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Tanger Factory Outlet Centers, Inc. (NYSE:SKT)

Q2 2014 Earnings Conference Call

August 6, 2014 10:00 am ET

Executives

Cyndi Holt - VP Finance, IR

Steven Tanger - President, CEO

Frank Marchisello - CFO, EVP

Analysts

Samir Khanal - ISI Group

Christy McElroy - Citi

Caitlin Burrows - Goldman Sachs

Todd Thomas - KeyBanc Capital Markets

Jeremy Metz - UBS Securities

Michael Mueller - JPMorgan

Todd Lukasik - Morningstar

Mike Bilerman - Citi

Cyndi Holt

Good morning. This is Cyndi Holt, Vice President, Investor Relations and Finance with Tanger Outlets and I would like to welcome you to our Second 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 Web site under the Investor Relations link.

Please note that during this conference call, some of management's comments will be forward-looking statements, including statements regarding the company's property operations, leasing, tenant sales trends, development, acquisition and expansion 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 projections 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, August 6, 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 Steve. Please go ahead, Steve.

Steve Tanger

Thank you, Cyndi, and good morning everyone. I'm pleased to report that the second quarter of 2014 was another solid quarter for Tanger, adjusted, funds from operations per share increased 6.8% compared to the second quarter of 2013. Same-center net operating income increased 3.3% for the quarter extending our streak to 38 consecutive quarters of internal growth dating back to the first quarter of 2005, when we first began tracking this metric. And last week, we expanded our footprint with the opening of a new 400,000 square foot outlet center in the Charlotte, North Carolina market.

Our long-term strategic plan is to build a growth company with substantially increasing cash flow and a balance sheet that's a fortress. Many of you are interested in an update on our development projects and anticipated returns. 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 development pipeline and our expectations for the balance of 2014.

Frank Marchisello

Thank you, Steve, and good morning everyone.

As Steve mentioned our reported AFFO per share increased 6.8% for the second quarter of 2014 to $0.47 per share from $0.44 per share for the second quarter of 2013. For the first half of 2014, AFFO per share increased 8.2% to $0.92 per share compared to $0.85 per share for the same period of 2013. On a consolidated basis, our total market capitalization at June 30, 2014 was $4.9 billion up 11% compared to June 30, 2013. And our debt to total market capitalization of approximately 28.4% was best in class for the mall REIT group. We also maintained a strong interest coverage ratio of 3.79x for the second quarter.

Our balance sheet strategy continues to be conservative targeting minimal use of secured financing and a manageable secured schedule of debt maturities. As of June 30, 2014 there was $428.8 million of available capacity under our unsecured lines of credit or 82% of the total $520 million commitment. As of quarter end, approximately 86% of our consolidated square footage was encumbered by mortgages. We have no significant maturities on our balance sheet till November of 2015, when our $250 million bond matures. Rate of these bonds are 6.15%, if rates and spreads remain constant; we were told we could refinance this debt at an all in rate below 4%.

We have paid cash dividends each year and as raised our dividend each of the 21 years since becoming a public company on May of 1993. At the current levels, we expect our AFFO to exceed our common dividend in the neighborhood of $100 million annually, so our dividend is well covered.

With an expected AFD payout ratio for 2014 of approximately 60%, we expect to generate significant incremental cash flow over our dividend, which we plan to use to reinvest in our business to help fund the development of new properties and the expansion of successful properties.

I will now turn the call back over to Steve.

Steve Tanger

Thank you, Frank. Some of our peers have begun disclosing total sales volume as another measure of the sales productivity of portfolio retail properties. On a same-center basis, our total tenant sales volume reported to us by all tenants throughout the consolidated portfolio regardless of their store size increased 2.6% to $4.1 billion for the 12 months ended June 30, 2014 compared to $4 billion for the 12 months ended June 30, 2013.

For Tanger, we believe this metric is a better indicator of the continued success of our ongoing efforts to improve the overall tenant mix and productivity within our portfolio. Same-center total sales capture sales for tenants immediately upon their opening compared to comparable tenant sales which only reflect new tenants upon their being opened for 12 consecutive months.

Comparable tenant sales for the 12 months ended June 30 increased approximately 1% to $386 per square foot. Comparable tenant sales is a single metric and is not the best indicator of Tanger's ability to generate future cash flow and to continue building shareholder value.

Our ability to raise rents to upgrade our tenant mix and to grow the footprint of our portfolio are the key drivers that will allow us to continue to increase the free cash flow for our business. We focus on related indicators for our growth including our low cost of occupancy and higher rent spreads, strong tenant demand for outlet space, our robust development pipeline and our proven track record of disciplined capital allocation and development success.

Our tenant partners overwhelmingly tell us that sales in any given quarter have virtually no impact on their long-term expansion plans within the outlet channel of distribution. Our tenant partners continue to grow their business by opening new profitable outlet stores particularly in this time a very limited new supply of other full priced retail space.

I'm pleased to report that we continue to generate healthy base rental rate spreads during the second quarter of 2014. For the first half of 2014, blended rental rates increased 22.9% compared to a 22.1% increase for the same period in 2013.

This ability to drive rents higher is a function of both retailer demand for outlet space and the fact that on average our leases are currently at below market rents. With the lowest average tenant occupancy cost ratio in our mall peer group at just 8.6% of our consolidated portfolio in 2013. Our average occupancy cost ratio is well below market and nearly 300 basis points lower than some other mall REITs. Under these conditions, we are able to raise rents while maintaining a very profitable distribution channel for our tenant partners.

These renewals in the first half of 2014 accounted for 1,011,000 square feet or approximately 60.8% of the space coming up for renewal during 2014 and generated a 16.9% increase in base rental rates an additional 385,000 square feet was released at an increase in base rental rates of 35.8% as we continue to capture the embedded value within our portfolio.

These positive leasing spreads together with contractually embedded rental rate increases were the primary drivers of our same-center net operating income growth. Mid-year consolidated portfolio occupancy is 98% this year compared to 98.3% last year. As I mentioned earlier, we reported same-center net operating income growth of 3.3% for the second quarter. Same-center net operating income also increased 3.3% for the first half of 2014. This healthy growth on top of touch comps as our first half same-center net operating income increased 4.2% in 2013 and 6.9% in 2012.

Tenant demand for outlet space coupled 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 as afforded us to robust external growth pipeline throughout the United States and Canada.

As I mentioned, the newest property was added to our portfolio just last week when we and our 50:50 joint venture partner opened a center in Charlotte, North Carolina. The 400,000 square foot upscale outlet center is located 8 mile southwest of uptown Charlotte and features about 90 brand name and designer stores. Since the center opened on July 31, shopper traffic has been strong. To accommodate the traffic volume on grand opening weekend, we utilized overflow parking and provided shuttle service to additional offsite parking, retailer feedback has been very positive with most tenants reporting above planned sales for the grand opening weekend.

Some of the sale side research published overnight expressed concern over changes to the development information summarized in our supplemental. We began providing this summary six quarters ago as a means of improving our disclosure too. Our best estimate based on current expectations for each project at the end of each quarter. However, I want to stress to you that changes in development pro formas are part of real estate development, even more so in the pre-development and early development stages.

As leases are executed rents, tenant allowance cost and tenant mix can vary from our original projections. Development cost and projected opening dates can vary from our original expectations as a result of a number of factors including, site or municipality specific conditions, inclement weather which may result in over time cost necessary to meet contractual tenant turnover dates and the availability of public funding sources among others.

The fourth quarter of this year will be busy for us, as we plan to complete five projects that are currently under construction. Just in time for the holiday shopping season. First up is the grand opening of our first ground up development in Canada located in suburban Kanata, Ontario, Tanger Outlet Ottawa is being developed with our 50:50 co-owner. Ottawa is the capital and fourth largest city in the nation with 1,200,000 residents and about 7.5 million annual visitors. The 316,000 foot center will feature about 80 brand name and designer stores when complete.

In Ottawa, we revised our projected yield to 6.5% to 7.5% from the initial 8% to 9% last quarter. The yield impact was caused by our long-term strategic decision to move forward with a major department store Anchor that will be unique in this market. We redesigned the center layout to accommodate the sort after tenant which increased our cost of construction, permitting fees and reduced our initial yield.

It is easy to increase the yield on development by putting middle and lower tiered tenants in the center at higher rates. However, we choose to look at the long-term viability of this development and are willing to accept a lower initial return, if it means improving the tenant mix and providing a better shopping experience for the consumer. Over time, this strategy results in a higher evaluation for the shopping center which in turn results in greater shareholder value.

Construction of a major expansion and renovation in Tanger Outlets Cookstown is currently underway. We and our Canadian co-owners plan to complete and open the expansion during the fourth quarter. Originally acquired in December 2011, the center is located in the Northern end of the Greater Toronto area in Southern Ontario's cottage country known for its high concentration of vacation homes.

The project will nearly double the size of 155,000 square foot center adding about 35 brand name and designer outlet stores and we will create an updated exterior for the existing space consistent with the expansion space. Based on our successful leasing of this expansion, we decided to further invest in the center by adding amenities to the original phase. This reduced our initial return but should add substantial long-term value as we continue to attract proven upscale brands and designer tenants.

Final three projects, we plan to open during the fourth quarter are expansions of successful outlet centers. Construction is on pace to achieve holiday openings for expansions of 65,000 square feet in Tanger Outlets Westgate in Glendale, Arizona. A 25,000 square foot expansion of Tanger Outlets and Brands in Missouri and a 21,000 square foot expansion of Tanger Outlets in Park City, Utah.

The total project cost for the new developments and expansions that we have opened or planned to open in 2014 is about $316 million. Of this amount, our remaining equity contribution necessary to complete these projects, net of construction loan proceeds was only about $74 million as the end of June 2014.

2015, we currently expect to open 4 additional new developments, two of which are already under construction. Tanger Outlets at Foxwoods, in Mashantucket, Connecticut at the Foxwoods resort casino will be suspended above ground to join the resorts two casino floors which along with Foxwoods other various onsite entertainment venues attracts millions of visitors each year. The 314,000 foot center will feature about 80 brand name and designer tenants when complete.

We currently expect a second quarter 2015 opening for the project which will be consolidated for financial reporting purposes as a result of our controlling ownership interest.

We and our 50:50 joint venture are developing a Tanger Outlets Center near Savannah, Georgia a market that welcomes 12 million visitors annually. The highly visible site is located on Interstate-95 near Savannah's International Airport in Pooler, Georgia. When complete, the initial phase of the center will include approximately 385,000 square feet and feature about 90 upscale brand name and designer outlet stores. Currently, we expect the center to open in the second quarter of 2015.

Last month, we acquired the land and began site work for our newly – for our new wholly-owned development in Grand Rapids, Michigan. This site is located 11 miles south of Grand Rapids at the southwest quadrant of U.S. 131 and 84th street in Byron Center, Michigan. The official groundbreaking is scheduled for Thursday August 21, 2014.

Redevelopment and pre-leasing activities are ongoing for other projects we intend to open next year with our 50:50 joint venture partner located in Columbus, Ohio. The total project cost for the development projects that we expect to open in 2015 is about $392 million. Of this amount, our remaining equity contribution necessary to complete these projects net of construction loan proceeds was about 142 million as of June 30. Based on our initial estimates, the initial yield is expected to be in the 9% to 11% range.

Our most recently announced pre-development site is located in the Hartford Market in Cheshire, Connecticut. Additionally, we have identified a deep shadow pipeline of other markets that we are either – that are either unreserved or not served by the outlet industry.

Sometimes properties open quicker than our original expectations like when we opened Tanger Outlets Westgate in November 2012 just eight months after breaking ground. Others may not always get underway as early as we originally expect them to.

We have two such examples this quarter, after close to three years the Park City expansion project has an expected opening date that is now pushed from the third quarter to the fourth quarter of this year. It took longer than we expected to get the final approvals but construction is now underway. We currently feel confident that the project will be completed in time for the 2014 holiday shopping season.

In Columbus, we and our partner are working on securing some potential public funding for the offsite improvements. As a result, we pushed the projected opening to the second half of 2015 from the first half, we plan the great break ground by the end of 2014 through meet our revised opening projection.

Consistent with the information included in our SEC filings, this quarter we began providing you with project cost incurred to-date and move from a projected cost range to a single cost projection for each project. As I mentioned, cost and yields can vary from quarter-to-quarter. Based on our expectations at June 30, 2014, we decreased the project yields for two projects and increased the project yields for two others.

Both of the projects with decreased project yields from -- primary the result of strategic decisions to invest in a tenant mix that we believe will have long-term value. In both cases, the initial projected return was negatively impacted by the addition of a key magnet tenant that we believe will drive traffic to these centers and result in higher yields in the long-term.

For our Westgate expansion, the situation is similar but the overall impact is meaningful given the small scope of this project at only 65,000 feet. We revised our projected initial yield to 6.5% to 7.5% down from 9.5% to 10.5%. The projects initial yield was negatively impacted because 30% of the square footage of the smallest expansion is allocated to a single magnet tenant. And the pro forma is impacted by the related rent structure and cost structure of this lease.

Again, this is a long-term play for Tanger, as we expect this tenant to drive traffic to the center and produce higher yields in the long-term. The combined development yield for the initial Phase I development and the small expansion is well within our targeted range of 9% to 11% for domestic development projects.

Projects with increased project yields resulted from costs that are currently expected to be the less than our original estimates. In Charlotte, our total cost was reduced and our project yield increased to a range of 10.5% to 11.5% from 9.5% to 10.5%. Tanger's ability to secure approximately $4.5 million in TIF financing was a major factor in reducing cost expectations.

For our small expansion in brands in Missouri, our projected total cost was reduced to $7.8 million from a range of $8 million to $9 million last quarter. Our projected yield was increased to a range of 10.5% to 11% up from 9% to 10% last quarter. To put these changes in perspective, we compared our current projections for the projects in this quarter supplemental to our originally published projections for each of these projects.

At the mid-point of the projected ranges, the weighted average yield is currently within our targeted 9% to 11% range which is far greater than our weighted cost to capital. And as I mentioned, these initial yields and our strategy is to increase them over time.

Moving to redevelopment, Tanger is known for its well-maintained portfolio of vibrant dynamic properties. Depreciation is a real expense, so from time-to-time, we embark on larger scale redevelopments to extend the life and performance of our centers and to elevate the Tanger brand.

In 2014, our major redevelopment project is a $16.8 million renovation of our flagship asset in Riverhead, New York. Designed to improve the customer experience and appeal to the most sort after tenants. The project will include a dramatic new exterior, new signage and energy efficient LED lighting retrofit and the addition of shopper friendly features like a fire pit foundations, soft ceding areas, mobile device, charging stations and an iPad equipped tech lounge.

We are also orchestrating what we call the Tanger shuffle during this renovation to group the more upscale brands together. This section of the center will include some tenants already operating in the center as well as new high-end fashion and designer tenants that we are bringing to Riverhead.

On a smaller scale, the $7 million renovation is underway at our center in Rehoboth Beach, Delaware. In addition to modifying the exterior of the center, the project will also include a new tower sign that can be seen up to a mile away to greatly increase the centers visibility. Both projects are nearing completion.

With respect to earnings guidance for 2014, based on our initial budgeting process, our current view of market conditions and the strength and stability of our core portfolio, we are maintaining the mid-point of our previously announced guidance. We expect our estimated diluted net income will be between $0.78 and $0.82 per share. And our FFO will be between $1.92 and $1.96 per share.

Our estimates do not include the impact of any additional rent termination fees any potential refinancing transactions, the sale of any out parcels of land or the sale or acquisition of any of our properties.

Our 2014 guidance assumes a projected increase in the same-center net operating income of approximately 3%. The tenant sales will remain stable or increase modestly and that general and administrative expenses will average approximately $10.5 million to $11 million per quarter.

We remain optimistic about the growth prospects of our company and our industry as shoppers continue to seek brand name products direct from the manufacture. The tenant community continues to indicate its desire to expand into new markets in the United States and Canada with Tanger as a preferred partner.

The resiliency of the outlet channel has been proven over the past 33 years through many economic cycles. We have over 2900 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 4.7% of our base and percentage rental revenues or 7.9% 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.

So I'm out of breath and now, I'm going to turn it over to any questions you might have. Operator?

Question-and-Answer Session

Operator

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

Samir Khanal - ISI Group

Just quickly on Canada here, on your Kanata project, looks like as of 2Q, the project was approximately I think 50% lease. We were going through based on RioCan disclosure. I mean do you have a sense as to where this will be leased as you open in 4Q later in the year?

Steve Tanger

Right now, we are approximately 86% committed. We have made a lot of project and signing leases since RioCan's disclosure several weeks ago. And we are very comfortable that the center will open in the mid to high 80% range, the first phase of the center.

Samir Khanal - ISI Group

And just on Canada, I mean I know as your current view on the market has that changed maybe in the last 6 to 12 months. Your view is current as what maybe your prior expectations may have been?

Steve Tanger

I think if you read our prior expectations, we are still consistent, Canada is an exciting growth area. We are looking forward to opening our center in Ottawa, which by the way there is to our knowledge no other large outlet center within 200 miles. So this will be a really good test for the nation’s capital of Canada and we are expecting great reception. We are doubling the size of our center in north of Toronto which is a large market.

So this is our initial test, we have always said that we expect anywhere from 8 to 9 new centers over a 5 to 7 year build out and this is the initial test and we are still very optimistic.

Samir Khanal - ISI Group

And one final question from me, if I may. I know on Atlantic City getting back to the U.S. here in domestic, I know there has been some sort of headlines coming out in terms of tourism and hotel closures. I know you have an asset over there just wondering if you have seen any kind of directionally at least in terms of sales or trends in terms of traffic, has there been any changes in your views?

Steve Tanger

What we are very excited about Atlantic City, it's a market where we have most of the upscale tenants in our – in the tenant world represented. Sales continued to increase in Atlantic City. We think that the market will rationalize as to the number of casinos that the market can support. A Bass Pro Shop is opening there, they have just opened a very large community owned or city-owned parking structure to provide convenient parking. We have a local government there in Atlantic City. And the Governor of New Jersey are committed to maintaining Atlantic City as a vibrant exciting tourist attraction. By the way, the Miss America Pageant is returning, and if you like tickets, we would be happy to provide them for you.

But, we are excited about Atlantic City and we still think the long-term viability of Atlantic City is exciting.

Samir Khanal - ISI Group

Okay. Thank you. Great guys.

Operator

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

Christy McElroy - Citi

Good morning everyone. Just a follow-up on Kanata, the change in the yield effectively in size on our math, roughly 20% decline in NOI per square foot with the total cost of the project unchanged. And if I understand it right, the Anchor is effectively replacing the inline space. So how large is that Anchor that's impacting the total NOI by that much, Anchor does the 86% committed does that include the new Anchor?

And you talked about the longer yield being higher; can you walk through ultimately how you get to a higher yield on this project?

Steve Tanger

Hope I can remember all those questions, but the Anchor is a well-known department store, which we are not right now at liberty to mention. But it will be their first store in that market, so we are excited about that. This lease came together after we have already started construction. So we had to redesign part of the site plan to accommodate this major Anchor. The Anchor will open about a year to 16 months after the center opens. So the yield will increase substantially once the tenant opens. But we had to increase our cost because we are building the space and redesign the space to accommodate them.

Christy McElroy - Citi

The cost of the project is unchanged, correct? Last quarter it was $115 million to $120 million, and now its $117 million.

Steve Tanger

Right. But we are paying that now and we are not having the income of the Anchor tenant until 16 months from now. So the yield is down because we have less revenue.

Christy McElroy - Citi

Because the 86% committed include the Anchor?

Steve Tanger

Yes, it does.

Christy McElroy - Citi

It does. And is it an American or Canadian retailer?

Steve Tanger

You can ask it anyway you want. I'm not going to tell you the name of the center.

Christy McElroy - Citi

Okay. And just a follow-up, in regards to the four projects that are coming online in 2015, when do you anticipate breaking ground on Grand Rapids and Columbus. And I know you provided general sort of standard 9% to 11% return target for those four projects but would you expect ultimately for those yields to come on the lower end or the upper end of that target range?

Steve Tanger

Grand Rapids we have already broken ground, we only – we own the land, have broken ground and we will have a formal groundbreaking within the next 30 days. With regard to Columbus, we are in the final permitting stages and still our anticipation to break ground in Columbus before the end of the year.

I don't really want to refine other than to say that the yield -- expectation for both projects the way that returns is within our range of 9% to 11%. But as we have done in the past after we break ground and pieces come together and construction cost comes together we will update that return in subsequent quarters.

Christy McElroy - Citi

Thank you.

Operator

Your next question comes from Caitlin Burrows from Goldman Sachs. Your line is open.

Caitlin Burrows - Goldman Sachs

Hi, good morning. Just a quick question on sales. In terms of sales growth you already reviewed your trailing 12-month tenant sales growth was about 1% for comparable tenants. But rather than looking at the trailing 12-month and instead just looking at the year-over-year second quarter versus first quarter for the three months. Could you quantify how the sales growth may have deferred for the two-time periods?

Steve Tanger

Well, sales in the first quarter were essentially flat compared to last year. I'm sorry the second quarter were essentially flat but I don't know if that's indicative of anything. We will look at the 12-month trailing numbers to – because one-month or one-quarter can be affected either up or down by non-recurring conditions.

So it's probably a better reflection and consistent with what the other mall REITs report to look at the trailing 12 months.

Caitlin Burrows - Goldman Sachs

Okay. Knowing that would you just general say that the first quarter sales were negative versus the prior year?

Steve Tanger

I'm not going to. You can draw whatever conclusion you want from the information we gave you but that's the way we report it.

Caitlin Burrows - Goldman Sachs

Okay. Thank you.

Operator

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

Todd Thomas - KeyBanc Capital Markets

Thanks. Good morning. Following Christy – following upon Christy's line of questioning, I'm curious at Glendale, just a few months away from that expected completion. Can you identify that magnet retail or that you mentioned will be taking 30% of the expansion GOA?

And then just kind of, on a more broad basis, bringing in magnet retailers or Anchors, is that a new strategy for the company as you see with regard to merchandising either new developments or even existing centers and could potentially -- needed some new redevelopments at some of your existing properties?

Steve Tanger

Let me answer one question at a time. With regard to Westgate, we are not prepared to announce the Anchor yet. It's obviously an upscale Anchor tenant and it' sensitive in the market. So in the next couple of months certainly by the next quarter, we will be able to announce that.

We have always worked with magnet tenants, some of the department store Anchors are in the range of 25,000 to 35,000 feet versus other outlet Anchor tenants or magnet tenants as we call them which were in the range of 8,000 to 10,000 feet.

So obviously, we look for the – we are in the real estate business which is a long-term capital allocation, long-term tenant mix decisions rather than short-term returns. We could easily lease the space to non-productive or just go the highest rent paying tenant to a short term return, but long-term might adversely affect the property. We won't do that.

We have always worked with these Anchors, sometimes they commit the first phase, sometimes they commit in the second phase, sometimes they commit as we are under construction and we have to change the footprint to accommodate it. And that's what happened in Ottawa and that's what happened in Westgate. But, the total return on our Westgate project including the expansion as well within our 9% to 11% yield.

Todd Thomas - KeyBanc Capital Markets

Okay. And then in terms of U.S. development, you talked about your expectations over the next few years and you won pre-development deal in Connecticut that's been announced and sort of slated for I guess a 2016 delivery. After the completion or delivery of the 2014 and 2015 deals, do you see the pipeline continuing to build or you comfortable that you can maintain this current phase of development?

Steve Tanger

We have always told the market to expect one to two new centers a year. In the past couple of years have been extraordinary to meet the demand. I think, we are still comfortable saying 2016 and going forward one to two new centers a year. We have not announced anything in addition to the existing development and expansion schedule because we want our tenants to focus on 2014 and 2015 development yields.

We do have our entire leasing team looking at shadow pipeline sites as we speak this week and hopefully we will be able to announce before the end of the year one or maybe two additional sites for 2016 delivery.

Todd Thomas - KeyBanc Capital Markets

Okay. Thank you.

Operator

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

Jeremy Metz - UBS Securities

Hey, good morning Jeremy Metz on with Ross. Steve, can you just talk a little bit about the leasing environment for your developments more broadly, are you seeing any changes in lease terms or kick-out provisions and then any particular tenants getting more or less aggressive with expansion plans?

Steve Tanger

We do business with close to 500 tenants. And the great majority of them are looking to grow their businesses. Right now they tell us they are allocating more capital to the outlet distribution channel than other distribution channels. So we are excited about the demand for our properties, the new developments.

Our existing portfolio remains at 98% occupied, which by the way in 33 years of being in business, we never ended the year less than 95% occupied. So that's a testament to the demand for space and outlet centers.

As far as lease terms, as you might imagine in a portfolio our size, it's all over the board. We don't see any particular trends. We are talking about 90 tenants in a new development. We are still on balance getting the yields that are appropriate and profitable for us. And long-term viability of the center where we can – we feel we can increase cash flow over time.

Jeremy Metz - UBS Securities

Okay, great. And then obviously, you got a lot going on in development fronts too, but are you actively underwriting any acquisitions, is there a mature market there right now?

Steve Tanger

If you know of any please call us.

Jeremy Metz - UBS Securities

I do not. All right. Thanks.

Operator

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

Michael Mueller - JPMorgan

Yes. Couple of questions, going back to returns, just want to clarify something for Kanata, the 6.5% to 7.5%, I know you mentioned that the Anchor is opening, I think you said it was 12 to 16 months later, does that return reflect the year one after the fourth quarter opening without the Anchor in there or the first year after the Anchor is open?

Steve Tanger

It reflects opening cash on cash return and the return should increase pretty nicely after the magnet tenant opens.

Michael Mueller - JPMorgan

Okay. So what after I guess that – this is probably a year two or year two, three what does that return go to after the Anchor is open?

Steve Tanger

It's speculative because it's obviously the return will be based upon the performance of the existing tenants and any percentage rents we get from them. And also leasing up whatever vacant place there might be. But our 33 year history has shown that we are able to move new developments into the mid-90% range over time. And I think that we will be able to do in Ottawa. This project is unique to the Ottawa market. And we think the consumer reaction will be strong.

Based upon this Anchor tenant coming, we are in discussion with other upscale and designer tenants and we hope to be able to get those into executed leases which will also over time increase the yield.

Michael Mueller - JPMorgan

Got it. And then Glendale is there – what's the gap between the center opening and the Anchor opening there?

Steve Tanger

We expect them to open either at the grand opening or within two or three months within grand opening of the expansion.

Michael Mueller - JPMorgan

Okay. So it seems like that that yield and a supplemental is more tied to that's the overall project there where Kanata maybe – is maybe a little bit more of a timing impact, is that correct way to think of it?

Steve Tanger

That's right.

Michael Mueller - JPMorgan

Got it. Okay. That was it. Thank you.

Operator

Your next question comes from Todd Lukasik from Morningstar. Your line is open.

Todd Lukasik - Morningstar

I was just wondering if you could comment on the capital improvement plan on the funds available for distribution schedule and why that ticked up. And then also what your full year expectation is for capital improvements this year?

Frank Marchisello

Yes. It ticked up specifically with regards to the Riverhead and Rehoboth Beach redevelopments which Steve spoke of earlier in his prepared remarks. And as far as for the year, we are looking at $35 million to $40 million in total.

Todd Lukasik - Morningstar

Okay. Thanks. And then last quarter you talked about weather is being an impact on the results, was that still an impact this quarter or was there anything else that may have impacted expenses this quarter?

Steve Tanger

Impacted expenses? I don't see anything that's an extraordinary impact on expenses in the second quarter.

Todd Lukasik - Morningstar

Okay. Thank you.

Operator

(Operator Instructions) Your next question comes from Christy McElroy from Citi. Your line is open.

Mike Bilerman - Citi

Hey, it's Mike Bilerman. Good morning. So I'm not going to ask you for the Canadian or American or whether it starts with an S or an H. But I did want to understand what the size of the Anchor in Ottawa was relative to – so the square footage went up about 13,000 square feet, I didn't know if that was the sole link or how of the existing inline of the original project size got taken away?

Steve Tanger

Hi, Michael. How are you? Yes, part of the original project was taken away and the Anchor tenant will be part of our second phase we are calling it. We still have additional expansions little bit of additional expansion, in addition to that Anchor. So we are excited that this is coming to fruition and I think long-term it will have great viability and excitement to the project in that market.

Mike Bilerman - Citi

And so is it a 40,000 square foot box or….

Steve Tanger

No. I think it's in the area 28,000 feet.

Mike Bilerman - Citi

28,000. So taking away 15000 from the existing project inline and then adding 13000 which aide into some of the second phase?

Steve Tanger

That's exactly right.

Mike Bilerman - Citi

And then…

Steve Tanger

But also the expense – the expense of building, its ongoing now without any revenue.

Mike Bilerman - Citi

Right. But you – the total project cost stayed relatively similar, so you must have had some savings somewhere else because your project total cost is – even though you are adding square footage, the total project cost is relatively inline?

Steve Tanger

That's right. But the revenue is down because we don't have any revenue from the Anchor.

Mike Bilerman - Citi

Correct. The Anchor rent I assume would – is there a certain factor that we should think about Anchor rent relative to inline, is it half of what a normal inline space would be, is it…?

Steve Tanger

I don't really want to discuss individual lease terms.

Mike Bilerman - Citi

I was just thinking more generally Anchor rents versus inline rents for your portfolio, how big of a spread that would be – as we think about Anchor tenants versus inline tenants.

Steve Tanger

There is always a spread between an Anchor tenant and an inline tenant. Again, I would prefer not to disclose the differential.

Mike Bilerman - Citi

Okay.

Steve Tanger

It's certainly in return for that differential, it's unique in the market and it draws traffic and over time it attracts other upscale and designer tenants. So we think and it's proven over time, it's a good investment.

Mike Bilerman - Citi

And I guess, if you were to put aside the lease-up of the additional space, and what percentage rents are – and how the center is once this Anchor opens, do you think just based on the rents that that have been committed for that space in the rents that you had targeted for the remaining that we – that the yield would still be comparable getting back to that original expectation of 8 to 9? Or do you think that they are still some compression in yield at least at the outset?

Steve Tanger

I think by the time our Anchor tenant opens in 12 to 16 months, we are expecting the initial yield will be back in the initial range.

Mike Bilerman - Citi

Okay. And then in terms of…

Steve Tanger

I'm sorry Michael. That includes leasing up some of the vacant space that’s not leased at opening et cetera. But the total return by the time that tenant opens we expect to be in the range that we initially announced.

Mike Bilerman - Citi

Great. And the additions schedules – the schedules continues to improve and certainly helpful, it would assume – it would – the total here is about $700 million of total development cost a growth share. Obviously, your share is smaller than that about $440 million. You talked a little bit about construction loans, it would be helpful to sort of know which one of these projects fall and so the sort of size of those construction loans, I don't know if you have just roughly if it's $708 million of total construction cost on this page, what is your construction loan gross total for that?

Frank Marchisello

Michael, lot of that would be in the Q. So it will additional disclosure there, we just cannot rent room on the pipeline page. So…

Mike Bilerman - Citi

We can make it landscape and shrink the font. So…

Frank Marchisello

Now, looking in the Q for additional color on some of the construction loans, but obviously, it's a joint venture you can pretty much assume roughly 60% -- 60% to 65% of the total expected cost would be funded through a construction loan.

Mike Bilerman - Citi

And so the remaining you have gross – you have spent about $136 million on this page using just the total in your share there about which leaves about $300 million, you said your equity of that was 124, if I heard you right is that the right number to finish these projects on equity?

Frank Marchisello

All of the projects on the schedule, it would be the total of the two numbers that Steve had mentioned in his prepared remarks. About…

Mike Bilerman - Citi

Yes. I'm sorry, I missed that. I apologize.

Frank Marchisello

I think it's about a couple of hundred millions.

Mike Bilerman - Citi

Okay.

Steve Tanger

Michael just – Michael, I'm sorry. Just to clarify. We have about $75 million remaining for Tanger's equity participation in 2014 projects. That's out of total cost of about $315 million. Now, we have about $142 million remaining of the $392 million total cost for 2015. For the two year total Michael its $707 million total cost, 100%.

Mike Bilerman - Citi

Yes.

Steve Tanger

And Tanger's remaining equity contribution over the next two years is $217 million.

Mike Bilerman - Citi

Perfect. That's exactly what I needed. I think where a lot of people are – and I think part of the initial negative reaction that you probably saw notes is – the footnote on this page says stabilized returns. So I think that when we looked at it or most of us and then certainly the market, they sort of saw them and said okay, all right, Ottawa is now down to 6.5% to 7.5% stabilized, forget about not knowing the Anchor things. So I think what maybe helpful in the future is maybe adding the construction loans and the equity required and having the totals on this page and BXP is a good sort of example of that. And then having initial return and then stabilize return in that way I think we can over something issues that have been drawn out on the call.

Steve Tanger

Thanks Michael.

Mike Bilerman - Citi

Okay. Thank you.

Operator

We have no further questions at this time. I will turn the call over to the presenters.

Steve Tanger

I want to thank all for participating in the call today and your interest in our company. Frank, Cyndi and I are always available to answer any questions you may have. We hope to see all in a couple of weeks in Grand Rapids for our groundbreaking. Have a great day. Take care. Bye.

Operator

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

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