Tanger Inc. (SKT) Q1 2014 Earnings Report, Transcript and Summary

Good morning. This is Cyndi Holt, Vice President, Finance and Investor Relations and I would like to welcome you to Tanger Factory Outlet Centers’ First Quarter 2014 Conference Call. Yesterday, we issued our earnings release as well as our supplemental information package and investor presentation. This information is available on our website under the Investor Relations link. Please note that during this conference call, some of management comments will be forward-looking statements, including statements regarding the company’s property operations, leasing, tenant sales trends, development, acquisition and expansion activities, as well as their comments regarding the company’s funds from operations, adjusted funds from operations, funds available for distribution and dividends. These forward-looking statements are subject to numerous risks and uncertainties and actual results could differ materially from those projected due to factors including, but not limited to, changes in economic and real estate conditions, the availability and cost of capital, the company’s ongoing ability to lease, develop and acquire properties, as well as potential tenant bankruptcies and competition. We direct you to the company’s filings with the Securities and Exchange Commission for a detailed discussion of these risks and uncertainties. During the call, we will also discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP measures to the comparable GAAP financial measures are included in our earnings release and in our supplemental information. This call is being recorded for 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, April 30, 2014. At this time, all participants are in listen-only mode. Following management’s prepared comments, the call will be opened for your questions. We ask that you limit your questions to two so that all callers will have the opportunity to ask questions. On the call today will be Steven Tanger, President and Chief Executive Officer, and Frank Marchisello, Executive Vice President and Chief Financial Officer. I will now turn the call over to Steven Tanger. Please go ahead, Steve.

Thank you, Cyndi, and good morning, everyone. 2014 is off to a solid start for Tanger with adjusted funds from operation per share of $0.45 for the first quarter, up 7.1% over last year and meeting our internal forecast. Contributing to our AFFO growth were the incremental NOI from properties developed and acquired in 2013 and the internal NOI growth that we were able to generate during the quarter that was heavily impacted by adverse weather conditions. In the face of these extreme conditions our first quarter same center net operating income growth was 3.3%. This extends our streak to 37 consecutive quarters of internal growth dating back to the first quarter 2005 when we first began tracking this method. Our consolidated portfolio was closed nearly 5 times more hours in the first quarter of this year due to inclement weather than it was in the first quarter last year. When weighted by the square footage of the specific properties, our consolidated portfolio was closed 3.3% of our total weighted operating hours. This does not include the impact of the days before or the days after a storm, when even though the center may have been opened, traffic and sales were greatly reduced. In addition, snow removal expense for the first quarter of 2014 was $2.9 million more than our internal forecast, which net of recoveries negatively impacted AFFO per share about $0.01. Given the weather related closures, we are pleased that our comparable tenant sales for the rolling 12 months ended March 31, 2014 were up 1.2% to $387 per square foot, which is equal to the sales for the rolling 12 months ended March 31, 2013. However, I want to stress that comparable tenant sales is a single metric and is not the best indicator of Tanger’s ability…

Thank you, Steve and good morning everyone. As Steve mentioned, AFFO per share increased 7.1% to $0.45 per share for the first quarter of 2014 from $0.42 per share for the first quarter of 2013. Although we do not provide quarterly guidance AFFO per share for the quarter was in line with our internal forecast, in spite of the negative weather impact we are maintaining our initial annual guidance provided in February. On a consolidated basis our total market capitalization at March 31, 2014 was $4.9 billion, up 4.6% compared to March 31, 2013. Our debt to total market capitalization of approximately 27.8% at March 31, 2014 was best in class for the mall REIT group. We also maintained a strong interest coverage ratio of 3.76 times for the quarter. Our balance sheet strategy continues to be conservative targeting minimal use of secured financing and a manageable schedule of debt maturities. As of March 31, 2014 there was $473.1 million of available capacity under our unsecured lines of credit or 91% of the total $520 million of commitments. As of quarter end approximately 86% of consolidated square footage was unencumbered by mortgages and we had no significant maturities on our balance sheet before November of 2015. Approximately 78% of our debt is now at fixed rates. On April 10, 2014 our Board of Directors approved a 6.7% increase in the annual cash dividend on our common shares from $0.90 per share to $0.96 per share. Simultaneously a $0.24 per share dividend was declared for the quarter ended March 31, 2014 payable May 15, 2014 to shareholders of record as of today. We have paid cash dividends each quarter and have raised our dividend each of the 21 years since becoming a public company in May of 1993. At the current levels we expect of AFFO to exceed our common dividend in the neighborhood of about $100 million annually, so our dividend is well covered. With an expected FAD payout ratio for 2014 of approximately 60%, we are able to generate significant incremental cash flow over our dividend which we plan to use to reinvest in our business to help fund the developments of new properties and the expansion of successful properties. I will now turn the call back over to Steve.

Thanks Frank. I am pleased to report that we continue to see positive base rental rate spreads in the 2014 for space renewed and released within our consolidated portfolio. For the first quarter, straight line blended rental rates increased 22.8% compared to 21.2% for the first quarter of 2013. Lease renewals accounted for 870,000 square feet or about 52.4% of the space coming up for renewal during 2014 and generated a 17.9% increase in average space rental rates. The remaining 273,000 square feet was released at an increase in average base rental rates of 35.9% compared to 32.2% for the first quarter 2013 as we continue to capture the embedded value in our portfolio. This growth was driven by positive leasing spreads together with contractually embedded rental rate increases and resulted in the 3.3% same center net operating income growth for the first quarter. At quarter end, our consolidated portfolio was 97.2% occupied. We continue to succeed in negotiating increased rental rates as a result of the low cost of occupancy for tenants doing business in Tanger Outlet Centers. With the lowest average tenant occupancy costs in our mall peer group at just 8.6% of our consolidated portfolio in 2013, our average occupancy costs ratio was well below market and nearly 300 basis points lower than any other mall REIT. Under these conditions, we are able to continue to raise rents while maintaining a very profitable distribution channel for our tenant partners. Tenant demand for outlet space coupled with our reputation within the industry of having refined skill set for developing, leasing, operating and marketing high quality outlet centers has afforded us a robust external growth pipeline throughout the United States and Canada. In fact, we have three grand openings scheduled in 2014. First up is a new 400,000 square…

(Operator Instructions) And our first question comes from Craig Schmidt from Bank of America. Your line is open.

Good morning. Steve, I was wondering where you think the pace of new development will be in 2016 and beyond, particularly comparing it to sort of the last three years in terms of new development?

Good morning, Craig. As you think will know in 2014 as an industry, I think we will deliver about maybe six or seven new centers totaling about 2.6 million square feet, which is about a little less than the 3% growth in our industry. We expect in 2015 that there will be maybe 10 to 11 centers delivered. Of those 10 to 11, we expect 5 will be Tanger, 2 will be Simon, and 1 will be a joint venture between Tanger and Simon. So, basically 8 out of the 10 or 11 will be between Tanger and Simon. 2016, we really haven’t given any guidance to that yet. Just my guess is I think we will probably if the economic conditions still hold, I think the industry can deliver anywhere from 7 to 10 centers in 2016/2017. I really don’t want to go up any further than that.

And do you think that you can maintain the pace that you are showing in ‘14 and ‘15 in the outer years?

We have not given any guidance on that. And I don’t really want to – I don’t want to give that guidance today. We have a deep shadow pipeline. We are, Craig as you might imagine in execution mode to deliver the assets that we have previously announced between now and the end of 2015. As these come to fruition and open, we intend to announce replacements again depending upon economic conditions.

Okay, thank you.

And our next question comes from Ross Nussbaum from UBS Securities. Your line is open.

Hi, good morning. It’s Jeremy Metz here with Ross. We appreciate the color on the development pipeline you are obviously making good progress. You mentioned some of the pre-leasing going on in Charlotte, but can you give us a little more color and update on how the pre-leasing stands at your other properties opening in 2014 and early 2015?

We don’t announce pre-leasing numbers, but you can assume that based on our longstanding practice that we have in excess of 50% of those committed by a great mix of outlet and designer tenants.

Okay. And then just going back to when you are talking about the development potential over the next couple of years, how do you see the opportunity in Canada versus the U.S.?

We have one or two new sites in early pre-development in Canada with our co-owner, RioCan and in the United States, I think I answered that with Craig we are looking at various markets that we feel are either not served or underserved by outlets. And we will continue to announce those as we deliver the existing pipeline.

And so just to be clear there, we had previously said about what you thought could deliver for the industry that was more U.S. versus U.S. and Canada as you look out?

I don’t think I understand your question. Do you mind rephrasing it?

Yes. When you were just talking about 10 to 11 centers could open in ‘15, 6 or 7 in ‘14, you were speaking just on U.S. at that point, right?

That’s correct, just U.S.

Great. Thank you.

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

Hey, good morning guys. Steve just wanted to follow-up on your comments on the five assets that you are – that you were looking to sell. You said that you identified one for redevelopment, which center was that and what sort of prompted that new vision for redevelopment that wasn’t there before? Was there something that sort of happened during the sales process? And maybe on the other four, can you give a little bit of color on why not continue to market those other four, if you were seeing good private market?

Hi, Christy. One of the assets which is located in California is across the street from a potential casino site. And within the last month or so, the casino – the Indian tribe or the Indian nation I should say after 12 years has had their environmental impact report accepted. So, almost immediately after that, we received inquiries, not only from our tenants, but from potential out-parcel users. So we want to pursue that and see what happens. With regard to the other four, the reason we packaged this as a portfolio was to give potential buyers an opportunity to invest more money and start a portfolio of outlet properties. So the other four, we are not going to continue to market at this time. As I mentioned, maybe within a year, when we actually build out and improve out the redevelopment opportunity, we will take another look at the market in our assets and decide what we want to do.

So, what you found in the market was you don’t think that those assets would stand on their own as far as potential opportunities for buyers?

We have not marketed them individually and don’t intend to.

Okay. And then just with regards to Cheshire, can you talk maybe a little bit about the location and decision to do a project there? What’s the competitive landscape and so where would you expect the center to draw its core customer base, just sort of initial findings for that site?

Well it’s a joint venture with WS Development, Jeremy Sclar and his partners have a longstanding track record of developing successful properties in the New England market. We – there is a competitive site in that area and we have looked at those sites and we feel that the WS Development site is far superior in Cheshire. We had our leasing group up there yesterday and we’re just starting really to aggressively market that. It will draw from the high income counties of Connecticut between New Haven, Hartford and the other high income areas in the state. And we feel with the Hartford market is probably underserved by an outlet center. So we’re excited about that. It’s in its very early stages, we just announced it. We have a very high quality well-known seasoned developer as our joint venture partner.

Thank you, Steven.

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

Hi, thanks. Good morning. Just first question for Frank. You noted that the quarterly result was in line with your internal budget. I was just curious though if that included the $0.01 impact net of recoveries from the higher snow removal costs or if that was offset by rents and other income running slightly ahead of your budget?

We actually – with the hit from the snow we were still able to meet our internal forecast. So obviously without the snow we would have been ahead of our internal budget.

Okay. And then I saw that occupancy dipped down in the portfolio overall. And I was just curious if there were sort of any bankruptcy related move-outs or anything or would you just sort of characterize that as post-holiday move out activity? I noticed Deer Park and Atlantic City specifically looked like they were both big drivers of the occupancy decrease in the quarter, anything going on there specifically?

Nothing unusual. It’s consistent with many years of occupancy dipping slightly in the first quarter as seasonal temporary tenants or holiday seasonal temporary tenants move out. I will say that we’ve had great success in re-leasing most of the space to higher volume tenants. And you’ll see that and we expect occupancy to trend backup in the next several quarters, but this is consistent with prior years.

Okay. And anything specific though at Deer Park or Atlantic City, it looked like a little bit of a larger decrease perhaps particularly relative to where the rest of the portfolio is sitting today?

Nothing unusual on either one of those markets. There are larger centers but there is nothing unusual on either one. And I said before we expect to continue to have occupancy to trend backup.

I think virtually most of the space in both Deer Park and Atlantic City is already spoken for.

Okay. Thank you.

Thank you, Todd.

And our next question comes from Ben Yang from Evercore. Your line is open.

Hi, good morning. Thanks. Steven, I’m just wondering if you have any thoughts about Coach obviously an important – now with tenant. They reported yesterday and that comp sales were down 21% in the quarter. And from what I understand the decline was predominantly in their outlet channel, I mean are you having any concerns? Can you comment on some of your recent discussions with them and how they intend to maybe operate their business going forward?

I have the opportunity to meet with their new Chairman and their new management team and was very impressed. As you may know they’ve also hired a new designer and their new line should be delivered in the – I think third quarter of this year. So we’re watching it closely. They are a long-standing valued tenant. They still, even though their sales were off a little bit on our properties, not nearly what was announced. They still are one of the highest, if not the highest volume tenant in our centers. So we are hopeful that the new line will be received by Coach customers and that their sales will stabilize and head back up.

So I guess it’s still early and it’s not necessarily your sense that they don’t intend to renew leases, maybe slowdown the pace of new openings and development, the jury is still out, is that kind of a fair way for me to describe that from your perspective?

We have a close relationship with Coach. We have seen no slowdown in their renewing existing leases when they come up for renewal. And we are working with them on our various new development projects.

Great, thank you.

And our next question comes from Carol Kemple from Hilliard Lyons. Your line is open.

Good morning. How did first quarter sales compared to the first quarter of last year, just for the three month periods?

Good morning, Carol. How are you doing?

Good, how are you?

Good. We announced in our script that the 12 months rolling sales at the end of December 31 were approximately the same as the rolling 12 month sales as of March 31.

So for the – but for the three months period, just January through March of the first quarter ‘14 and the first quarter of ‘13, would those be the same?

Carol, we report as we report.

Okay.

You can draw whatever conclusion you want.

Okay. Thank you.

And our next question comes from Rich Moore from RBS Capital Markets. Your line is open.

Hello, guys. Good morning I’m actually still at RBC. I want to go back, if I could, to Todd’s question. And Steve, I am wondering too about the dip in occupancy which was a little bit more in the first quarter than it normally is in a normal first quarter. You hit a record in the fourth quarter of 2013 but then you didn’t kind of back up a little bit more than usually, even more so than 1Q ‘13 backed up from 4Q ‘12. And you had given us some stats before on the renewal outlook and I realized bankruptcy is one side of the story, but I am also curious from a renewal standpoint if you are seeing any change in the level of renewals that you guys are enforcing renewals that tenants are selecting versus what you had seen say last year?

Hey, Rich – Steve, if I could, just to put it in perspective, you go back a few years Q1, 2011 we ended at 96.7, Q1 of 2012 we ended at 97.3, so Q1 of 2013 being 98 was kind of the abnormal Q1 end if you will on occupancy, so dropping to 97 is not a typical.

Okay. Would you say, Frank there is any change in the level of renewal activity because it’s harder to track, we can see the bankruptcies, but we can’t tell if there are tenants that just don’t want to renew as much as they used to want to?

Yes, go ahead Steve.

The answer is no. There is no trend that you are trying to identify, leases we have a very high percentage of these renewals when leases come up for renewal. And if space is not renewed that’s in the tenant – re-tenanted category for which we got a huge increase when we mark that space to market and capture the embedded value. So we almost root for tenants not to renew. And that goes back to increasing our cash flow and building long-term shareholder value. I think it’s terrific that in three year we have increased our free cash flow 100% – I think it’s 149% that’s extraordinary. And our goal is to continue to increase cash flow and that’s by continuing to upgrade our co-tenancy with higher volume and higher rent paying tenants when space does come available. We are in the process and already have released a substantial portion of the space that vacated in the first quarter and I think you will see that as I may have mentioned, I think you will see that reflected in our numbers through the rest of the year.

Okay, good, yes, got you, Steve. Thank you. And then one thing on the snow removal expenses, is that – are those not recoverable when they increase? Is there some reason that those aren’t put back in common area maintenance and charged back to the tenant?

Quite a bit of it was recoverable which is why Steve pointed out that made about a $0.01 per share difference even though we exceeded our expectations of snow by well over $2 million. The bottom-line impact was less than that because we were able to recover quite a bit of it, but still versus substantial increase in leakage for the quarter.

Okay. And the part not recoverable, Frank, is the fixed cam contracts or fixed leasing…

Yes, that kind of it.

Yes, fair enough, yes, right. Okay, great. Thank you guys.

And our next question comes from Michael Mueller from JPMorgan. Your line is open.

Hi, I tried to get out the queue. I’m good. My question was answered. Thanks.

And our next question comes from Nathan Isbee. Please state your company name. Your line is open.

Yes, hi. It’s Nate Isbee from Stifel. Good morning. Just going back to the comp tenant sales figures. You have previously disclosed on a quarterly basis. I’m just curious why you changed now.

Like we decided to report the way most of our competitors are reporting and we’re going to be consistent with that.

Okay. And then on the occupancy; where would you say year-end occupancy is relative to last year in your guidance?

Our projected year in occupancy?

Correct.

For 2014?

Yes.

I think we provided an occupancy guidance if you will, Nate, but certainly I think if you look historically we’ve ended the year at obviously in the high 90s.

No, I know but you’re about a 100 basis points below where you were last year at the same period, I’m just curious as we go through the year as they catch up those should be assumed that will be pretty much – there will be some lower occupancy throughout this year.

The first quarter occupancy level tends to be the lowest of any year.

No, I know but year-over-year, you’re about a 100 basis points, like you pointed out before, you’re about 100 basis below where you were last year.

Correct.

So I’m curious as we trend through ‘14, should we expect about a 100 basis points lower throughout the year or will there be a catch-up as we get into the important lease-up season?

As Steven mentioned, we have already retendered a lot of the space that became vacant during the first quarter so unless there is other vacancies that occurred. We should be impact to similar occupancies as prior year.

Okay, perfect. Thank you so much.

And our next question comes from Samir Khanal from ISI Group. Your line is open.

Thank you. Good morning. Just curious on – with all the new developments taking place, are you guys seeing a sort of a more competitive environment for tenants with sort of expiring leases, at this point?

No, expiring leases again as I mentioned are being renewed and pretty much the same frequencies previous years and if there are not renewed, we’re able to capture the embedded value in the portfolio. So, I wouldn’t draw that conclusion.

Okay. And can you remind us where are you guys on the conversion of fixed cam at this point?

We’re about 18% of the way there.

Okay, thank you.

We have no further questions in queue. I’ll turn back to the presenter.

In closing, I would like to remind all of our shareholders of our annual meeting on May 16. Your vote is important to us, so we ask that you review the proxy statement we filed on April 4th and please vote your shares. Thank you all for participating on our call today and your interest in our company. Frank and I are always available to answer any questions you may have. Thank you, again. Have a great day and think outlets and think Tanger. Goodbye.

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