Tanger Factory Outlet Centers' (SKT) CEO Steven Tanger on Q2 2016 Results - Earnings Call Transcript

| About: Tanger Factory (SKT)

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

Q2 2016 Earnings Conference Call

July 27, 2016 10:00 AM ET

Executives

Cyndi Holt - VP and IR

Steven Tanger - President and CEO

Jim Williams - SVP and CFO

Analysts

Todd Thomas - KeyBanc Capital Markets

Caitlin Burrows - Goldman Sachs

Jeremy Metz - UBS

Tayo Okusanya - Jefferies

Carol Kemple - Hilliard

Rich Moore - RBC Capital Markets

D. J. Busch - Green Street Advisors

Mike Muller - JP Morgan

Cyndi Holt

Good morning. This is Cyndi Holt, Vice President of Investor Relations, and I would like to welcome you to the Tanger Factory Outlet Centers’ Second Quarter 2016 Conference Call. Yesterday, we issued our earnings release as well as our supplemental information package in our presentation. This information is available on our Investor Relations web page, investors.tangeroutlet.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 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, including funds from operations or FFO, and 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’s important to note that management’s comments include time sensitive information that may only be accurate as of today’s date, July 27, 2016. [Operator Instructions] We ask you to limit your questions to two, so that all callers will have the opportunity to ask questions.

On the call today will be Steven Tanger, President and Chief Executive Officer; Jim Williams, Senior Vice President and Chief Financial Officer; and Tom McDonough, Executive Vice President and Chief Operating Officer. I will now turn the call over to Steven Tanger.

Please go ahead, Steve.

Steven Tanger

Thank you, Cyndi, and good morning everyone. During the second quarter of 2016, Tanger continued to produce strong growth with AFFO per share up 9.3% and same center net operating income up 3.8%, compared to the second quarter of 2015. Other key highlights for the quarter included the June 24th opening of the Tanger Outlet center in Columbus, Ohio, and the June 30th acquisition of our partner’s interest, ownership interest in the Tanger Outlet center in Westgate, Arizona, increasing our ownership interest from 58% to 100%.

Before I discuss our other external growth opportunities, our operating performance and our outlook for the balance of the year, I will turn the call over to Jim, who will take you through our financial results and a brief overview of our recent financing activities. Go ahead, Jim.

Jim Williams

Thank you, Steve. Positively impacted by $49.3 million gain on our previously held joint-venture interest related to the Westgate transaction, second quarter 2016 net income available to common shareholders increased 192.3% to $0.76 per share or $72.7 million, from $0.26 per share or $24.2 million for the second quarter of 2015. As Steve mentioned, AFFO increased 9.3% during the second quarter of 2016 to $0.59 per share or $59.4 million, from $0.54 per share or $54.1 million during the second quarter of 2015.

Our total market capitalization as of June 30, 2016 was $5.6 billion, up 19% compared to June 30, 2015. Our debt to total market capitalization ratio was 28% as of June 30, 2016, compared to 32% as of June 30, 2015. We continue to maintain a strong interest coverage ratio during the quarter of 4.68 times. We have raised our dividend, each of the 23 years since becoming a public company in May of 1993, and have paid a cash dividend for 92 consecutive quarters.

Our dividend is well covered with an expected FFO payout ratio for 2016 in the mid-50% range. At these levels, we expect to generate more than a $100 million in excess cash flow to cover - over our dividend, which we plan to continue to reinvest in our business by upgrading our properties and funding most of our development needs.

On April 13, 2016, we amended our $250 million unsecured term loan. The size of the facility was increased to $325 million, the maturity date was extended more than two years from February of 2019 to April of 2021, and the LIBOR spread was reduced by 10 basis points from 105 basis points to 95 basis points.

As a result, the next significant maturity on our balance sheet has now been pushed to June of 2020. The $75 million in proceeds, which used to pay down balances under our unsecured lines of credit. Also in April, we entered into interest rate swap agreement that fixed the base LIBOR rate at an average of 1.03% on $175 million in LIBOR denominated debt through January 1 of 2021.

Combined with the existing derivatives in place since October 2013, a recent derivative transaction effectively locked $325 million of our floating-rate debt at an average interest rate of 2.11% through August of 2018. Tanger Outlets Westgate became wholly-owned on the last day of the quarter when we acquired our partner's ownership interest. Serving the vibrant Phoenix market since 2012, the Westgate center is an upscale outlet shopping destination featuring 95 brand name and designer outlet stores. While only ranked 10th in our consolidated portfolio in terms of tenant sales productivity, it ranks third in terms of traffic growth for the first half of 2016.

The Westgate joint venture was an effective collaboration. Our partners contributed the underlying real estate on which our center was built; we contributed our retailer relationships and outlet center expertise. Consummating a privately-negotiated transaction between partners, we pay $40.9 million in cash consideration and assumed the $62 million in place mortgage loan, valuing the property at $159.5 million.

We estimate this value would be equivalent to a market capitalization rate of approximately 6.27% based on our 2016 net operating income forecast, excluding termination rents and straight-line rent adjustments. Keep in mind that a joint-venture partner often cannot sell its ownership interest to a third party without the other partner’s consent. An agreement among existing partners also voiced the transaction complexity that a third party may introduce. We believe that the restrictions on marketability combined with the execution certainty and efficiency can result in a negotiated price among partners that is lower than what a buyer might pay for 100% ownership of a center.

There are many factors other than price that motivate buyers and sellers. Well, this transaction, it was very attractive to our partners that we had the ability to close within 30 days of our initial negotiations. Prior to this transaction, we accounted for Westgate under the equity method of accounting and effective as of the acquisition date, Westgate is consolidated in Tanger’s financial results.

Based on in-place financing, we expect the impact of the Westgate acquisition to be modestly accretive to net income and FFO per share during the second half of 2016. We continue to evaluate our overall capital structure and are considering various long-term financing alternatives with the objective of reducing our floating-rate debt exposure, extending the average term of our outstanding debt, increasing the unused capacity under our lines of credit, and expanding our unencumbered asset pool.

Based upon current market conditions, we believe the Westgate acquisition combined with any potential future long-term refinancing activities, if executed, should be modestly diluted the net income per share and approximately neutral to FFO per share for the second half of 2016. Our conservative mindset has served Tanger well throughout 35 years of economic peaks and valleys. Maintaining a fortress balance sheet and investment grade credit is our way of life. Financial stewardship is a hallmark of Tanger outlets that we do not intend to change.

I will now turn the call back over to Steve.

Steven Tanger

Thanks, Jim. Blended based rental rates increased 20.2% during the first half of 2016, on top of a 24.9% increase during the first half of 2015. Lease renewals during the quarter accounted for approximately 934,000 square feet or about 66% of the space coming up for renewal, and generated an 17.4% average increase in base rental rates.

Re-tenanting activity accounted for an additional 302,000 square feet of lease was executed during the quarter, and generated an average increase in base rental rates of 27.9%. With the lowest average tenant occupancy cost ratio among the high-quality mall REITs at just 9.3% for our consolidated portfolio in 2015, we have been successful at raising rents while maintaining a very profitable distribution channel for our tenant partners.

Over the last several years, we have successfully implemented a leasing strategy to give tenants fewer renewal options and to increase the number of leases with annual rent escalations. As a result of our ability to capture base-rent growth and increased CAM reimbursement throughout the lease term, our rent spreads have narrowed slightly for lease renewals. These embedded base rent and CAM escalations during the term of our leases are key drivers of the same center net operating income growth.

Same center net operating income increased 3.8% during the quarter, on top of a 4.6% increase in the second quarter of 2015. On a year-to-date basis, same center net operating income increased 4.1%, on top of a 4.3% increase in the first half of last year. We have now posted same center NOI growth in 51 consecutive quarters. In addition, total portfolio NOI for the consolidated portfolio increased 6.2% and 6.8% respectively for the second quarter and the first half of 2016.

Lease termination fees, which are not included in same center NOI or portfolio NOI, were approximately $1.5 million and $2.0 million respectively during the second quarter and the first half of 2016, compared to $1.7 million and $2.8 million respectively during the second quarter and first half of 2015.

Price deflation is prevalent in the apparel business today. Our tenant mix is primarily footwear and apparel in the outlet business. We do not have Apple or Tesla stores, nor do we have large department stores. Given this heavily promotional environment, average tenant sales within our consolidated portfolio were $395 per square foot for the trailing 12 months ended June 30, 2016, stable compared to the 12 months ended June 30, 2015, in spite of our comparable traffic being up for the same period.

Although our tourist centers are primarily drive to vacation destinations that are not affected materially by foreign currency exchange rates, we have a few centers that have experienced some negative impact related to strong dollar. Given these various headwinds, we are pleased that tenant sales productivity has been in line with our initial guidance, which assumes stable tenant sales.

You may have noticed that the trailing 12-month average centered sales that we report each quarter in our supplement decreased this quarter for our unconsolidated portfolio to $398 per square foot from $416 per square foot. Changes in the productivity of any given center or changes in the mix of centers are more impactful to our unconsolidated portfolio average, given its total square footage of 2.8 million square feet compared to the size of our consolidated portfolio at 11.9 million square feet. Primary drivers of this change are related to a new center entering the unconsolidated portfolio in a more productive, established center leaving the unconsolidated portfolio.

In our first quarter 2016 supplement, Westgate was included in the unconsolidated portfolio tenant sales average and its productivity was slightly below the unconsolidated portfolio average. Beginning in the second quarter, Westgate moved to the consolidated portfolio due to our acquisition or partnership centers or partners ownership interest.

In our second quarter supplement, our Savanna center which opened in April of 2015 was included in the unconsolidated portfolio tenant sales average. When new centers initially enter the unconsolidated sales pool, it is not uncommon for them to not be as productive as the existing centers. Prior to Savanna, each of the most recent new development that enter the tenant sales average for the unconsolidated portfolio were Charlotte, North Carolina, in the first quarter of last year, which had a slight negative impact that quarter, and each of the following two quarters, the unconsolidated portfolio tenant sales average increased as did the amount of the Charlotte space open for the entire trailing-12 months period, and therefore, included in our unconsolidated portfolio tenant sales average.

Our consolidated portfolio was 96.9% occupied as of June 30, 2016, up 10 basis points from 96.8% on June 30, 2015, and up 30 basis points from 96.6% at March 30, 2016. We remain optimistic about the future of our business, our reputation of retailers of having a quality portfolio of outlet centers, and a refined skillset for developing, leasing, operating, and marketing them has afforded us a robust external growth pipeline.

In 2016, we expect to expand our footprint by approximately 5% by opening two new outlet centers. First of these two centers opened, 95% leased in Columbus, Ohio, market on June 24. As a result of overwhelming shopper response, standstill traffic stretched several miles from the center’s freeway off-ramp on Interstate 71 during much of the opening weekend.

355,000-foot center features over 90 brand name and designer outlet stores, in addition, our construction and leasing efforts are on target for the planned November opening of our new 352,000 square foot center in Daytona Beach, Florida. Currently, we’ve planned to commence construction in the Fort Worth, Texas, market in mid-September, targeting a holiday 2017 Grand Opening.

Last week, we signed a lease with a magnet tenant unique to the market, bringing our retailer commitments to 59%. This retailer’s commitment has generated significant interest from other retailers, we currently expect to have substantially surpassed our 60% pre-leasing threshold before we break ground. The center will be located with the champion’s circle mixed-use development adjacent to the Texas Motor Speedway.

Our second 2017 project will be a major expansion of our center in Lancaster, Pennsylvania, which will increase the size of the center by approximately 123,000 square feet. Last week, we secured some key entitlement and are already mobilizing on the site. We plan to break ground soon and are targeting a third quarter 2017 opening for the expansion. In addition, work is ongoing on a number of predevelopment stage sites in our shadow pipeline, which we plan to announced upon successful completion of our underwriting process.

We are increasing our 2016 diluted net income per share guidance range to $1.55 to $1.60 per share from $1.5 to $1.11 per share. This increase is primarily due to the large gain recognized on the Westgate transaction during the second quarter. Driven primarily by better-than-expected results during the quarter, we are raising the midpoint of our FFO and AFFO guidance by $0.015 per share. We currently expect 2016 FFO to be between $2.31 and $2.36 per share, and AFFO to be between $2.32 and $2.37 per share.

We are leaving our guidance for same center net operating income growth unchanged, with an expected range between 3.0% to 3.5%, as our forecast includes the impact of remerchandising activity planned in a number of our centers during the balance of the year. Our forecast also includes projected downtime associated with the bankruptcies of Aeropostale and PacSun, and with Jos. A Banks announced store closings as we work to fill any space recapture with higher volume more sought-after brands. Our total consolidated portfolio exposure for these three tenants is approximately 210,000 square feet or about 1.8% of our total consolidated square footage.

While we expect there more clarity on the outcome of the space later in the third quarter based on what we know today, we’re projecting that we will recapture approximately 58,000 square feet, which includes 42,000 square feet during the third quarter and 16,000 square feet for the first quarter of 2017. The total space we currently expect recapture constitutes only about 1.5% or 1% of our consolidated portfolio, those in terms of square footage and annual base rental revenue. Majority of the 42,000 square feet we expect to recapture this quarter is related to schedule closure of all 33,000 square feet of Jos. A Bank stores in our consolidated portfolio at the end of this month.

For the 12 months ended June 30, the average tenant sales per square foot generated by these nine stores was less than half the average tenant sales per square foot for our consolidated portfolio. Lease termination agreements have been executed and the tenant has paid a significant termination rents for each of these stores. Our estimates are based on average quarterly general and administrative expense of approximately $11.4 million to $11.9 million, an average projected management, leasing, and other service income of approximately $1 million per quarter.

Our forecast assumes tenant sales remain stable and does not include the impact of any additional bankruptcies or storewide closures, the sale without parcels, additional properties or joint venture interests or the acquisition of any properties or any additional partnered joint-venture interest. We remain optimistic about the growth of our company as shoppers continue to seek Tanger's unique shopping experience and a wide array of brand-name merchandise direct from the 80 to 90 manufacturers that operate stores in each Tanger outlet center.

The tenant community continues to indicate its desire to expand into new markets within the profitable outlet channel and with Tanger is a preferred partner. The resiliency of the outlet channel has been proven over the past 35 years through many economic cycles. We have more than 3,100 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 6.1% of our base and percentage rental revenues or 7.8% of our gross leasable area. In addition, approximately 90% of our total revenues are expected to be derived from contractual base rents and tenant expense reimbursements.

Now, I’d be happy to answer any of your questions. Operator, we’re happy to take any questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Todd Thomas from KeyBanc Capital Markets. Your line is open.

Todd Thomas

Yeah, hi, thanks. Good morning. This first question is just regarding development, it seems like the pace of new starts is slowing as we think about 17 and maybe 18 and beyond, is it getting harder to source deals or would you say that that's not a fair characterization of the current environment?

Steven Tanger

I think that’s not a fair characterization of the current environment. We have guided the streak continuously. We will produce and develop one to two new centers in a year. We are on pace for that, and we’ll deliver two this year and just stay one to two next year, and we have no reason to doubt that we’ll continue that pace into 2018.

Todd Thomas

As you think about new starts, you’ve been able to achieve double-digit stabilize yields on the domestic developments, and I’m just curious with required returns coming down more broadly and your cost of capital now much lower than it's been in quite some time, are you lowering your return hurdles at all for new deals?

Steven Tanger

Fortunately, Todd, the tenant community still finds the outlet distribution channel highly profitable. We've been successful in working with our tenants to get new developments in the range of 9% to 11% cost of occupancy for our tenants, and so far that seems to be stable. We will update the analyst community and our investors as we announce the 2018 transactions, but right now we don't see anything to change that guidance.

Todd Thomas

Okay. And then, just regarding the PacSun, Aero and Jos. A Bank space that you talked about, you mentioned 58,000 square feet of the 210,000 of total exposure and what's happening there, but what’s the expectation around the remainder of that space?

Steven Tanger

So far we’re negotiating with each of the tenant, that’s the two that are in bankruptcy, and this has what we are led to believe in our current negotiations that we’ll only get back 58,000 feet, it hasn’t been approved by the bankruptcy court yet, but as of today that’s what we’re led to believe. The balance of this space will stay open with the existing tenant.

Todd Thomas

Okay, thank you.

Steven Tanger

Thank you.

Operator

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

Caitlin Burrows

Hi, good morning. My question was on same store NOI, your first half of the year’s same store NOI growth was above 4%, but like you mentioned the full-year guidance is for 3.0% to 3.5%, so to make us expect a slowdown in the second half and a similar thing did happen in 2014 and ‘15, so just wondering what drives that slowdown in the second half and it seems like there should be some sort of easy comp that then lapse itself, sorry, and then also combined with a holiday season in the fourth quarter?

Steven Tanger

Good morning, Caitlin. We have received and disclosed a large termination fee from the tenants in this quarter, and we’ll probably get more termination fee in the third quarter, that pays upfront for the space that’s vacated overtime. So there's two buckets, we get the cash and termination fee now, but we don't get the monthly rent which affects the same center NOI in the next several months into a release of the space. So, that's why we're guiding, still remains stable 3.0% to 3.5% and we’ll update that in the next 90 days as we have more clarity on our ability to fill the space with more productive, more exciting tenants.

Caitlin Burrows

Okay, got it. So it’s related to more like one off, things that happened to have occurred as opposed to something else that's part of a regular schedule?

Steven Tanger

Yeah. I mean, Caitlin, you look last year, we had similar termination fees and similar same center NOI in the third and fourth quarter, consistent with what's happened in the past. This gives us a 97% occupied, this gives us the opportunity to re-merchandise some of our centers by adding some larger or some more exciting tenants where we didn't have space before to accommodate them.

Caitlin Burrows

Got it. And then, just when you think about - over the long term, do you think that 3.0% to 3.5% same store NOI growth could be sustainable over like a five or 10 year period?

Steven Tanger

No. I wish my crystal ball was that, Caitlin, I can’t look out that far unfortunately. If you look back 10 years, we've average to more than 3.5% NOI growth over the past 10 years. So past is not an indicator of the future, but we’re comfortable guiding you to the end of this year and we’ll give guidance as we always do for 2017 at the appropriate time.

Caitlin Burrows

Okay. Thank you.

Operator

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

Jeremy Metz

Hey, good morning. I jumped on a little late, so apologize if I missed this, but I just want to quickly ask on the Western acquisition, this is a top 10 asset for Tanger, so just wondering why your partner would want to exit that and did you guys have a role for there?

Steven Tanger

Good morning, Jeremy. In our presentation, we did go into that in some detail. Our partner was a very fine private equity fund. Our partnership agreement, as most partnership agreements, restricts the transfer of a partner's interest without the other’s consent; also we were able to accommodate our partner from start of negotiation to closing in 30 days, which was important to them. So, this transaction work for both of us, and I think if you check with our partner, they’re pleased and we’re pleased.

Jeremy Metz

Okay. And then, the 6.3% cap rate, just how should we think about that, is that a fair view of market for outlets doing [indiscernible] square foot or the cap rate reflect a little more of that ability to close quickly and the minority interest, was that for sale here?

Steven Tanger

Well, I think the latter is probably true. We bought a minority interest which of course is not marketable. We bought an interest from our partner, which would require our consent to market and we were able to close fast and our partner had another use for the money being a private equity fund. This is consistent with their normal business prep, so I think we accomplished what they wanted in closing quickly and it accomplish for us what we wanted to gain a 100% control. I don’t think this is indicative of anything, it’s a one-off transaction that we were pleased with.

Jeremy Metz

Alright, thanks, Steve.

Operator

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

Tayo Okusanya

Hi, good morning. Congrats on a very fine quarter. Two questions from me. The first one is just in regards to demand for space in general, could you talk about any new concepts out there that maybe looking for space in the outlets business so that a spin-off brand or what have you that - maybe the street is not aware of that could drive meaningful demand going forward?

Steven Tanger

Good morning, Tayo, and thank you for your nice comments about our outstanding quarter. We appreciate it. The demand for space continues in the outlet world. We’re doing very well, 97% occupied, I am sure our good friends of the Simon Property Group have had the same experience. There's all kinds of new concepts and new tenants looking to come in, such as Tory Burch, Lululemon, Vineyard Vines, these are very high profile, very high volume tenants that we’re excited to do business with and excited to welcome them into the outlet environment.

So, I think you should be aware that the top 10 tenants in our portfolio 10 years ago no longer exist. We couldn’t get a center built without Liz Claiborne, Anne Klein, Mikasa, and some of those concepts. So, part of our skillset, 35 years is to identify new tenants and start relationships with them, introduce them to the outlet concept and roll it out.

Tayo Okusanya

Alright. Okay. Any of the discounts, any of the department store discount concept increasing and looking for space and is Primark also possibly look at anything on the outlet side?

Steven Tanger

We are not in conversations with Primark. We have a very few of the department store off-price concepts. We have several sacks off desk. We have one Neiman Marcus and that's it. I don't know what their plans are, or the site location criteria they currently have.

Tayo Okusanya

Got it, that’s helpful. And then, last one from me, I appreciate you indulging me, one to two outlets a year being built I appreciate that color, could you talk about your shadow pipeline kind of anything in that space is kind of getting harder and colder in regards to potentially starting a development?

Steven Tanger

It's always been the same temperature, Tayo. We are looking at lots of sites around the country, we’re talking to our key tenants about lots of different sites, but we want to be sure that it’s an orderly expansion of our portfolio, it would make sense to announce five or six sites and then get them still over a period of time. So, this is an orderly rollout, which seems to work for us for 35 years, and we see no reason to change it.

Tayo Okusanya

Sounds good. Thank you.

Operator

Your next question comes from the line of Carol Kemple from Hilliard. Your line is open.

Carol Kemple

Good morning.

Steven Tanger

Hi, Carol.

Carol Kemple

As far as your Lancaster expansion, how did you all decide to expand that center and what additional centers or how many centers do you have additional looking where you could do a similar project?

Steven Tanger

We’ve been working on buying additional land attached to our Lancaster center, which is one of our best for several years now. There were some permitting issues, some access issues, but we were able to get them solved. As such, this 123,000 foot expansion will allow us to attract some more very high profile, high volume tenants to cement our Lancaster property as they go to property in the Lancaster market.

With regard to expansions in other centers, some of the newer centers we have, we can expand based on tenant demand. Most of the legacy portfolio we have has been so successful, it’s already been and expanded and totally built out.

Carol Kemple

So, with an expansion, do you have a pre-leasing threshold before you break ground since you already have retailers there where you break ground before you hit 50% or 60% threshold?

Steven Tanger

We maintain the same disciplines we’ve had and we certainly are over the 60% commitments for expansion in Lancaster. We’re not going to change our underwriting standards.

Carol Kemple

Okay. Thank you very much.

Operator

Your next question comes from James Bambrick from RBC Capital Markets. Your line is open.

Rich Moore

Steve, hi, guys, it’s Rich, I’m here with Jimmy. And Steve, I’ve got to say I enjoyed the Columbus and you did a great job on that, you and Simon both. So, my question to you is with all the moving parts going on, what are you thinking about year-end ‘16 occupancy, I mean what do you think the target is at the end of the year?

Steven Tanger

Thanks, Rich, for your comments, we were delighted to have you and your wife and Jim attend the Grand Opening, and experience the excitement of a Grand Opening, and the way consumers still love the outlet concept. It was amazing that we backed up Interstate 71 for six miles getting into the property. With regard to occupancy, we’re currently effectively 97% occupied as of the end of second quarter. I think and this is speculation but based on every indication we have assuming no further bankruptcies, we still think that we’ll be able to fill some of the vacant space so that will be between 97.0% and 97.5% by year-end, which will mark the 35th consecutive year, we’ve ended the year at least 95% occupied.

Rich Moore

Okay, good, got you. And then, as you think about 2017 leasing, I know you guys are, I’m sure, well underway with 2017 leasing, how is that going versus what it normally does this time of year and I guess from a demand standpoint by retailers, and what do you think about ‘17?

Steven Tanger

We are substantially ahead of our renewals to work 2017 versus this time last year renewals for 2016. The demand from the tenants remains strong. We remain a very profitable distribution channel for our tenants. And right now, we see no indication that that will change.

Rich Moore

Okay, good, thank you.

Operator

[Operator Instructions] Your next question comes from the line of D. J. Busch from Green Street Advisors. Your line is open.

D. J. Busch

Thank you. Steve, I just have a follow-up on the Lancaster expansion, understanding that there is a competing center down the road, certainly not at the same quality as the Tanger Outlet, but has some of the key tenants that maybe your centers currently missing, but what’s the status of that outlet and is the opportunity here to bring some of those tenants that may have been missing in the Tanger spot over?

Steven Tanger

Hi, DJ, how are you doing? We appreciate you’re taking such a great interest in the outlet distribution channel by visiting so many of our sites and the other sites, and getting educated, it means a lot to us. You have to ask the owner of the other site at Lancaster what their future is, I certainly can't speak to that, but we are excited and we will announce shortly the names of the major magnet tenants that will be occupying our expansion, and I think you'll find some of the names that are currently in the other center coming over to our property with brand-new larger stores.

D. J. Busch

Okay, fair enough. And then, I guess just my second question is, as you think about the shadow pipeline in new ground-up opportunities that it seems like most recently it's been focused on the US, can you talk about potential opportunities if any in your Canadian partnership, and how you’re thinking about that part of the portfolio at this time?

Steven Tanger

We are very pleased with our partnership with our partnership with RioCan, they’re superb partners and great operators. We have four properties there, and they - the ones in Ottawa, which was the first ground-up property, are comping very well, and our major expansion in large center in Cookstown are doing very well. As we mentioned, we want to get through a couple of years to just assess the market and see what the total expectation is and the size of the market. So, we’re constantly reviewing that with our 50% partner in Canada, and right now, we’ve not announced any new sites but we are looking at several.

D. J. Busch

Great, thank you so much.

Operator

Your next question comes from the line of Nikky Robelli from JP Morgan. Your line is open.

Mike Muller

I got on the call late. So, I apologize if I had missed this and a few addressed this already, I can pull up from the transcript, but I was wondering can you give a little color on the moderation in leasing spreads and how much of that maybe just coming from bumping up against higher rents as opposed the changes in lease terms and bumps or just term, et cetera?

Steven Tanger

Mike, we did address that in pretty great detail in the prepared remarks. I would refer you to those.

Mike Muller

Okay, that will be fine. Thanks.

Operator

There are no further questions at this time, I turn the call back over to management.

Steven Tanger

Thank you all for participating in the call today, and your interest in Tanger Outlet Centers. All of us are prepared at any time to answer your questions and provide more color, and I wish all of you a great day and good bye.

Operator

This concludes today’s conference call, you may now disconnect.

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