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Edited Transcript of SKT earnings conference call or presentation 1-Aug-18 2:00pm GMT

Q2 2018 Tanger Factory Outlet Centers Inc Earnings Call

Greensboro Aug 3, 2018 (Thomson StreetEvents) -- Edited Transcript of Tanger Factory Outlet Centers Inc earnings conference call or presentation Wednesday, August 1, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cyndi M. Holt

Tanger Factory Outlet Centers, Inc. - VP, IR

* James F. Williams

Tanger Factory Outlet Centers, Inc. - Executive VP & CFO

* Steven B. Tanger

Tanger Factory Outlet Centers, Inc. - CEO & Director

* Thomas E. McDonough

Tanger Factory Outlet Centers, Inc. - President & COO

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Conference Call Participants

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* Caitlin Burrows

Goldman Sachs Group Inc., Research Division - Research Analyst

* Christine Mary McElroy Tulloch

Citigroup Inc, Research Division - Director

* Craig Richard Schmidt

BofA Merrill Lynch, Research Division - Director

* George Andrew Hoglund

Jefferies LLC, Research Division - Equity Research Analyst

* Michael William Mueller

JP Morgan Chase & Co, Research Division - Senior Analyst

* Omotayo Tejamude Okusanya

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* Samir Upadhyay Khanal

Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst

* Todd Michael Thomas

KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst

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Presentation

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Cyndi M. Holt, Tanger Factory Outlet Centers, Inc. - VP, IR [1]

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Good morning. This is Cyndi Holt, Vice President of Investor Relations. And I would like to welcome you to the Tanger Factory Outlet Centers' Second Quarter Conference Call. Yesterday, 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.tangeroutlets.com.

Please note that during this 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 metrics -- measures as defined by SEC Regulation G, including funds from operations, or FFO; adjusted funds from operations, or AFFO; same-center net operating income; and portfolio net operating income. 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, August 1, 2018. (Operator Instructions)

On the call today will be Steven Tanger, Chief Executive Officer; Jim Williams, Executive Vice President and Chief Financial Officer; and Tom McDonough, President and Chief Operating Officer.

I will now turn the call over to Steven Tanger. Please go ahead, Steve.

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Steven B. Tanger, Tanger Factory Outlet Centers, Inc. - CEO & Director [2]

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Thank you, Cyndi. And thank you for joining us on another earnings call, a practice we started 100 quarters ago. Our second quarter results were in line with our expectations as we remain focused on driving traffic to our centers and filling vacancies caused by multiple tenant bankruptcies over the past 2 years with a high, new quality -- with new high-quality in-demand tenants.

As we continue to adapt to the evolving retail landscape and consumer shopping behaviors, it is encouraging to see positive results from our focused efforts. We are pleased with the ongoing sales growth at our centers and the positive consumer reactions to our proactive marketing and engagement efforts. Traffic has been stable with 12 of the last 13 weeks posting flat or positive traffic growth.

Sales for the 12 months ended June 30 were up 1% compared to the same period last year for our same-center portfolio. We are also heartened by our progress in leasing, but acknowledge it will take additional patience as we work through the current vacancies. While the decline in same-center NOI we experienced in the quarter was anticipated and communicated, it does not mean we are satisfied with where we are. We obviously can't control bankruptcies and store closures for struggling tenants. What we can control is the quality of our assets, the brands, value and the experience that we offer to our tenants and our shoppers, along with a lower occupancy cost solution and proactive engagement with these tenants and prospects.

Store closures during the quarter were as anticipated and we remain in line with our guidance for the year. Through the end of the quarter, store closings have totaled 105,000 square feet, including the Toys "R" Us, Nine West and Easy Spirit closings we detailed last quarter. Subsequent to the quarter-end, Rockport declared bankruptcy and has closed their 7 stores at our consolidated centers, representing 17,000 square feet.

We also maintained conversations with other tenants who have recently declared restructurings. Consistent with what we discussed last quarter, we expect cash renewal leasing spreads to continue to moderate for the next several quarters as we work with these retailers to retain them as tenants. Let me remind you that we do not have any department stores which may go dark and require large capital investments to re-tenant or reposition the space.

Beyond these challenges, I'm particularly excited by some of the new concepts we are bringing to our centers. One highlight is an American Girl outlet, which will be opening in Hershey, Pennsylvania this month. This will be their first and only outlet store. And the preopening buzz and the local press and social media shows an incredibly high level of anticipation in the marketplace for this experiential tenant.

We are also showing success in bringing more local value concepts into our centers, stores which historically have not had a presence in outlet centers. For example, in Myrtle Beach, we will be opening a Carolina Pottery, a popular discounted pottery and home goods store in the Southeast. Other examples of local concepts who recently signed leases with us include: Palmetto Moon, a Southern lifestyle store; and restaurants like PS Taco, Rock-N-Roll Sushi and Fireflies. Additionally, local-based tenants with national exposure, such as Shinola, a luxury men's retailer, and Spartina, an upscale women's handbag and accessory company, have opened outlet stores near their home-based markets.

In terms of our balance sheet and capital position, we're in great shape. We have a largely unencumbered portfolio, maintained solid interest coverage and have no significant debt maturities until 2021. We are committed to sustaining a stable and flexible financial position. We plan to continue to deliver a very strong level of cash flow and remain disciplined in our capital allocation decisions with a singular focus on creating value. The cash we generate covers our capital needs for investing in our assets, paying our dividends, repurchasing our common shares and deleveraging our balance sheet. Our dividend, which remains a priority, is secure and well covered. We have also continued to execute on our share repurchase program.

Going forward, we do not anticipate any new developments in 2018 and '19. But we'll continue to evaluate our priority uses of cash and long-term opportunities for growth. While we recognize the challenges we have discussed related to select overleveraged retailers, we believe industry sentiment surrounding fashion retailers is improving. According to recent reports, nearly 7,000 stores closed in all retail properties were announced in 2017. And slightly less than half of that number is slated to close this year. Importantly, offsetting those closures, approximately 2,800 stores are scheduled to open this year. This all suggests a healthier retail outlet.

Our confidence in the long-term growth of the outlet distribution channel remains unwavered. In particular, relative to other retail channels, we don't believe that outlets have been overbuilt. So the need to rightsize and the competition among landlords is minimized. Furthermore, we are increasingly hearing the conviction among retailers that brick-and-mortar is a critical element of their omni-channel brand strategy. While the positive sales are encouraging and our conversations with tenants and prospects are constructive, we know there's still much work to be done. We continue to employ a strategic approach that has proven effective and successful over the last 37 years, which includes keeping the tenant mix of our centers dynamic and giving Tanger shoppers the brands and designers they want. With this long-term view, we have proven we can successfully adapt to evolving consumer preferences and align those with tenant needs.

Finally, I'd like to welcome Susan Skerritt to Tanger's Board of Directors. Susan has an extensive and distinguished career in banking and finance with top board and executive leadership positions at the Royal Bank of Canada and Deutsche Bank, among others. In recognition of her leadership and accomplishments, Susan was named to American Banker's list of the Most Powerful Women in Banking for multiple years. She brings a wealth of experience, a fresh perspective and additional diversity to our board. We look forward to working with Susan for many years to come.

With that, I'd like to turn the call over now to Tom, who will discuss the current sales and leasing environment.

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Thomas E. McDonough, Tanger Factory Outlet Centers, Inc. - President & COO [3]

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Thanks. As Steve mentioned, we saw the cadence of traffic build as we moved from April to June, ending the quarter essentially flat compared to last year. Average tenant sales productivity for the consolidated portfolio was $383 per square foot for the 12 months ended June 30, 2018, flat to the prior year period.

For the 12 months ended June 30, 2018, average tenant sales includes our Daytona center, which stabilized in the first quarter of 2018. On an NOI weighted basis, average sales productivity was $409 per square foot for the 2018 period, up 1.5% from $403 for the 2017 period. Same-center tenant sales performance for the overall portfolio increased 1% for the 12 months ended June 30, 2018, compared to the 12 months ended June 30, 2017.

We believe this performance demonstrates the strength of the consumer, the value of our established brand and the consumers' desire to shop at our centers. For the second quarter of this year, sales performance was down slightly due to in part to the negative impact of the shift in Easter from April last year to March this year. In the quarter, we saw strength in apparel, particularly juniors and denim, athletic, accessories and active wear.

The key reason that shoppers come to Tanger Centers is the attractive brand value proposition that we provide. In today's more experience-based economy, our value shopping experience is what attracts many of our customers. However, we are always striving to provide more. Therefore, foremost, we continue to curate the optimal mix of tenants that will excite our customers.

We have also shifted some of our marketing efforts to focus more on customer experience and engagement. For example, in recent months, we have hosted a number of food truck festivals, family fun nights with games and entertainment as well as several art festivals. With each of these events, we have seen positive results with a notable increase in both traffic at the centers and engagement on social media.

As of June 30, consolidated portfolio occupancy was 95.6% compared to 96.1% in the year-ago quarter. The year-over-year difference was primarily driven by roughly 200,000 square feet of closures that we faced in 2017 and the additional 105,000 square feet we captured in the first half of 2018.

For the trailing 12 months ended June 30, 2018, commenced leases, excluding remerchandising projects, in our consolidated portfolio that were renewed or re-leased for a term of more than 12 months included 296 leases, totaling approximately 1.4 million square feet. These leases achieved a 14% increase in blended average rental rates on a straight-line basis and 5.8% on a cash basis. These results remove the impact of commenced leases with terms of 1 year or less, and therefore, we believe better reflects the long-term growth profile of our portfolio.

As a reminder, given the elevated levels of bankruptcies and store closings in 2017 and year-to-date in 2018, we signed a higher percentage of leases with terms of 1 year or less, many at below market rates in order to maintain relationships, sustain the occupancy and vibrancy of our centers, achieve an optimal tenant mix and maximize revenue. Looking ahead, we anticipate that the use of shorter-term leases with sizable negative spreads should moderate. But it will likely take several more quarters for the current retail cycle to change.

For our total consolidated portfolio, including leases of all terms and remerchandised centers for the trailing 12 months ended June 30, 2018, 364 leases commenced, representing approximately 1.8 million square feet. For these leases, spreads rose 6.3% on a straight-line basis and declined 80 basis points on a cash basis. These spreads show an improvement from what we showed in the first quarter, where straight-line rents were up 5.3% and cash rents were down 2.4% for leases which commenced in the trailing 12-month period. This all-in view takes into account the roll-down impact of the shorter-term leases, along with the subsequent renewing or re-tenanting of that space into longer-term leases.

Now I'd like to provide some perspective on our forward outlook. We would characterize the current leasing environment as marginally better than when we spoke to you 3 months ago. At the International Council of Shopping Centers Convention in Las Vegas in May, we started hearing of new open-to-buys. There were a number of brand talkings about expanding. Activities since that point has been up slightly, albeit with some ongoing pressure on rate. We believe that the level of bankruptcies and restructurings that we saw in recent years is tapering. However, we may still be impacted by additional unexpected closures through the balance of this year.

Another positive indicator is that the leases that were executed in the second quarter versus those that were executed in the first quarter of this year were with more favorable terms. Specifically in the first quarter, approximately 17% of the GLA of leases executed in our consolidated portfolio were for terms of 12 months or less compared to less than 5% in the second quarter. Also for all leases executed in terms of GLA, more than 70% had positive cash spreads in the second quarter. This compares to less than 50% in the first quarter. Definitely too early to establish a trend, but these metrics have moved in the right direction with tenants committing to longer-term deals.

While these are positive data points, we do expect rates to continue to moderate as indicated by leases that have been executed for 2019 but not yet commenced. I want to emphasize that based on our historical pace, these particular leases represent only about 20% of what we would ultimately commence for the year. So the average commenced rate might be meaningfully different than what we are seeing today. But as of today, we expect cash spreads to be flat to slightly down for next year.

Finally, as part of our ongoing effort to help you better understand our business, we have added additional detail to our supplemental materials. On Page 9, you will see more details around our top 25 tenants as well as their contribution by GLA and annualized base rent.

I will now turn the call over to Jim to take you through our financial results and a brief balance sheet recap.

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James F. Williams, Tanger Factory Outlet Centers, Inc. - Executive VP & CFO [4]

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Thank you, Tom. Second quarter FFO available to common shareholders was $0.60 per share, an increase of 2% over the second quarter of 2017. Incremental income from our new developments and expansions completed in 2017 and reduced G&A expense were partially offset by the same-center NOI decrease of 1.9% compared to the prior year quarter, driven primarily by the 2017 and 2018 store closures as previously mentioned.

On a year-to-date basis, same-center NOI was down 1.7%. There were no material lease termination fees in the consolidated portfolio during the second quarter of 2018. However, from the second quarter of 2017, we recognized $1.5 million of lease termination fees, which are not included in the same-center and portfolio NOI.

Our balance sheet remains strong. During the quarter, our Charlotte joint venture closed on a $100 million mortgage loan with a fixed interest rate of 4.27% that matures in July 2028. The proceeds from the loan were used to repay existing $90 million mortgage loan with an interest rate of LIBOR plus 1.45% that had an original maturity date of November 2018. Our share of the excess cash of about $4.7 million was used to pay down our floating rate line of credit.

As of June 30, 2018, approximately 94% of the square footage in our consolidated portfolio was not encumbered by mortgages. Only $224 million was outstanding under our unsecured lines of credit, leaving 62% unused capacity or approximately $370 million. We maintained a substantial interest coverage ratio during the first quarter of 4.4x and net debt-to-EBITDA was approximately 6.0x at quarter-end.

Our floating rate exposure represented 13% of our total debt and less than 6% of total enterprise value as of June 30, 2018. The average term of maturity was 6.1 years and the weighted average interest rate for our outstanding debt as of quarter-end was 3.4%. We have no significant debt maturities until April of 2021.

As Steve discussed, total shareholder returns is an important part of our value proposition. We continue to execute on our share buyback plan on a leverage-neutral basis. During the second quarter, we repurchased approximately 476,000 of our common shares at a weighted average price of $21.01 per share for a total consideration of $10 million. Year-to-date, we have repurchased approximately 919,000 shares or $20 million at a weighted average price of $21.74. This leaves approximately $56 million remaining under our $125 million share repurchase authorization.

In April, we raised our dividend by 2.2% on an annualized basis to $1.40 per share. We have raised the dividend every year since becoming a public company 25 years ago. And over the last 3 years, our dividend has grown 22% cumulatively. We expect our FFO to exceed our dividend by more than $100 million in 2018 with an expected FFO payout ratio under 60%.

I'd like to point you to another new disclosure that we have added to our supplement. On Page 11, we have provided detail of our capital spending. During 2018, upon completion of the residual funding of our 2017 development projects and spending between $35 million and $40 million for capital expenditures and lease-up costs, we should have internally generated cash of approximately $50 million that may be used financially to lever our balance sheet and further reduce floating rate debt exposure and/or repurchase additional common shares as market conditions warrant. The strength of our balance sheet will allow us to take advantage of opportunities that arise as the cycle turns more positive.

In terms of expectations, we are reiterating our guidance for 2018. We continue to expect our FFO per share for the year to be between $2.40 and $2.46 and same-center NOI to be down 1.5% to 2.5%. Details assumed in our guidance can be found in the release we issued last night.

This concludes our prepared remarks. I'd now like to open it up for questions. Operator, can we take our first question?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Craig Schmidt from Bank of America.

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Craig Richard Schmidt, BofA Merrill Lynch, Research Division - Director [2]

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Regarding your objective of reinvesting in your assets, will this take the form of redevelopment efforts? Or is this going to be more along the lines of re-tenanting?

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Steven B. Tanger, Tanger Factory Outlet Centers, Inc. - CEO & Director [3]

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We have spent about $350 million in the last 10 years upgrading, renovating and re-tenanting our centers. We have reduced the average days of our properties to about 15 years. So our properties are beautiful, well-maintained, up-to-date and tenanted appropriately. As far as redevelopment, we completed 5 redevelopment projects in the last year or so, successfully completed them. We have no major redevelopment projects slated for the near future. Our focus is on filling our vacancies, which were created by the highly publicized, unexpected bankruptcies of several tenants. And that's our short-term plan, is to create value by filling vacancies and create demand in our property for space.

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Craig Richard Schmidt, BofA Merrill Lynch, Research Division - Director [4]

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Great. And then just as a follow-up, thanks for the discussion on store closing, appreciated. Just curious, looking at store closings on a national level, the pace has slowed significantly in the last 2 months. I wonder if you're experiencing the same. Or is it a little more lingering in the outlet space?

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Steven B. Tanger, Tanger Factory Outlet Centers, Inc. - CEO & Director [5]

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As we mentioned, the only stores that have closed due to bankruptcy in the last couple of weeks or actually this week were 7 Rockport stores, totaling 17,000 square feet. We have known closures so far this year of about 122,000 square feet. We don't know what's going to happen tomorrow, obviously. But the body language with our tenants appears much better than it was 90 days ago.

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Operator [6]

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Your next question comes from the line of Christy McElroy from Citi.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [7]

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Tom, I just wanted to go back to your comments on re-leasing spreads. And we've talked about this before. We calculate that the rents on the shorter-term lease deals that you're doing, so converting the marked to short term, are rolling down by about 25%. And I'm wondering if you've started to make progress on converting any of those leases, so those that were marked down by that much, back to permanent leases at market rents such that it would -- and I'm wondering if that flows through that re-tenanted space or the renewed space greater than 12-month spreads. So I'm just wondering how to reconcile that in your slides.

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Thomas E. McDonough, Tanger Factory Outlet Centers, Inc. - President & COO [8]

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With respect to those short-term leases, we have re-leased about 1/3 of the short-term leases that we did in 2017 and we've re-leased those pretty much at market rates. And I'm not sure if that answers your question, but that's what happened so far.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [9]

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Well, I think the ones that you -- I think the ones that you converted -- go ahead.

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James F. Williams, Tanger Factory Outlet Centers, Inc. - Executive VP & CFO [10]

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Christy, this is Jim. To answer the second part of your question, we've -- as Tom said, we've executed about a 1/3 of those leases back to market, about 15% on that has commenced. So they are in those spreads that you mentioned in the top portion. Just as a note, those come in -- they are coming in -- they will be coming in the spreads at a slower pace than how they come out. What we do point here, and to remind you that we are doing and showing you -- showing you the all-in spreads which shows the roll down and the roll back up.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [11]

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Right. I guess, I'm just wondering to the 1/3 that you mentioned that you've re-leased those are the 17 -- those are the 2017 that you lost, right? You roll down it, I think about 10% on average. I'm wondering about those that you are rolling down this year at about 25%. And as those start to flow through, the re-leasing spreads, the greater than 12-month re-leasing spreads, how that might start to impact that number and inflate that number given that there's probably going to be meaningful mark-to-market on those.

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Thomas E. McDonough, Tanger Factory Outlet Centers, Inc. - President & COO [12]

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Well, as Jim said, we think they're going to come in over time as opposed to go up quickly. So I think that, that will distribute and dilute the impact of those spaces rolling back into our spreads. And again if -- but in any case, if the issue is still concerned, we point you to the all-in spreads that would take all that into comp.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [13]

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Okay. And then just -- in thinking about the full year same-store NOI growth range, you've maintained it at down 2.5% to 1.5%, and then in looking at the first half pace of down 1.7%, it seems like the midpoint of guidance suggests that NOI growth will get more negative in the back half of the year. How should we be thinking about the biggest drivers of that given that you've lost -- you've closed a lot of stores in the first half?

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Steven B. Tanger, Tanger Factory Outlet Centers, Inc. - CEO & Director [14]

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Good morning, Christi. Again, I want to thank you for your acknowledging our additional disclosures. We've got a business right now that's very dynamic and there's lots of unknowns. We acknowledge that there's going to be challenges in the second half of the year, that's why we have a range. Candidly, the third quarter -- the third quarter maybe a little bit softer. But as things change, we'll update our guidance as appropriate. But again as I've said, we are cautiously optimistic. It's going to take several more quarters for things to stabilize. But we're encouraged by what we're seeing. And we are committed to giving you appropriate disclosure so that you can track our progress and we welcome your comments.

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Operator [15]

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Your next question comes from the line of Todd Thomas from KeyBanc Capital Markets.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [16]

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Just following up on the cash re-leasing spreads. Tom, I think some of your comments were about the year ahead, so 2019. You commented that you'd expect cash re-leasing spreads to be flat, slightly negative, I guess, in 2019. Is that right? And can you provide more context there maybe just touching on your expectations around the first quarter of '19 just given conversations you're having and also just given the outsized leasing volume that takes place in the first quarter each year.

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Thomas E. McDonough, Tanger Factory Outlet Centers, Inc. - President & COO [17]

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Yes, Todd, good morning. You're right, I did say and we are expecting the spreads in '19 will be flat to slightly negative. We're hopeful and optimistic that we'll do better than that. As I mentioned, we did see some real positive in Q2 executed numbers versus the Q1 executed numbers. But beyond that, I don't know that I can give you anymore color, we are not specifically providing any kind of guidance for 2019 and particularly for the first quarter of 2019.

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Steven B. Tanger, Tanger Factory Outlet Centers, Inc. - CEO & Director [18]

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Todd, what we wanted to do is based on a very small sample size of only 20% or so of leases that are executed, we wanted to give you what we're seeing, when we're seeing it, so you can plan appropriately as you put together your 2019 model. Obviously, we are working every day and in 90 days we'll update what we're seeing. But this is the first time we've looked ahead so far and we hope that based upon a small sample, it will be useful to you as you construct your model.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [19]

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Okay. And then, I was just wondering if you could talk a little bit more about tenant sales growth in the quarter. Looks like it slowed a little bit, the trailing 12-month result was just slightly lower on a sequential basis. And you talked about traffic trends improving in 12 of the last 13 weeks of the quarter, can you comment on sort of the cadence of sales and how they trended throughout the quarter?

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Steven B. Tanger, Tanger Factory Outlet Centers, Inc. - CEO & Director [20]

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Sure. There was the shift in the Easter this year from historically April to March. So those sales were pretty much in the first quarter. The cadence increased every month from April, May to June. I just want to remind you that we have very little luxury tenants that were soft in the past couple of years, but now appeared to be doing much better. We are focused totally on outlet centers in the United States and the international market where some of our peers appear to be doing well. So we're focused on our market. We're focused on reducing our G&A as sales continue to trend slightly up. And I just want to remind you that there's -- we are a dynamic business and we're very happy to have produced results that beat FFO consensus in this quarter.

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Operator [21]

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Your next question comes from the line of Samir Khanal from Evercore.

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Samir Upadhyay Khanal, Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst [22]

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Steve, I'm sorry, but did you say the 105,000 square feet you got back, that number included toys?

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Steven B. Tanger, Tanger Factory Outlet Centers, Inc. - CEO & Director [23]

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Yes. We disclosed and highlighted that number 90 days ago.

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Samir Upadhyay Khanal, Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst [24]

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Okay. So first quarter -- if I work through the maths -- math, 37,000 square feet first quarter, second quarter was 68. So how much of the 68 was kind of broken down between, I guess, Nine West and Toys? If you have that (inaudible)

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Steven B. Tanger, Tanger Factory Outlet Centers, Inc. - CEO & Director [25]

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You have that number, Jim?

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James F. Williams, Tanger Factory Outlet Centers, Inc. - Executive VP & CFO [26]

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Yes, I don't have (inaudible) most of it. I'd say about 2/3 of that was Nine West and a 1/3 of it was Toys.

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Samir Upadhyay Khanal, Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst [27]

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Okay. And then you've got another additional sort of 15 for Rockport gets you to around 120. So you still have a cushion about 50,000 square feet per guidance, right?

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Steven B. Tanger, Tanger Factory Outlet Centers, Inc. - CEO & Director [28]

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Actually, 30 to 50.

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Samir Upadhyay Khanal, Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst [29]

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30 to 50 okay. And then, I guess, my second question is when you look at some of the other, your mall peers, I mean, they started a -- you start to see a bit of rebound in sales, the sort of the 3-ish percent and you guys are kind of sort of this of 1% range. I guess, why didn't we see the same sort of result from you guys last night? And if sales doesn't pick up here and with occupancy costs sort of at 10%, I guess, where do you go from here from a pricing power perspective? If sales doesn't pick up, then it feels like it's going to be tough to get pricing power back. So how do we think about that sort of going forward?

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Steven B. Tanger, Tanger Factory Outlet Centers, Inc. - CEO & Director [30]

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Well, we're seeing some encouraging signs in our conversations with our tenants. We do continue to fill vacant space created by the bankruptcies. We are encouraged, as Tom mentioned in his remarks, that leases executed in the second quarter, 70% were positive cash spreads compared to less than 50% in Q1. And also, I just want to caution you that this is -- the second quarter results are a pretty small sample size and it's way too early to call a trend or a bottom, but we are encouraged. I don't think that you'll see pricing power shift until we -- still we fill more of the vacant space and hopefully there will be no new supplier vacant space by overleveraged private equity bought out companies going bankrupt. It's going to take several more quarters to have that pricing power. That's candidly what we're seeing.

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Operator [31]

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Your next question comes from the line of Caitlin Burrows from Goldman Sachs.

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Caitlin Burrows, Goldman Sachs Group Inc., Research Division - Research Analyst [32]

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I was just wondering if maybe you guys could talk about when your signing leases, who those new users are? Are they relocating from nearby outlet or full price stores and/or expanding footprints?

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Steven B. Tanger, Tanger Factory Outlet Centers, Inc. - CEO & Director [33]

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Good morning, Caitlin. They are coming from all over. As we mentioned, we signed a -- and are about to open a Carolina Pottery, 52,000-foot store in Myrtle Beach, South Carolina, which will fill significant amount of vacant space in that center. We have signed the first and only American Girl outlet. We're continuing to work with people like T.J. Maxx, Marshals, HomeGoods. There are several other local tenants that we're dealing with. Actually, we've had the pleasure of working with T.J. Maxx for about 8 years now in our centers. So we have -- obviously, there's a lot of people we're talking to. We're very profitable distribution channel, and as I said before, it's going to take a couple more quarters, several more quarters for things to continue to stabilize before they move back up.

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Caitlin Burrows, Goldman Sachs Group Inc., Research Division - Research Analyst [34]

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Okay. And then on the idea of essentially looking out to 2019, I know some of the other companies have talked about on the impact, they think, changes to the internal leasing costs will have on G&A and/or FFO in 2019. So I was wondering if you have anything to tell us on that front.

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James F. Williams, Tanger Factory Outlet Centers, Inc. - Executive VP & CFO [35]

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Yes, Caitlin. It's Jim. We're still working through that, we're not quite finished -- put the finishing touches on that. But what we can give you is kind of a point of reference. Last year what we capitalized in internal leasing, legal cost was about $6 million. What we've capitalized so far through the first 6 months this year is about $2.8 million. A big portion of that will be expense, but we'll also continue to capitalize some of that. So that's where we are, and as we finish that up, we can give you a little more color. I think you can just -- even if you looked at it from a perspective that all of that would be expense and it won't be because we will continue to capitalize some of that, and of course with that standard, I think, it's 92% or less of our FFO.

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Operator [36]

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Our next question comes from the line of George Hoglund from Jefferies.

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George Andrew Hoglund, Jefferies LLC, Research Division - Equity Research Analyst [37]

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I just have one question on the overall tenant retention rates going forward. Just -- and so we've seen kind of broadly the pace of store closure is slow, how do you view sort of tenant retention if customer -- if tenants are still trying to trim back their store portfolios?

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Steven B. Tanger, Tanger Factory Outlet Centers, Inc. - CEO & Director [38]

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We continue to see our retention level in the mid-80% range which has been consistent for the past many years. So we're -- we haven't seen any change in that and that's still very positive.

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Operator [39]

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(Operator Instructions) You next question comes from the line of Omotayo Okusanya from Jefferies.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [40]

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I just wanted to first of all to echo Christi's sentiments about the additional disclosure, I found that very helpful. So thank you for that. In regard -- just along George's line of questioning and the tenant retention, I mean, the process that you guys go through to decide buying a short-term lease versus let the tenant go and maybe try to re-lease the space to a stronger tenant down the line. Could you just kind of walk us through a little bit of through how you kind of make that decision and again what kind of impact that eventually -- that should have on your outlook over the next 12 to 18 months as you kind of look at the retail environment.

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Steven B. Tanger, Tanger Factory Outlet Centers, Inc. - CEO & Director [41]

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Thank you for the positive comments. Our discussion with regard to leasing is obviously dependent upon timing. In the past 2 years, we had over 300,000 square feet of space returned due to bankruptcy caused by private equity funds overleveraging great specialty retailers. That was unexpected and more than we've had in many, many previous years. We worked our way through most of that as we disclosed our occupancy at the end of Q2 was down only 50 basis points or about 65,000 square feet. So we're working our way through most of that and have worked our way through most of it. Now with no new bankruptcies hopefully on the horizon, although we could be surprised, but none that we're aware of, our terms are stiffening with the tenants. We are not as apt to make short-term deals that are less advantageous to the company because we filled a lot of the vacant space, and there's not a lot of supply overhang. So we're getting thing back to -- close to the supply-demand equilibrium. It hasn't quite shifted to more demand than supply. But right now, we're seeing stabilization, as I mentioned to you. And it's probably going to take another -- several more quarters for that stabilization to take hold. But clearly, these negotiations are like most other parts of any business based on supply and demand.

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Operator [42]

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Your next question comes from the line of Michael Mueller from JPMorgan.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [43]

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I know you touched on leasing quite a bit and the spreads, but I'm just curious if you take a step back and think about it, the comments about you need several more quarters to stabilize, and I'm sure you're referring to numbers as well. But how much of that comment is -- we should think of it as it's going to take several more quarters for what happened in the first half of this year as well as 2017, to actually makes its way into the numbers, because the ball is in motion, it's going to take another year or so for it to fully work its way in. Or should we think of that comment as, that's happening, but there still other stuff on the horizon that's going to produce headwinds in the back half of the year even though the environment has gotten a little bit better with the margin.

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Steven B. Tanger, Tanger Factory Outlet Centers, Inc. - CEO & Director [44]

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As much as I try, it's very hard for me to see over the horizon. And if somebody can do that, please let me know. We're just commenting on the facts as we see them today, Mike. We will -- we have over the years been reactive, we've been proactive, we've been active. We've been doing this for 37 years. This is not the first time we faced a market like this. As we sit here today, we can just give you our comments and our thoughts upon what we see. If, when we hang up on the call, we get a press release that someone has declared bankruptcy, we'll deal with it as we've done before. But right now, we've identified what we think are the headwinds that we know about. We have a plan to deal with them and we're -- I don't know what else I could really say. We've made big investments into our centers. We've added experiential amenities to our properties. We've added technology to our properties. We're doing the things that one might expect to make the shopping visit enjoyable. But I don't know, I can't comment on things that are unknown at this time.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [45]

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Got it. So it sounds like a lot of the commentary then was more backward-looking in terms of what's happened so far and flowing into the numbers then. That sounds like what you were talking about more so then.

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Operator [46]

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Your next question comes from the line of Todd Thomas from KeyBanc Capital Markets.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [47]

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I just want to try to understand this a little bit, just given the comments. So on the re-leasing spreads in '19, is that comment meant to be sort of relative to the 2018 spreads or in the sense that you think spreads will moderate further in '19 relative to '18, or are you just thinking about them on an absolute basis?

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Steven B. Tanger, Tanger Factory Outlet Centers, Inc. - CEO & Director [48]

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We're giving you what we know today which based on 20% of the space coming for renewal in 2019, that's what we're seeing. It's about 2019.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [49]

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Okay. I guess -- I'm just a little unclear then just given some comments around the stabilization in leasing that you're seeing. Is this specific to -- I guess, a couple of tenants or categories or something to that extent where occupancy cost ratios are just a little out of whack? Or is it just sort of a broader comment and expectation in general?

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Steven B. Tanger, Tanger Factory Outlet Centers, Inc. - CEO & Director [50]

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As I said, it's based upon a small sample size of 20%. Obviously, we expect to get a lot more leases signed in the next 90 and 180 days for next year and we'll update that. Based on the 20% that are executed for 2019, we are seeing the market continue to be flat and maybe slightly down. The spreads are flat -- the spreads are flat to slightly down.

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Operator [51]

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Your next question comes from the line of Caitlin Burrows from Goldman Sachs.

There are no further questions at this time. I will turn the call back over to the presenters.

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Steven B. Tanger, Tanger Factory Outlet Centers, Inc. - CEO & Director [52]

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I want to thank everybody for participating. As I mentioned earlier, we're very proud to say that we have celebrated our 25th anniversary as a public company. This concludes our 100th earnings release and conference call. So thank you for your support and thank you for participating. Goodbye now.

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Operator [53]

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This concludes today's conference call. You may now disconnect.