Q3 2019 Earnings Call
Due to the tanker factory outlet centers third quarter 2019 conference call yesterday, we issued our earnings release as well as our supplemental information package in our investor presentation.
This information is available on our Investor Relations website investors that Tanger outlets Dotcom. 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.
Actual results could differ materially from those projected we direct you to our 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 measure as defined by FCC regulation G, including funds from operations or.
Adjusted funds from operation at that.
Same center net operating income and portfolio net operating income reconciliations of these non-GAAP financial 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 is important to note that management's comments include time sensitive information that may only be accurate as of today's date October 31st 2019. At this time all participants are in listen only mode. Following management's prepared comments.
I will be opened for your question. We ask you to limit your questions to too so that all callers will have the opportunity gas question on the call today, even Tanger, Chief Executive Officer, and Jim Williams, Executive Vice President and Chief Financial Officer, I will now turn the call over to Stephen King. Please go ahead Steve.
Good morning.
Thank you for joining us.
I will provide you with our third quarter results.
Operational and strategic highlights Jim will review, our financials and outlook for the.
Despite facing a number of headwinds.
We are encouraged by our improved outlook for 2019.
Based upon our results so far.
Our expectations for the remainder of the year, we are raising our guidance.
The value proposition the desirability of our centers continues to resonate with shoppers.
Traffic was up 1.1% in the third quarter and 1.3% year to date from comparable periods.
The favorable traffic momentum has continued into October .
You are the same center NOI declined by 80 basis points and for the third quarter declined 180 basis points compared to the prior year period.
Well ahead of our expectations.
These results do reflect the challenges of today's retail environment.
At quarter end.
Our consolidated portfolio maintained a high occupancy rate.
Maybe 549%.
Leasing continues to be a top priority as reach your radar centers with quality retailers to provide an optimal customer experience.
We had leases we have lease renewals executed or in process for 74% of space at the consolidated portfolio scheduled to expire during 2019 calendar year.
Our blended average rental rates increased 2.5% on the straight line basis and were off 2%.
Cash basis for all leases that commenced during the trailing 12 months ended September 32019.
For the remainder of the year.
We anticipate seeing ongoing pressure on cash spreads similar to what we have seen for the current trailing 12 month period.
Continue to prioritize maintaining high occupancy despite the recent and anticipated store closings that were created by recent tenant announcements.
This means as we are being more creative by allowing tenants to test a multichannel approach that works for them, while also maintaining a desirable presentation to our customers.
We believe the outlet distribution channel continues to offer a compelling value proposition to retailers because of its low cost of occupancy at a high profitability.
Our tenant occupancy cost ratio remains lower than any of them all rights at 9.9%.
Some examples of recent store openings. This quarter include Columbia, Sportswear Polo, Ralph Lauren and American Eagle.
We are seeing strength, the jewelry on health and beauty categories.
As well as athletics and specialty issues.
With a number of retailers looking for opportunities to expand their own by presence into new markets.
Through the and the third quarter.
We recaptured approximately 195000 square feet with them the consolidated portfolio related to bankruptcies and brand wide restructuring by retailers, including 6000 square feet in the third quarter.
With regard to anticipated closures.
Dressbarn plans to close all their stores at the beginning of 2020.
And our consolidated portfolio. This comprises 22 stores was approximately 170, so 77000 square feet about 170 basis points of annualized base rent and average sales of $140 square foot.
There have been three other recent tenant announcement a potential store closures, we do not know exactly how many stores will close on when and if there will be an early termination fee or any rent adjustments at stores that remain open.
Kitchen collection has announced plans to close all their retail stores.
We currently have 30 stores and our consolidated portfolio, representing 93000 square feet.
Preventing of approximately 70 basis points of FBR.
Forever 21, and destination maternity filed bankruptcy court protection in October .
The current potential tanker store closure list includes two forever 21 stores and five destination maternity locations together. These seven stores represent only 33000 square feet.
30 basis points, a baby are.
Well these situations remain fluid, we do not expect any significant impact from these in 2019.
We are already in active discussions with existing retailers interested then from we're expanding the outlets space, including for approximately half of the dressbarn spaces, some of which are already executed.
Over the past years, we're seeing brands come and go.
One thing that has remained consistent is that there's ongoing retailer demand for high quality and well located outlet centers.
Leasing is one of our core competencies and we're confident in our ability to fill the space. Although it may take some time.
During our tenant mix continues to be one of our top priorities and re tenanting is an opportunity to refresh our retail offering with the most compelling brands for our customers.
Sales productivity for the consolidated portfolio for the 12 month ended September 32019 increased by $12 per square foot or 3% to $395 per square foot as compared to the prior year.
On an annualized weighted basis, they were a healthy 422 to $422 per square foot.
13 dollar to 3% increase from the prior year.
Same center tenant sales performance for the overall portfolio increased 170 basis points for the 12 months ended September 30.
Compared to the prior year.
During the third quarter.
We drove a 1.1% increase in traffic due to our aggressive leasing efforts.
Highly successful marketing programs and the appeal of Tanger centers to shoppers looking for an engaging experience, including a compelling branded value offerings.
Through a strategic combination of targeted direct mail.
Expanded digital touch points and tailored experience show program, our marketing efforts are proving to be effective.
Both with consumers or visiting our centers and with tenant brands, who are increasingly participating in our marketing programs.
We continue to refine and strengthen our digital outlay outreach with targeted offers and content, providing a compelling reason for shoppers to come to our properties.
We have continued to successfully implemented experience actual events across the portfolio.
These events, our family entertainment oriented and designed to drive traffic and extend dwell time.
During the third quarter. Some highlights include numerous back to school events at family festivals in August .
And a holiday celebrations around the fourth of July and Labor day.
During event weekends traffic and sensors hosting events was up almost 205%.
We also worked directly with tenants, creating custom programs to support their goals such as building excitement around a new store openings or promoting key brands to drive visits.
These retailer collaboration events helped drive increases of high single to double digits in comp traffic for the weekend. So the promotion.
We remain confident in the prospects for tanker.
The outlet business is differentiated from other retail formats for four three key reasons. It provides consumers with consistent value for the most sought after brands.
It is one of the most profitable distribution channels for our tenants.
And unlike other physical retail format. The outlet industry is not overbuilt and does not have multi level.
Boxes that require large capital investments to re tenant.
As we look ahead.
We are already proactively addressing the expected vacancies going into 2020.
Well it will take some time to return to sustain growth.
We are having constructive conversations with new and existing retailers, who value the attractive cost of occupancy and shopper appeal that tanger outlets provide.
The retail landscape continues to evolve.
Clearly brick and mortar is changing but it's not going away.
Tanger has a great brand and high quality centers.
Along with the world around those we continue to adapt to determine our optimal value proposition.
By utilizing data and emphasizing tenant productivity and customer engagement, we're working hard to ensure the tanker retains its position as an important element of the retail landscape.
Additionally.
I want to mentioned that we are continuing a thorough search process to identify new president and Chief operating officer.
Well, we did not have an announcement at this time.
We will provide an update well we have information to share.
Finally, I'd like to again, thank the tanker team for their hard work dedication and creativity and navigating this evolving retail landscape and creating the tanger experience for our customers and retail partners.
With that I'd like to now turn the call over to Jim to take you through our financial results at a brief balance sheet recap.
Thank you, Steve third quarter, a FFO available to common shareholders.
At the eight cents per share compared to 63 cents per share in the third quarter of 2018.
Your parents inclusive of four cents dilutive impact of the four assets, which were sold earlier this year.
Same center NOI decreased 1.8% compared to the prior year quarter, driven primarily by tenant bankruptcies lease modifications and store closures.
In terms of our financial position, we continue to maintain our solid foundation.
We have no significant debt maturities and our consolidated portfolio until December 2023, a low 3.5% weighted average interest rate and a largely undrawn lot of credit.
This provides us with folks stability and optionality.
As of September Thirtyth, approximately 94% of the square footage in our consolidated portfolio was not encumbered by mortgages.
Our unsecured line of credit have 99% unused capacity or nearly $600 million.
We maintain a substantial interest coverage ratio for the first nine months of the year of 4.3 times and net consolidated debt to EBITDA was approximately 5.8 times for the trailing 12 months.
Our floating rate exposure represented only 1% of total outstanding debt at September Thirtyth.
Average starting to maturity was 5.7 years.
Year to date, we have reduced our outstanding consolidated debt by a $141 million.
The strength of our balance sheet and the significant free cash flow, we generate after payment of our dividends, which we expect to be nearly $95 million for 2019 allows us to take advantage of selective growth opportunities that may arise.
During the third quarter, we were active in our share repurchase program by an approximately 651000 shares for $10 million.
Year to date, we have deployed $20 million of capital into share repurchases and have $80 million remaining at our authorization through May 2021.
Regarding our 2019 outlook, we are pleased to refine our guidance for the full year.
We are increasing our same center NOI guidance for the consolidated portfolio to be down at the range of to be down in the range of 1.8% to 1.4% fund the previous range of down 2.25% to 1.5%.
And the fourth quarter, we do not anticipate a deceleration.
I'm, sorry, and fourth quarter, we do anticipate a deceleration in Hawaii.
Relative to our year to date performance due primarily to the impact of lower overall occupancy and selective lease modifications from the previously mentioned bankruptcies and restructurings as well as a tough comp over last year's quarter, which included some favorable expense savings primarily from a mild winter.
Our average occupancy has trended better than we had previously anticipated, resulting in enhanced enhancement outlook for Q4 relative to our prior expectation.
We expect average occupancy for the year to be to be between 95.5% 95.8%.
Compared to our prior projection of between 94.75% and 95.25%, which is augmented by our strong temporary and pop up store program.
Our guidance assumes the Dressbarn stores will remain open to the end of the year and that recently announced store closure plans by other tenants, which remain fluid at this time will not have a significant impact on 2019 occupancy and same center NOI.
Additional details regarding our guidance can be found in the release, we issued last evening.
We are encouraged that despite the various headwinds that we have discussed we have prioritized and succeeded and maintaining a conservative low levered balance sheet solid cash flows at a well covered dividends when they current FNB payout ratio of 71%.
We continually evaluate our priority uses of capital which include reinvesting in our assets.
And our dividend.
Repurchasing our common shares opportunistically and deleveraging the balance sheet why also evaluating potential opportunities for long term growth.
We feel very comfortable that our strong balance sheet and this thoughtful approach to capital allocation will provide the necessary support to maintain our dividend and to continue to successfully successfully navigate the current retail landscape.
Now I'd like to open it up for questions. Operator can we take our first question.
Yes, as a reminder, you asked a question you will need to press star one on your telephone to answer your question press, the pound or how should.
Please standby Colby compiled the queuing roster.
First question comes from your line is Christy Mcelroy from Citi. Please ask your question.
Hi, good morning, everyone.
Thanks for all the detail on the on the pending store closures on counseling about 300000 square feet.
Already which compares to 195000 this year and about 270 basis points of FBR.
It's a pretty big hit to 2020, and you mentioned that about half of that Dressbarn space. There is an active discussion can you kind of give us a center a reasonable timing for that speaks to get back filled and what what does that imply for potential average occupancy in 2020, given that all back space will come online earlier this year.
Good morning Christie.
We are expecting.
And we have had.
Very positive conversations with tenants to backfill the dressbarn space.
We have mentioned we have commitments for about half the space, which we anticipate.
Putting into occupancy in the first half of next year.
I might mention the Dressbarn sales were less than 50% of our portfolio average. So this gives us an opportunity to improve and cure rate the quality of our assets.
Which is one of our primary focus.
If you take that space and those.
We do have some headwinds headed into next year, but we have time, though to prepare for them.
The.
After 11 bankruptcies in the restructurings.
Our not chapter seven which vacates immediately.
So we will we as as we have always in the past.
Aggressively work with our tenant partners, both new and prospective partners to fill the space the space will be filled as in years past with existing and new permanent tenants and several.
Pop up.
Tenants that are testing the outlets space.
It's we're doing just find it is tough out there as you know.
We continue to perform.
And we will be happy to give you guidance as to.
Our progress.
End of February when we announce our year end results and our 2020 guidance for the year.
So as I think about the pressure that this kind of space coming on create frankel pacing I'm sorry.
Short term leasing in terms of whats commenced has started to come down as a percent percentage of saying from the decrease in terms of the impact on the spreads but with the pickup in closures over the next few months what would you expect that short term, we seem to have to pick up again.
And sort of what what impact does this create on the leasing capex as well.
The space that we are getting back.
Is easily re tenanted, it's almost entirely.
Same depth 100 feet deep.
It's entirely.
On grade one level re too so we're not talking about significant capex to re tenant space.
We do as I mentioned have significant.
Interest in the space.
Bye.
More high volume tenants that will create excitement.
And.
We're not going to give you next year's guidance.
Today, we will.
End of February , but if you look at our history.
38 years, we've never ended the year less than 95% occupied.
This is not the first time weve faced with potential.
New space coming.
On the market and we've been successful and we plan to continue to be successful and re tenant in the space.
But we can reasonably expect that short term Lee for all pickup.
Again, I'm not going to guide you on that.
I'll have more facts.
2020 in the makeup of the different leases when we visit again.
Either at the conference or public Forum at our next conference call.
Okay. Thank you Steve.
Your next question comes from the line of Greg Mvpds from Deutsche Bank. Please ask your question.
Hey, good morning.
We just got a couple of questions on forever 21, So first or the current on rent what are the expectations on recovering any loss rent and then how did that how's the bankruptcy process impacting your accounting for their rent payments.
Good morning, Greg.
We were said Steve for Forever 21.
File for bankruptcy.
Consumers still like their product.
And.
As with regard to financial.
Impact.
We have not been paid for September rents.
And have taken at bridges that off in Q3.
We have good paid in October .
So we're working with forever 21.
There are ongoing strategy.
As Im sure you, saying they have revised their potential store closing list significantly.
We had two stores on that list.
It remains a fluid situation.
We expect those two stores to close in the fourth quarter.
But not certain.
Okay. Thanks, and then second I've learned from other company earnings calls not necessarily trust everything we read and the Forever 21 bank to documents, but I believe they originally listed 11 Tanger leases up for negotiation. So based on the expect to closure of two stores can we assume that there was roll downs and the other locations it's kind of.
Curious what rent reduction may have been on those leases. When these leases would go into effect. So any details in the process an outcome would be appreciated.
Greg.
We'd be happy to give you guidance at the end of February with regard to.
The facts with regard to forever 21.
This filing occurred two weeks ago.
It is and remains a complicated fluid situation. So I don't want to give you any.
To answer that may not prove to be correct.
All right well I can appreciate that thanks, Steve.
Your next question comes from the line God. This Thomas from Keybanc capital markets. Please ask your question.
Hi, Thanks, good morning.
Question, so for the pop up in temporary tenants in the portfolio, where did that stand at the end of September as a percent of the portfolios Gls, a and then Steve Steve I realize the goal of the pop up and temporary tenants.
On the portfolios to fill space and then try to convert some to permanent leases historically what percent of pop up in temp tenants convert to permanent lease deals.
If you kind of look back over time.
Good morning today.
Right now.
Pop up temporary seasonal tenants.
Account for about 5% of our occupancy.
This is slightly elevated.
From an average of 4% over the vast over the past many years, our long term strategy is to maintain occupancy.
An exciting presentation to our consumers.
As far as the conversion.
To permanent stores.
Some of them do convert like vineyard vines, which now is in a lot of our different centers.
Some of them.
Our local tenants, which provide local color.
And.
Stay tuned for long term.
Don't execute long term leases they stay as temporary tender for years.
Which gives us the opportunity to rate.
Repossessed the space if we have.
Different tenant we want to put in.
Okay, and then in terms of you know timing I guess.
You know to see some of those convert or potentially.
Not not renew or or or stay in an occupancy I guess.
Is the timing generally sort of a post holiday decision is that something that.
Happened historically in January .
We're focused on a really small percentage of the portfolio.
Again, I'd be happy to give you the facts.
When we get together again in the public Forum the end of February .
And we'll know was certainty.
What the situation is with those tenants.
We will be happy to give you guidance and our thoughts from 2020.
Just one or reiterate.
This is a longstanding imports as part of our strategy to present.
Telling experience to customers when they come to our properties.
There is no landlord contribution or expense.
These value temporary tenants and pop up stores take vacant space and create value and excitement.
So we will continue to have that is an important part of our strategy.
Okay and then just a question for Jim I think you said that in your comments.
You made a comment about growth opportunities and I don't know, if you're referring to Nashville or.
Yes, expansions or or acquisitions, but I was just curious if you could provide some context around that comment and also with regard to national maybe we could you give us an update on on that.
Potential project.
Todd I'll take that one.
Nashville is progressing on schedule.
We are.
Working with the master developer.
As they do there.
As they do their mask rating is install a new interchange.
I wanted just pointed out that this is a large.
Developments.
We will be the hub of this development, which is currently zone for 3 million square feet of mixed use it will include office apartments.
And the outlet center as a.
As a very important hub and we're the first wanted to go with.
So we are as far as unconcerned on target.
And then hopefully.
With the.
Disciplines that we.
Maintained over many years.
We will have the 60% pre leased.
In all non appealable permits.
This time next year and be able to start construction.
Okay. Thank you.
Your next question comes from the line of keeping Barroso from Goldman Sachs. Please ask your question.
Hi, good morning.
Maybe just as part of it 2019 guiding fee guys increase the SDMA part a little bit. So could you go to what's driving that and whether we should think about.
Being onetime in nature or more permanent.
Okay than I had trouble hearing news.
Ill.
I will take that he's got better ears.
I'll take that question.
Yes.
Taking on the fourth quarter.
In a increase from those from previous guidance was there theres several small components not necessarily recurring.
Part of that including some additional expense related to the accelerated vesting of some share based compensation related to the directors that are not going to stand for reelection next year.
Got it okay.
And then on the dividend you guys have.
Talked about your payout ratio in the past is being around 60% on an AFFO basis, maybe mid to high Sixtys on F D basis, but now we're getting above those levels. So just wondering as we go forward do you expect to moderate I dividend increases until that gets lower or how should we think about dividend growth going forward.
Caitlin, there's not much difference between the high Sixtys exceed 60 971.
So we are certainly.
Our payout ratio.
With exception of one one of our valued.
Competitors in our sector is the lowest as a sector as you know.
Our dividend policy.
We will be reviewed.
By our board.
Based on managements.
Look for 2020.
We will provide that.
Disclosure when we give you our 2020 guidance next February .
For two rigs seriously.
Its dividend policy.
And management is responsible for the.
Allocation of our free cash flow.
Each year.
Dividends is one of your dividend increases is only one of the many priorities that we have.
We will.
It's really premature to announce the dividends for energy is this time.
Okay. Thanks.
Your next question comes from the line of Craig Schmidt from Bank of America. Please ask your question. Thank you good morning.
I wonder roughly in 2019, what percent of the drag on same store NOI is due to lease modifications versus store closings.
Okay.
Craig as we as we guided earlier in the year.
That's a complicated question that I'm sure that are interrelated.
We had expected.
Guided that we.
Received back about 225000 square for you to space.
Through tenant restructurings and bankruptcies.
And with that of course, the associated then a lie with space being occupied.
We.
Gave your best guidance.
In February of this year based on our view of the landscape at that time.
And we will do it again next year.
We are delighted that.
We've been able to.
Continue to exceed expectations with regard to.
Our NOI same center NOI.
We've increased our guidance for the fourth quarter.
I don't want on.
I want to lessen the fact that is it's tough out there.
Our challenges.
But we are we're doing pretty well compared to.
Our expectations and are delighted to continue to raise guidance.
As we has as we did last quarter going into the fourth quarter.
Okay, and then just looking back in history on the average how many months between a store closing and a space is backfills and rent pain.
That's a tenant specific.
If we get advance notice as we did was dressbarn.
Our goal.
Okay of the tenant Cuba gave us.
Oh landlords.
Six to seven months notice of their plan.
Hey rent will pay run through the closing date it gives us time.
Two two ends to install a new tenant we have some tenants that was announced that will take occupancy weeks. After dressbarn departs some space could take nine to 12 months. So it's very hard to give you.
One answer.
But looking at.
The entire portfolio.
We still we've just updated our guidance for yearend occupancy, which incorporates the space we get back.
And filling that space with new and exciting tenants, we will give you occupancy guidance next year.
Which will incorporate the ability to release.
And install new tenants.
All of that will be in our guidance. Both in July guns same center NOI guidance FFO guidance and occupancy guidance. So it's a it's a complicated.
Question, Craig and I can't give you simple answer other than the one I gave.
No I appreciate it thank you.
Your next question comes from the line of Michael Mueller from JP Morgan. Please ask your question.
Yes, Hi, I guess following up on the one of that earlier questions about store closures in 2020.
I appreciate that you're going to get more detailed guidance in 2000 and February yourself, but is your expectation that.
This point that 2020 from a closure I guess lease amendment.
Perspective could be.
Worse than what we see this year similar or better just.
Any high level color would be appreciated.
Good morning, Michael.
Certainly the announced closures.
As in past three weeks and dress barn.
Give us.
A challenge for next year.
As I mentioned previously the situation is fluid.
The original store closing list for.
Forever 21.
And many stores closing and now the revised list is too.
The other situations are fluid so I really.
Hi.
I'm reluctant.
To give you any sort of guidance for next year.
We are totally focused right now.
On filling space with exciting high volume tends.
To go into the holiday season and end our year, that's our focus.
Our focus is on providing.
Really a fabulous experience for our shoppers.
And maintaining strong balance sheet.
So that.
If you.
If you will bear with us.
Happy we'd be happy to give you.
Much detail as appropriate.
When we give you 2020 guidance.
Got it Okay, and then I guess going to the better guidance for the balance of this year.
Is it I mean to weaken.
What exactly where the drivers of the better guidance. I mean is it you are you played out you could have closures and bankruptcy closures of up to I think it was.
225000 square feet or so is that you're now expecting less there or is it something else where you were a.
Nothing happening on the leasing side or percentage rents or just any other color there would be great.
Hi, Michael This is Jim.
Yes, if something were the primary drivers.
Better expected occupancy as you pointed out and.
So it's somewhat as supported by a strong are temporary.
So a program as certainly making.
Contributions to that and variable rents.
It's also contributing to improved outlook for same center NOI guidance.
Okay.
That's it thank you.
Your next question comes from the line.
People on from Green Street.
Hi, Sir your line is open please ask your question.
Hi, good morning.
Talk a little bit about the rationale for the share buybacks over the past few quarters I'm just like you get a sense of me a wide share buybacks or more attractive use of capital then maybe reducing debt just given that debt to enterprise value is now in excess of 50%.
Good morning.
We have four.
Major.
Capital allocation buckets, one is to invest in our assets.
Two is too.
Maintain and pay and occasionally raised our dividend as we have for each of the 26 years, we've been public.
Buying back our stock on a measured selective basis and paying down debt.
So far this year, we bought back $20 million worth of stock.
And we paid down our debt by over $140 million.
Our ratios are.
Very attractive.
There are better than most of the mall reads.
And we take great pride in our investment grade ratings.
And we will continue to.
Appropriately.
And conservatively allocate capital.
To maintain or to attempt to maintain those ratings.
And selectively buyback or side.
That makes sense. It is this is there any criteria you can share they'd like what made the buyback contract is that the discount and Avi or is it really the fact that you know you're comfortable with the balance sheet, you've done a lot of de leveraging this year and that was the next place best place to put the capital or that your view that any others, a sizable discount to fair value here.
And that's the arbitrage you're trying to capitalize on.
Well I think it's probably all the above.
I mean, let's put it to perspective in the third quarter, we only bought back $10 million, where the stock.
At the end of the second quarter, we only bought about $10 million, where the stock.
So.
At the same time, we paid down $140 million and debt.
We.
It is a balanced approach and I don't want to get into our internal calculations of.
Asset value, but you can assume since we bought back our stock that we thought it was undervalued.
Fair enough. Thank you.
No no further questions at this time presenters. Please continue.
Okay well.
Want to thank everybody for joining us this morning.
We will see you either in a read or.
That being hosted at an Investor Conference.
Next week at New York.
And wish you all are very happy day, and thank you again goodbye now.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.