Tanger Factory Outlet Centers, Inc. (NYSE:SKT) Q3 2023 Earnings Call Transcript
Tanger Factory Outlet Centers, Inc. (NYSE:SKT) Q3 2023 Earnings Call Transcript November 7, 2023
Ashley Curtis: Good morning. This is Ashley Curtis, Assistant Vice President of Investor Relations. And I would like to welcome you to the Tanger Factory Outlet Centers Third Quarter 2023 Conference Call. Yesterday afternoon, 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.tanger.com. Please note that during this conference call, some of management's comments will be forward-looking statements that are subject to numerous risks and uncertainties, and actual results could differ materially from those projected. We direct you to our filings with the Securities and Exchange Commission for a detailed discussion of these risks and uncertainties.
During the call, we will also discuss non-GAAP financial measures as defined by SEC Regulation G, including funds from operations or FFO, Core FFO, funds available for distribution, or FAD, same-center net operating income, adjusted EBITDAre and net debt. Reconciliations of these non-GAAP measures to the most directly comparable GAAP financial measures are included in our earnings release and in our supplemental information. This call is being recorded for rebroadcast for a period of time in the future. As such, it is important to note that management's comments include time-sensitive information that may only be accurate as of today's date, November 7, 2023. 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 Steven Tanger, our Executive Chair; Stephen Yalof, President and Chief Executive Officer; and Michael Bilerman, Executive Vice President, Chief Financial Officer and Chief Investment Officer. In addition, other members of our leadership team will be available for Q&A. I will now turn the call over to Steven Tanger. Please go ahead, Steve.
Steven Tanger: Good morning, and thank you for joining us for our third quarter earnings call. As we previously announced, I will be transitioning from my current role as Executive Chair of the Board to Non-Executive Chair of the Board at the end of this year, and Bridget Ryan-Berman will remain as the company's lead Independent Director. In conjunction with my transition, this earnings call will be my last one as an active participant. Since Tanger's IPO approximately 30 years ago, I have proudly participated in 122 quarterly earnings calls, which marks one of the longest consecutive streaks in the REIT industry. My father and I started this business in 1981 with a hunch that consumers wanted to buy directly from the world's most successful brand name companies.
Now, more than 42 years later, we have over 700 retail brands represented in our portfolio in approximately 3,000 stores. Throughout economic cycles, we have proven the resilience of the outlet distribution channel. In good times, people like a bargain, and in tough times, people need a bargain. A couple of weeks ago, I was honored to participate in the ribbon-cutting celebrating the opening of our 37th Tanger Center in Nashville, Tennessee. To see our latest vision come to life was not only incredible, but also very emotional. It has been a privilege to be a part of such a remarkable company and to work with such a smart and devoted team and board of directors. I want to thank the leadership and all of the Tanger employees for your continued dedication.
I could not be more proud of where we are today and confident in the long-term strategy in the team and in the outlook. The future is very bright. I will now turn the call over to our CEO, Steve Yalof.
Stephen Yalof: Thank you and good morning. I'd first like to thank Steve Tanger for his leadership throughout our history and for trusting us to carry his vision forward. I'm pleased to announce that we delivered solid earnings growth in the third quarter as we continue to see strong leasing and operational execution. We anticipate positive momentum will continue, which is contributing to an increase in our full year earnings guidance. Additionally, our board of directors recently authorized a 6% dividend increase. We continue to drive total rents while elevating and diversifying our tenant mix. In the third quarter, we delivered a 7.6% increase in same-center NOI, and occupancy was at 98% at the end of the quarter, up 80 basis points sequentially and 150 basis points year-over-year.
We've recovered nearly 600 basis points of occupancy over the past three years. We have also achieved strong rental rate growth with positive rent spreads of 13% on renewals. and more than 30% on re-tenanted space over the past 12 months. Leasing activity continues to be strong as we executed over 560 leasing transactions, comprising more than 2.3 million square feet of space, including the lease up of Tanger Nashville. This represents nearly 20% of our portfolio GLA, a 30% increase in transaction volume from the prior year period. These leases include a mix of new to portfolio brands, renewals, and expansions with core brands. We continue to convert temporary stores to permanent deals while utilizing our temp leasing strategy to fill space and introduce new tenants to the portfolio.
Looking ahead to next year, 21% of our GLA and APR will come up for renewal. This presents an opportunity to continue to drive total rent growth and further curate our tenant mix. With seven consecutive quarters of positive rent spreads, we remain confident in our ability to grow total rents. We saw a 10 basis point increase in our occupancy cost ratios since last quarter, which provides the opportunity for additional rent upside. Traffic and tenant sales per square foot were down slightly compared to the prior year, while discretionary categories were more challenged the athletic and athleisure categories saw continued gains. Leasing activity remains strong with new retailers and categories entering our channel as we continue to diversify our tenant mix by including the health and beauty category, restaurants, home stores, and more experiential brands.
Tanger Outlets Nashville, our 37th center, grand open last month to massive crowds and robust sales. This unique 290,000 square foot open-air property exemplifies the evolution of Tanger and is the first outlet center in the United States to break ground and deliver to the market since 2019. Tanger National opened 96.5% leased with a dynamic and diverse mix of local and national brands, including sought after lifestyle brands and global designers, as well as popular national and local restaurants and food options. We continue to execute on our strategic plan of driving same-center growth, monetizing and realizing embedded opportunities throughout our peripheral land and asset intensification initiatives, and pursuing selective external growth through new development and acquisitions.
We recognize there is broad macroeconomic uncertainty, but we remain encouraged by our positive momentum and confident in our platform and the value we offer to shoppers and brands alike. We generate strong free cash flow, have ample liquidity, and will continue to adhere to our core principle of maintaining a conservative balance sheet as we use our platform to realize additional growth. We have built a best-in-class team focused on executing this strategy, and I would like to thank them and our retailer partners, shoppers, and stakeholders for continuing to grow with us. I 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 budget, our strong balance sheet position, our external growth initiatives, and I'm going to end with our increased 2023 guidance. Our third quarter results came in ahead of expectations, with core FFO of $0.50 a share compared to $0.47 a share in third quarter of last year. Same-center NOI increased 7.6% for the quarter, driven by gains in occupancy, and our strong rent spreads which have led to both higher base rents and higher expense recoveries, and the quarter benefited from the recognition of the of some out-of-period rent collections, which totaled approximately $0.01 of FFO. Our balance sheet remains in a position of strength.
At the end of the third quarter, we had $1.6 billion of prorated debt and $207 million of cash and cash equivalents and short-term investments. 94% of our debt is at fixed rates and we have no significant debt maturities until late in 2026. We also have full availability and our $520 million unsecured lines of credit. Our net debt to adjusted EBITDAre was 5.2x for the 12 months ended September 30th, one of the lowest in the retail and REIT sector. This below average leverage, combined with our significant cash position, provides the capacity to fund and pursue our growth initiatives. Our quarterly cash dividend remains well covered with a continued low payout ratio. In terms of our interest rate hedges, we continue to proactively address the February ‘24 expiration of the interest rate swaps on $300 million of our debt that had fixed adjusted SOFR at 50 basis points.
As of November 6, 2023, we have entered into $250 million of new forward-starting swaps that will commence once the current swaps expire on February 1 of next year. These swaps have varying maturities through January of 27, so we're effectively fixing this debt for another 2.5 years on average. These new swaps fixed the adjusted SOFR at a weighted average base rate of 4% compared to the current 0.5% with the impact of the higher interest rates being recorded upon expiration and the start of the new forward swaps next February. In terms of external growth, we successfully opened Nashville during the quarter, which does have a few income statement and balance sheet factors. Through the end of the third quarter, we have incurred costs of $119 million against our narrowed cost range of $144 million to $146 million, which leaves $26 million to spend at the midpoint predominantly in the fourth quarter.
We continue to estimate a 7.5% to 8% stabilized yield and effective with the opening on October 26, we ceased capitalizing interest on the project. With our low leverage balance sheet and strong liquidity position, along with the continued free cash flow after dividends, we have significant optionality to pursue additional growth opportunities. We have prioritized maintaining financial flexibility, which includes an undrawn line of credit and an ATM. In the third quarter, we opportunistically issued a small amount of equity, approximately $2.7 million at $24.89 a share for accretive deployment. Now turning to our increased 2023 guidance, which reflects better than anticipated performance in the third quarter, including approximately a $1.00 which will not repeat, and our improved outlook for the remainder of the year.
We are increasing our expectations for core FFO by $0.035 at the midpoint to a new range of $1.90 to $1.94. We're also increasing and narrowing our Same-center NOI growth expectations to a range of 4.75% to 5.5%, up from 3.5% to 5% currently, or an 87.5 basis point increase at the midpoint. We're also reducing the anticipated recurring CapEx in 2023 to a range of $40 million to $50 million down from $45 million to $55 million due to the timing of certain projects and continued high tenant renewal rate. For additional details on our key assumptions, please see our release issued last night. And we're greatly looking forward to seeing many of you at upcoming conferences, including Nareit next week in LA, as well as many upcoming sell side events and property tours.
It has been our absolute pleasure to have welcomed so many of our financial stakeholders to our assets this year, including Stops and Palm Beach, Fort Worth, Deer Park, Riverhead, Charleston, Myrtle Beach, National Harbor, St. Marcos, and upcoming visits scheduled in Phoenix and our newest center in Nashville next March. We couldn't be more proud as an organization to show off our people, our assets, and our strategies in action. And we love that you've been able to experience our assets as a guest and as a shopper, seeing why our guests and retailer brand partners highly value the Tanger platform. And with that, I'd now like to open up the call for questions.
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