Q2 2022 Tanger Factory Outlet Centers Inc Earnings Call
Good morning. This is Ashley Curtis assistant Vice President of Investor Relations and I would like to welcome you to the Tanger factory outlet centers second quarter 2022 conference call.
Great evening, we issued our earnings release as well as our supplemental information package and Investor presentation.
Formation is available on our Investor Relations website investors thought tanger outlet dot 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 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 measures as defined by SEC regulation G, including funds from operations or <unk> core F. F. O same center net operating income adjusted EBITDA and net debt.
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 is important to note that management's comments include time sensitive information that may only be accurate as of todays date August nine 2022 at this time all participants are in listen only mode.
Following management's prepared comments the call will be opened for your questions. We request that everyone ask only one question and one follow up to allow as many of you as possible to ask questions. If time permits we were happy for you to re queue for additional questions.
On the call today will be Steven Tanger, our executive Chair, Stephen Yalof, President and Chief Executive Officer, and Doug Macdonald Senior Vice President Finance and capital markets. In addition, other members of our leadership team will be available for Q&A I will now turn the call over to Steven Tanger. Please go ahead Steve.
Good morning.
Thank you for joining us for our second quarter 2022 earnings call.
The Tanger team delivered another strong quarter as we are.
Executed on each of our strategic initiatives.
And shoppers and retailers continue to recognize the value the tank or open air centers offer.
I am pleased with our continued momentum and our positioning to drive long term growth.
Thank you to all of our stakeholders for your ongoing support.
I'm happy now to turn the call over to Steve Yalof to provide additional details.
Thanks, Steve we delivered another quarter of solid operational performance and earnings growth as reflected in the 5% year over year increase in both same center NOI and core <unk> per share.
This performance is the direct result of the successful execution of our three key priorities accelerating leasing commercializing marketing and reshaping operations at our open air shopping destinations. We continue to extend our same center platform.
And are also investing in additional growth without thirty-seventh center in Nashville, which broke ground in May and our 38 center in Palm Beach, Florida.
Retailer demand for Tanger outlet centers is robust and occupancy continues to grow currently at 94, 9% up 170 basis points year over year.
And up 60 basis points sequentially.
We have continued to drive increased rents and longer lease terms during the trailing 12 month period.
<unk> renewed or re tenant as leases on more than one 7 million square feet with blended rent spreads of four 1% for all comparable leases.
This represents a 280 basis point sequential improvement and the fifth consecutive quarter of rent spread growth.
Our re Kennedy spreads exceeded 10% as demand grows and our pricing power returns. Additionally, we've increased the stability of our cash flows through the conversion of variable to permanent base rent, while in many cases, maintaining or driving higher than previous percentage rates, providing for additional long term.
Upset.
We continue to accelerate lease renewal activity and as of today, we have nearly 68% of 2022 renewals executed or in process.
780 basis points ahead of roughly the same time last year.
We anticipate higher than average tenant retention, which will result in lower downtime and re tenant and costs. Additionally.
Additionally, a number of our brands continued to convert short term leases to long term permanent deals.
Our productive leasing execution is one of our key highlights and we continued to diversify and elevate our portfolio.
The new platform brands to Tanger centers, and addition of high quality apparel footwear brands, we've added direct to consumer home goods entertainment and food and beverage destinations.
Our dynamic leasing results deliver quality shopper visits attract higher income shoppers and introduced tanger to a younger customer base.
Tenant quality continues to improve as our watch list is at the lowest level in four years with no meaningful exposure or bankruptcy risk.
Our performance marketing is delivering measurable results in the face of headwinds such as inflation and higher gas prices.
Traffic remains above pre pandemic levels and was stable in the quarter compared to last year.
With many tailwind that included lower gas stimulus checks vaccinations, and a lower interest rate environment.
Yeah.
Our centers are well located and easily accessible and we continue to be the go to shopping experience for local regional and tourist shoppers in the markets. We serve seeking the brands they want.
When customers come to a Tanger center they come to shop.
Sales per square foot for the trailing 12 month period was $450 per square foot of six 4% from the prior comparable period.
Although sales were down slightly from the prior quarter. We attribute this mainly to increased promotional activity due to excess inventory in the channel, which is driving incrementally bigger baskets at lower cost to our shoppers.
By prioritizing our Tanger loyalty club, which provides numerous benefits to our members we are promoting elevated engagements with our customers.
During the second quarter unique engagements by our Tanger loyalty club members increased by 80% year over year and new loyalty club membership grew by 25%.
Our marketing partnership business continues to build as brands seek access to the higher value Tanger centers shoppers we.
We saw new sponsorships with global brands, including Procter <unk> Gamble and bond delay while brands such as Coca Cola Unilever and T mobile have made incremental media buys.
<unk> centered activations at our centers, we are continuing to increase digital and media inventory across our platforms as we generate additional demand.
We're focused on enhancing efficiencies that our centers, which is particularly important in a broad inflationary environment.
In response, we are actively managing our energy and water usage, which are also tied to our sustainability efforts a key strategic priority. In addition, we released our sixth annual environmental social and governance report yesterday.
Our newly appointed sustainability lead has already identified opportunities to improve the efficiencies advance our corporate sustainability goals and contribute to our bottom line.
We are actively working on a science based plan to achieve net zero emissions by 2050 in a matter that aligns with our business strategy.
This year, we will double both our solar and EV charging infrastructure, which will provide our centers with the capability to operate more sustainably and engage with our shoppers, while driving additional revenue streams and managing our expense structure.
Now turning to our external growth and May we broke ground on our 37th center in Nashville, and our leasing activity continues to be brisk with some of the best brands, including new to industry retailers were excited to deliver this quality center and the rapidly growing Nashville market with Grand opening scheduled.
Fall of 2023.
Last week, we announced a strategic partnership to rebrand operate lease and market and existing outlet center in Palm Beach.
Centre will be renamed Tanger outlets Palm Beach.
Already assumed the marketing leasing and property management responsibilities.
This arrangement will also provide the potential opportunity to acquire equity ownership over time.
Tanger has a balance sheet that provides for financial flexibility and support we remain optimistic for our business, which is well positioned and provides consumers with great value in light of broader macroeconomic uncertainty and is reflected in the increase in the midpoint of our guidance.
Additionally, with minimal new supply in the market.
Well located Tanger centers should continue to maintain occupancy gains our entire team is focused on elevating our centers, drawing compelling retailers and signing high quality leases, which will allow us to continue to deliver solid NOI growth.
Our value proposition of Tanger resonates throughout economic cycles.
Our expanded uses a new revenue streams across our entire portfolio, we continue to offer consumers the opportunity to shop.
Gyn and be entertained in an open air environment.
The value proposition of our open air centers is continually being validated by shoppers tenants and the communities we serve.
Thank you to the entire Tanger team, our retailers and shoppers and stakeholders.
I would now like to turn the call over to Doug Macdonald take you through our financial results balance sheet and increased guidance for 2022.
Thank you Steve.
We delivered solid results for the second quarter of 2022 with core <unk> per share of <unk> 45.
Up four 7% compared to the same period last year.
Aim center NOI for the total portfolio at share increased five 1% to $79 $8 million, primarily driven by growth in occupancy and rental rates.
Our balance sheet is well positioned we have no significant debt maturities until April of 2024 and as of June 30, our net debt to adjusted EBITDA rate was five three times for the trailing 12 months down from five six times a year ago our.
Our weighted average interest rate was three 2% and 93% of our outstanding debt was fixed.
At June 30, we had cash of $194 million and full availability on our $520 million revolving credit facility.
We have always prioritized, maintaining a strong financial position by utilizing a disciplined and prudent approach to capital allocation in May we broke ground on our new center in Nashville, and have incurred costs of $18 $3 million.
Based on current construction costs are estimated total cost will be between 135 and $145 million with a projected stabilized yield in the low to mid 7% range.
Our dividend was well covered with a fad payout ratio of 47% for the second quarter, and we continue to evaluate opportunities to grow our dividend as our operating performance improves.
Due to the combination of better than anticipated financial results and our leasing execution year to date, we are increasing the midpoint of our full year guidance.
We now expect core <unk> per share to be in the range of $1 73 to $1 79, implying a midpoint increase of <unk> from our prior range. In addition, we expect same center NOI growth at a range of three to four 5%.
Compared to our prior expectation of two and a half to four 5%.
And as Steve alluded to when discussing our higher than expected tenant retention. We also lowered our projected capex range for the year.
For additional details on our key assumptions. Please see our release issued last night.
I'd now like to open it up for questions. Operator can we please take our first question.
Thank you.
To ask a question at this time you May press Star one from your telephone keypad.
Please first stolen if you'd like to remove your question you May press star two.
The first question will be coming from the line of Todd Thomas with Keybanc capital markets. Please proceed with your question.
Hi, Thanks, good morning.
First question I wanted to talk about Nashville, and Steve I was wondering if you could discuss some additional details around leasing there and how much of the center.
Is pre leased at this time and then if you could also provide some thoughts around whether you expect to be compete.
Competing against Simon in the market as you move forward.
Good morning.
Thanks for the question.
Listen with regards to competition every one of our shopping centers.
A competitive marketplace and I think Nashville is.
Certainly no different however.
When we started leasing et cetera over a year and a half ago until now we broke ground. We said we'd be 60% committed we broke ground in basis, our last call.
And are well on our way to delivering.
A shopping center in fall of 'twenty, three although we're about 70% committed right now, but again, that's with almost over a year before we actually will open up the shopping center, we've got great prospects a lot of new tenants to the outlet space, a great collection of food and beverage.
And like last quarter, we announced a number of names that will be joining us in the shopping center.
Thank you will find that it will be.
Probably slightly elevated then.
What you're used to seeing in the Tanger centers. The design is completely different to what used to seeing a Tanger center.
And we're looking for this center to drive not only the tourists that come to Nashville on an annual basis, but also to be a superregional drop where the southeast section on 24, which we think is the gateway to Nashville from the South.
So I think we'll have a great.
We will serve a great value.
The local community as well.
Okay.
Do you think do you think that Theres room for two outlet centers in the Nashville, the greater Nashville market, there and with regards to the pre leasing.
Now that you've completed.
The tenants have.
Certain flexibility around their their their leases are either outright cancellation clauses or kick out clauses.
Early on that that would be worth noting.
No there are no cancellation clauses in our leases.
Yes.
There is another side of adult marketplace.
Yeah.
Okay, and what about the market in general do you think it could support.
Two centers two outlet centers.
Well again, let's leave that to the whoever else decides that they're going to be building I mean, I don't know when the last time you were in Nashville was I was just there last week, there's a tremendous amount of new retail being developed in Nashville from 12000 to places in the north to the Gulf.
And I think it just speaks to a completely robust marketplace, that's an exciting place to be.
Tourism is growing the permanent population base is growing and I think that there is there going to be plenty of room for our Tanger shopping center when it opens in fall of 'twenty, three and we're excited about that.
Okay Alright. Thank you thanks, Tom.
Thank you. Our next question is from the line of Craig Mailman with Citi. Please proceed with your question.
Hey, good morning, everybody.
Steve maybe just a clarification the indoor to the story when you say, 70% committed or are those signed leases or are those just indications of interest.
It is a combination of executed leases or leases out for signature.
Okay, I'll, let 70, how much is executed.
We typically report the committed number.
Okay.
Yeah.
Fair enough and then moving on to Palm Beach could you just give a little bit of the economics there.
The agreement you guys have today and then maybe go into some of the details on what would trigger your ability to add some equity ownership and what that level could be.
Sure Craig are actually going to turn that over to Doug to take you through some of that.
Sure.
I hinted about this project.
The strong centers and a great market.
And we think that Tanger platform our scale.
<unk> helped our partner create additional value at the center.
We can't really elaborate on that.
Specific economic terms of the deal.
We are excited about the opportunity to potentially acquire ownership interest in the future as we helped grow the value at the time.
Could you maybe provide what kind of as a full contribution.
It could be on an annualized basis as we model.
Sure this is going to be fairly standard.
Term with regards to property management and leasing fees construction management.
Maybe it adds.
A penny a year a little more than that in the near term.
Okay. That's helpful and then just what the.
Kind of universe of opportunities to do more of these brand new deals in the outlet space for you guys.
So Craig I think that there's probably a dozen great shopping centers out there that are either independently owned or owned by.
Smaller outlet developers.
Who have looked at what we've done looked at the platform, we've created with our best in class leasing marketing and operation footprint.
And what would be part of the Tanger branding.
It's interesting in the outlet center business, what's unique to a lot of other shopping destinations as you find that we have not only the retailer as a customer but also the shopper is our customer in a very unique way.
Our retailers rely very heavily on tanger to drive customer traffic to the shopping centers.
In that regard using our performance marketing and other great initiatives that we've been using over the past.
<unk> in years.
We've been recognized as being a great partner to these retailers and were looking to grow the footprint not only with adding new retail store shopping centers, but a number of other developers.
Taken hold and we're in contact with speaking too about the potential of adding more centers to our portfolio.
That's helpful. So if I think about maybe.
<unk> per share.
And then another 12, you ask it almost raise ethanol by.
5% to 7% with very little Capex does that sort of the way to think about this over the next couple of years.
I think that for us a larger equity position in shopping centers on a going forward basis is probably going to be a little bit more of what we're going to target.
Okay, great. Thank you.
The next question comes from the line of Craig Schmidt with Bank of America. Please proceed with your question.
Got it.
Thank you.
Our first quarter and second quarter same store NOI were $9 nine and five 1%, but for the bank.
Your goal is three to four 5%, which would suggest a slowing down our same store NOI.
Tempering your same store NOI growth in the second half of the year.
Sure Craig the first half of the year.
<unk> benefited from a few of the reserve reversals that we discussed last quarter.
Especially.
In our first quarter numbers.
We.
We still expect positive.
AOI growth in the back half of the year, but we're trying to be more prudent with the expectation given the economic backdrop, given some of the other conditions that we're seeing but we are optimistic about our business.
Trends continue to be positive and we think that that way.
Can deliver.
Great. Thanks, and then just also coming to Palm Beach.
What is the.
Occupancy of that asset right, now and where does that sales per square foot stand relative to tengiz overall average.
Sure sure the Occupancies in the high 90%.
Sales per square foot.
Our in I'd say they'd be in the top third of our portfolio, but we will be able to.
We'll be able to share more of that once we start.
Really operating the assets.
Thank you.
Our next.
One is from the line of Greg Mcginniss Scotiabank. Please proceed with your question.
Hey, good morning.
The midpoint of <unk> per share guidance implies a bit of a slowdown in the back half of the year to 43 cents a share per quarter could you just touch on maybe potential headwinds or conservatives conservatism thats built into that number.
Sure that's similar to how I answer that we just gave the first half of the year benefited from a few one time items reserve reversal.
So couple of terminations in the first quarter those health.
They helped overstate the first half relative to the second half, but in terms of the core business. We see continued growth in the second half of the year and and then like we said, we're just we're trying to be prudent with the guidance given the economic backdrop, but we are optimistic about the business.
Okay, that's fair.
And then could you touch on.
The.
The change in tenant sales numbers that we've seen over the last couple of quarters in terms of that number coming down sequentially, obviously still up year over year, but.
Seems it seems to imply that maybe the shopper isn't.
Spending quite as much money.
Which I think we've.
I've been reading about.
Anyways.
But just curious what youre seeing in terms of shopper foot traffic tenant sales.
And especially in.
In the most recent quarter versus the trailing 12 months.
So Greg I don't know when the last time you visit our centers, but if you were there last year. This time versus this year you would've seen in the parking lots are justice for this year as they were last year, but the major difference is promotional activity in stores.
The last year. This time, we talked about in several calls ago.
Q3, and Q4 of last year.
Retailer pricing with supply chain issues with an all time high even though we're value every day, we are still.
The best value for the famous brands that we sell in our shopping centers, but if you visit one of our shopping centers, especially starting in the summer promotional activity is much different.
Which would imply that a.
Shopper.
Who spent $500 in our shopping center last year and bought.
A number of units could buy more units for slightly less than that amount this year because of that.
The major promotional activity that you're seeing.
Sure.
Okay that was actually in Super Bowl this weekend.
<unk> pretty full parking lot there and how about pricing did you walk into sourcing fee.
The discount is above what you probably could have gotten last year. If you were there.
I honestly I didnt notice that.
A significant difference from that standpoint, but I will I'll take your word on that.
Thanks, Greg.
The next question comes from the line of Floris Van <unk> with Compass point. Please proceed with your questions.
Thanks for taking my question guys.
You just posted your second quarter of <unk>.
Positive lease spreads.
They appear to be.
Increasing as well.
Steve maybe if you could comment on.
Leasing and the structure of the lease terms you're getting.
Saw that on your <unk>.
New leases there longer term.
Are there any other changes are you getting higher fixed rent bumps.
You're getting improved terms on your on your Cam maybe if you can walk us through the lease structure and how that's evolving.
As the occupancy builds.
I think the major change to lease structure happened around the Covid period of time, but I think what's happening now is structurally we're going back to the way we used to do business.
Several years ago lease terms are longer.
Youll see more Ti paid out as it relates to a longer term lease we're seeing a lot more 10 year leases. So there is.
There has been a big jump in our average term of lease, particularly around our re tenanted space.
But we are in the base rent and extra business.
Pivoted during Covid, obviously to preserve occupancy, making those trades, where we traded variable.
Some of that downside protection on the base rate, but as we continue to produce results for our retailers whether that comes on the sales line.
We are seeing.
<unk> power returning.
And our asking rents going up we're marking we're marking our rents to market everyday based on our performance in our shopping centers and I think that there is a lot more tolerance for our retailers to step up and pay more rent.
And.
And in terms of the rent bumps that youre getting and maybe if you can also touch upon the.
Touch on the signed not open I think last quarter was about 40 basis points is that gone up a bit.
Last quarter.
So it's about 50 basis points now.
But the ramp ups here, we've got a ramp ups for our base rents are in that 3% range and our rent bumps for our cam can be somewhere between four and 5% depending on the lease.
And youre not getting any pushback from retailers on that.
I think the retailers want to be in our shopping centers and they're looking at it from an occupancy cost point of view if you take a look at our occupancy cost at eight 5% OCR, we're still one of the cheapest channels.
In the retail ecosystem.
We have plenty of room to push our rates and Thats what were going to do we believe in our real estate.
Our asking rents are what we think our real estate is worth and we're getting those rents.
I see.
Thanks Lars.
Thank you.
A reminder, you May press star one to ask a question. We ask you. Please limit yourself to one question and one follow up if you have additional questions time permitting there'll be addressed.
The next question is from the line of Emily <unk> with.
Green Street. Please proceed with your questions.
Thank you.
So with your updated guidance does assume no meaningful change in your share count, but I was hoping you could discuss how you're thinking about share buybacks, given where your stock is trading.
Sure.
Yeah.
Obviously, we evaluate a lot of different investment opportunities.
The development acquisitions.
Investing in our existing portfolio a lot of the sustainability initiatives that produced an ROI.
We look at all of that along with share buybacks.
<unk>.
And then have to decide where the best opportunities to allocate our capital, but we do think that.
The share price presents a compelling value we do still have some authorization remaining under our buyback approval from the board and we'll continue evaluating it.
Okay, and then just a follow up outside of Nashville would you mind walking us through your plans on how.
Will it be spending your high cash balance and using your free cash flow that you're generating I'm, assuming it will be relatively similar to how you are thinking about the share buybacks as well.
Sure.
Sorry, I didn't quite hear the question.
Hello.
No.
Sorry, yes.
I heard you ask about Nashville.
I just want to make sure I understood.
Greg.
Yeah, so outside of Nashville would you mind walking us through your plans for your high cash balance and the free cash flow that you're generating I am assuming the thought processes.
With the share repurchase.
Processes, well, but if you have any additional color.
Yes, that's right.
There's a lot of investment opportunities in our portfolio, we talked about the peripheral land we've talked about some of the.
Sustainability initiatives with solar with EV charging station.
Different.
Value enhancing opportunities within the existing portfolio and then we're looking at opportunities to grow the portfolio and leverage our platform bring our scale to create value.
Outside of the existing portfolio so.
We will continue to pursue opportunities to grow the company and.
And invest these dollars accretively.
Great. Thank you.
Our next question is from the line of Mike Mueller with Jpmorgan. Please proceed with your question.
Yes, Hi, just two really quick ones here I guess, how much temp to Perm leasing have you done year to date and then looking at Nashville, The 480 per square foot cost.
Is that elevated because of what you touched on last quarter about just building on rock and taking longer.
Yes, I'll take the I'll take the second question first and then I'll give you the answer the first question.
Obviously construction costs are much higher than they were when we first.
Identified this land five years ago. The fortunate thing about that is that rents continue to grow in the Nashville market as well so were.
Our construction costs continue to rise and now I think we're pretty stable, where we are right now so we're pretty comfortable with the range that we provided.
But what is growing is rents in that market.
We're confident about the yield that we posted.
And then.
The first question that you asked again.
The temp to Perm, yes, how much.
Yes, just to Perm leasing, yes, well look we've grown our permanent occupancy sequentially, but as I look at temp to Perm leasing what's important to US is if we if we have a tenant.
Tenants in a great space in our shopping center.
That temp lease has the right for us to terminate and replace it with a permanent lease when we've got an appropriate tenant paying us an appropriate rent for that space.
But we're never going to look.
To get rid of a temp tenant.
If there is still a vacant square footage in that shopping center and typically what we'll do is we'll just move the temp tenants to another vacancy et cetera, if a vacancy.
If it exists in that particular center with regard to.
Retailers or more high profile retailers that have done 10 deals with us to so called test the waters before they become firm.
We had great success this quarter converting some columbia deals.
Some late stage deals.
And some of deals from temp tenants in our space, It's a long term permanent deals in our space.
Got it okay. Thank you.
Thanks, Mike.
Thank you we've reached the end of the question and answer session I will now turn the call over to Mr. Steven tanker for closing remarks.
Thank you for your time this morning.
Your questions.
We're very proud of our positive results and continued momentum.
We look forward to providing ongoing updates on our initiatives in future calls.
You have any questions.
The interim please feel free to call Steve Yalof.
The other folks on the call today.
Thank you.
Have a great day goodbye.
This will conclude today's conference. Thank you for your participation you may disconnect your lines at this time.
Yeah.