Tanger Inc. Q2 FY2022 Earnings Call

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 Second Quarter 2022 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 Investor Relations website, investors.tangeroutlets.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; 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, August 9, 2022. On the call today will be Steve Tanger, our Executive Chair; Stephen Yalof, President and Chief Executive Officer; and Doug McDonald, Senior Vice President, Finance and Capital Markets. 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.

Good morning, and thank you for joining us for our second quarter 2022 earnings call. The Tanger team delivered another strong quarter as we executed on each of our strategic initiatives and as shoppers and retailers continue to recognize the value of the Tanger open-air centers offer. I am pleased with our continued momentum and our positioning to drive long-term growth. Thank you to all of our stakeholders for your ongoing support. I'm happy now to turn the call over to Steve Yalof to provide additional details.

Thanks, Steve. We delivered another quarter of solid operational performance and earnings growth as reflected in the 5% year-over-year increase in both same-center NOI and core FFO per share. This performance is the direct result of the successful execution of our 3 key priorities: accelerating leasing, commercializing marketing and reshaping operations at our open-air shopping destinations. We continue to extend our same-center platform and are also investing in additional growth, with our 37th center in Nashville, which broke ground in May, and our 38th center in Palm Beach, Florida. Retailer demand for Tanger outlet centers is robust and occupancy continues to grow, currently at 94.9%, up 170 basis points year-over-year and up 60 basis points sequentially. We have continued to drive increased rents and longer lease terms during the trailing 12-month period, executing renewed or retenanted leases on more than 1.7 million square feet, with blended rent spreads of 4.1% for all comparable leases. This represents a 280 basis point sequential improvement and the fifth consecutive quarter of rent spread growth. Our retenanting spreads exceeded 10% as demand grows and our pricing power returns. Additionally, we've increased the stability of our cash flows through the conversion of variable to permanent base rent, while in many cases, maintaining or driving higher than previous percentage rates, providing for additional long-term upside. We continue to accelerate lease renewal activity. And as of today, we have nearly 68% of 2022 renewals executed or in process, 780 basis points ahead of roughly the same time last year. We anticipate higher than average tenant retention, which will result in lower downtime and retenanting costs. Additionally, a number of our brands continue to convert short-term leases to long-term permanent deals. Our productive leasing execution is one of our key highlights, and we continue to diversify and elevate our portfolio, attracting new-to-platform brands to Tanger centers. In addition to high-quality apparel and footwear brands, we have added direct-to-consumer, home goods, entertainment and food and beverage destinations. Our dynamic leasing results deliver quality shopper visits, attract higher-income shoppers and introduce Tanger to a younger customer base. Tenant quality continues to improve as our watch list is at the lowest level in 4 years with no meaningful exposure or bankruptcy risk. Our performance marketing is delivering measurable results in the face of headwinds such as inflation and higher gas prices. Traffic remains above pre-pandemic levels and was stable in the quarter compared to last year, a quarter with many tailwinds that included lower gas, stimulus checks, vaccinations and a lower interest rate environment. Our centers are well located and easily accessible, and we continue to be the go-to shopping experience for local, regional and tourist shoppers in the markets we serve seeking the brands they want. When customers come to a Tanger center, they come to shop. Sales per square foot for the trailing 12-month period was $450 per square foot, up 6.4% from the prior comparable period, although sales are down slightly from the prior quarter. We attribute this mainly to increased promotional activity due to excess inventory in the channel, which is driving incrementally bigger baskets at lower cost to our shoppers. By prioritizing our Tanger Loyalty Club, which provides numerous benefits to our members, we are promoting elevated engagements with our customers. During the second quarter, unique engagements by our Tanger loyalty club members increased by 80% year-over-year and new loyalty club membership grew by 25%. Our marketing partnership business continues to build as brands seek access to the higher-value Tanger center shoppers. We saw new sponsorships with global brands, including Procter & Gamble and Mondelez, while brands such as Coca-Cola, Unilever and T-Mobile have made incremental media buys for on-center activations at our centers. We are continuing to increase digital and media inventory across our platforms as we generate additional demand. We're focused on enhancing efficiencies at our centers, which is particularly important in a broad inflationary environment. In response, we are actively managing our energy and water usage, which are also tied to our sustainability efforts, a key strategic priority. In addition, we released our sixth annual environmental, social and governance report yesterday. Our newly appointed sustainability lead has already identified opportunities to improve efficiencies, advance our corporate sustainability goals and contribute to our bottom line. We are actively working on a science-based plan to achieve net zero emissions by 2050 in a manner that aligns with our business strategy. This year, we will double both our solar and EV charging infrastructure, which will provide our centers with the capability to operate more sustainably and engage with our shoppers while driving additional revenue streams and managing our expense structure. Now turning to our external growth. In May, we broke ground on our 37th center in Nashville, and our leasing activity continues to be brisk with some of the best brands, including new-to-industry retailers. We're excited to deliver this quality center in the rapidly growing Nashville market with a grand opening scheduled for fall of 2023. Last week, we announced a strategic partnership to rebrand, operate, lease and market an existing outlet center in Palm Beach. This center will be renamed Tanger Outlets Palm Beach, and we have already assumed the marketing, leasing and property management responsibilities. This arrangement will also provide the potential opportunity to acquire equity ownership over time. Tanger has a balance sheet that provides for financial flexibility and support. We remain optimistic for our business, which is well positioned and provides consumers with great value in light of broader macroeconomic uncertainty, and is reflected in the increase in the midpoint of our guidance. Additionally, with minimal new supply in the market, our well-located Tanger centers should continue to maintain occupancy gains. Our entire team is focused on elevating our centers, driving compelling retailers and signing high-quality leases, which will allow us to continue to deliver solid NOI growth. The core value proposition of Tanger resonates throughout economic cycles. And with our expanded uses and new revenue streams across our entire portfolio, we continue to offer consumers the opportunity to shop, dine and be entertained in an open-air environment. The value proposition of our open-air centers is continually being validated by shoppers, tenants and the communities we serve. Thank you to the entire Tanger team, our retailers, shoppers and stakeholders. I would now like to turn the call over to Doug McDonald to take you through our financial results, balance sheet and increased guidance for 2022.

Thank you, Steve. We delivered solid results for the second quarter of 2022, with core FFO per share of $0.45, up 4.7% compared to the same period last year. Same-center NOI for the total portfolio at share increased 5.1% to $79.8 million, primarily driven by growth in occupancy and rental rates. Our balance sheet is well positioned. We have no significant debt maturities until April of 2024. And as of June 30, our net debt to adjusted EBITDAre was 5.3x for the trailing 12 months, down from 5.6x a year ago. Our weighted average interest rate was 3.2%, and 93% of our outstanding debt was fixed. At June 30, we had cash of $194 million and full availability on our $520 million revolving credit facility. We have always prioritized maintaining a strong financial position by utilizing a disciplined and prudent approach to capital allocation. In May, we broke ground on our new center in Nashville and have incurred costs of $18.3 million. Based on current construction costs, our estimated total cost will be between $135 million and $145 million with a projected stabilized yield in the low to mid-7% range. Our dividend was well covered with a FAD payout ratio of 47% for the second quarter, and we continue to evaluate opportunities to grow our dividend as our operating performance improves. Due to the combination of better-than-anticipated financial results and our leasing execution year-to-date, we are increasing the midpoint of our full-year guidance. We now expect core FFO per share to be in the range of $1.73 to $1.79, implying a midpoint increase of $0.01 from our prior range. In addition, we expect same-center NOI growth at a range of 3% to 4.5% compared to our prior expectation of 2.5% to 4.5%. And as Steve alluded to, when discussing our higher-than-expected tenant retention, we also lowered our projected CapEx range for the year. For additional details on our key assumptions, please see our release issued last night. I'd now like to open it up for questions. Operator, can we please take our first question?

. And our first question will be coming from the line of Todd Thomas with KeyBanc Capital Markets.

First question, I wanted to talk about Nashville. And Steve, I was wondering if you could discuss some additional details around leasing there and how much of the center is pre-leased at this time? And then if you could also provide some thoughts around whether you expect to be competing against Simon in the market as you move forward?

Listen, with regard to competition, every one of our shopping centers is in a competitive marketplace, and I think Nashville is certainly no different. However, when we started leasing the center over 1.5 years ago up until now, we broke ground, we said we'd be 60% committed. We broke ground in May since our last call, and are well on our way to delivering a shopping center in the fall of '23. Also, we're about 70% committed right now. But again, that's with almost over a year before we actually will open up the shopping center. We've got great prospects, a lot of new tenants to the outlet space, a great collection of food and beverage. And like last quarter, we announced a number of names that will be joining us in the shopping center. So I think you'll find that it will be probably slightly elevated compared to what you're used to seeing in a Tanger center. The design is completely different from what you're used to seeing in a Tanger center. And we're looking for the center to draw not only the tourists that come to Nashville annually but also to be a super regional draw. We're in the Southeast section on 24, which we think is the gateway to Nashville from the South. We also think we'll provide great value to the local community as well.

Okay. Do you think that there's room for 2 outlet centers in the Nashville, the greater Nashville market there? And with regards to the pre-leasing that you've completed, do the tenants have certain flexibility around their leases there, either outright cancellation clauses or kick-out clauses early on that would be worth noting?

No. There are no cancellation clauses in our leases if there's another center built in the marketplace.

Okay. And what about the market in general? Do you think it could support 2 centers, two outlet centers?

Well, again, Todd, let's leave that for whoever else decides that they're going to be building. I mean, I don't know when the last time you were in Nashville was. I was just there last week. There's a tremendous amount of new retail being developed in Nashville from 12 South to places in the north to the Gulch. And I think that it just speaks to a completely robust marketplace. It's an exciting place to be. Tourism is growing. The permanent population base is growing. And I think that there's going to be plenty of room for our Tanger shopping center when it opens in the fall of '23. And we're excited about that.

Our next question is from the line of Craig Mailman with Citi.

Steve, can you clarify what you mean by 70% committed? Are those signed leases or just indications of interest?

It is a combination of executed leases and leases out for signature.

Okay. Of that 70%, how much is executed?

We typically report the committed number.

Okay. Fair enough. And then moving on to Palm Beach, could you just give a little bit of the economics there on the agreement you guys have today? And then maybe go into some of the details on what would trigger your ability to add some equity ownership and what that level could be?

Sure, Craig. Actually, I'll turn that over to Doug to take you through some of that.

Sure. We're excited about this project. It's a strong center in a great market. And we think that Tanger's platform, our scale can help our partner create additional value at this center. We can't really elaborate on the specific economic terms of the deal, but we are excited about the opportunity to potentially acquire ownership interest in the future as we help grow the value at the center.

Could you maybe provide what kind of FFO contribution? It could be on an annualized basis, as we model.

Sure. It's going to be fairly standard terms with regards to property management, leasing fees, construction management. Maybe it adds $0.01 a year or a little more than that in the near term.

Okay. That's helpful. Then just what's the kind of universe of opportunities to do more of these branded deals in the outlet space for you guys?

Craig, I think that there's probably a dozen great shopping centers out there that are either independently owned or owned by smaller outlet developers who have looked at what we've done, looked at the platform we've created with our best-in-class leasing, marketing and operation footprint and want to be part of the Tanger branding. It's interesting. The outlet center business, what's unique to a lot of other shopping destinations, is you find that we have not only the retailer as a customer, but also the shopper is our customer in a very unique way. Our retailers rely very heavily on Tanger to drive customer traffic to the shopping centers. And in that regard, using our performance marketing and other great initiatives that we've been using over the past months and years, we've been recognized as being a great partner to these retailers and we're looking to grow the footprint, not only with adding new retailers to our shopping centers, but a number of other developers have taken hold and we're in contact with and speaking to about the potential of adding more centers to our portfolio.

That's helpful. So if I think about maybe $0.01 per share of FFO and another 12, you actually would almost raise FFO by 5% to 7% with very little CapEx. Is that sort of the way to think about this over the next couple of years?

I think that, for us, a larger equity position in shopping centers on a going-forward basis is probably going to be a little bit more of what we're going to target.

The next question comes from the line of Craig Schmidt with Bank of America.

First quarter and second quarter same-store NOIs were 9.9% and 5.1%. However, for the remainder of the year, your goal is 3% to 4.5%, indicating a potential slowdown in same-store NOI. What factors are affecting your same-store NOI growth in the second half of the year?

Sure, Craig. The first half of the year benefited from a few of the reserve reversals that we discussed last quarter, especially in our first quarter numbers. We still expect positive NOI growth in the back half of the year, but we're trying to be more prudent with the expectation given the economic backdrop, given some of the other conditions that we're seeing. But we're optimistic about our business. Trends continue to be positive, and we think that we can deliver.

Great. And then just also coming to Palm Beach. What is the occupancy of that asset right now? And where does its sales per square foot stand relative to Tanger's overall average?

Sure. The occupancy is in the high 90s. The sales per square foot are likely in the top third of our portfolio. However, we will be able to provide more details once we begin fully operating the asset.

Our next question is from the line of Greg McGinniss with Scotiabank.

So the midpoint of FFO per share guidance implies a bit of a slowdown in the back half of the year to $0.43 a share per quarter. Could you just touch on maybe potential headwinds or conservatism that's built into that number?

Sure. That's similar to the NOI answer we just provided. The first half of the year benefited from a few one-time items, including reserve reversals, and there were a couple of terminations in the first quarter that contributed to an inflated performance in the first half compared to the second half. However, we anticipate continued growth in the core business during the second half of the year. We are being cautious with our guidance due to the economic environment, but we remain optimistic about the business.

Could you discuss the recent trends in tenant sales numbers that have declined sequentially over the past few quarters? While they remain higher year-over-year, it appears that consumers may not be spending as much, which has been reflected in various headlines. I'm interested in your observations regarding shopper foot traffic and tenant sales, especially in the latest quarter compared to the previous 12 months.

So Greg, I’m not sure when you last visited our centers. If you had visited last year around this time and compared it to this year, you would have noticed that the parking lots are just as full now as they were then. The significant difference is in the promotional activity within the stores. Around this time last year, and as we discussed in previous calls, retailer pricing due to supply chain issues was at an all-time high in Q3 and Q4. While we offer everyday value, we still maintain the best value for the well-known brands in our shopping centers. If you were to visit one of our shopping centers, especially starting in the summer, you'd see much more promotional activity. This indicates that a shopper who spent $500 in our center last year and purchased several items could potentially buy even more this year for slightly less due to the increased promotions.

Okay. Yes, I was actually in Sevierville this weekend and saw a pretty full parking lot there.

And how about pricing? Did you walk in the stores and see the discounts above what you probably could have gotten last year if you were there?

Honestly, I didn't notice a significant difference from that standpoint, but I'll take your word on that.

The next question comes from the line of Floris Van Dijkum with Compass Point.

So you just posted your second quarter of positive lease spreads. They appear to be increasing as well. Steve, maybe if you could comment on leasing and the structure of the lease terms you're getting? I saw that on your new leases, they're longer term. Are there any other changes? Are you getting higher fixed rent bumps? Are you getting improved terms on your CAM? Maybe if you can walk us through the lease structure and how that's evolving as the occupancy builds?

I think the major change to lease structure happened around the COVID period of time. And I think what's happening now is, structurally, we're going back to the way we used to do business several years ago. Lease terms are longer. You'll see more TI paid out as it relates to a longer-term lease. We're seeing a lot more 10-year leases. So there's been a big jump in our average term of lease, particularly around our retenanting space. But we are in the base rent and extras business. We pivoted during COVID, obviously, to preserve occupancy, making those trades, where we traded variable for some of that downside protection on the base rent. But as we continue to produce results for our retailers, whether that comes on the sales line, we're seeing our buying power returning and are asking rents going up. We're marking our rents to market every day based on our performance in our shopping centers. And I think that there's a lot more tolerance for our retailers to step up and pay more rent.

Could you provide an update on the rent increases you're experiencing and also discuss the stores that are not yet open? Last quarter, the increase was approximately 40 basis points. Has that figure risen in the last quarter?

It has. It's worth about 50 basis points now. Our rent bumps for base rents are in the 3% range, and our rent bumps for CAM can vary between 4% and 5% depending on the lease.

And you're not getting any pushback from retailers on that?

I think the retailers want to be in our shopping centers, and they're looking at it from an occupancy cost point of view. If you take a look at our occupancy cost, at 8.5% OCR, we're still one of the cheapest channels in the retail ecosystem. We have plenty of room to push our rents, and that's what we're going to do. We believe in our real estate. We're asking rents on what we think our real estate is worth and we're getting those rents.

. The next question is from the line of Emily Arft with Green Street.

So with your up-to-date guidance, it assumes no meaningful change in your share count, but I was hoping you could discuss how you're thinking about share buybacks given where your stock is trading?

Sure, Emily. Obviously, we evaluate a lot of different investment opportunities with new developments, acquisitions, investing in our existing portfolio, a lot of the sustainability initiatives that produce an ROI. We look at all that along with share buybacks and then have to decide where the best opportunities are to allocate our capital. But we do think that the share price presents a compelling value. We do still have some authorization remaining under our buyback approval from the Board, and we'll continue evaluating it.

Okay. And then just a follow-up. Outside of Nashville, would you mind walking us through your plans on how you will be spending your high cash balance and using your free cash flows that you're generating? I'm assuming it will be relatively similar to how you're thinking about the share buybacks as well.

Yes, that's correct. There are numerous investment opportunities in our portfolio. We've discussed peripheral land and sustainability initiatives such as solar and electric vehicle charging stations, as well as various ways to enhance value within our existing portfolio. Additionally, we are exploring opportunities to expand the portfolio, leverage our platform, and utilize our scale to create value beyond what we currently have. We will continue to seek ways to grow the company and invest these funds in a beneficial manner.

Our next question is from the line of Mike Mueller with JPMorgan.

Just two really quick ones here. I guess how much temp-to-perm leasing have you done year-to-date? And then looking at Nashville, the $480 per square foot cost, is that elevated because of what you touched on last quarter about just building on rock and taking longer?

Sure, I will address the second question first and then respond to the first one. Construction costs are significantly higher than they were when we originally identified this land five years ago. The positive aspect is that rents in the Nashville market continue to increase as well. Therefore, as our construction costs rise, we feel stable at our current position and are comfortable with the range we provided. However, rents are also on the rise, and we are confident about the yield we presented. Now, regarding your first question about temp-to-perm leasing...

Yes. How much of, yes, temp-to-perm leasing?

Yes, we've seen a sequential increase in our permanent occupancy. When it comes to temp-to-perm leasing, it's important for us to maintain a tenant in a desirable location in our shopping center. The temporary lease allows us to terminate and replace it with a permanent lease when we find a suitable tenant willing to pay the right rent for that space. We won't remove a temporary tenant while there are still vacant areas in the shopping center. Typically, we will relocate the temporary tenant to another available space if one exists. In terms of high-profile retailers who have entered into temporary leases to evaluate the market before committing to a permanent deal, we successfully converted several deals this quarter, including those from Columbia, Lacoste, and UGG, transitioning them from temporary tenants to long-term agreements in our spaces.

Thank you. We've reached the end of the question-and-answer session. I'll now turn the call over to Mr. Steven Tanger for closing remarks.

Thank you for your time this morning and your questions. We're very proud of our positive results and continued momentum. We look forward to providing ongoing updates on our initiatives in future calls. Should you have any questions in the interim, please feel free to call Steve Yalof and the other folks on the call today. Thank you, and have a great day. Goodbye.

This will conclude today's conference. Thank you for your participation. You may disconnect your lines at this time.