Tanger Factory Outlet Centers, Inc. (NYSE:SKT) Q1 2024 Earnings Call Transcript

Tanger Factory Outlet Centers, Inc. (NYSE:SKT) Q1 2024 Earnings Call Transcript May 1, 2024

Tanger Factory Outlet Centers, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Ashley Curtis: Good morning. I’m Ashley Curtis, Assistant Vice President of Investor Relations, and I would like to welcome you to Tanger Inc.’s First Quarter 2024 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 IR website, investors.tanger.com. Please note that this call may contain 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.

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 today’s date, May 1, 2024. At this time, all participants are in listen-only mode. Following management’s prepared comments, the call will be opened for your question. On the call today will be 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 Stephen Yalof. Please go ahead.

Stephen Yalof: Thank you, and good morning. I’m pleased to announce another quarter of solid performance. Last year’s positive momentum carried into our first quarter and we continue to successfully execute on our strategic initiatives of unlocking the embedded value in our portfolio through our leasing, operating and marketing efforts and selectively pursuing external growth. In the first quarter, same center NOI grew by 5.2% and core FFO per share by 13%, driven by the execution of our internal and external growth initiatives. Leasing volume and rent spreads are key indicators of our ability to reprice our space and over the trailing 12 months, we leased more than 2.3 million square feet of GLA, representing nearly 20% of our portfolio, and an average increase of 13% on a comparable basis as reflected in our rent spreads.

Rent spreads in the quarter were 36% for re-tenanted space and 11% for renewals. We are pleased with the demand for space in our portfolio as we maintain a robust pipeline of deals and progress with existing best-in-class brands and new to Tanger retailers, categories and uses seeking to grow their business with us. As of March 31, our portfolio occupancy was 96.5% flat to the prior year period for the total portfolio with our same center portfolio up 60 basis points. As we discussed last quarter, we continue to grow occupancy and create demand for space in our centers. That end, we’re focused on portfolio enhancement. Where appropriate, our leasing professionals are prioritizing re-tenanting and right-sizing over renewing selected stores in order to enhance the overall merchandising mix, utility and shopper experience.

Over the past few years, we have seen renewal rates greater than historical averages. Today, we see our increased pricing power as a catalyst to driving higher re-tenanting activity, which may result in renewal rates returning to our previous levels. Peripheral land has continued to be an important driver of incremental growth as we continue to activate and monetize our real estate with a variety of complementary uses and attractions that add to the diversity of experiences on center and drive both local and tourist trade. Additionally, the locations of our centers are benefiting from broader demographic, travel and migration trends. We have the advantage of serving high tourist destinations, which are also the areas of the country that are experiencing elevated population and employment growth.

This creates additional demand drivers for our centers and uniquely positions them to cater to both destination shoppers and more frequent local shoppers. These shoppers enjoy our mix of apparel and footwear retailers, as well as the new categories we’ve added, which include food and beverage, entertainment, and health and beauty uses. Traffic in the quarter was up slightly to last year, as a challenging January was impacted by weather related closures. However, this was offset as the quarter progressed with a stronger February and March due in part to the earlier timing of Easter. Sales led by family apparel, athletic and footwear brands drove an increase in trailing 12 month total portfolio sales per square foot to $437, a sequential improvement over our year end reported numbers.

We are pleased with the integration of the three centers we added to the Tanger platform in the fourth quarter last year. Nashville continues to build momentum benefiting from tourist shopper visits and the growing local population. As sales and traffic continue to grow, we’ve executed leases for most of the remaining space and look forward to welcoming these exciting retailers to Tanger Nashville. Both our Asheville and Huntsville centers have proven to be strong contributors and natural fits to our platform. We are executing against our strategic plans for each with new tenant announcements, food and beverage additions, and shopper amenities expected later this year. With our proven track record as operators and asset managers of Open Air Centers, we continue to see opportunities to selectively pursue expansion.

Our solid balance sheet position and operational expertise have provided a wider addressable market as we consider additional acquisition opportunities. We will maintain a disciplined approach, which incorporates leveraging our best-in-class leasing and operating platform, as well as our retailer relationships to create value. I want to thank the Tanger team, our shoppers, retailer partners and all of our stakeholders for their contributions and support toward our continued success. I’d now like to turn the call over to Michael.

Michael Bilerman: Thank you, Steve. Today I’m going to discuss our first quarter financial results, our balance sheet activity, and our increased guidance for the year. Overall, we continue to deliver strong financial results, driven by both internal and external growth backed by a solid balance sheet which was further enhanced by the recent upsizing, extension and reduced pricing on our unsecured lines of credit. In the first quarter, we delivered core FFO of $0.52 a share compared to $0.46 a share in the first quarter of the prior year as we saw continued solid operating growth along with the contributions from the three new centers added in the fourth quarter. This growth was partially offset by increased interest expense from the new interest rate swaps which became effective during the first quarter.

Same center NOI increased 5.2% in the first quarter, driven by the robust leasing and positive rent spreads that Steve talked about which has led to higher rental revenues from increased base rent and higher expense recoveries. In addition, in the first quarter, we recognized certain expense refunds related to expenses from prior year periods, which were approximately $0.01 higher than we anticipated. This was partially offset by additional snow removal expenses compared to the milder winter in the prior year. Our balance sheet remains well-positioned to support our internal and external growth initiatives with low leverage, a largely fixed rate balance sheet, minimal debt maturities until late 2026 and ample free cash flow after dividends.

At quarter end, we had an equity market capitalization of $3.4 billion and had $1.6 billion of pro rata net debt. Including the $325 million of interest rate swaps that went into effect in February of this year, approximately 93% of our total debt outstanding is at fixed rates. While our net debt to adjusted EBITDA was 5.7 times at pro rata share for the trailing 12 months ended March 31, 2024, pro forma for a full year of adjusted EBITDA for the three new centers that came online during the fourth quarter, we estimate that our leverage ratio would be between 5.2 times and 5.3 times on a trailing 12 month basis, still one of the lowest in the REIT sector. At quarter end, we had $474 million of availability on our unsecured lines of credit and $23 million of pro rata cash and investments.

Subsequent to quarter end, we were pleased to amend our lines of credit which increased Tanger’s liquidity, reduced our borrowing costs and extended our maturity through 2029 with options further enhancing our flexibility to pursue Tanger’s growth initiatives. With the amendment our borrowing capacity increased by $100 million to $620 million with an accordion feature to increase that capacity to $1.2 billion subject to lender approval. In addition, our pricing grid was improved, including a 15 basis point reduction at current levels while all of our financial covenant thresholds were maintained. We were very pleased with the execution of our line recast, especially during a difficult real estate lending environment and greatly appreciate the continued strong support from our overall lender group.

Thank you for your confidence in Tanger, our growth, our credit and our team. In April, our Board approved the 5.8% increase in our dividend to $1.10 per share on an annualized basis, which lifted our dividend yield approximately 20 basis points with the shares yielding just under 4% today. Our quarterly cash dividend remains well covered with a continued low payout ratio that provides free cash flow to support our growth. In the first quarter, our dividend payout ratio was at 54%. Now turning to our increased guidance for 2024. We’re increasing our core FFO per share expectations by $0.01 to a range of $2.03 to $2.11, or 4% to 8% growth over 2023. We have increased our same center NOI growth expectations by 25 basis points on both ends of the range to a new range of 2.25% to 4.25% predominantly due to the better than expected expense refunds that I previously discussed.

All the other expectations remain unchanged from the guidance that we provided on our year end call. For additional details on our key assumptions, please see our issue — our release issued last night. We are greatly looking forward seeing many of our financial stakeholders at upcoming industry events and property tours. The next stop on the Tanger tour will be at Tanger Outlets Savannah, which will take place on May 7 in conjunction with Wells Fargo’s 27th Annual Real Estate Securities Conference, which takes place on May 8th and 9th in Florida. In addition, members of our management team will be hosting meetings at BMO’s Conference in New York on May 8th, the ICSC Conference in Las Vegas on May 20th and 21st and NAREIT’s REIT Week in New York on June 4th through the 6th.

With that, I would now like to open up the call for questions. Operator, can we take our first question please?

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] And our first question will come from the line of Jeff Spector with Bank of America. Please proceed with your question.

Jeffrey Spector: Great. Good morning, and congrats on the quarter. My first question just thinking about enhancing the merchandising mix, I know we’ve discussed this, but if you can maybe talk a little bit more about that. Are these tenants that are in outlets already? Are these tenants that are in, let’s just say, other outlets and not yours or maybe some are at Deer Park, but you’re hoping to expand or maybe a combination?

Stephen Yalof: Good morning, Jeff, and thanks for the question. Yeah, it’s a combination of all. We’re doing a really good job of surfing out new brands and retailers that haven’t been in the Tanger platform or haven’t been in outlets before. And we’re quite proud when we’re able to bring a new retailer into the outlet space. We’ve announced a number of those. We talked about Nashville, where 20% of the tenant mix in Nashville were either new to Tanger or new brands to the outlet space. We’re also going after diversified uses, better restaurants, sit down restaurants, they’re moving away from food courts and moving more into a sit down experience. We’re also going after different brands for our peripheral land, where we’ve a lot of traction, signed a number of deals that we’re looking forward to announcing shortly.

But again, adding brand new brands, uses, amenities to the portfolio to create a far more diverse experience because as we go after both that tourist customer and the local customer, we’re looking for things for all of our shoppers to do when they come and visit.

Jeffrey Spector: Thank you. And then, as you’ve been achieving this — you’ve been working on this the past year. I know it’s a bigger part in 2024, but are you bringing in a different or new customer at some of the centers where you have work, let’s say, brought in some of these new categories and tenants?

Stephen Yalof: Absolutely. Go back to Hilton Head, South Carolina where we added Nantucket meat and fish. It’s a great example of a grocery store opening up in one of our shopping centers that’s anchored by H&M and Nike. And we see a whole new set of people coming in shopping more frequently and staying for the brand shopping as well. We’re seeing our catchment area expanded as we add these new uses and we’re seeing our frequency of visit expand as well. So I think the strategy for us is to improve the complement of uses when you come to one of our shopping centers. I think the customer is demanding a far wider ranged experience when they come to us, not just that traditional power shot that we get at the outlet centers of a generation ago.

I think our customers are looking for far more wide ranging uses, amenities, services and product categories and that’s what we’re going after. And our customers are responding. And you can see it in the traffic numbers as they continue to build this quarter. You can see it in our sales numbers as they continue to build this quarter. So a lot of that strength is coming through based on a lot of the work that our leasing team has done.

Jeffrey Spector: Great. Thank you.

Stephen Yalof: Thanks, Jeff.

Operator: Thank you. Our next question is coming from the line of Craig Mailman with Citi. Please proceed with your questions.

Craig Mailman: Hey, good morning. Steve, I just want to go back to the commentary about clearly retention could be up and down this year as you guys are more purposeful about re-tenanting and remerchandising. It seemed like you emphasized that. Should we expecting anything in the next quarter or two, so that we’re not surprised here if retention drops or occupancy kind of dips in the near term?

Stephen Yalof: No, I don’t think there’ll be any surprises, but we guided to 2% to 4% same center NOI growth. We’ve grown that guidance 2.5 to 4.5 same center NOI growth. So I think that those numbers are all contemplated in our guidance. Sorry, I said 2.5, I mean 2.25% to 4.25%, Craig. But as far as we’re concerned, I think strategically what we’re looking to do is, it’s been retained 95% of our customer base on a renewal basis for the last two years. This year we anticipate less renewal because we see some of that renewal space as opportunity to re-tenant. We’re getting over 30% spreads on our re-tenanting. We’re getting close to 10% to 12% on our renewal and it’s a great trade for us, if we can take some older retailers that we’ve been renewing over the past 10, 15, 20 years, right-size them in better locations inside our portfolio and then replace some of that more visible space with far better retailers that are far more productive.

And that’s been the trend, that’s what we’ve been doing. There’s a number of retailers that are going to be brand new to our portfolio that we’ll be announcing shortly that are great examples of that strategy.

Craig Mailman: And kind of bigger picture, I know these some of these initiatives are newer, but you guys have done a lot on the digital side with the new app and that initiative there. I mean, are there any early takeaways from how customers are using it or I don’t know, if you guys are actually tracking kind of how they’re moving about through the centers, but anything on that front that’s helping you kind of reprice space within your centers or having kind of a different take on maybe what’s the more valuable space or how people are kind of approaching their shopping patterns?

Stephen Yalof: We haven’t been using our internal digital footprint in order to speak to how to value our real estate. I think that our centers — the footprints of our centers are manageable enough that supply and demand certainly dictates that pricing. We are using our digital footprint however to communicate better with our shoppers and our customers. And being in the discount space, we’re able to communicate everyday value in everyday discount in partnership with our retailers to get out in front of that. So as an example, a lot of our a lot of full price retail, a lot of brands that don’t typically go on sale can’t offer as a catalyst to drive customers into your shopping center an additional discount. In our space, we can and because of our great relationships with our retailer partners, we’re able to use the speed that digital offers to get new offers out in front of our customers and drive shoppers into our centers.

Craig Mailman: That’s helpful. And maybe just one last one. Michael, on Express, I know you guys lost one tenant there and you’ve been pretty clear in your responses at conferences and last quarter’s earnings. But from the range of outcomes that could happen there, kind of, it is a potential 7, which I know is not being discussed really, but is that captured in the low end of the range? Do you think, could you just kind of talk about the range of outcomes for that particular tenant as you guys kind of build-up guidance?