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#Good morning.
This is <UNK> <UNK>, Vice President of Investor Relations.
And I'd like to welcome you to the <UNK> Factory Outlet Centers First Quarter Conference Call.
Yesterday, we issued our earnings release as well as our supplemental information package in our 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; 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, May 2, 2018.
(Operator Instructions) On the call today will be <UNK> <UNK>, Chief Executive Officer; Jim <UNK>, Senior Vice President and Chief Financial Officer; and Tom <UNK>, President and Chief Operating Officer.
I will now turn the call over to <UNK> <UNK>.
Please go ahead, Steve.
Thank you, Cindy.
Let me start with a significant milestone that we will celebrate later this month: 25 years of our stock trading on the New York Stock Exchange.
Since the time of our IPO, we have grown from 17 centers with 1.5 million square feet to 44 properties with 15.3 million square feet.
Our enterprise value has grown from about $200 million to about $4 billion at the end of the quarter, a compounded annual growth rate of 13%.
Throughout this time, we have successfully navigated a number of different economic and retail cycles, and we have adapted our business accordingly, keeping our centers relevant and highly occupied.
We pride ourselves on keeping the tenant mix of our centers dynamic and giving <UNK> shoppers the brands and designers they want.
We have stayed true to our mission of delivering the best brands, the best prices and the best experience.
With this long-term view, we have proven we can successfully adapt to evolving consumer preferences and aligning those with tenant needs.
We have consistently focused on redevelopment and renovation of our properties.
We have invested approximately $340 million over the last 10 years, making <UNK> Centers more innovative and exciting.
We have also invested in the consumer experience across our entire portfolio.
In recent years, we had added enhanced shopping amenities, including gathering in play areas, digital platforms, which meet the needs of tech-savvy shoppers as well as community events such as 5Ks, concerts and food truck festivals.
We believe these investments help to drive the consistent traffic we experience at our centers and reflect our confidence in the long-term growth of the outlet distribution channel.
That being said, we are still working through some retailer closures and liquidations, and our budgeting for potential additional store closures and lease adjustments still to come this year.
We unfortunately also faced a challenge in the first quarter, caused by unusually harsh winter weather conditions, which led to higher-than-anticipated unreimbursed snow removal costs and center closures, which result in lower variable rents.
In light of this environment, we have adjusted our 2018 guidance accordingly.
This near-term change does not alter our long-term optimism.
Sales and traffic are strong.
Our conversations with tenants and prospects are encouraging.
And we continue to employ a strategic approach that has proven effective and successful for the last 25 years.
Importantly, our company maintains a very strong level of cash flow.
We remain disciplined in our capital allocation decisions with a singular focus on creating shareholder value.
The cash we generate covers our capital needs for investing in our assets and maintaining one of the sector's strongest balance sheets.
Our dividend remains a priority, as is evident by our recent 2.2% increase to $1.40 per share, which marks the 25th consecutive annual increase and represents a 3-year cumulative growth rate of 22%.
Today, our dividend is secure and well covered.
Furthermore, during the quarter, we executed our share repurchase program.
Going forward, we will continue to evaluate our priority uses of cash, including investing in our assets, continuing to raise our dividend, repurchasing our common shares and deleveraging our balance sheet.
Although not a current priority for us, we continue to monitor new development and acquisition opportunities.
Throughout it all, the 3 pillars of the outlet business have remained constant for us: brand, value and experience.
By keeping our tenant mix dynamic, we deliver the most popular brands and designers to our shoppers.
Through our best price promise, we take price out of the equation whenever a shopper visits any <UNK> Outlet Center.
In addition, the social experience of outlet shopping cannot be duplicated on a computer or a mobile device.
I'll now turn the call over to Tom, who will discuss the current leasing environment with you.
Thanks, Steve.
In recent months, we have met face-to-face with more than 70 retailers.
And while we recognize some near-term challenges exist, based on our conversations with current and prospective tenants, it appears that overall sentiment is improving.
Over the years, we have remained strategic in our approach to leasing.
We have evolved and invested in our centers and in the experience to keep <UNK> Outlet Centers fresh and fun, making us the desired location for retailers and the shopping destination of choice for customers.
As of March 31, consolidated portfolio occupancy was 95.9% compared to 96.2% on March 31, 2017.
The year-over-year decline was primarily driven by the roughly 200,000 square feet of closures that we faced in 2017, and the additional square footage recaptured in the first quarter of 2018.
Fortunately, we do not have any Bon-Ton or other department stores.
For the trailing 12 months ended March 31, 2018, commenced leases that were renewed for ---+ renewed or re-leased for a term of more than 12 months included 277 leases, totaling approximately 1.3 million square feet.
These leases achieved a 13.5% increase in blended average rental rates.
Recognizing some of the near-term pressures on occupancy, in certain cases, we've allowed for lease modifications and leases of 12 months or less.
By accommodating our tenants in these instances, we are maximizing revenue, maintaining relationships, sustaining the occupancy and vibrancy of our centers, and preserving long-term upside optionality in terms of tenant mix and rent increases.
Total commenced leases for the trailing 12 months ended March 31, 2018, that were renewed or re-leased for all terms, included 338 leases, totaling approximately 1.6 million square feet.
These leases achieved a 7.7% increase in blended average rental rates.
Our approach of selectively signing short-term leases is a strategy we have employed throughout our 37-year history.
To give you perspective, the leases of 12 months or less that we have signed represent about 2% of our total GLA, which remains in line with our historical average.
These leases are on a case-by-case basis, with no concentrations in any one tenant, geography or tier.
Of the leases with terms of 12 months or less, which commenced in 2017, we've already renewed or re-leased approximately 1/3 of the space at market rates for an average term of roughly 5 years.
I would like to point you to Pages 11 and 12 of our supplemental package, where we have added some additional disclosure regarding our leasing.
We are now providing you with details around trailing 12-month commenced leases, including leases only greater than 12 months, including all leases, and showing the impact of the remerchandising activities from last year, in order to provide a clear picture of our leasing activity.
We believe that the level of bankruptcies that we saw in recent years is tapering, although we may be impacted by some throughout the balance of this year.
During the first quarter of 2018, we've recaptured approximately 37,000 square feet within our consolidated portfolio related to bankruptcies and brand-wide restructurings by retailers compared to 62,000 square feet during the first quarter of 2017.
Retailer sentiment in the leasing environment showed signs of ongoing improvement, driven in part by increased sales and tenant profitability.
Average tenant sales productivity for the consolidated portfolio was $384 per square foot for the 12 months ended March 31, 2018, and then on an NOI weighted basis, it was $409 per square foot.
Same-center tenant sales performance for the overall portfolio increased 1.7% for the 12 months ended March 31, 2018 compared to the 12 months ended March 31, 2017, and traffic maintained a consistent level over this period.
For the first 3 months of this year, sales performance was up a strong 5.6%, noting, however, that this includes the impact of the shift in Easter from April last year to March this year.
Examples of some tenants that are performing particularly well, include Old Navy, Adidas, Tommy Hilfiger, American Eagle Outfitters and Coach.
We saw particular strength with apparel, athletic, handbags and the food categories.
We believe this performance demonstrates the consumer's continuing desire to shop at <UNK> Outlet Centers.
I will now turn the call over to Jim to take you through our financial results and a brief balance sheet recap.
Thank you, Tom.
First quarter FFO available to common shareholders was $0.60 per share, an increase of 3% over the first quarter of 2017.
Incremental income from our new developments and expansions completed in 2017 and reduced G&A expense was partially offset by our same-center results.
Same-center NOI decreased 1.5% compared to the prior year quarter, driven primarily by the 2017 and 2018 store closures, as previously mentioned as well as the harsh winter conditions, which resulted in greater-than-expected unreimbursed snow removal expense at certain centers and lower percentage rents due to center closings.
During the first quarter of 2018, due to snowstorms, <UNK> Centers were closed a combined 900 hours compared to 300 hours during the first quarter of 2017.
In addition to the time that centers are closed, snowstorms and road conditions affect traffic and sales on the date of center closes and several days thereafter.
Lease termination fees, which are not included in same-center and portfolio NOI, totaled approximately $1.1 million for the consolidated portfolio during the first quarter of 2018 and $1.2 million during the first quarter of 2017.
In addition, our share of lease termination fees and our unconsolidated joint ventures, which is included in the equity and earnings of unconsolidated joint ventures line, was $45,000 for the first quarters of both 2018 and 2017.
Our balance sheet is strong.
As of March 31, 2018, approximately 94% of the square footage in our consolidated portfolio was not encumbered by mortgages.
Only $228 million was outstanding under our unsecured lines of credit, leaving 62% unused capacity or approximately $366 million.
We maintained a substantial interest coverage ratio during the first quarter of 4.4x and net debt-to-EBITDA was approximately 6x at quarter end.
Our floating rate exposure represented 13% of total debt, down from 15% at year-end or 6% of total enterprise value as of March 31, 2018.
The average term at maturity and weighted average interest rate for our outstanding debt as of quarter end was 6.3 years and 3.4%, respectively.
We have no significant debt maturities until April of 2021.
In January, we completed mammoth store lines of credit, a line of credit agreement to extend the maturity by 2 years, increased our borrowing capacity to $600 million from $520 million and reduced the interest rate spreads to 87.5 basis points of our LIBOR from 90 basis points.
As Steve discussed, shareholder return is an important part of our value proposition.
During the first quarter, we repurchased approximately 444,000 of our common shares at a weighted average price of $22.52 per share for total consideration of $10 million.
This leaves approximately $66 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, marking the 25th consecutive year we have increased our dividend.
We have raised it every year since becoming a public company 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 of under 60%.
Our dividend is well-covered.
We have no new store openings planned for this year.
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 to naturally deliver 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 growth opportunities that arise as the cycle turns positive.
In terms of our guidance.
We are updating our expectations for 2018, and we are now expecting our FFO per share for the year to be between $2.40 and $2.40 (sic) [$2.46] per share compared to our prior expectation of between $2.43 and $2.49 per share, representing a change of 1%.
We\
We had anticipated Nine West to close.
We were led to believe of conversations with the tenant that they would stay open until the end of October.
And they made a decision to close basically the first or the second quarter.
So the 7 months' early closing, there was no way we could possibly anticipate that.
Nick, we felt ---+ we feel that the guidance today reflects our view of the current state of the industry.
We have increased the amount of expected or anticipated store closures from a 100,000 square feet to a range of 150,000 to 175,000 square feet.
We've also reduced our average annual occupancy from 96% to 95% to 95.5%.
We feel that this guidance is appropriate, and, obviously, we'll visit with it ---+ we'll visit the guidance every 90 days as we go forward.
Well, as you may know, being in the New York area, Riverhead is one of our marque assets.
Most of the space that vacated in Riverhead was due to some of these bankruptcies.
Fortunately in Riverhead, it's our flagship property, and we're being very selective and ---+ which tenants we want to put into the space.
I might mention that the, as an example, the OfficeMax space, which is now vacated, will be replaced and ---+ be replaced this summer by a new West Elm store.
And West Elm will join Pottery Barn and <UNK>-Sonoma as an addition to our home furnishings presentation to the consumers.
So we are being very selective.
Some of the other centers, we also are replacing tenants now that some of them have gone bankrupt, for instance in Jeffersonville, we've signed also West Elm and they'll be taking occupancy in July, and that will add ---+ that one store will add about 500 basis points or 5% to the occupancy to get it back up in the mid-90s.
So as you can see, we're aggressively in the process of upgrading our cotenancy, as these stores come back.
It gives us the opportunity to refresh our properties with exciting, new, more high-impact tenants.
We have no ---+ today, we have contemplated no significant expansions of any of our assets.
We are constantly reviewing our capital allocation strategy.
And the free cash flow that we generate, which is pretty substantial, will be used ---+ we just raised our dividend, as you know.
The balance of the year, the free cash flow after CapEx and whatever remainder there is on our 2 major projects last year, about $50 million will be allocated between naturally deleveraging our balance sheet.
And it's very important to us that we maintain our high credit rating of BBB+ and Baa1.
And also on a selective basis, repurchasing our common shares and executing our announced strategy there.
We have 3,100 leases.
So fortunately, only about 15% to 18% of them come up for renewal every year.
We reflect in our guidance our expectation for the renewals.
Thank you for reminding everybody that our cost of occupancy at 10% is, to our knowledge, the lowest in our peer group.
So fortunately, we've been a very profitable distribution channel for our tenants.
The current market environment is now in favor or there is some leverage on behalf of the tenants.
We're getting through that now.
But the good news is our properties are highly occupied and extremely well maintained, and we're focusing right now on putting high-impact, exciting new tenants into the properties.
And we've been through this type of situation before.
So all the replacement tenants are and all the new tenants are reflected in our guidance.
There is really no concentration, <UNK>.
The lease modifications, the lease renewals are spread out geographically by center, by tenant and across all of our asset tiers.
So there is really no conclusion.
It's a case-by-case basis.
All 5 of the remerchandised centers are now open.
3 of them are performing as we had expected or better, and 2 of them are still experiencing some remerchandising, one of which is Jeffersonville, which I mentioned we are adding West Elm, which will be opened this year.
And the other is Hilton Head, which was adversely affected or their occupancy was affected by some bankrupt tenants.
And we're in the process now and working through that to replace those tenants.
<UNK>, we have completed our package of renewals with Ascena through the first quarter of 2019, and they're reflected in these numbers.
The CapEx and the budget that we've put forward between $35 million and $40 million is in line with our 10-year average for the combined lease-up costs and CapEx.
So we are consistent with what we've done for the past, basically, 10 years, <UNK>.
We're not spending anymore.
Happy to, <UNK>.
The Myrtle Beach 501 property is preparing for the addition of a very popular regional tenant by the name of Carolina Pottery, which is going to take 52,000 square feet and which will bring the occupancy of Myrtle Beach back up to where it was.
They were ---+ we had re-leased them basically of market rents, which is up considerably from what the short-term leases were, and the term has been extended to 5 years from the short-term.
So this is a pretty good evidence that our strategy to keep our properties highly occupied is working.
We're building a bridge between today and when we think the market will turn with these short-term leases to keep our properties vibrant.
It's a strategy that we've employed successfully for many years, 37 years, actually.
So it's standard practice for us.
Well, some of them are bankruptcy-related.
We're attempting to keep stores open while they are in reorganization, so yes.
I don't want to lose sight pleasing the fact that it's a very small subset.
We have about 61 leases in that category, of which 11 have already been re-leased.
So that's out of 3,100 leases we have.
There is ---+ we ---+ as a trend, we have executed fewer short-term transactions in the first quarter than we did in the fourth quarter of last year.
<UNK>, I don't know if we really understand your question.
Jim, do you want to take a shot at it.
So <UNK>, the ---+ that bucket that we refer to, that's been re-leased.
Remember, these spreads are on a commenced basis, and these are ---+ we've re-leased them, but they have ---+ most of those, if not all of them, I'm not sure how many, but I know the majority of them would ---+ have not commenced yet.
So they have not ---+ they're not in the numbers.
<UNK>, are you ---+ is your question regarding why the differential is greater now than it was a year ago.
Jim, you want to take that.
I'll give that to you.
Yes, we have traditionally, Tayo, used shorter-term variable rate debt at the centers open and commence.
And when they mature is when we would consider ---+ hit the stabilization marks to mature is when we would think about putting longer-term financing.
Most of those JVs still are fairly new, but there are couple that already hit that maturity stage and we are in discussions right now with our partners to potentially put some longer-term fixed rate debt on those partners.
Tayo, we're having trouble with hearing you.
Would you mind repeating the question.
Tayo, it does incorporate a little bit.
It's ---+ bad debt expense for us hasn't necessarily been material.
It ranges usually between 0.3% and maybe 0.5% of our revenues.
And most of that would be to put a straight line rent write-offs, which doesn't get into your same-center NOI.
So unfortunately, we haven't really been hit that hard, particularly on a cash basis.
And while certainly that we may, we have built in with an expectation of getting the additional square footage back of a 150, 175, we have raised it a little bit, but it's really not that significant.
Steve, the West Elm is not currently in our existing property.
I don't know what their website shows.
But we're preparing the space for them now, and they were going into ---+ they are going into the closed OfficeMax property.
But I can get you further details.
Let me check on that for you.
<UNK>, as you may know, in the ---+ on the press release what we offered, we did increase interest expense, but we also increased an assumption for term fee, both $500,000 each.
Those tend to wash.
The offsetting ---+ I think ---+ no, you're right.
You got it right on the same-center NOI.
The offset is the centers that's in the non-center pool.
Fort Worth that we opened last year and the Lancaster expansion are leasing up a little bit quicker than we thought and some GAAP rents or another thing that doesn't factor into your NOI, because increased cash basis rents, but GAAP rent throughout the portfolio reflect those 2 properties as well as lot of this leasing activity that we'd been talking about earlier that will open later in the year.
As we said earlier, <UNK>, we anticipate having $50 million of excess cash flow.
We do expect, and it's in our guidance, to use a portion of that to pay down our debt and as market conditions warrant, we'll consider buying back some more shares.
<UNK>, no, there really is no color we can give.
And we don't have broker introduced to give us cap rate valuations on particular assets.
We have today no assets in the market for sale.
We in the past have entertained qualified reverse inquiries, which led to the sale of an asset last year.
But there is no color I can give you.
I wish there were many more comparables, because I think the private market puts a higher value ---+ this is just Steve <UNK>'s guess ---+ a higher value on our assets than the public market does.
First, <UNK>, if I might just go back to Steve's question with regard to West Elm.
There is not a West Elm warehouse store, but we do have a West Elm outlet store currently existing in our Riverhead property, and they are upsizing to the new ---+ to replace OfficeMax, and we are working to replace the existing West Elm.
So I just wanted to close the loop on a previous question.
With regard to yours.
Every part of a cycle during the down part feels like it's never happened before and it's only going to get worse and during an up part of the cycle, it feels like it's always going to stay the same and only get better.
We ---+ candidly every time is different.
After the stock market crash in '87, we experienced downturn after the bubble of the e-comm, tech bubble or the dotcom bubble of '98, '99.
Obviously 10 years ago, which was an economic cycle, I know there was no Amazon.
We have been tracking e-commerce sales for the better part of 20 years.
The comfort we have is that although retail ---+ although the country is over-retailed, or as one of my friends with a friendly competitor says, it's not over-retailed, it's probably under demolished, our industry is under built.
There is only about 175 outlet centers in the country, with about 70 million square feet.
There is, according to ICSC, over 1,000 regional malls with about 1 billion square feet.
We don't have large multiple-level boxes, department stores, category-killer type of asset ---+ stores.
We have a property type and a structure that's easily adaptable to new trends, and that's why we've been able to, for 37 years, never end the year less than 95% occupied.
So there is no easy answer, <UNK>.
It's just my instinct based on my experience.
We're still able to keep occupancy north of 95%.
Our traffic is flat.
If you read the popular press and if everybody was just sitting at home, our traffic would be off significantly, and I believe our sales would be off significantly, but the facts are the opposite.
So I can't point you to anything.
I wish that I had a crystal ball or a transporter to go 2, 3, 4 years in the future and look back, but we don't.
That's just my feeling; it's not corporate representation.
The lawyers are looking in the ---+ you asked a personal question and I'm just giving you a personal answer.
We review constantly our capital allocation strategy, as I mentioned.
We have a balanced strategy to pay down debt, opportunistically execute our common stock repurchase program and investing in our assets.
We want to make our assets as strong as possible, with the best tenant presentation as possible to the consumer.
I think it's the right strategy.
In addition, we raised our dividend, as you may know.
So we're comfortable with that current strategy and we don't see any reason right now to change it.
With no new development planned for 2019, I think that the free cash flow will continue to grow.
And with maybe $50 million this year after CapEx and paying for previous investments, may grow considerably next year.
And look, we constantly review our capital allocation strategies.
I don't see any reason for it today.
But you know what, we're a public company.
And as we get credit for shareholder-friendly governance, if someone wants to talk to us, we have a responsibility, and we're happy to talk to anybody as we have ever since we went into business as a public 25 years ago.
I want to thank everybody for participating today on our call.
As always, we're available for any follow-up questions, and we look forward to seeing everybody at NAREIT in a couple of weeks.
So have a great day and good bye, now.
