Q2 2023 Tanger Factory Outlet Centers Inc Earnings Call
Good morning. This is Ashley Curtis and I would like to welcome you to the Tanger factory outlet centers second quarter 2023 conference call yesterday evening, we issued our earnings release as well as our supplemental information package and investor presentation.
This information is available on our Investor Relations website investors that Tanger 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 S. E regulation G, including funds from operations or <unk> or.
So funds available for distribution or a C. D same center net operating income adjusted EBIT diary 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 4th 2023.
At this time, all participants are in listen only mode.
During management's prepared remarks, 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 question.
If time permits we are 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 Michael Bilerman Executive Vice President Chief Financial Officer, and Chief Investment Officer. 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, and thank you for joining us for our second quarter 2023 earnings call.
The team continues to unlock the value of the Tanger platform to drive attractive organic and external growth.
We look forward to the opening of our newest center in Nashville, Tennessee, and we remain confident in our outlook.
I will now turn the call over to Steve Yao.
Thanks, Steve and good morning.
He used to announce another quarter of strong results demonstrate the continued execution of our strategic plan.
Elevate and diversify our tenant mix drive total rents and leverage our platform and balance sheet you realize additional growth.
We delivered a same center NOI increased four 3% for the second quarter, which was better than anticipated and contributed to our increased guidance for the full year.
Leasing activity continues to be a highlight the.
The successful execution of our leasing strategy has enabled us to rebuild occupancy drive rent expense recovery gross to curate a portfolio with sought after brands to create an experience shoppers seek.
In the second quarter, we marked our sixth consecutive quarter of positive lease spreads and another quarter of occupancy gains.
Occupancy stood at 97, 2% on June 3200, 30 basis points year over year.
70 basis points sequentially.
US our highest occupancy since pre COVID-19.
As we discussed and leasing strategy incorporates a commitment to locking in higher fixed rent and expense recoveries.
Blended average rental rates increased 13, 2% for the trailing 12 months ending June 32023.
The tenant in spreads grew 39% and renewal rent spreads grew 12, 1%.
Our ability to drive solid increases in renewal rents as the clearest demonstration retailers commitment to our Tanger branded open air portfolio, allowing us to capture rent upside.
As of the end of the second quarter renewals executed or in process, representing 64% of leases expiring this year consistent with last year.
And we are actively addressing our rule for 2024.
We have rebuilt our occupancy grown our rents and are confident in our ability to sustain this growth.
You prioritize diversifying our tenant mix and continue to add new brands to our portfolio.
One example is in San Marcos, Texas, We've recently opened multiple home furnishing brands, including restoration hardware design within reach West Elm and wasting.
This newly created outlet furniture destination, coupled with the recent opening of shake Shack is proving a great generator of traffic to our center.
Living out our mission to drive new customer and have them stay longer when they visit.
Our continued focus on adding new brands and converting temporary space to permanent has contributed to our occupancy gains in the quarter.
We will continue to strategically utilize our 10th leasing strategy to introduce new tenants to the portfolio with the objective of filling our centers with the most compelling brands over time.
Furthermore, we have increased our occupancy cost ratio by 50 basis points from the prior period from eight 5% to 9%, which is still one of the lowest in the industry supporting our confidence in our ability to continue to grow rents. We continue to focus on enhancing our portfolio NOI by reducing.
We're downsizing underperforming tenants.
And optimizing highly protected brands across our portfolio to achieve maximum productivity.
Traffic was largely in line with the prior year quarter, and we saw a slight decline in average tenant sales.
In the second quarter, our shoppers gravitated to brands that provided better promotions and everyday value pricing consistent with our outlet bottle.
The introduction of our new Tanger loyalty program launched last month with a strong start.
As members of our Tanger club can enjoy even greater value across the participating store network.
Our new digital first loyalty program provides for a customized experience and retailer offers specifically tailored to each member's interest and enables them to unlock rewards for increasing levels of purchases and engagement.
This program also provides an opportunity for us to better interact with our retailer partners and for retailers to drive visits from these valuable shoppers by delivering targeted offers.
Each of you that joined the new Tanger club to experience it.
In the second quarter, we published our latest ESG report, we remain committed to reducing our environmental impact cultivating a people first employee culture and fostering healthier more resilient communities, where we do business in the report we highlighted some of our 2022 achievements, including doubling our solar Inc.
Cost structure, reducing energy use and greenhouse gas emissions doubling EV charging capabilities electrified, 100% of our security fleet of vehicles and certifying over half of our GLA to meet needs high standards.
Lastly, I'm extremely pleased to share the Tanger Nashville are 37 shopping center will Grand open on October 27th of this year.
As of today with just under 90 days until opening we are currently 95% lease executed with an amazing assortment, if the very best National and international fashion accessories Athletic home furnishing and cosmetic brands.
Many of which are new to Tanger and due to the outlet channel.
Tanger Nashville will also feature a combination of famous national and local iconic food and beverage offerings with indoor and outdoor dining terraces surrounding a half acre Central Park community space that serves as the projects centerpiece.
Centre will qualify for LEED silver certification.
As we look ahead, we are aware of the continued macroeconomic pressures, but are confident in our proven strategy of driving organic and external growth as we renew and re tenant or existing portfolio, while diversifying our tenant mix monetizing our peripheral land.
Expanding select centers and growing incremental revenue streams.
Our people platform and strong balance sheet provides us opportunity to execute on these initiatives.
Want to thank our entire team our shoppers retailers and all of our stakeholders for their continued support.
I'd now like to turn the call over to Michael.
Thank you Steve.
Today, I'm going to discuss our financial results, which came in ahead of our budget, our strong balance sheet position, our external growth initiatives and I'm going to end with our increased 2023 guidance.
Our second quarter results came in ahead of our expectations with core episodes of 47 cents per share compared to 45 cents in the prior year period.
Same center NOI for the total portfolio increased four 3% for the quarter and five 9% year to date driven by the gains in occupancy from our robust leasing activity that Steve talked about.
Strong rent spreads, which had led to higher base rents and higher expense recoveries as well as the benefits from operating expense efficiencies and the timing of some of our expenditures.
Our operating results reflect our ongoing strategy of structuring leases to grow total rental revenues and higher Cam contributions, while also converting percentage rents to fixed rents.
We continue to maintain a conservatively leveraged well ladder balance sheet with the liquidity and the flexibility to pursue our growth objectives. We have no significant debt maturities until late in 2026, and we've been proactively addressing the February 24 exploration of our current $300 million.
Of interest rate swaps.
At the end of the quarter, we had $1 $6 billion of pro rata debt and.
And we had $234 million of cash and cash equivalents and short term investments.
We also have full availability on our $520 million unsecured lines of credit, which in aggregate provides tanger with over $750 million of immediate liquidity.
Our net debt to adjusted EBITDA was five two times for the 12 months ended June 30th when the lowest in the retail sector and importantly, we are carrying $90 million of incurred cost to date for Nashville, without the commensurate EBITDA, which is going to come on next year.
During the quarter, we were pleased to receive further validation of our balance sheet strength with an investment grade Triple B rating from Fitch, which adds to our existing investment grade ratings by both Moody's and S&P.
With the addition of this rating we're gonna realize an improved cost of debt with a 25 basis point reduction on our unsecured lines of credit as well as our term loan which is factored into our updated guidance range.
Now in terms of our $300 million of interest rate swaps that will be expiring in February 2024.
We have executed at attractive forward, starting swap agreements on $125 million of these explorations and we've locked in adjusted so far at a rate of three 4% up from the current swapped rate of two 5%.
Our new swaps will start at the expiration of the current swaps next February and carry an average duration of 2.3 years, which would take us into mid 2026.
No impact from these swaps in 2023, and our next debt maturity isn't until September 2026.
Our quarterly cash dividend remains well covered with a continued low payout ratio, providing the company with additional free cash flow after dividends to drive our growth.
With our low leverage balance sheet, and our strong liquidity position along with the continued free cash flow that we're delivering.
We have significant optionality to pursue additional growth opportunities, including expanding our centers by activating our peripheral land new development and the acquisitions of open air shopping centers.
Now in terms of our immediate cash needs the largest usage, meaning funding for our Nashville development and to date through the end of the second quarter, we have incurred costs of $89 million against our narrowed cost range of 143 million to 147 million, which leaves $56 million to.
Spend at the mid point and the majority of the spend will be incurred during the third and fourth quarters.
We are very pleased to note that we are also increasing our projected stabilized yield on this project by 50 basis points to a range of 7.5% to 8% primarily due to our successful leasing activity and our forward outlook for the center.
Now turning to our increased 2023 guidance, which reflects the better than anticipated performance in the second quarter and our outlook for the remainder of the year.
We are increasing our expectations for core <unk> fell by two and a half cents at the midpoint to a revised range of $1 85 to $1 92 a share.
We are also increasing the same center NOI growth expectations by 50 basis points at the midpoint to a range of 3.5% to 5% and if the increased interest and other income by $2 million at the midpoint as interest rates have remained elevated.
We're also reducing the anticipated recurring capex in 2023 to a range of $45 million to $55 million, which is down $5 million at the midpoint largely due to the higher renewal activity, which in turn reduces our second generation tenant allowances.
For additional details on our key assumptions. Please see our release issued last night and now I'd like to open the call up for questions operator.
Thank you.
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Yeah.
And our first question comes from the line of Greg Mcginniss with Scotiabank. Please proceed with your questions.
Hey, good morning.
Michael could you just touch on the factors that can drive to hang on to the top or bottom end of the guidance range. In addition to expectations.
Full year impact of bad debt and what you guys. So far.
Sure. Thanks, Greg So if you look at the assumptions in the release really you know the majority of it is the top and bottom range of our same store guidance and all the other elements, whether it's G&A interest interest and other income that's going to get you to the low and the high end of our guidance range.
In terms of bad debt when we when we initiated our guidance in the year. If you remember we started the year at $1 80 to $1 88.
We increased that guidance last quarter by two cents worth.
We lifted our same store guidance range by about 75 basis points at the midpoint and now we've increased guidance again, raising that same store guidance by 50 basis points and we talked about how we were being prudent in our approach on bad debt and we continue on that level as we sit here today with a little watch list.
And we're just mindful of the overall environment.
Okay, Thanks, and just moving onto Nashville, real quick nice to see that at 95% lease rate there.
Could you touch on the expected initial yield when it opens and what the path to achieving them.
758% stabilize yield looks like in terms of time.
Sure.
We're really excited about the Nashville execution.
The center is going to open in late October .
95% leased we did increase our stabilized yield by 50 basis points.
Just on all the leasing that we've been able to do to date and the forward outlook that we see coming.
Coming out of the ground, we still expect it to be $7 I think last call or maybe the call before.
Coming out in the 6% are in the sixes as a start and I remember a field of dreams, where they said if you build it will they come.
There's a lot of marketing and opening our center to.
To ensure the customers no Theres New center in town and so there's just that ramp from a marketing expense perspective, as well as sales that are going to build over the course of number of years.
To that stabilized yield of seven five to eight.
There, Okay and final final question for me so based on our math more than 80% of newly leased G. G. L. A in Q2 I went to tenants outside the top 25.
Just give any color on the new tenants are in the portfolio who's growing fastest with you.
And any and any you know I appreciate you you're talking about the the furniture outlet destinations, but is there any any other tenants that you can point to as being ones that you're proud to have in the portfolio and growing growing with even faster than others.
Yes sure.
I'd love to focus on category more than the retailers themselves, but I'll share some things with you first of all just make sure in your in your numbers or renewal rates have been extremely high so a lot of that leasing velocity that you've seen is really our existing tenants.
Loading to stay in our portfolio.
And pay rent increases averaging around 12% in order to do so and remember when we do a lot of that renewals, we do with it relatively low capital cost with regard to do tenants in the portfolio and tenants that are quite active a lot of the athletic brands you can probably imagine we've done a number of deals with Adidas.
In in the apparel business.
Secret has been a big contributor of a lot of the new leasing for US we've talked a lot about the furniture brands on most of them are in my.
Rick remarks earlier.
And then the food and beverage, which we've been saying for the last year and a half two years has become a far more important part of our business. We just opened up our first shake shack in San Marcos and more has shake shack joining us in a number of our other centers are moving forward. So that's just a quick random sampling just other categories directly.
Consumer brands, we're finding a lot of success with direct to consumer brands coming into the outlet channel now.
And they're growing with us so there's a number of brands that we've leased to date.
Their first ever store I'll give you. Some resource is great example of a direct to consumer brand opened their first store in Myrtle Beach and now it is expanding with us rapidly throughout our portfolio.
Thank you Steve.
Our next question comes from the line of Todd Thomas with Keybanc capital markets excuse me with your questions.
Hi, Thanks, good morning.
First question I wanted to ask about the higher expense recovery income and lower operating expenses in the quarter I know, it's been an initiative to drive total overall revenue not just the base rent component, which you talked about and your expense reimbursement rate is higher by by over 1000 basis points compared to.
21, and 'twenty, two which is good so we're making really good progress there.
Is that sustainable as we think about the backend of the year and heading into 2024.
Thanks Todd.
A couple of things going on too.
You articulated and as we've been talking about we've been structuring our leases to drive total rent, which has driven an increase in our fixed cam and so that's part of what's flowing in the numbers over the course of this year relative to last year, right, which we're driving total NOI with the retailers paying us both in.
Base as well as in fixed Cam now in terms of the timing of that obviously when you go to fixed Cam it's fixed over the course of the whole year.
Where our operating expenses given our business are more variable.
There's obviously things like snow, which we had in the first quarter, which was much lighter it didn't snow that much and so we did have a small it snow expenses, but we still got the same amount of fixed cam and so the percentage recovery will look very high we.
We had a continuing amount this quarter always continued to mitigate as much of our expenses, but also the timing of those expenses. So another example would be like our marketing expenses, which tend to be heavier in the back half of the year relative to the first half of the year. Therefore, you should expect our expense recovery rate.
On average in the back half of the year is probably more in the low <unk> in terms of percentage relative to being in the high eighties that we've had in the first half and as we think about our same center NOI growth. We really believe this on a full year basis, and a three and a half to five that's what we're sort of guiding to for the entire year.
Okay. That's helpful. Then or are you able to share you know since this initiative.
Maybe maybe it was implemented or you've been driving a little harder at it a little bit more recently it seems can you share what the sort of expense recovery rate or the target rate looks like on leases that you've executed over the last few quarters I'm not sure.
You know if you're if you're achieving.
Achieving a you know sort of a greater than 100% margin on new leases, if we could potentially see the expense recovery rate.
To move higher and kind of climb up another 500 or 1000 basis points over the next couple of years, maybe you could talk about that a little bit.
Yeah.
Sure Todd its Doug we are continuing to drive total rent like Michael said.
And we do expect the recovery rates to move higher over the next few years.
But we're not at a point that we can provide guidance on where we would target that recovery rate in future years.
Okay.
And then if I could just last question.
Wanted to touch on Nashville is on track slated to open in October and I think in your prepared remarks, you talked about being <unk>.
Positioned for additional opportunities and external growth.
Just wanted to see if you could speak to any any new developments or external growth initiatives that you are.
Beginning to to to say.
As we mentioned in prior quarters.
Definitely out there looking at a number.
Of our transactions land.
We think that the outlet business.
Is is continues to be a very strong business evidenced by how quickly we were able to lease Nashville and it was.
But what about 90 days until opening 95% lease executed I'm doing this for a long time I think that that's one of the highest.
At least that I've seen.
So we're excited about that and we think that there's room to grow. This this platform across the country, obviously nothing to announce on this call today is that changes we're looking forward to sharing with you what we're thinking about and where we're looking to grow and build.
Yeah.
Okay alright, thank you.
Our next questions come from the line of Samir Khanal with Evercore. Please proceed with your questions.
Good morning, everyone. Steve can you talk about your ability to continue to push rents here I mean sales were down a little bit here I mean, even if sales are.
Our flat and I understand occupancy cost ratios are still low.
But so what what is your ability to still push rents here. Thanks.
Thanks, Yeah, you're looking at.
I look at the sales number I mean, obviously, that's a that's an important metric for us, but you know I think a lot of that sales impact has a lot to do with higher price point product in the market across all channels higher price point product happens to be struggling.
What is in favor right now.
Yes.
Great brands promotional re priced and we see that through our platform. So if you take a look at our sales productivity and compare 2019 were still up 15% and managed to be holding at that 15%.
Great.
Truly optimistic about the second half of the year and we think there'll be some some positive sales impact in the second half of the year, but you know that said if you look at the.
The product that we're actually selling as real estate.
And we continue to push the pricing on our real estate, we've seen great growth with our re tenant a 30% increase six consecutive quarters of rent spread growth. We still think there's a lot of runway a lot of headroom for us to push our rents going forward you mentioned occupancy cost ratio.
I first started here in the middle of Covid extremely low we talked about pushing our occupancy cost ratio was a huge focus of ours.
We're now up to about 9%, but our historic highs are over 100 basis points over 1100 basis points greater than that because of that we think that theres plenty of room for us to continue to push our leasing team is extremely focused on pushing rents.
Occupancy at 97, 2%, although very hot.
You know if we have to trade a rent for occupancy at this point, Brian and growing NOI is really our main focus.
Got it and Michael I know the uncollectable tenant revenue I think there was about a 1 million in there.
What was that related to and when you think about.
The watch list as it sits today it feels like you're in a good position, but maybe just a bit long term looking at maybe into even next year.
Any sort of early reads on that.
You know I think the bad debt in this quarter is consistent with you know some things that we have within.
The portfolio that we're just mindful of its.
It's all embedded within our guidance nothing out of the ordinary in our watch list remains low.
Yeah.
Thank you.
Our next question is from the line of Craig Mailman with Citi. Please proceed with your questions.
Hey, good morning, just wanted to follow up on the.
The capital deployment opportunities Michael you know that you guys have north of 750 million of cash currently part of that is earmarked for to finish Nashville, and then price of leasing costs and other things you've.
You've done, but I'm just kind of curious as you look at your your opportunity set here is there in your cost of capital. What's your equity is approved but you know the debt cost continued.
To rise here, how how would you rank them.
The attractiveness of the different options that you have right now.
Sure. Thanks, Craig.
I'm really happy you're so curious about our external growth strategy.
Okay at the end of the day deals that we're gonna do has to be fruit.
Prudent.
Disciplined and where we want to do something we want to create value.
We have significant optionality given the capital that's on our balance sheet to deploy.
And we're looking at a lot of different opportunities that you see sort of highlighted and when when do we get the deal well.
Evaluate its long term IRR relative to our current cost of capital in terms of how we're financing it.
As well as sort of how we see capital evolving over the future we feel that there's a significant opportunity to really add value with our operating strategy, our leasing strategy, our marketing strategy and the Tanger platform that we've built.
And we're looking at a lot of different opportunities across acquisitions as well as development.
I guess, if you had if you think about you know where the risk adjusted returns are doing an out parcel.
On an existing asset.
What kind of IRR would you be targeting there and then what.
What kind of differential would you need to do something outside of the portfolio either a new another outlet or potentially going to kind of open air shopping centers.
So adding density to our existing sites, where we already own the land obviously has a very high return, but just in terms of capital size.
Doing it out parcel was very different than building.
Or acquiring center.
And the opportunity set as we look at larger scale you know those are two different things.
The real estate Densification as part of our business and you know we have a significant amount of free cash flow that allows us to fund those initiatives as well as our liquidity and then as we look at things that are truly external growth, where either we're buying something or we're developing something or we're going to a joint venture with someone you know every deal.
<unk> got to stand on its own.
And we got to look at what the economics are and what the opportunity is over time with whatever center that we're buying.
Okay and then just one last quick one you guys are sitting on cash.
Deposit rates are going up right, so you're getting a nice lift from.
Interest income here, but as we think about 'twenty, four and kind of a sustainable run rate here do you feel like you have enough in the hopper from commencement to offset kind of potentially deploying that capital losing that that interest income that you guys aren't going to have any dimunition sort of in the run rate as we head into 'twenty four.
I know you guys haven't given guidance, yet just trying to get a sense.
Hum.
Our cash is currently.
We're earning interest income on it our hope is and I think you would hope that this is true that anything we'd go out and buy is going to be a higher yielding of our cash. So we should be able that should be a decent hurdle for us to get over so it is we deploy that cash we're going to see accretion from it.
As we put additional capital out we feel we're in a great spot right now with $234 million of cash and only $56 million left to fund on Nashville. That's the that's the main capital commitment and then if you look at our dividend payout ratio, which was in the 50% range in the first half.
Because we were able to retain more cash flow.
In the first half that just adds to that liquidity.
Liquidity as we go forward over the next 12 months.
As we deploy that.
Great. Thank you.
Thanks, Craig.
Our next questions are from the line of Caitlin Burrows with Goldman Sachs. Please proceed with your questions.
Hi, Good morning, everyone. Maybe just following up on that last point, Michael It sounded like you were suggesting outlet expansion.
Could be possible. So I was just wondering when you look at the centers that are 100% occupied or high 19th I guess is there extra land at places like Deer Park fully San Marcos Myrtle Beach, there was a number that fall into that category of 90 to 100, but just wondering.
If there is that opportunity.
I think thats from a land perspective.
Right, Okay, but it's a it's the golf. So just you know to answer that question.
And a lot of that occupancy also some of them some of our temp tenants.
So I understand you know in the past we've been if we marked our 10th space to market. There is three to four times range opportunity. So I think thats real important part of our organic growth story, particularly in some of those locations that you that you shared.
So in the case of a deer Park, where we have a Christmas tree shops. As an example, we all know what's happening with Christmas tree shops, we don't look at that as a burden we look at that as great opportunity. So when you have a 100% occupied shopping center on long Island.
And your partner.
We find ourselves with great opportunity to get that space back and engineer it into a number of shops and definitely drive additional rent there.
Regards to our peripheral land we have.
A lot of.
And monetized.
Referral across our portfolio, we've got a team in place focused solely on generating revenue.
Peripherally. So that's just if we call that our organic or organic growth story, and we've got great anecdotes of that occurring all across our portfolio. So that is a great example.
Where we've recently and we're under construction on an out parcel.
With Dave and Busters, and as part of the Dave <unk> Buster's a build we also go in addition to our small shops.
So for US that's Savannah market has been it's been a great success story for US there's a number of other out parcels and opportunities to monetize additional land there and expand that shopping center. So those are things that we're looking to do from an organic growth point of view.
Got it and just a quick follow up on the temp occupancy is it still around 10% today, just trying to figure out how big that opportunity is that you mentioned.
It's probably around that but you know a lot of that occupancy growth that you've seen in this last quarter.
Has where we've been able to trade a lot of that temp.
Temporary tenants, it's a permanent tenants, we're seeing a we're seeing growth in our permanent occupancy as well.
Got it Okay and then just you mentioned the focus on increasing base rents and reimbursements, which makes sense I was wondering if you could talk some about Kristen it seems like percent ranked our high now versus pre COVID-19 levels I'm wondering what's driving it and should we expect the numbers of the ratios to come down and kind of if they do.
To what extent should we expect a shift in skill base rents versus experienced some leakage.
Well look whats driving.
Better percentage rents is our ability and our pricing power as a company to make better real estate deals.
Historically percentage rent pay ratios were far less than they are today.
And you know that we've Sn.
Essentially.
Asked for greater percentages.
Out of the new transactions that we've done whether they are in our new center in Nashville, whereas we're re tenant in or renewing deals going forward and retailers have been far more agreeable to paying those higher rates with those higher rates as a natural breakpoint is calculated.
The the rate at which the peso.
Great points also come down so we find those higher percentages will be achievable.
Lower sales volume and historic in our company. So as I said earlier, we're optimistic about sales in the back half of the year. So we're actually optimistic about the contribution of our overage rent as well.
Got it thanks.
Thanks Caitlin.
Our next questions come from the line of Floris Van Dicom with Compass point. Please proceed with your questions.
Good morning, guys.
Keith I think the the playbook is playing out and it's a as you laid out in terms of increasing cash flow from the operations side.
I'm curious.
A couple of things I guess my two questions for you are your guide implies that.
Same store NOI is going to slow in the second half what's going to be the biggest.
You know factor for that for that expected slowing in the second half as it is at the the fact that occupancy can't be pushed much or is it. The fact that you think you are.
Your temp to Perm conversion, which again has been driving some of the growth is going to slow down going forward simply because you'll have less.
To convert all the 10% still sounds like it's a pretty high number probably twice of what it normally is so maybe you can give some more color and then I want to delve into the OCR are a little bit more is well placed.
Okay. So Michael is going to just.
And the first half of that question and then we'll talk about the dosing.
And so you know.
Florida, when we think about our same store NOI, we really think about this on an annual basis in part you know what we're talking about I think it was with Todd earlier on the call.
Kim is destroying a year, but our operating expenses are variable and given two factors. One we had better operating expenses in the first quarter and second quarter in part driven by the mild winter and all the operating expense savings and flip over to having a little bit higher <unk>.
Then slowed in the back half that's really what's impacting the sequential or the quarterly same store NOI a rethink about this business on an annual basis and the.
The trajectory into 2024, just like the trajectory into 2023, if you remember we had positive same store growth last year. We started this year thinking it was going to be two to four we're now up to three and a half the five based on all of the drivers that we've been talking about that's going to impact the run rate into 2024.
We're not getting into but we don't give quarterly same store guidance.
And we are very.
Yeah, as we think about where we are where we're going into 'twenty for all of the drivers of our business are supportive of that on an annual basis.
And I'll, let Steve go on so.
So you want to frame your question on OCR.
Yeah, I know and you sort of alluded to this earlier I mean, I think one of the one of the upside.
Drivers potentially for you guys is the fact that your OCR again. It was you know you know in the in the eights in the low eights are you know I think as you know.
As recently as a couple of quarters ago, but it's now at 9% you've talked about you know.
Fact that your peak OCR ratio is in the in the 10% you know 10 and a half you know maybe as high as 11% range, how is that progressing and how much of that incur.
Increase in OCR is gonna be from that tempt to permanent conversion how much of that is going to be driving rates and and other things around the lease structure.
Well look it's it's coming across.
All of the all of our business I mean, if you take a look you just have to look at the rent spreads you know for this quarter alone 12% on renewal, 30% on re tenant it.
So I mean, that's just.
That's just sort of.
And that's that's without.
290000 square feet that we leased to Nashville.
So we'll continue to press rents, we still think theres plenty of headroom 50 basis points of increase.
Since the last quarter.
We continue to grow these numbers our leasing team is extremely aggressive we're going out to retailers that are far more productive far more productive retailers can pay better rents.
And that's how we're merchandising and leasing our portfolio, we're going to continue to do that.
I mentioned to Greg at the beginning of the call I rattled off a number of the brands that are doing.
Do we do deals with us he is a highly productive retailers that are enjoying great sales in our portfolio.
Can I can I follow up on on one aspect to that Steve If you don't mind.
If I'm if I'm correct. Your rent spreads includes your Cam in there as well obviously Cam has and you know your your your operating costs have increased significantly over the last couple of years, what would that have you guys looked at what that spread would be if you exclude the the increase.
A portion of that.
Yeah. It's it's really it's a question of how we allocate our rents.
So there's a floor is theres a lot of there's a lot of math in those numbers.
Perhaps offline we can go through we can go through that math, but.
But at the end of the day a lot of the retailers are paying us rent based on their occupancy cost based on the sales volume that theyre doing and what percentage of that sales volume are they going to pay us and that's really the critical part of the negotiation.
We allocate a portion of that to our a cam expense because we.
We happen to have pride ourselves on managing what we believe are best in class looking maintained and operated shopping centers. So that's just how we elect to operate our business.
Yeah.
Thanks, Steve we keep keep up the results.
Thanks Floris.
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Our next questions come from the line of Mike Mueller with Jpmorgan. Please proceed with your questions.
Thanks, Hi, I have two quick ones here, one can you talk a little bit about what's going on with some of the I guess the portfolio occupancy outliers that look to be in it looks like Michigan, New Hampshire, and maybe Foxwoods and then second what are the typical rent reset mechanisms that that are in your legacy options.
Versus the options that you're signing today.
Well first of all very few of our leases have options.
So when we're renewing leases those are pure new deals that we're negotiating from scratch with our existing retailers.
With regard to the.
The other.
Other properties that you just pointed out we're seeing meaningful progress on leasing at all of those properties. They are all cash flow positively.
And.
We're very optimistic about continuing to push our leasing in those properties.
Oh, okay. Okay. Thank you.
Thank you.
Our next question is from the line of Emily Arc with Green Street. Please proceed with your questions.
Hi, there I was wondering if you could describe what the refinancing process with bank Frick Houston.
Thinks they're looking for with respect to lending requirements today.
Do you need double digit, but youll doors, taking quality property any sort of color there would be helpful.
Sure Doug.
And that was a unique asset because it's given the vintage it was at a period, where it had higher role than usual.
That limited some of the options, but there were still a wide variety of see MBS providers and certain banks that were willing to bid on that.
One of the things that we were targeting though is a shorter term with that deal we believe that as the project stabilizes offer.
The higher ROE than usual that there will be additional refinancing opportunities at.
What we would what we would deem.
Better.
Better rates better terms.
And Emily.
At Tanger, we are.
Dominantly an unsecured borrower.
We predominantly use secured debt in our joint ventures.
And on the unsecured side, that's where we feel our cost of capitals and an advantage.
Especially with the recent decline in our line of credit cost and our term loan cost.
Overall.
Okay. Thanks, and then kind of moving on to the leasing pipeline can you remind us where you're currently used to physical spread is that and then looking at the retailers. How quickly are they opening up today, what does the cadence look like in your pipeline for the next 12 months.
Well first of all at 95% renewables.
There's no downtime. So I think that's a really important thing to keep keep in the back of your mind, where we're doing a lot of our existing retailers.
Much higher rents.
And you know.
We lose absolutely.
Time into capital when we renew those as far as new tenants at the time from them to take occupancy and opened up a store.
Lee varies based on the complexity and the size of the store going in but I think the the mitigating factor is our ability to keep those rooms occupied until the very last minute. So we talked about our temp leasing strategy, which I think is a really important one here if we have a tenant thats, leaving.
The shopping center and a new tenant that's taking the space and if there is.
Little is a month of downtime between those we're going to make sure that we keep that room, let hockey.
Occupied and cash flowing during that period of time.
Okay.
Thank you.
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