Tanger Reports Year-End Results For 2016

Tanger Factory Outlet Centers, Inc. (NYSE: SKT) recently stated financial and operating results for the three months and year ended December 31, 2016 and offered initial earnings guidance for 2017.

For the year ended December 31, 2016, net income available to common shareholders was positively influenced by gains totaling $101.8 million, or $1.07 per share, related to the sale of an asset and the acquisition of interests in formerly held joint ventures. Net income available to common shareholders for the three months and year ended December 31, 2015 were positively influenced by gains totaling $86.5 million, or $0.91 per share, and $120.4 million, or $1.27 per share, respectively, related to the sale of assets and interests in an unmerged joint venture.

Net income available to common shareholders for the three months ended December 31, 2016 was $0.25 per share, or $23.8 million, contrast to $1.13 per share, or $106.9 million, for the three months ended December 31, 2015. Net income available to common shareholders for the year ended December 31, 2016 was $2.01 per share, or $191.8 million, contrast to $2.20 per share, or $208.8 million, for the year ended December 31, 2015.

Adjusted funds from operations (“AFFO”) available to common shareholders for the three months ended December 31, 2016 raised 5.2% to $0.61 per share, or $60.9 million, from $0.58 per share, or $58.1 million, for the three months ended December 31, 2015. For the year ended December 31, 2016, AFFO available to common shareholders raised 6.8% to $2.37 per share, or $238.4 million, from $2.22 per share, or $221.4 million, for the year ended December 31, 2015. Funds from operations (“FFO”) and AFFO, which do not include the gains that positively influenced net income, are widely accepted supplemental non-GAAP financial measures used in the real estate industry to measure and compare the operating performance of real estate companies. Complete reconciliations containing adjustments from GAAP net income to FFO and to AFFO are included in this release. Net income, FFO and AFFO per share are on a diluted basis.

“During 2016 we continued to deliver strong internal growth, with same center net operating income up 3.3% for the year, extending our record to 53 successive quarters of merged portfolio same center NOI growth. Our merged portfolio was 97.7% occupied at year-end despite having recaptured 262,000 square feet of space since the starting of 2015. External growth was achieved by opening two new Tanger Outlet Centers during 2016 and commencing construction of another new outlet center that will open in time for the 2017 holiday shopping season. We are happy with these achievements given the challenging retail environment,” commented Steven B. Tanger, President & Chief Executive Officer. “We also strengthened our fortress balance sheet during 2016 by converting $525 million of debt from floating to fixed rates. In addition, we recycled $109 million in asset sales proceeds to repay floating rate debt.” he added.

2016 Highlights

  • Same Center NOI for the merged portfolio raised 3.3% during 2016 and 2.7% during the fourth quarter, contrast to 3.5% and 2.1%, respectively for the same periods of 2015
  • Blended average base rental rates raised 20.2% on space renewed and released throughout the merged portfolio, contrast to 22.4% for 2015
  • Merged portfolio occupancy rate was 97.7% on December 31, 2016, contrast to 97.5% on December 31, 2015 and 97.4% on September 30, 2016
  • Apart From eight centers negatively influenced by severe weather events during the third and fourth quarters, average tenant sales were $394 per square foot for the twelve months ended December 31, 2016, and on a same center basis were stable contrast to the twelve months ended December 31, 2015
  • Average tenant sales for the merged portfolio counting these properties were $387 per square foot for the twelve months ended December 31, 2016, and on a same center basis, reduced 80 basis points contrast to the twelve months ended December 31, 2015
  • Total enterprise value was $5.3 billion as of December 31, 2016, contrast to $4.9 billion at December 31, 2015
  • Debt-to-total market capitalization ratio was 32% as of December 31, 2016 and December 31, 2015
  • Interest coverage ratio was 4.40 times for 2016, contrast to 4.58 times for 2015
  • Raised regular quarterly common share cash dividend in April by 14% on an annualized basis to $1.30 per share, marking the 23rd successive year of raised dividends
  • Opened two new Tanger Outlet Centers
  • Begind two construction projects expected to be accomplished in 2017, counting a new outlet center and a major expansion of an existing outlet center
  • Raised ownership interest in three key assets to 100%
  • Sold one small, non-core outlet center
  • Unencumbered three outlet centers by repaying floating rate mortgage loans totaling $310 million
  • Expanded the unsecured term loan to $325 million from $250 million, extended the maturity to April 2021, and reduced the interest rate spread by 10 basis points
  • Reached interest rate swap agreements that fix the base LIBOR rate at an average of 1.03% on $175 million in LIBOR denominated debt through January 1, 2021
  • Accomplished two offerings totaling $350 million of 3.125% unsecured senior notes due September 2026, with a blended yield of 3.193% netting proceeds of about $344.5 million

Core Portfolio Drives Operating Results

During 2016, Tanger executed 399 leases totaling 1,607,000 square feet throughout its merged portfolio with a 20.2% blended increase in average base rental rates, contrast to a 22.4% increase for the year ended December 31, 2015. Lease renewals accounted for about 1,223,000 square feet, which generated a 17.7% increase in average base rental rates. Leases renewed represent 85% of the merged portfolio space planned to expire during 2016, contrast to an 84% renewal rate achieved by the Company during 2015. Re-tenanted space accounted for the remaining 384,000 square feet, with a boost in average base rental rates of 27.4%.

Historically, most of the Company’s leasing activity happens early in the year. Less than 14% of total annual renewal activity was accomplished during the fourth quarter of 2016, and only six leases were re-tenanted. Later quarters, where only a small portion of the annual leasing activity is executed, may not be representative of ongoing leasing performance, as the mix of leases can easily skew rent spreads when the base activity is small.

For the three months ended December 31, 2016, Same Center NOI for the merged portfolio raised for the 53rdsuccessive quarter, by 2.7%, on top of a 2.1% increase for the three months ended December 31, 2015. For the twelve months ended December 31, 2016, Same Center NOI raised 3.3% for the merged portfolio, on top of a 3.5% increase for the twelve months ended December 31, 2015. Portfolio NOI for the merged portfolio raised 12.5% and 8.4% for the three and twelve months ended December 31, 2016, respectively, contrast to the same periods of 2015. Same Center NOI and Portfolio NOI for the merged portfolio exclude lease termination fees, which for the three months ended December 31, 2016 and December 31, 2015 totaled $0.1 million and $0.2 million, respectively, and for the twelve months ended December 31, 2016 and December 31, 2015 totaled $3.6 million and $4.6 million, respectively. Tanger’s share of lease termination fees in our unmerged joint ventures for the three months ended December 31, 2016 and December 31, 2015 totaled $0.3 million and $0.1 million, respectively, and for the twelve months ended December 31, 2016 and December 31, 2015 totaled $1.7 million and $0.6 million, respectively.

Same Center NOI and Portfolio NOI are supplemental non-GAAP financial measures of our operating performance. Complete definitions of Same Center NOI and Portfolio NOI and a reconciliation to the nearest comparable GAAP measure are included in this release.

About 19% of Tanger’s merged portfolio was affected by major weather events during the third and/or fourth quarters of 2016. In August, the Company’s center in Gonzales, Louisiana was closed all or part of six successive days because of severe flooding in the region and mandatory curfews that were subsequently imposed. During the third and fourth quarters, severe weather and mandatory evacuations related to Hurricanes Hermine and Matthew, respectively, negatively influenced Tanger’s centers in Charleston, South Carolina; Hilton Head, South Carolina (two centers); Myrtle Beach, South Carolina (two centers); Nags Head, North Carolina; and Savannah, Georgia. Merged portfolio average tenant sales apart from these eight centers were $394 per square foot for the trailing twelve months ended December 31, 2016, and on a same center basis were stable contrast to the twelve months ended December 31, 2015, due in part to continued price deflation prevalent in the apparel industry. Counting these centers, merged portfolio average tenant sales for the trailing twelve months ended December 31, 2016 were $387 per square foot, and on a same center basis, reduced 80 basis points contrast to the twelve months ended December 31, 2015. Sales include stabilized outlet centers and are based on all reporting retailers leasing stores less than 20,000 square feet in size which have occupied such stores for a minimum of twelve months.

As of December 31, 2016, the Company’s merged portfolio was 97.7% occupied, contrast to 97.5% on December 31, 2015 and 97.4% on September 30, 2016. During the fourth quarter of 2016, 11 stores totaling about 45,000 square feet closed within Tanger’s merged portfolio related to the bankruptcies of Aeropostale and The Limited. During 2016, the Company recaptured a total of 105,000 square feet within the merged portfolio related to bankruptcies (Aeropostale, PacSun, The Limited) and brand-wide store closures (Joseph A. Bank), contrast to 157,000 square feet in 2015 and 38,000 square feet in 2014. Tanger has recaptured an additional 54,000 square feet during the first quarter of 2017 related to the bankruptcies of PacSun and The Limited and the closure of all of Kenneth Cole’s stores.

Investment Activities Provide Potential Future Growth

During 2016, the Company delivered two new Tanger Outlet Centers totaling 705,000 square feet, an expansion of about 5% based on the Company’s overall footprint at the starting of the year. These projects represent a combined total investment of about $181.8 million, had a weighted average year-end occupancy rate of 96%, and are presently expected to generate a weighted average stabilized yield of about 10.3%. Tanger’s net capital requirement for these projects was about $134.4 million, substantially all of which had been funded as of December 31, 2016.

During the fourth quarter of 2016, the Company opened the newest Tanger Outlet Center in Daytona Beach, Florida. This wholly-owned center includes 349,000 square feet and features over 80 brand name and designer outlet stores. The property opened 93% leased on November 18, 2016 and has generated positive feedback from shoppers and retailers. Located at the southeast quadrant of I-95 and LPGA Boulevard, the center is adjacent to the main entrance of the Ladies Professional Golf Association corporate headquarters and golf course, about 2.5 miles north of Daytona Speedway and about 6 miles from the beaches of Volusia County. Tanger’s other 2016 new outlet center opening was a 355,000 square foot center in Columbus, Ohio, which opened in June through a 50/50 joint venture.

Construction of two additional projects is ongoing, both of which are expected to open in 2017. Tanger anticipates to complete a 123,000 square foot expansion of its Lancaster, Pennsylvania outlet center during the third quarter. In addition, the Company anticipates a holiday grand opening for its new 352,000 square foot wholly-owned outlet center project in Fort Worth, Texas. Combined, these 2017 projects represent a total investment of about $137.9 million with an expected weighted average stabilized yield of about 9.3%. As of December 31, 2016, $105.5 million of the Company’s expected net capital requirement remained to be funded.

Pre-development and pre-leasing efforts are ongoing for other projects in the Company’s shadow pipeline of development opportunities. Land acquisition and starting of construction for these projects is contingent on Tanger achieving its minimum pre-leasing threshold and securing the required entitlements.

Tanger also raised its legal ownership interest in three key assets to 100% during 2016. The Tanger Outlet Center in Deer Park, New York became a wholly-owned Tanger asset in January as a result of the Company repaying a deferred financing obligation to the noncontrolling interest. Before the transaction, Tanger’s legal ownership interest in the center was two-thirds, but as the Company received substantially all of the center’s economic benefits, the center was merged in Tanger’s financial results.

In June and August 2016, respectively, the Tanger Outlet Centers in Glendale, Arizona (Westgate) and Savannah, Georgia, became wholly-owned assets as a result of Tanger acquiring its partners’ ownership interests in these unmerged joint ventures, which were formerly accounted for under the equity method of accounting. Before these transactions, Tanger’s legal ownership interest in the Westgate center was 58% and in the Savannah center was 50%. However, because of preferred equity contributions Tanger made to the Savannah venture, and the returns earned on those contributions, Tanger’s estimated economic interest in the book value of the Savannah venture’s assets was about 98%. Therefore, substantially all of the earnings of the Savannah joint venture were recognized by Tanger as equity in earnings of unmerged joint ventures. Effective as of the dates of acquisition, these properties are merged in the Company’s financial results.

In January 2016, the Company accomplished the sale of a small outlet center in Fort Myers, Florida near Sanibel Island. The $26.0 million transaction represented a capitalization rate of about 7.0% for this bottom-tier asset.

Balance Sheet Summary

During 2016, the Company successfully executed a financing strategy to convert $525 million of debt from floating to fixed interest rates, and further reduced its floating rate debt by an additional $109 million using proceeds from assets sold in 2015 and 2016. In addition to reducing the balance under its unsecured lines of credit with these financing and asset sales proceeds, Tanger repaid $310 million in mortgage loans secured by its outlet centers in Deer Park, New York; Glendale, Arizona (Westgate); and Savannah, Georgia, which unencumbered 12% of the Company’s merged portfolio square footage.

In April, Tanger expanded its unsecured term loan to $325 million from $250 million, extended the maturity by two years to April 2021, and reduced the interest rate spread by 10 basis points. The Company also reached interest rate swap agreements in April that fix the base LIBOR rate at an average of 1.03% on $175 million in LIBOR denominated debt through January 2021. These derivatives, combined with interest rate swap agreements in place since October 2013 that fix the base LIBOR rate at an average of 1.30% on $150 million in LIBOR denominated debt through August 2018, effectively lock $325 million of the Company’s floating rate debt at an average of 2.11%. Through public offerings in August ($250 million) and October ($100 million), the Company issued $350 million of 3.125% unsecured senior notes due September 2026, at a blended yield of 3.193%, netting proceeds of about $344.5 million.

As of December 31, 2016, Tanger had a total enterprise value of about $5.3 billion counting about $1.7 billion of debt outstanding, equating to a 32% debt-to-total market capitalization ratio. The Company had $61 million outstanding under its $520 million in available unsecured lines of credit and total outstanding floating rate debt of $191 million, representing 11% of total debt outstanding, or less than 4% of total enterprise value. About 92% of the Company’s merged square footage was unencumbered. Tanger’s outstanding debt had a weighted average interest rate of 3.82% and a weighted average term to maturity of about 5.9 years as of December 31, 2016. For the year ended December 31, 2016, Tanger maintained an interest coverage ratio of 4.40 times.

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