partners and maintaining high occupancy.

Additionally, we recaptured nearly double the amount of space in 2017 than we did in 2016. Nevertheless, our overall occupancy rate was 97.3% at year-end. While these short-term renewals will continue to impact our 2018 results, retailer sentiment and the leasing environment have improved considerably since our last earnings call driven by, among other things, positive holiday sales increases, improved margins and the tailwind recent tax reform is expected to provide the retailer community.

Our tenant sales were up 1% during the fourth quarter and tenants such as Barneys, Armani, Vans, Theory, Lululemon, ASICS, Adidas, Sperry and Levi's posted impressive sales gains within our portfolio for the year.

By category, beauty, shoes and food were the best performers while accessories and apparel were flat to down slightly. While we still have a watchlist, the list today is shorter and of less concern than it was at this time last year. And our expectation of stores to be recaptured this year is around half of the amount recaptured in 2017.

Many of the marketing metrics we track have been quite positive also. During 2017, users our mobile app were up 46%, website sessions were up 28% and our e-mail database increased 23%.

Membership in TangerClub, our shopper loyalty program, grew 15% last year. Perhaps the most compelling reason that we feel like we are turning a corner in tenant demand. Our tenants continue to tell us that outlets are their most profitable distribution channel, and the group of high volume designer and brand name tenants interested in opening new stores is growing.

Starting with [New York guide CMC] in December 2017 and continuing into this year, tenants have been without question, more active and upbeat than they were in late 2016 and early 2017.

Turning to development. As previously announced, we opened a new outlet center in October in Fort Worth, Texas and completed a major expansion of our Lancaster, Pennsylvania center in September. These wholly-owned projects featured first-to-market tenants and opened 93% leased. Both centers had strong openings and have continued to perform well and garner positive feedback from retailers and shoppers alike. They represent a combined total investment of $138.8 million and are expected to generate a weighted average stabilized yield of 9.2%.

It takes 12 to 18 months to complete a new center once we break ground. So we will not be opening any new developments during 2018 and possibly 2019. Recall that we did not deliver any new developments between October 2008 and October 2010. The period that followed was one of the most robust growth periods in our company's history. Since then, we have opened 12 new developments, acquired 7 existing outlet centers and sold 9 noncore centers.

We continue to work diligently on opportunities in our shadow pipeline to achieve the predevelopment and pre-leasing threshold that we impose upon ourselves before acquiring land and breaking ground on a new development.

I will now turn the call back over to Steve.

Thanks, Tom. Our consolidated portfolio was 97.3% occupied as of December 31, 2017, which is higher than any mall REIT that has reported year-end earnings to date. Historically, we have maintained both high occupancy and a dynamic lineup of the most sought-after brand-name retailers.

At times of the cycle when underperforming brands have shuttered stores, we have capitalized on those opportunities to enhance our tenant mix by filling the space with fresh new brands that our shoppers tell us they want in our centers. While these desirable high-volume retailers have a lower relative occupancy cost that may impact re-tenanting spreads in the short-term, remerchandising vacant space with high-volume retailers has been a successful long-term strategy for Tanger for more than 37 years. Enhancing the tenant mix in this way has historically increased shopper traffic, driven demand from other new tenants and increased future renewal spreads and overall tenant sales productivity.

These were our objectives when we made plans to remerchandise 5 outlet centers during 2017, all of which have been successfully completed. Our projected unleveraged yield is expected to be about 8% on this $20.6 million capital investment, partially offset by unplanned bankruptcies and store closures in the rest of our portfolio since starting the remerchandising. We are not currently planning any additional major remerchandising activity in 2018.

Excluding 9 leases totaling 165,000 square feet for large format stores with high-volume retailers in the 5 centers that we remerchandised during 2017, blended rental rates increased 12.1% on 343 leases, totaling 1,508,000 square feet for renewals and retenanted space that commenced throughout the consolidated portfolio during the 12-month period ending December 31, 2017.

Re-tenanted space accounted for 247,000 square feet of this space and resulted in average rental rate increases of 25.8%. Lease renewals accounted for the remaining 1,261,000 square feet of executed leases and resulted in an increase in average rental rates of 8.7%.

As Tom mentioned, we've strategically executed 50 renewals that represented about 15% of the total renewal space commenced for the term of 1 year or less in order to maintain high occupancy and preserve our upside potential. Excluding these 50 renewals and the 9 remerchandised leases, average rents increased 13.2% for renewals and 16% on a blended basis. The equivalent cash basis spreads were 5.8% for renewals and 6.8% on a blended basis. We have renewed 84% of the consolidated portfolio space scheduled to expire in 2017, in line with our 2016 renewal rate of 85%.

We've made a great deal of progress on our 2018 expirations. Through the end of January, we have executed leases and/or leases in process for about 58% of the consolidated portfolio space scheduled to expire this year, up from 46% of the space scheduled to expire in 2017 that was renewed at the same time last year. For consolidated portfolio leases renewed and re-tenanted through January 31, 2018 that will commence in 2018, blended rent spreads increased 4.4% on a straight-line basis and decreased 3% on a cash basis. Excluding 41 renewals with the term of 1 year or less, which represent about 20% of the renewed space, blended rent spaces -- blended rent spreads increased 9.9% on a straight-line basis and 1.5% on a cash basis. And renewal spreads increased 12% on a straight-line basis and 4% on a cash basis. Current negotiations with tenants lead us to believe that rent spreads should improve for the balance of the renewals.

Average tenant sales productivity within our consolidated portfolio was $380 per square foot for the trailing 12 months ended December 31, 2017 or $406 per square foot on an NOI weighted basis. Same-center tenant sales performance for the portfolio was up 1% for the trailing 3 months ended December 31 and was stable for the 12-month period -- 12-month trailing period. With the lowest average tenant occupancy cost ratio among the mall REITs at just 10% of our consolidated portfolio, we have been successful at raising rents while maintaining a very profitable distribution channel for our tenant partners. Said another way, at the rents our tenants are paying, there is more cushion for the store to remain profitable should top line growth slip.

Regarding our 2018 outlook, we're introducing per-share guidance between $1.02 and $1.08 for net income and between $2.43 and $2.49 for FFO. This guidance assumes portfolio NOI growth between 0.5% and 1.5% and same-center NOI between negative 1% and flat. These NOI ranges assume tenant sales remain stable, assume a lower overall average occupancy rate related to the elevated level of store closings in 2017 resulting from bankruptcies, filings and brand-wide restructurings by retailers, and assume that 2018 store closings will be about half the level of 2017. They also reflect the negative impact of short-term lease renewals and modifications commencing in 2018 and 2017, which we strategically executed to preserve our upside potential and maintain high occupancy.

Other key guidance assumptions are as follows: lease termination fees, which are not included in same-center NOI, are expected to be about $1 million for the consolidated portfolio; general and administrative expense is expected to average between $11.1 million and $11.5 million per quarter; we expect second-generation tenant allowance and capital expenditures to be about $34 million combined in 2018; 2018 projected weighted average diluted common shares for net income of $93.1 million and $98.1 million for FFO. Our forecast does not include the impact of any financing activity, the sale of any outparcels, properties or joint venture interests, or the acquisition of any properties or joint venture partner interests.

To conclude, outlets continue to provide the brand, value and experience that customers want and remain one of the most profitable channels of distribution for our retailers. We believe that our fortress balance sheet, the strength of our core portfolio and our longstanding retailer relationships and our unique shopping experience differentiate us from other mall REITs and bode well for long-term prospects for our business.

And now I'm happy to turn the call over to any questions you might have.

(Operator Instructions) And your first question comes from the line of Craig Schmidt from Bank of America.

I was wondering, I noticed you said that no more remerchandising efforts in '18. Beyond '18, do you think you might be doing additional remerchandising efforts like the 5 you did in 2017?

Craig, we're not prepared to discuss our plans for 2019 yet. We carefully examine each property with our asset management team many times during the year to decide on any potential remerchandising opportunities that might present themselves. But right now, we have no plans for 2019.

Okay, great. And then I know you mentioned on the call that store closings in '18 you expect to be half of what they were in '17. How would you compare lease modification and short-term renewals in '18 versus '17?

Well, again, the -- our guidance includes half of the store closings that we received last year which is back to our 2016 and 2015 levels of about 100,000 to 150,000 square feet. So it's a normal part of our business during the year to recapture some space. As far as lease amendments, those are captured in our same-center NOI guidance for -- the actual results for '17 and the guidance for '18. So all that's baked into the guidance.

Your next question comes from Christy McElroy from Citi.

Just on the short-term and rent re-lease deals of 50 in 2017 and the 41 in 2018. What percentage of those deals are rent relief for tenants in bankruptcy versus sort of normal course lease expirations? And are these deals happening across the whole portfolio? Or is it more in the tail or the lower productivity assets?

The -- as far as lease modifications as I just mentioned, all of those are rolled into or baked into our NOI. We don't give guidance on individual leases or individual properties, but as the overall global picture, the guidance for '18 and the actual results for '17 with regard to any lease amendments or any new leases are all baked into our NOI.

I mean, just in thinking about sort of the longer-term game plan with regard to this strategy, keeping occupancy high, giving up some on rent in terms of short term. What's the plan sort of the longer term to re-tenant these stores with longer -- hopefully permanent longer-term leases at higher rent?

We are convinced that we're starting to see some positive momentum from our tenant partners. Our long-term strategy, since we started business, was pretty straightforward. Occupied stores are great and alive. Vacant stores are dark and dead. Very few of our customers know the difference between a short-term lease of 1 year or less and a permanent tenant. They just know if a store is occupied or not occupied. We've been through this before. This is not our first downturn in the 37 years we've been doing business. We are talking to many more new tenants to add to our portfolio. We're getting -- we're having extremely positive meetings with our existing tenant partners. I will tell you that everybody in our company today is a leasing rep. We're all out talking to tenants and the reaction is much more positive than it's been 90 days ago or certainly a year ago.

Just a really quick follow up on that. I know I only got 2 questions. But what -- just to follow up on that kind of, what was the last sort of period of time where you had this level of short-term deals in place in your portfolio?

Christy, I think it was some time in 2008 to 2010. As you may recall, that was when the recession hit. And before that, it was probably 1999 to 2001, right after the tech boom -- the tech bubble burst. And before that, it was 1988 to 1990 after the stock market crash. So we've been through this before. Our balance sheet is a fortress. The reason we are so focused on liquidity is to have the safety net to get us through market cycles like this. And we do believe it is a retail cycle and we will come through this stronger. And we have the liquidity to maintain our properties and keep them fresh when other owners may not have the liquidity to maintain their assets. So you can go to any of our properties anywhere, and they are refreshed, remerchandised, they look great, and we're ready when the market turns and we are sensing it is turning.

And, Christy, this is Jim. I will just refer you to our investor presentation that's on our website. There is a page in there that shows our NOI growth and rent spreads. They go all the way back to the 2008-2009 period. And you can see the effect that the short-term deals had on the NOI growth and spreads then and how we pretty quickly rebounded a couple years later after that.

(Operator Instructions)

Caitlin, are you there?

Yes.

It's Michael Bilerman. I thought I would re-queue up, but I guess I'm next. So just -- do you have the -- if you take the 15% of short-term deals that were done in '17, 20% of the early '18, it appears it's about 350,000 square feet or about 3% of the portfolio. And I don't know if you can maybe just confirm that, that's the right math because that's what it seems like. But maybe just sort of drill down a little bit if in net it was 91 deals, is it 91 different retailers? Is there a certain number of retailers that it represents? Is there a geography? Just because it is a bigger number. And, Steve, I respect the fact that you've done this before. But in all those other examples, it was really economic, recession-driven, stock-market driven. This time feels different given the fact the economy is working really well, but the retailers are being negatively impacted in their business because of what's happening online.

Michael, Jim -- this is Jim. It's hard to answer that question exactly. I think most of those short-term renewals were related to the bankruptcies. And some of the tenets of that was showing up on watchlist during the year so, which we all know those tenants were struggling not only in their outlook portfolio, but more so in their retail portfolio for a variety of reasons. But that's, I would say, that was where most of these renewals were directed.

But I guess, and if you step back from it, did you reset all of their leases? Or was it just the ones that were coming up from renewals? So if it's 3% of your portfolio's square footage today that just got marked down, call it, about 20%. How much in totality do those tenants represent of your future leases?

Well, Michael, sometimes in negotiations with the trustee in bankruptcy, we modify the leases short-term so that the lease will be assumed in bankruptcy. And we maintain optionality so that we can replace that tenant with a stronger tenant or higher-volume tenant and we have a year or so to do it. So we consciously, and we've done this before, have maintained short-term leases with the expectation that in the future it's a potential a tailwind. We're sensing the market is changing. We have conversations going on now with many more high-volume brand-name tenants that if we don't get market rents when the 1-year term expires, we'll both have to go our own ways and replace them with higher-volume tenants. And I appreciate what you're saying about our past experience, which our orders will tell me is no guide to the future, as you well know. But this -- every market downturn, regardless of the cause, seems like it's never happened before and it's only going to get worse. Once again, we feel confident that we'll be able to replace these short-term deals with longer-term deals when they expire. But our strategy, which you should understand completely, is that, over time, maintaining high occupancy of these assets leads to higher return and higher rents.

And I get that. And I appreciate the fact that keeping your assets full so that shoppers have a place to shop and it's important right because it affects everything. I think just stepping back from it, you had these 91 leases that you did in 2017 and early part of '18 already that represent on average about 350,000 square feet, just doing the math. That's 3% of your portfolio. What I think I want to get a better sense of is how much more exposure do you have to these tenants in your future rollover? Because, arguably, if they don't survive or they can't get it, there is going to be a lot more vacancy that you're going to have to deal with other than this 350,000 square feet next year when you're going to try to get full market rents.

There is no way we can look into the future. We are in conversations with some of these short-term deals are with existing tenants that we have normal lease terms with also. So it's not -- these -- most of these are not unique tenants. They are existing people we've done business with in large portfolios over time. Our instinct is that the market is stabilizing. That's what we're seeing. But -- and we have a much shorter watchlist of tenants that we feel are at risk than we did a year ago, probably half the number. So our outlook and our experience tells us that there is not greater exposure, if you're asking do we go from 4% to 10%? I don't believe that's going to happen. And I don't know how else to answer you because you are asking me to look into the future which I can't do.

I'm not trying to look into the future. And I'll get off after this. I just -- it is not an insignificant number in terms of the square footage. And I think we're just trying to get a better picture of what that 350,000 square feet represents and how much exposure is beyond that for those tenants that have asked you to say, look, I can't sign a long-term lease, nor do you want to sign -- you don't want to sign a long-term lease at these rents. And that's why they've taken a year with rents down, if you do the math on a GAAP basis, down 17% on a cash -- it's even larger. We're just trying to understand the -- what's in there to understand what the risk is in the rest of the portfolio?

Michael, I'll -- we historically, if you look back, have always had 3% or 4% of our portfolio as tenants with 1 year or less leases and the balance of the 97.3% is long-term permanent occupancy. So this is not an abnormality. We just want to be sure that people understood the strategy why we're doing it. And I appreciate the fact that you have confirmed that really we have no desire to enter into long-term leases with anybody that are significantly below market because we feel today is an anomaly. And when we look back a year from now, as we've done several times in several of the different market conditions, we'll be happy to have short-term leases. And as I said, it's a potential headwind. It's hard to quantify, but it's certainly -- I don't see -- my instinct is it's not going to worse.

And your next question comes from of Caitlin Burrows of Goldman Sachs.

I guess just in terms of the '17 same-store NOI growth results and the '18 outlook, is there anything you can give in terms of what you think the driver of the short-term renewals and the lease modifications have been? Was it sales results? And then on the occupancy side, are you finding that other channels, maybe such as strip centers, power centers, malls are getting more competitive with your space?

Let me try to answer both questions. We don't hear back from our tenant partners that a decision between whether to go into an outlet center or a strip center is on their agenda. Most of our tenants have been long-term partners of ours, some as long as 35 years in outlet centers. So we don't compete against a strip center for their store growth. I think on the last call I answered most of the questions with regard to the temporary tenants and our strategy for entering into them. But if you like more color, I'd be happy to respond.

If you could give a quick response, that would be appreciated.

Do you mind asking the question again, so I give you an accurate...

Yes. More just -- when you think about the driver of the short-term renewals or lease modifications, does it seem like it's driven by sales results at the location? Or is it something else maybe with the brand as a whole?

A lot of the short-term, 1 year or less, deals are with tenants that went into bankruptcy. And in order to have the lease assumed by the trustee, we modified the lease for a short-term period. Very few of them are based on sales. We have portfolio reviews with multiple tenants and at some assets they may want a short-term to see if the business rebounds. But in other parts of the portfolio, we enter into 5- and 10-year renewals.

Your next question comes from Todd Thomas of KeyBanc Capital Markets.

Just a question on the same-store NOI guidance. What are you assuming for the year-over-year decrease in occupancy in the model? Are you able to share what the midpoint of the guidance range or same-store range has assumed for occupancy at year-end?

Todd, yes. I mean, we think the average occupancy in our model at the midpoint will probably be down about 60 basis points.

Okay. And then can you provide maybe any color on the interest that you're seeing so far from new tenants and the rent levels that you expect to achieve on some of the lease modifications that were completed in 2017? Is there any sense at this point how some of those might sort of play out?

Todd, I'll just reiterate that we have the lowest cost of occupancy already for our tenant partners which acts as a kind of a shock absorber when their top line growth slows. We are having meaningful conversations with many tenants, both existing and new tenants. We feel that these -- when these negotiations are completed, that they will be at market rents which in most instances, are higher than existing rents. The outlet distribution channel is still either the most profitable or one of the most profitable divisions of our tenant partners corporations. Capital tends to follow a return. And most of our tenants are still growing. They understand the profitability in the outlets and they understand the value we can create for them.

Okay. And one more quick one if I could just sneak it in here. The 150,000 square feet of remerchandising that you completed in 2017, is all of that in the same-store?

Yes, Todd. Yes it is. For 2018? Assuming for 2018?

Yes.

Yes.

Your next question comes from Nick Yulico of UBS.

This is Greg McGinniss on with Nick. Just had a couple of quick questions on external growth. I know you mentioned the potential for no openings in 2018 and probably 2019 as well. So groundbreaking it appears out of the picture this year. But does the project announcement this year seem feasible with the level of tenant interest you are seeing today?

The balance sheet that we've created allows us the flexibility to be opportunistic whether it's through acquisitions or through other type of ground-up development as external growth. Right now, we have nothing planned. But it's a long year. If something does present itself, we have the balance sheet and liquidity to close rapidly on an accretive investment, should one present itself.

Okay. Then if you kind of preempted my second question there, on the potential for acquisitions of any assets or JV ownerships as you mentioned in your investor presentation. I know it's a small market, is there anything even on the market in terms of high-quality outlets at valuations that makes sense?

We know of no high-quality outlet centers on the market. If one were selling a high-quality outlet, most of them know where to find us and we'd be happy to talk to them.

And your next question comes from Michael Mueller, from JPMorgan.

I guess, first going to the 50 leases on the short-term renewals, what's the expectation that once that year mark passes, how many you will be able to keep in the portfolio but bring it up to a normal rent? Or how many of them just go away and they're just literally 12-month placeholders? I mean, how should we be thinking about that?

First of all, it's 50 leases out of thousands of leases that we have.

Okay.

And we're in conversation with these tenants. Most of the 1-year or less leases are with tenants that we have other leases within the balance of our portfolio. So we are in ongoing conversations with them all the time. I can't give you any guidance other than the fact that our instinct is that the market is improving. And we'll be able to, as the market does improve and our tenant sales improve, be able to improve the revenue we get from these leases.

Okay. And the second, question Steve, when you're talking about guidance, you talked about an expectation of lower year-over-year occupancy. I may have missed it but I didn't hear you quantify how much lower and I was curious if you could just give a little color about that?

Sure. I mean, our guidance includes about 50 basis points less average occupancy -- 60 basis points less occupancy during the course of the year. As you know, we ended this year at 97.3% occupied. We're not giving guidance for the ending occupancy as of December 31. But our guidance average during the year includes 60% less -- 60 basis points less occupancy on average. Now obviously, we're working real hard and everybody is a leasing agent, as I said, to beat that number but that's the number in our guidance.

And there are no further phone questions at this time. I'll turn the call back over to Steve Tanger.

Once again, thank you, everybody, for your interest. I hope we've answered all of your questions. And if you have any other questions you'd like for us to respond to or more additional color, Jim, Tom and I are available at any time. And again, we'd like to wish you and your loved ones a very happy and healthy Valentine's Day. So have a good one. Goodbye now.

And this concludes today's conference call. You may now disconnect.