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Tanger Outlet Centers (NYSE:SKT)

Q1 2008 Earnings Call

May 1, 2008 10:00 am ET

Executives

Stanley K. Tanger- Chairman, CEO, and Founder

Steven B. Tanger- President and COO

Frank Marschisello, Jr. - Executive VP and CFO

Analysts

Christy McElroy- Banc of America Securities

Michael Bilerman- Citigroup

Jonathan Habermann- Goldman Sachs

Jim Sullivan- Green Street Advisors

Steve Sakwa- Merril Lynch

David M. Fick- Stifel, Nicolaus & Company, Inc.

Jeffrey Spector- UBS

Stanley Tanger

Frank will take you through our financial results, and Steve will follow with our operating performance and future developments. Then we’ll have time for questions. I would like to turn the call over to Frank Marchisello please.

Frank Marchisello

Our total funds from operations available to common shareholders for the first quarter increased 7%, to $22.8 million, compared to $21.3 million last year. FFO per share also increased 7% to $.61 per share as compared to $.57 per share last year. Our year-over-year increase in FFO is a direct result of our ability to drive rental rates on renewals and re-lease space, as well as incremental revenues from our four expansion projects which opened during the fourth quarter of 2007.

Our FFO payout ratio for the quarter that ended March 2008 was 59%, compared to 60% last year, and our FAD payout ratio was 82% as compared to 97% last year. Including the impact of the recently announced dividend increase, we currently believe that we can maintain an FFO payout ratio in the [inaudible] % range and an FAD ratio in the 90% in 2008. We will continue to invest additional dollars in capital improvements during 2008, including a $17 million reconfiguration project currently underway in our center located on Highway 501 in Myrtle Beach, SC. Excluding this reconfiguration project, our FAD payout ratio for 2008 is expected to be in the mid-70% range. In addition we will continue to invest in our ongoing efforts to increase occupancy at selected centers, and attract new high-volume tenants to the outlet industry. We are committed to achieving high quality, long-term earnings by consistently investing in our business. Net income available to common shareholders for the first quarter of 2007 was $5.6 million or $.18 per share, as compared to net income of $1.9 million, or $06 per share for the first quarter of 2007.

On a consolidate basis, our total market capitalization as of March 31st, 2008 was approximately $2.2 billion, and our debt-to-total market capitalization at the end of the first quarter was approximately 32.4% We also maintained a strong interest covered ratio of 3.43 times for the first quarter of 2008.

We have now successfully increased our unsecured lines of credit capacity by over 62% from $200 million to $325 million. On February 15th, 2008, we repaid our $100 million of unsecured

senior notes which had a coupon rate of 9 1/8%. We repaid them with amounts available under our unsecured lines of credit which bear interest over the rate of 75 basis points over the thirty day LIBOR interest rate.

On July 10th, 2008, our only remaining mortgage loan which has a principal balance of $171.7 million, and bears interest at a rate of 6.59% will become payable at our option. We are currently analyzing a number of refinancing options with respect to this mortgage. We should be in a position to announce our intentions sometime prior to the end of the second quarter. A strong balance sheet is a strategic advantage, and will protect our franchise, especially in turbulent market conditions like these. No matter what happens in the economy, we want to have access to capital, liquidity, and the overall strength to continue to invest wisely in our business.

I will now turn the call over to Steven Tanger.

Steven Tanger

The outlet industry continues to be a profitable channel of distribution for our tenants, and we are excited to be a major player in a growing industry. Continuing to build off the positive trends of the last couple of years we had an outstanding first quarter in 2008. Once again, our shareholders have been rewarded with a 5.6% increase in our common dividend from $1.44 per share to $1.52 per share, which was announced on April 10th of this year. This marks the 15th consecutive year we have increased our dividend since becoming a public company in May of 1993.

In the past five years we have raised our dividend almost 24%. During that time, our shareholders have received a total return on their investment in Tanger of approximately 245%. From an operational standpoint we had an exceptional first quarter. I am pleased to report that the robust rent spreads we achieved the last few years have continued into 2008. As of March 31st, we have executed or in process of approximately 67% of the square feet associated with leases that come up for renewals throughout our wholly owned portfolio this year. We have achieved an average increase of executed renewals of 17.9% on a straight-line basis compared to 13.3% last year. Over 279,000 square feet was re-tenanted in the first quarter of 2008, producing an increase in average base rent on a straight-line basis of 41.7% over the rent that was being paid by the previous tenant prior to vacating their space, compared to an increase of 37.4% last year. Leases entered into 10-15 years ago, are coming to the end of their term.

The fundamental metrics of our business remain strong. The successful re-merchandising strategy implemented in the past 5-6 years has dramatically increased sales, and now, together with our relatively low cost of occupancy, allows us the opportunity to mark our assets to current market with substantially higher rents. The scarcity of this type of quality asset gives us the opportunity to add value for our stakeholders and our tenants. Our leasing momentum remains strong with tenants on waiting lists for several of our properties.

Same center NOI growth during the quarter was 5.7%, compared to 3% during the first quarter of 2007. The occupancy rate for our wholly owned stabilized properties was 95.2% at the end of the first quarter of 2008, up from 95.1% last year. This is exceptional given the fact that we have recaptured 38 stores that were occupied by 6 tenants in the first quarter, representing a gross leasable area of approximately 236,000 square feet, or 2.8% of our wholly owned portfolio. Sales for these tenants averaged only $167 per square foot, with an average base run of about $16 per square foot. We believe this space can be re-leased to better tenants at much higher rental rates. Approximately 26% of this space has already been re-leased at base rents 60% higher than the $16 average rent being paid by the previous tenant. It is our goal to have most of the remaining space re-leased by the end of this year.

There have been many articles written about the pending retail bankruptcies and store closures. Because the majority of our tenants are brand-name retailers and manufacturers, many of which are listed on public stock exchanges, we do not have the bankruptcy risks that other retail formats may have. In fact, we have only had one tenant, The Disney Store, file for bankruptcy since the first of the year. As reported in the Wall Street Journal yesterday many of the companies announcing store closures are actually closing their full-price stores and leaving their outlet stores in place, or opening new outlets. In fact, the majority of our tenants have in their 2008 plan to increase the number of outlet stores in their portfolio. Outlet stores remain a very profitable distribution for our tenants. Outlet centers represent an attractive, defensive property type and growth opportunity during an economic slow down.

While not immune from the effects of a slowing economy or possible recession, Tanger enters this environment with high occupancy, and many long-term leases ending with below market rents, and a strong balance sheet. We continue to be comfortable with our comp center NOI growth assumption of 4% this year. With respect to tenant productivity, reported tenant comparable sales within our wholly owned portfolio increased 3.5% for the rolling three months ended March 2008 compared to March 2007 with sales for the rolling 12 months ending March 31st for $343 per square foot.

As most of you know the majority of our centers are located in areas that attract domestic tourists. We have not benefitted materially from the extraordinary sales volume generated by international tourists.

Turning to our development pipeline, construction at our site in Washington County, south of Pittsburgh, continued during the first quarter of this year. We have signed leases for approximately 74% of the 370,000 square-foot first phase, with an additional 8% under negotiation our out for signature. We are still targeting a second quarter 2008 turnover to tenants, with a grand opening planned around Labor Day. When a center celebrates its grand opening we expect to have about 90% of its space leased. Bass Pro Shops has closed on the acquisition of two parcels of their development site adjacent to our center, and appear to be moving forward with the development of their property.

As for our new development site, on Deer Park on Long Island, NY site work and construction continues on an initial phase that will contain approximately 682,000 square feet. Currently, we have 53 signed leases for approximately 58% of the first phase with an additional 23 leases, or 17% of the space under negotiation or out for signature.

We are committed to the environment, and are pleased to report that the Tanger Outlet Center in Deer Park will be the first LEED certified shopping center on Long Island. In developing this property we adhered to the most stringent guidelines. We are currently planning a second quarter 2008 turnover to tenants with a grand opening planned in October of this year.

We have signed options for new development sites in Melvin, NC; Fort Saint Lucie, FL; and Irving, TX. Initial reactions to these sites from our Magnet tenant has been positive, however we are still in the early due-diligence study periods on all these sites. We also have several target markets in our shadow pipeline, and plan to announce one additional new site this year.

Our goal is to deliver at least two new centers in each of the next three to five years. We have been managing the risks associated with development for the past twenty seven years. It takes about 2-3 years to get all the permits, and 50% of the leases signed for us to buy the property and start construction. Though mindful of the current economic environment, we are long-term optimists about the future of the U.S. economy and our company. Our solid balance sheet should allow us to fund our healthy development pipeline and drive good strong growth in our business for years to come.

Based on our internal budgeting process, our view of current market conditions and the strength and stability of our core portfolio, we are maintaining our estimated diluted net income per share guidance for 2008 of $93- $1.01 per share, and our FFO guidance for 2008 of $2.60-$2.68 per share. Our guidance range reflects the uncertainty that continues to exist in the credit markets as well as other variables such as the expected lead time necessary to re-lease the space vacated by certain tenants during January of this year, our projected opening dates for our two new centers, as well as the overall sales productivity of our tenants. That said, the mid-point of this range represents an increase in FFO over the prior year of approximately 6.5%. We plan to continue to thoughtfully use our resources, and to maintain a conservative financial position. Our solid balance sheet allows us to fund our healthy development pipeline, and to grow accretively. We are very excited about the execution of our strategy by our team to maximize revenue from our assets in 2008. We have not only worked hard to instill management discipline, but we have also spent considerable time and resources developing a strong foundation for long-term growth.

There is no substitute for good judgment and strong oversight. With that, we would be happy to answer any questions you may have.

Question-and-Answer Session

Operator instructions

The first question comes from the line of Michael Bilerman with Citi.

Michael Bilerman- Citi

The first question I had for you, it looks like the total pre-leasing including under contract and out-for- signature in Pittsburgh dropped from 4Q. Can you give us details on who fell out and why?

Steven Tanger

I don’t think your information is accurate. Frank is just checking from the fourth quarter We had additional signed leases and additional out-for-signature. I don’t think you’re correct.

Michael Bilerman- Citi

The options you have on the Irving land, could you give some more color on those options? How easy would it be for you to back out, and also any concerns about competing centers in the area?

Steven Tanger

The option is merely an option to buy the land, subject to our due-diligence. We have the ability, should we not be satisfied with our due diligence, to cancel the option and not develop the site. There are competing sites, as there always are, and that’s part of the development process that we have dealt with for the past 27 years.

Michael Bilerman

The comp sales were up on a strong 3.5%. What regions were the major drivers of that?

Steven Tanger

We are seeing sales basically in the tourist areas in our sites in Texas and New England have done very well. Those are the primary drivers. Also we have a site in California which is doing very well.

Michael Bilerman

My final question is, it looks like your percentage runs are a little low. Any particular reason for that?

Frank Marchisello

On percentage rents they were less than last year mainly because when we renew leases, and we have gotten substantial increases on base rent on renewals, often times the break point for percentage rent also goes up, so what we’ve done is swapped a contractual fixed rent amount for a variable percentage rent amount. We are happy to do that, it takes some of the risk out. Ultimately the sales of the tenant whose break point increase will go up and they will eventually be in percentage rents again. It really is just a swap in the short term of a variable rate rent to a fixed rate rent.

Michael Bilerman

Was any of that related to the tenants that closed? Were any of them on percentage rents only?

Frank Marchisello

For the tenants that closed, I don’t believe they would have been on percentage rents given the average of their sales.

Steven Tanger

Their sales only averaged $167 per square foot.

Operator

The next call is from Jonathan Habermann from Goldman Sachs.

Jan Hatzius-Goldman Sachs

On the [inaudible] stores that you recaptured in the first quarter, just looking to get some color on the new rates you are seeing, and a sense of what retailers are thinking of in terms of expansion plans, given a modest growth in retail sales in the quarter?

Steven Tanger

As we announced during our prepared remarks, we have released 26% of the space at an average increase of about 60% over the prior tenants rent. I think that is the answer to your first question. The second question I believe we also answered, we are not seeing any slow down yet, and don’t have any indication that one is coming. In the velocity of new tenants coming in to the outlet industry and the existing tenants opening stores. If you read the very positive article yesterday in the Wall Street Journal about the outlet distribution channel, you will have seen that some of the stores mentioned are now opening outlet stores for the first time. And other stores mentioned are closing full-price stores and continuing to open outlet stores. The outlets continue to be a very profitable, or for some companies, the most profitable channel of distribution.

Jan Hatzius- Goldman Sachs

As a follow-up on your leasing, and how progress is going with your Pittsburgh and Deer Park projects, could you provide some color on that? And also whether you are still targeting a September/ October store opening?

Steven Tanger

In Pittsburgh we did mention that we are still anticipating second quarter turnover, and we have a grand opening planned in October. That has not changed. I don’t know what you mean by color on Pittsburgh. We’ve given you the number of leases and percentages that are signed and out-for-signature.

Operator

Your next question is from Nathan Isbee with Stifel Nicolaus.

Nathan Isbee- Stifel Nicolaus & Company, Inc.

Following up on Deer Park. It seems that the total leasing and leases-out-for-signature remains firm at about 75%. Can you talk a little bit about what might be slower there than expected, if it is, and what types of tenants you are envisioning for the remaining 25% that is not signed.

Steven Tanger

We have a total of 76 leases either signed or out-for-signature in Deer Park, totaling in excess of 500,000 square feet. As you know that is significantly larger than the average size of a first phase of a Tanger center. We are in various stages of negotiating with various tenants to go in our designer wing. Unfortunately, there is an analyst report out there with information that was not discussed with us prior to the report,and that may not be correct. We are negotiation with some unique tenants that will provide unique shopping experiences for this property, and we are also in discussions with several upscale designer brands that usually come into a property that usually sign leases at the very end of the process, right before they are ready to open.

Nathan Isbee- Stifel Nicolaus & Company, Inc.

Can you set the record straight? Where do you expect that wing to open? In terms of what occupancy?

Steven Tanger

Right now the wing has about 117,000 square feet, which represents 12% of the entire shopping center. Of that approximately 36,000 square feet is signed. That leaves about 81,000 square feet or about 11% of the shopping center that is to be leased. We expect that a large percentage of that will be leased by the time we open in October.

Nathan Isbee- Stifel Nicolaus & Company, Inc.

Are you getting pushback from tenants given the proximity to Riverside and Woodbury?

Steven Tanger

We are not getting pushback. It is Riverhead, not Riverside. We are not getting pushback from tenants that are in Riverhead going into Deer Park, and there will be numerous tenants in both properties. They are two separate markets. Long Island is one of the largest markets and one of the highest demographic profiles in the country, and certainly can support two outlet centers. This is 35 miles from River Head and 35 miles from Manhattan, totally different market places. And as a matter of fact people are very excited to go into both properties.

Nathan Isbee- Stifel Nicolaus & company, Inc.

And how about Woodbury? Is it safe to say that you will see tenants in both properties?

Steven Tanger

Absolutely. Woodbury Commons is one of the most productive outlet centers in the world. It is located about 55-60 miles north of Manhattan. Deer Park is located about 35 miles due east of Manhattan. So if one were to drive it is about a 90 mile drive, but I’m sure you know being familiar with New York that 90 miles can take anywhere from 2-4 hours, depending on traffic. So they are two separate markets and Woodbury will continue to do well, and Deer Park will do well, and River Head will do well.

Nathan Isbee- Stifel Nicolaus & Company, Inc.

One follow- up question. What are you assuming for same store NOI in your guidance?

Steven Tanger

Four percent.

Nathan Isbee- Stifel Nicolaus & Company, Inc.

So, based on 5.7% in the first quarter, that would seem to imply you are expecting not a decline, but a moderation in the growth in the coming quarters. What would be causing that, given that as you lease upward of 236,000 square feet.?

Steven Tanger

There are a lot of macro environmental uncertainties outside of our control. Most of which you are familiar with. We remain comfortable with 4% after one quarter of productivity. If our visibility towards the end of the year changes, in the next couple of quarters, of course we will adjust our guidance.

Operator

We have a follow-up question from Michael Bilerman with Citi

Michael Bilerman- Citi

Have you seen any of the bigger mainstream luxury retailers like [inaudible] looking to open in your existing centers rather than just your new developments?

Steven Tanger

We are talking with the retailers you mentioned about both going to our existing properties and to our new properties.

Operator

At this time there are no further questions.

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