Tanger Factory Outlet Centers, Inc. (NYSE:SKT) Q4 2023 Earnings Call Transcript

Tanger Factory Outlet Centers, Inc. (NYSE:SKT) Q4 2023 Earnings Call Transcript February 16, 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 Fourth 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 IR website, investors.tanger.com. Please note 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, February 16, 2024. At this time, all participants are in listen-only mode. Following management’s prepared comments, the call will be opened for your question. [Operator Instructions] On the call today will be Stephen Yalof, President and Chief Executive Officer; and Michael Bilerman, 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. Please go ahead.

Stephen Yalof: Thank you, Ashley, and good morning. I’m pleased to report another strong quarter that closed out a milestone year for Tanger. We realized robust organic growth, the same center NOI grew 5.4% for the quarter and 6.2% for the year, which was ahead of our expectations. This was driven by record leasing velocity and positive rent spreads. We delivered earnings ahead of expectations with core FFO of $1.96 per share, which was 7.1% ahead of last year. In the fourth quarter, we executed on our external growth initiatives, adding three new centers to our portfolio in Nashville, Tennessee; Asheville, North Carolina; and Huntsville, Alabama. These assets are consistent with our long-term strategy of investing in dominant open-air retail centers in markets that benefit from outsized residential and tourism growth and can immediately benefit from Tanger’s leasing, marketing, and operating platforms.

Tanger Outlets Nashville, our new development in the fast growing city of Nashville, Tennessee, open to strong retailer and customer response in October. This 291,000 square foot open-air center offers shopping and dining across seven retail buildings complimented by the green, a unique place making community space. Tanger Nashville reflects our commitment to diversifying and enhancing the shopping experience for our customers with nearly one quarter of the center’s dynamic assortment new to Tanger’s portfolio or first to the outlet channel. In November, we acquired Tanger Outlets Asheville, a 382,000 square foot open-air shopping center in Asheville, North Carolina, a dynamic and growing tourism driven market. The center is currently occupied by a diverse mix of brands that include leading home furnishings providers as well as iconic apparel, footwear, and accessory brands.

The center’s sales at the time of this acquisition put this property in the bottom quartile of our portfolio. However, we believe there is great upside opportunity as Tanger Asheville will greatly benefit from the market’s growth and infrastructure investments combined with the impact of our branding, marketing, leasing, and operations over time. In late November, we acquired Bridge Street Town Centre, an 825,000 square foot open-air lifestyle center that is part of a larger mixed use development in Huntsville, Alabama, which is one of the fastest growing markets in the country. The center comprises over 80 retail stores, restaurants, and entertainment venues and serves as the dominant shopping destination in the market. With occupancy just below 90%, we believe we have the opportunity to lease and merchandise the center with elevated brands and traffic generating uses leveraging the Tanger brand and platform.

We continue to see positive trends across our business. Leasing activity remains strong as we grew our portfolio with new and existing tenants. Eight consecutive quarters of positive leasing spreads reflect both the value of our properties and the demand from retailers. We’ve maintained high occupancy as we successfully backfilled vacant spaces and elevated our tenant mix across all categories. Our diverse tenancy continues to contribute to driving more shopper visits, longer dwell times, and bigger spends, while adding to the vibrancy of our centers and enhancing the overall shopping experience. Year-end occupancy was 97.3% compared to 97% at year-end of 2022. Occupancy was down 70 basis points versus last quarter driven by the acquisitions of Tanger Asheville and Bridge Street Town Centre in the fourth quarter.

2023 was a record year for leasing productivity. We executed 544 leases totaling over 2.3 million square feet, which is 9% greater than 2022. We accomplished this while elevating and diversifying our tenant mix and driving strong rent spreads. Blended average rental rates were 13.3% up 320 basis points year-over-year with 37. 5% spreads on re-tenanted space and 11.2% on renewals. Our high occupancy and strong tenant demand allows us to be proactive and asset manage our centers, creating additional value while optimizing the tenant mix and center configurations. In 2024, we will continue this focus on tenant and brand elevation with an aim to drive our assets revenue growth while enhancing the overall center utility and shopper experience and adding amenities, restaurants, and entertainment to our user profile.

In this connection, we will proactively re-tenant and select stores with more productive brands rather than renew the existing user. This may have a near-term impact on our renewal metrics, but we believe the strategic asset management is important to drive long-term sustainable rent growth while we continue to elevate the quality and value of our centers. December sales and traffic comps were positive continuing the trend of improvement we realized during the quarter and culminating with a strong holiday retail season year-over-year. Retailers employed promotional activity to create value for consumers and shoppers responded positively to these offers. While athletic, athleisure, and family apparel saw continued gains, discretionary categories were more challenged.

We are encouraged by the recent sales and traffic growth and are optimistic that this trend will continue into 2024. The Tanger Digital Loyalty app that launched in 2023 continues to be an important initiative for us. Usage continues to grow and we are encouraged by the program’s ability to personalize offers, drive additional shopping visits, and provide us with important information about our shoppers that helps us target our marketing more efficiently and improve the shopping experience. As we continue through 2024, our priorities remain consistent. Deliver organic growth driven by strategic leasing and proactive asset management. Maximize traffic and shopper engagement through measurable and relevant digital communications and compelling offers in collaboration with our tenants.

Further intensify our real estate over time, including out parcel activation and unlocking additional other revenue opportunities. And selectively pursuing the acquisition and development of additional open-air centers, leveraging the strength of the Tanger platform and balance sheet. We are proud of the value we’ve generated for our shareholders and tenants. Our track record of positive results underscores our ability to unlock embedded opportunities within our existing portfolio and to selectively pursue external growth. We remain steadfast in our commitment to delivering value, fostering strong tenant relationships, and maximizing returns for our investors. I’d like to offer my sincere appreciation to our unmatched team, as well as our customers and our shareholders for their continued support.

I’d now like to turn the call over to Michael.

Michael Bilerman: Thank you, Steve. Today, I’m going to discuss our financial results, which came in ahead of our full year guidance, our strong balance sheet position, our external growth initiative, and I’m going to end with our 2024 guidance. Our fourth quarter results came in ahead of expectations with Core FFO of $0.52 a share compared to $0.47 a share in the fourth quarter of the prior year. For the year, Core FFO was $1.96 versus $1.83 in the prior year. The upside versus our recent guidance was the result of higher core growth and our external growth activity. Same center NOI increased 5.4% for the quarter and 6.2% for the year driven by gains in occupancy and strong rent spreads with higher base rents and higher expense recoveries, minor contributions from out-of-period income, as well as continued operating efficiencies and the benefits of a milder winter.

Our proactive balance sheet management and focus on liquidity supported our accretive investment capital deployment. In total, we invested more than $400 million on three new centers, almost $300 million of which was deployed during the fourth quarter. We funded these transactions through cash on hand, our available liquidity, and common shares issued under our ATM program. During the fourth quarter, we sold 3.4 million common shares at a weighted average price of $25.77 per share, generating gross proceeds of $87.3 million. Post the transactions and our capital markets activities, 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 the end of the year, we had $1.6 billion of pro rata net debt and $507 million of availability on our unsecured lines of credit. Our net debt to adjusted EBITDA at pro rata share was 5.8 times for the 12 months ended December 31st. The sequential increase in this ratio reflects the external growth spending that was deployed in the fourth quarter without the commensurate benefit of a full year of earnings from those assets. Pro forma for a full year of EBITDA from the three new centers, we estimate that our leverage ratio would be between 5.2 and 5.3 times, still one of the lowest in the retail and REIT sectors. In terms of our interest rate hedges, $325 million of new forward starting swaps commenced on February 1st of 2024, the date that $300 million of our prior swaps had expired.

These new swaps fixed the adjusted SOFR at a weighted average base rate of 4% compared to the prior rate of 0.5%. Since our last call, we added $75 million of swaps. And in aggregate, the $325 million of new swaps have varying maturities through January of 2027, so we’ve effectively fixed this debt for another two and a half years on average. And including this activity, over 1.5 billion or 95% of our debt is fixed rate and we have no significant debt maturities until late in 2026. Our quarterly cash dividend remains well covered with a continued low payout ratio providing free cash flow to support our growth. Now turning to our guidance for 2024, we expect core FFO per share in a range of $2.02 to $2.10, which is up 3% to 7% over 2023, reflected continued organic growth and the contribution of the external growth activity that we completed in 2023, moderately offset by higher interest rates from the expiring swaps.

We expect same center NOI to be in the range of 2% to 4%, which benefits from the strong leasing activity to date and the impact of the proactive re-tenanting that Steve discussed, which could result in some short-term downtime. We expect recurring CapEx in the range of 50 million to 60 million, reflecting a higher re-tenanting rate in 2024 and the continued investment in our portfolio. For additional details on our key assumptions, Please see our release issues last night. And finally, we are greatly looking forward to seeing many of you at upcoming investor and analyst events later this month as well as into March. We are participating in Wolf Research’s Virtual Real Estate Conference on February 28th, Citi’s Global Property CEO Conference in Florida from March 4th to the 6th, a tour and management discussion at our newest development, Tanger Outlets Nashville on March 11th as part of ICR’s Nashville Multi-Property REIT tour together with Highwoods, MAA, Ryman and Peak.

In addition, we’ll be touring Tanger Outlets National Harbor in connection with Evercore ISI’s Multi-Property DC REIT tour on March 25th, and we’ll be participating in BofA’s New York City Retail REIT headquarters tour on March 27th. Please reach out to the respective firms if you’d like to join and meet with us at any of these events. I’d now like to open up the call for questions. Operator?

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Q&A Session

Operator: Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question today comes from the line of Lizzy Doykan with Bank of America. Please proceed with your questions.

Lizzy Doykan: Hi. Good morning. I was just looking to get some more color on what’s embedded for expense growth in the same-store and a wide guide. I mean, what should we be considerate of when modeling certain line items for ’24? Like obviously there’s the better, you know, weather experience last year. But then in terms of things like operational costs or marketing spend associated with ramping up your recent acquisitions and then just the general kind of cost environment. Would love to hear a bit more.

Michael Bilerman: Sure. Thanks for the question, Lizzy. So a couple of things impacting 2024 are some things that happened in 2023. So as we’ve been talking about during the year, we’ve certainly had a milder winter. There was about $2 million of savings this year from this year in ’23 from a not snowing and relative to 2024, our forecast assumes a normal snow year relative to the five-year average. So you got about a $2 million or call it just over 50 basis point headwind in that OpEx. There are some of the uncontrollable items like taxes and insurance which continue to go higher. And then what we are trying to do as an organization, as you’ve seen in our OpEx, which was relatively flat year-over-year is try to mitigate as much of that expense growth by trying to operate as efficiently as possible. And so our 2% to 4% same center range does have, obviously, some level of expense growth in it, but it all nets down to that 2% to 4% same center growth profile.

Lizzy Doykan: Okay, thanks. And as a follow-up question to some comments earlier on selectively pursuing acquisition and development of other centers. Do you think you could talk about kind of the, maybe these opportunities you’re seeing today given you kind of seem to have your hands full on the recent deals you closed on like kind of what set of criteria might be needed to capture on such opportunities? Maybe is there a number of target acquisitions that you’re seeing for outlet centers and perhaps more lifestyle open-air centers? Thanks.

Stephen Yalof: Well first of all we’re going to be opportunistic as we were in 2023. You know, we were very active in the space, looking at a number of different asset and asset classes between the full price open-air lifestyle as well as the open-air outlet centers. We’re fortunate to find two and obviously we developed one. Our balance sheet gives us plenty of capacity. So if we should opportunistically find something in 2024, obviously we’ll be in a position to move forward on that acquisition. There are a number of things that we’re currently looking at and much like where we were this time last year, you know, unfortunately not ready to speak about anything until we’ve executed. But from a criteria point of view, we’re looking for centers that are the dominant center in the marketplaces that they serve, that have great residential growth, great touristic growth, and an opportunity for us to plug and play our platform, which is really best-in-class leasing, marketing, and operations.

So we bring a lot to a shopping center. We’re looking forward to showing you all we’ve been able to do with Bridge Street at Asheville as we bring them into our platform.

Lizzy Doykan: Thank you.

Operator: Our next question is from the line of Floris van Dijkum with Compass Point. Please proceed with your questions.

Floris van Dijkum: Morning guys. Thanks for taking my question. First question, I guess, is obviously, tenant sales were down a little bit. You sort of allude to this new leasing strategy, and what can we expect, and what would that do to your average tenant sales productivity as well? Obviously your leasing costs will be a little bit higher, but maybe also talk in terms of new uses potentially that would come into the centers. And then are these concentrated mostly in your higher-end or your more densely populated centers or is this across the portfolio? If you can talk a little bit about the strategy, that would be great, Steve.

Stephen Yalof: Sure, sure. First of all, our leasing strategy, yeah, we like to say it’s a new leasing strategy, but it’s really what we’ve been executing to for the past two or three years. We’re constantly seeking to replace lesser productive retailers with far more productive retailers and we think we’ve done a really good job. We’re also digging deeper and looking for alternative uses to round out the assortments in our shopping centers because we think it gives it more commercial vibrancy, draws more customers. You know, Shake Shack was a new addition to a few of our centers in 2023. And we feel Shake Shack’s got this great core customer base where customers will come to our centers for Shake Shack and stay for the shopping or vice versa.

They’ll come for the shopping and stay for Shake Shack. So we feel like these great marquee names that we’re bringing into our centers, whether they’re in the home furnishings category, the health and beauty and wellness category, which is a new and expanding category for us, have really created a lot of diversity and pushed a lot of customers to come for more trips than they would typically make to an outlet center in a given year. You know, that same customer base also has full price strategy and that’s why that open-air acquisition in Huntsville made so much sense for us. A lot of the retailers that we’ve been working with for years in our outlet platform also have full price representation in that other space. Similarly, there’s a number of retailers that are in the full price space that haven’t yet discovered outlet.

And so from a strategic point of view, that acquisition also gives us access to retailers that either we’ve spoken to before and haven’t had a chance to bring into our space, but now probably have a lot more connectivity to and are looking forward to proliferating them throughout our entire portfolio.

Floris van Dijkum: Thanks, and if I could follow-up maybe, one of your more exciting opportunities potentially is in Palm Beach, but you don’t have any equity stake. I mean, would you, is that potentially on the list of things that you would look to, you know, increase your equity ownership of an asset like that? And obviously, how many other ones are there out there like a Palm Beach?

Stephen Yalof: Well, Palm Beach is a unique asset. It’s a wonderful asset for us and we like to call that asset Tanger Outlets Palm Beach. So when you’re driving up and down 95, it is very prominently displayed. Obviously, the relationship that we have with the owner allows us to perhaps gain equity over time. We’re excited about those prospects. We continue to raise the [indiscernible] that shopping center and grow the leasing base. You know, we’ve added a number of great retailers to that shopping center. We’re building on that foundation. And much like the rest of our portfolio, we’re slightly changing the use profile, adding better food and beverage and things like that. Are there other assets like that? You know, I think that the fact that the market is aware that we’re willing to be nimble, entrepreneurial, and strategic with how we pursue additional assets, our phone rings and we talk about a number of these creative structures a lot.

And when there’s an opportunity for us to make a deal similar to the Palm Beach deal that gives us equity over time, that’s something that we would consider.

Floris van Dijkum: Thanks, Steve.

Stephen Yalof: Thanks, Floris.

Operator: Our next question is from the line of Samir Khanal with Evercore ISI. Please proceed with your questions.

Samir Khanal: Hey, good morning, everyone. I guess, Michael or Steve on same-store here, you know, there’s been a lot of questions around sort of troubled tenants, right? So maybe help us understand what you’re assuming for bad debt in your guidance. Thanks.

Michael Bilerman: Thanks, Samir. So if you look to 2023, it was under 50 basis points of effective reserve and bad debt. And within our guidance range of 2% to 4% we effectively have you know a similar esque level at different ends of the range we feel we are reasonably protected in that way because we’re constantly in discussions with our tenants. You know when things hit the news generally that’s not going to be a surprise to us and it’s something that we work towards and manage through during the year.

Samir Khanal: Okay. And then I guess that my second question is around sales growth. You know, when you look at sales, it’s been flat over the last two years and your occupancy cost is, it’s 9.3%. I mean, it’s still a good level to be, but it is moving up. So what happens if sales sort of continues to be flat or slightly down and let’s say occupancy cost is about 10% over the long term? What’s your ability to push rents at that time? Thanks.

Stephen Yalof: Well, look, growing rents is really, I mean, that is really priorities one, two, and three for this organization. And I think we’ve done a pretty impressive job of executing that to that, you know, eight consecutive quarters of positive rent spreads and we continue to build on that The other thing is our leasing velocity hasn’t slowed down last year was a banner year for us. It was the most leasing that we’ve done in any given year. We also see the new acquisitions that have come with their share of vacancy. We see vacant space as an opportunity to continue to fill with retailers that are far more productive than some of the retailers that we have in our existing tenant base right now. You know, we’ve also are, where we’ve talked about temp to perm and taking a lot of that temp space and putting permanent tenants, we’ve done a real good job of replacing the temp space with permanent tenants.

But you know, now we’re also thinking about that renewal activity. Last year we renewed 95% of our tenants renewed. I mean, it’s great. There’s no downtime. We did so at about a 10% spread to the prior rents. But now we’re going to be a little bit more strategic. And some of those tenants that might choose to renew, we may elect to replace with more productive, higher rent paying, better sales producing retailers. And that’s the focus of ours and our leasing team is 100% laser focused on executing to that. We’ve been able to drive new tenancy into our centers, new uses, and we think that’s going to help us grow our sales over time. But the most important point is the leasing velocity hasn’t slowed down. And the retailers are showing that they’re willing to pay more rent to be in our shopping centers.

Samir Khanal: Thank you.

Operator: Our next question is from the line of Todd Thomas with KeyBank Capital Markets. Please proceed with your questions.

Todd Thomas: Hi, thanks. Good morning. First question was on the same-store guidance, so 2% to 4% and the higher re-tenanting activity that you discussed in the year ahead, just compared to ’23, which could cause some disruption. How much drag on ’24 same-store do you anticipate from that? And then how should we think about the re-tenanting spreads and renewal spreads that you anticipate relative to the 37% new lease spreads and 11% renewals in ’23?

Michael Bilerman: Thanks, Todd. So embedded in our 2% to 4% same center guide is the earning that we have from the leasing activity that Steve talked about where we released upwards of 20% of our portfolio of 13. And then as we think about what happens in ’24, the range contemplates different scenarios in terms of where our tenant retention will be. And there are different strategies in terms of getting to both ends of the range, depending on if we have a higher tenant renewal and therefore more downtime, but higher rents, which translates into ’25, or maybe a little bit higher of a renewal rate, and therefore less downtime, but not as high on the rent side. So there’s a lot of puts and takes, and there’s not necessarily a number that’s within the range of downtime, but it is a headwind.

They’re definitely coming in at 95% this year. We talked on the last conference call about our intent of this strategy, both from a CapEx perspective, but also some of the downtime that would be associated with that. And we’re going to try to mitigate as much of that downtime with some temp tenants, but there is certainly a modest drag in our numbers from it.

Todd Thomas: Okay. So higher re-tenanting activity would result in more drag, higher re-tenanting lease spreads, which would maybe have positive implications as we think ahead to ’25 and vice versa. The higher renewals end up resulting at higher same-store this year with lower combined leasing spreads?

Stephen Yalof: You know, we don’t guide to leasing spreads. What we do guide to is SSNOI growth. And we’ve built a plan that took into consideration renewal rate that’s probably more in line with previous years of 80% to 85% renewals where last year was an outsized year at 95%. So our mission is to replace a lot of the lesser productive with more productive. Michael mentioned there’ll be a drag. There’ll be some downtime. We’re pretty good at keeping those spaces filled and occupied and minimizing downtime as much as we can. We’ve got a great TI team that’s on the front lines whose sole purpose is to make sure that we facilitate a very quick transition from retailer to retailer. But I think the best indicator of our ability to plan this is in that SSNOI guidance that we shared with you.

Todd Thomas: Okay. And then my other question was around investments. You were sitting on a lot of cash previously, over $200 million last quarter, which helped the companies blended cost of funding for the acquisitions completed in the fourth quarter. With that cash deployed now for Asheville and Bridge Street, how does that change how you think about future investments and required returns just given your cost of equity and debt today without having that cash on the balance sheet to deploy.

Michael Bilerman: Sure. What’s interesting, Todd, is with the reduction in credit spreads and the decline in interest rates, the cost of debt from when we did those transactions has come in meaningfully. You think about where REIT bonds and we’re trading last year, we’ve come in pretty substantially. So we’re conscious of our cost of debt as well as our cost of equity both have improved over time. We are going to be prudent and disciplined in everything that we look at. We want to make sure that any asset we bring onto this portfolio is both strategic in nature and ultimately provides financial accretion. And those are two disciplines that we want to be very mindful of. And the other part of this is where our balance sheet stands today, pro forma for the acquisitions were 5.2 to 5.3 times, and that’s where we are today.

But we’ve provided same center guidance of 2% to 3% — 2% to 4%. You know, EBITDA growth a little bit ahead of that, given where our G&A load is. And then from a free cash flow perspective, you know, you look at back in 2023, this company generated $80 million of free cash flow. And so the combination of continuing to have a low pay-out ratio, we’re increasing FFO 3% to 7% this year, that’s going to drop to the bottom line and provide us free cash flow and EBITDA growth, which would provide us the capacity to go out and make acquisitions on a solid basis. And so we really take pride in where the balance sheet stands to be able to have the opportunity to execute and be mindful of those opportunities.