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Tanger Factory Outlet Centers, Inc. (NYSE: SKT), is a publicly-traded REIT headquartered in Greensboro, North Carolina that presently operates and owns, or has an ownership interest in, a portfolio of 40 upscale outlet shopping centers. Tanger’s operating properties are located in 20 states coast to coast and in Canada, totaling approximately 14.4 million square feet, leased to over 2,900 stores which are operated by more than 500 different brand name companies. The Company has more than 38 years of experience in the outlet industry. Tanger Outlet Centers continue to attract more than 181 million shoppers annually. For more information on Tanger Outlet Centers, call 1-800-4TANGER or visit the Company’s website at http://www.tangeroutlets.com.
Tanger Factory Outlet Centers, Inc.
3200 Northline Avenue
Greensboro, NC 27408
Primary IR Contact
VP of Investor Relations
Tel: (336) 834-6892
Fax: (336) 297-0931
Rich: Hi, good morning everybody. Can you hear me okay? It sounds like you can. My name is Rich Moore. I'm head of the research team at RBC Capital Markets in the United States. We're here today with the management team of Tanger Factory Outlets. We have some seats up front if anybody would like to move closer to the front. We're offering free tickets to the next session here if you move into the front seats. I'd like to introduce if I could, Steve Tanger who is sitting two over from me. He is the president and CEO of Tanger. Steve is going to give us a short presentation and then we'll open it up for questions. Steve, if you could, if you can introduce the rest of the team that'd be great. Go ahead and start at your leisure.
Steve: Thank you. Thank you Rich. I apologize in advance for my froggy voice. Let me introduce my colleagues and teammates. Cyndi Holt is our Vice President of Finance and Investor Relations. To my right is Frank Marchisello, our Executive Vice President and Chief Financial Officer. To his right is Jim Williams our Senior Vice President and Chief Accounting Officer. Good morning. Tanger Outlets is the only publicly traded REIT specializing solely in outlet centers. Our deep and long standing tenant relationships and our expertise in developing, leasing, marketing and operating outlet centers have resulted in a proven track record of long-term value creation for all of our shareholders.
Since starting the business in 1981, our average consolidated portfolio occupancy rate has been 95% or greater at the end of each year. Throughout our history as a public company beginning in 1993, we have paid an all cash dividend each quarter and have increased our dividend each year. Most recently, we increased our annualized common dividend by 18.8% to $1.14 per share from $0.96 per share on April 1, 2015. The four legs on our growth stool: internal growth, U.S. development, Canadian development, opportunistic acquisitions, leave us well positioned for the future. Through the first quarter of 2015, our consolidated portfolio has posted 41 consecutive quarters of same center net operating income growth dating back to 2005 when we first began tracking this metric.
Our robust pipeline of identified opportunities coupled with the capacity for additional properties in this relatively small industry, make development an ideal growth vehicle for Tanger. There are less than 70,000,000 square feet of quality outlet space in the United States, which represents less than half the total retail square footage in the city of Chicago. Last year, we delivered nearly 1,000,000 square feet of new space, which represents about 7% of our total foot print at the beginning of 2014. This year we expect to grow our foot print by an additional 10% by delivering 4 new development projects totaling 1,400,000 square feet with a weighted average stabilized yield on cost of approximately 10.1%.
Two of these centers opened in the past 60 days and construction is on track to open the other two centers later this year, one next month and the other in November. As of March 31, 2015, Tanger's remaining equity requirement to complete construction of these projects was only $56.7 million. Currently, our business generates more than $100,000,000 annually in excess cash flow over our dividend. We plan to deliver 1-2 new outlet centers in 2016, a pattern that has held true for Tanger on average over the long-term. We've already announced the opening of one new Tanger Outlet Center in 2016 and dirt is already moving at our site in Columbus, Ohio with the official ground breaking scheduled for June 25th.
In addition, we have a couple of pre-development sites that are progressing nicely through the pre-leasing and entitlement phase and we are hopeful that one of these will fill out our development pipeline for 2016. Financial stewardship is a Hallmark of Tanger Outlets. Maintaining a fortress balance sheet and investment grade credit is our way of life. Our financial strategies include maintaining low leverage in our management schedule of debt maturities, a preference for unsecured financing, maintaining significant capacity under our revolving credit facilities, limiting exposure to floating rate debt and a disciplined development approach. Historically, these strategies have resulted in access to multiple sources of capital, providing flexibility throughout many economic and market cycles.
We believe that over the long term, disciplined balance sheet management and low leverage create greater returns for our shareholders. As of March 31, 2015 $404,000,000 or 78% of the total capacity was available under our $520,000,000 in committed lines of credit. Our debt-to-total market capitalization ratio was 29% and 86% of our consolidated portfolio GLA was unencumbered by any mortgages. We currently have no significant debt maturities until 2018. Our 2015 outlook is positive. Our FFO per share guidance represents an 8% increase over 2014 AFFO per share, after the $0.10 per share dilutive effect related to completed and potential asset sales. Excluding these asset sales, this represents per share growth of about 13%.
The positive leasing trends of the first quarter have continued into the second quarter. 2015 lease executions for space renewed or released within the consolidated portfolio through the end of April resulted in an increase in average base rental rates of 26.2%, exceeding the 24.1% last year to date total we recorded at the end of March and surpassing our 23% full year increase for 2014. For the first quarter of 2015, same center net operating income increased 4%. We currently expect our same center net operating income growth for 2015 to improve to 3-3.5% compared to 2.6% in 2014. We have provided our range for same center net operating income growth to account for the uncertainty regarding the amount of down time that will be required to re-tenant the space that has been vacated.
Or we expect to be vacated by the end of this year as a result of tenant bankruptcies and recently announced store closures. Excluding space that naturally expires in 2015, the space remaining to be re-tenanted accounts for a little more than 1.5% of our consolidated foot print. A little over half the space is related to tenant bankruptcies, the vast majority of which we now control with only a few leases being assigned to new tenants by the bankruptcy court. For the remainder of the space not subject to bankruptcy protection, the tenants are contractually obligated to pay rent and we will aggressively negotiate termination rents. Historically, these closures have given us the opportunity to further upgrade our tenant mix and to simultaneously mark the rents to market.
Through April 30, 2015, we had executed leases with new tenants for 26% of the space including 28% of the space related to bankruptcies and 12% of the space related to brands exiting owned store distribution that have closed or plan to close their stores in our portfolio between April 1 and October 31 this year. On a straight-line basis, the contractual based rent for these new leases are on average 34% higher for the bankruptcy related space and 51% higher for the non-bankruptcy related space. We remain bullish about the outlet business. Year-to-date traffic into our centers was up through the end of May. Retail is competitive and ebbs and flows in brand performance are simply the nature of the business.
We have entered into a purchase and sale agreement for the sale of 4 centers to the private buyer that had entered into a letter of intent with us in April. The buyer is conducting due diligence and should the buyer move forward, we currently expect the transaction would close in the next 60 days. These centers represent substantially all the assets that we currently believe are candidates for divestiture. Although these centers contribute only a small portion of our overall net operating income, they remain highly occupied, cash flow positive and free of any mortgage incumbrances. If the buyer does not move forward to acquire them, we plan to continue to operate them. If these properties are sold and we are unable to identify new opportunities that would qualify for 1031 tax treatment, we may need to either increase our dividend for the second time this year or pay a special dividend. We continue to be optimistic about the prospects for the outlet industry. More than 34 years ago after Tanger created the outlet industry, outlet shopping is more fashionable than ever and the Tanger Outlets brand continues to garner the respect of shoppers and retailers. The value proposition is embedded in the lifestyle of today's consumer and outlets are the destination of choice for branded apparel. It is this value proposition that makes the outlet distribution channel profitable and sustainable for our tenants and our company. Thank you. I'd be delighted to answer any questions as would our team.
Rich: Thank you Steve. If anyone has a question, you can fire away or I will start. Yeah please.
Ken: You've had a really good run on your release. What were the increases? I wonder how that points to tenant occupancy cost?
Rich: The question is with what's happened with rental increases, how does that relate to tenant occupancy cost?
Steve: Hi, Ken welcome back. It's good to see you again. If just for our purposes so we don't know many of you, if you ask a question would you please just introduce yourself and tell us which company you're with? We've been successful in a win-win situation with our tenant partners by tenant sales increasing dramatically over almost every year. We at the same time have been able to, based on the sales increases, raise rents and capture the embedded value in our portfolio. Our occupancy cost is about 8.9% now, which is up from 5 years ago at 7.5% so we've increased the occupancy cost by 20% in the past 5 years. At the same time, tenant sales have grown and the rents have grown so everybody is pleased.
Rich: Did you have a question? Yeah.
Brad: Brad Thompson, Forbes, question for Steve or the panel, you've had a number of partnership deals in and around Savannah [inaudible 00:13:37] Columbus is a JV with Simon. Can you talk about your selected ... and I know [inaudible 00:13:42] of your partnerships. Can you talk about your strategy [inaudible 00:13:52] and what's your strategy with selecting your business partners.
Rich: The question is how do you pick your partners for your joint ventures.
Frank: Do you want me to take it?
Steve: I guess you pick your partners how you pick your wife very carefully. We like to be a little more opportunistic. We have some partners that were the original land owner, that wanted to roll the profits from their land into an ongoing property. We have the largest retail REIT, Simon Property Group is a partner in three assets where we join together and have delivered really successful quality assets. The third will be Columbus. We have a couple of entrepreneurs.
You mentioned Ben Carter. We were able to work out a partnership with Ben and a couple of others after they had done maybe 2 or 3 years of due diligence working on entitlement and initial leasing. We joined hands and we are able to get across the finish line. We have various types of partners. There's no one model. I want to just point out that every partnership agreement has a buy/sell agreement embedded in the contract and after a certain lockout period, anywhere from 2 to 3 to 4 years, that buy/sell can be instituted by either party. Every partnership has an exit scenario.
Rich: Do we have any other questions? Steve, I'll throw one at you. Retailers seem to have three basic strategies. They have full price and they're usually regional mall, they have an outlet strategy and of course, they have their online strategy. I think some of the investors I've talked with are asking, "Is the outlet business still as good? Are retailers still as excited about that side of the business?" I know you were just at the big ICSC convention, maybe you can tell us what you heard there from retailers and in general who might be opening new concepts.
Steve: Let me just say quickly, my meetings with CEOs of a lot of our tenant partners, and we do business with about 450 of some of the largest, most profitable, best designer and brand name companies in the world. Part of my job is to sit with their CEO and think about the future. We try to match our capital allocation with our tenants’ capital allocation, which is only a prudent way to conduct business. Our tenant partners tell us that the outlet distribution channel is still either one of or their most profitable division. That they intend to allocate a disproportionally large share of their investible capital into growing the outlet division. That's the first data point.
Second, most of our tenant partners if not all have an omni channel approach. Now, omni channel is the term [de jure 00:17:29]. I'm sure they'll change ... The name will change but basically, they try to touch the consumer in as many different places as possible. They have invested in internet sales. Most of our tenant partners tell us those internet sales are not profitable. By the time you build the infrastructure, pick back and ship an individual item. Get the item back if it doesn't fit. What do you do with it if it's returned?
The internet is a useful tool because most of our tenants tell us, it's the first portal. It's the portal to the brand for the most of their consumers. A lot of consumers do their research online and then come either to Brick and Mortar stores or outlet stores to purchase product. We developed the outlet stores as a distribution channel based on a simple and elegant business strategy. That is brand names selling direct to the consumer. Our entire concept is successful because we deal with brand name products.
We're not selling cheap products at a cheap price. These are the best brand and designer names in the world. In order to establish a brand name, a company has to have full price retail distribution and the finest department stores or highest rates in the world which our tenant partners do. That establishes the brand and establishes the full price. It also then establishes those data points for shoppers that come to the outlet store. They were able to establish or the brands are able to establish a discount from the full price.
I know it's a long answer to a short question but I wanted to give you the full 360 on what we're looking at. Some of the brands coming into our sites now reflect the finest brands and regular price retail. We're opening stores now for Rag & Bone, Vineyard Vines, Victoria's Secret, Forever 21, H&M , Jared the jewelry store and on and on and on and on. There's always turn over. Fashion is a Darwinian business. The brands that were anchored tenant, 5 and 10 years ago, some of them are no longer in existence. Some of the major hot brands today were just a dream, 5 and 7 years ago. Part of our job is to shop at the malls. Read magazines and identify early on new brands and start a dialog with them.
Rich: Go ahead, yeah, please.
Male: You started off [inaudible 00:20:32] some of the advisors [inaudible 00:20:35].
Steve: I'm sorry I didn't understand what you said.
Male: I guess [inaudible 00:20:40].
Rich: The question is, are you noticing any specific consumer retail trans, maybe some changes in the recent months?
Steve: I'm sorry, sir. I don't know your name.
Male: [inaudible 00:20:58].
Steve: The outlets mirror full price retail. The trends that one sees in full price retail such as the teen retailer struggling. 5 years ago, Aeropostale, American Eagle, Hollister, [Abercrombie 00:21:19] were the hot prints. Today, they've been replaced by Fast fashion, Forever 21, H&M, etc. We just reflect the fashion trends of full price retail in our stores.
Rich: Good. Thank you, Steve. Any ... Yeah, please?
Brad: [Inaudible 00:21:43] shareholder obtain a full disclosure. Question, Steve, let's talk about the Tanger brand not the tenant thing but the Tanger company brand. As I find your brand, as you move, you want [inaudible 00:21:57] 20 years of existence. Congratulations on the latest at 18%. Arguably, when I look at all the other leadership REITs out there today, their stock is trading at a fairly substantial discount. Could you comment on that at all in terms of how you feel about your evaluation today?
Rich: The question is, would you comment on evaluation and I guess where you think your stock should be?
Frank: The only answer to that is stock is cheap. No. I think operationally from any metrics you want to look at, we're performing very well. Our FFO growth, our NOI growth, our development pipeline, our development yields are all very positive. I do think some investors are looking at the asset sale and want to see us close on that which we hope to do at the end of the July. I think you're right. I think the Tanger brand resonates not only with consumers and with our tenants but also with shareholders.
If you look at our long term shareholder return, 5, 10, 20 years, we're in the top 2 to 3 of all REITs in total return to shareholders. Our beta is low. In good times, we do really well. In tough times, we still do well. I think long term shareholders will realize value in the Tanger name regardless of when they choose to invest in our company.
Brad: Are you buying back any stock?
Frank: We are not buying back any stock. We think the best use for internally generated cash is to reinvest in additional new developments and we will continue to do that.
Rich: That's a good question, Brad. I'll tell you one as a follow up if I could. One of the things I hear is that there's perhaps more competition from other builders and developers, owners of outlets. There's maybe you guys could comment on how you see the competitive landscape for the outlet center business from a landlord point of view.
Steve: Just as a data point in history, we went public in May 28, 1993. Within the following 12 months, 5 other private developers completed an IPO specializing in outlets. In 1994, there were 6 public companies. None of them would ever have been run by at none ... The management teams have never run a public company before. Running around with other people's money. Some of them building on speculation. That was competition. Today, the people that we compete against are professionally managed, highly sophisticated developers with disciplines of running a public company for 15 to 20 years.
They are disciplined, they are smart, they are strategic. We have always been able to compete. This is our only business. We have long standing tenant relationships which we value. I think the tenants realize that we will deliver what we say because this is all we do. We don't need financing to get a property built. We use our line of credit for the construction expense. Competition is the American way. We have no problem with that. It will be a competition going forward. Just so long as it’s disciplined, smart competition. I think the industry will thrive and our tenants will thrive.
Rich: Okay. Good, thank you. Yeah, you please.
Male: Steve, if I interpret your comments correctly, you're opening four this year, opening two next year and probably two more in 2017. Could you give us some color beyond that time elapsing, of all what you’re going, or expecting to deliver?
Rich: The question is, what will Tanger deliver beyond 2017 in terms of new centers.
Frank: I think our thoughts there are one to two new centers per year is a reasonable run rate for the first stable future. That's our target. Some years obviously could be more and some might be less. Given where we are and our shadow pipeline, that seems reasonable right now.
Rich: As a follow up to that, you've been on the record, Steve, and pretty accurately I would say, at predicting how many centers would be built by the industry overtime. Where does that stand in your mind as we look at the next 5 to 10 years in terms of total outlet center, new development outlet centers in the US and Canada for that matter, I suppose.
Steve: For those of you really not familiar with our industry. There's about 200 outlet centers in the United States. Average size, 350,000 square feet so there's 70,000,000 square feet of outlet space. That's half the retail GLA in the city of Chicago. Let that sink in. There's 1,000,000,000 square feet of regional mall space. 1,100 malls average size, 900,000 square feet. We have a long runway to grow. There's many markets that we've identified in this country that are either underserved or not served by outlets. We're on record, we were three years ago, four years ago, saying that there could be another hundred outlet centers delivered over 8 to 10-year build out.
We're along the lines of that right now. I think 10 or 11 will be delivered in 2015 on top of 10 or 11 last year. I still think there's probably in the next 7 to 10 years, room in this country for another 70 or so outlets. There will also be, during that period of time, probably another 25 to 30 that will be considered for re-positioning. These are some of the older outlets in different types of locations that may be better served for other purposes. The total growth in the industry still will be ... The industry still will be an extremely small sector of retail but the highest growth sector of retail.
Rich: Okay, good. We're close to the end here. Does anybody else have any final question? Yes, shoot. Fine.
Male: What are some of the main differences in the tenant selection between I think the outlet, the center, than running a regional mall?
Rich: The question is, what are some of the differences between outlet centered tenant selection and regional mall selecting tenants?
Steve: I don't know if I totally understand your question but virtually, everyone of our tenants has multiple retail distribution channels. Among them, regional malls or high space, high street space and outlet stores. Our tenants are in multiple retail locations. The outlets have always started as a clearance vehicle. Once the excess inventory is used up, they make a decision of whether just to keep the store count constant or to set up a distribution channel and grow the outlet division. Virtually every one of our tenants has decided for the latter. To set up the distribution channel and grow the division because it's so profitable.
Rich: Did someone else have one more? Yeah?
Todd: [Inaudible 00:30:11] sales that I know your store has been building spaces but assuming they closes, can you kind of know the likelihood of 1031 at this [inaudible 00:30:23] development, or would you acquire business center. How do you feel about that 1031 strategy?
Rich: The question is, will you use the proceeds from the assets sales as 1031 exchange?
Frank: Todd, you're right. If we can, when we have six months from closing to reinvest the proceeds. We have a little bit of runway there but we can redeploy into new developments as long as they're wholly owned developments. We could acquire property if that were to come about. We could also buy out a partner as long as we end up owning 100% of the property that also qualifies for 1031 exchange. We have a few options. Our tax guys are all over it. We do have to designate our replacement property but we have some time to do that and we'll work through it. If we're unable to do so, then we will most likely have to pay a special dividend which is okay, too.
Rich: Steve and team, thank you and thank you all for coming.