Tanger Inc. (SKT) Earnings Call Transcript & Summary

Welcome to the Tuesday, 11:40 a.m. session of Citi's Global Property CEO Conference. I am Christy McElroy with Citi Research. We are pleased to have with us Tanger Factory Outlet Centers, Steve Tanger, CEO; and Cyndi Holt, Director of IR. This session is for investing clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available up here and on the webcast on the Disclosures tab. For those in the room or webcast, you can sign on to liveqa.com and enter code Citi2020 to submit any questions or you can just raise your hand. Steve, I'm going to turn it over to you to introduce your company and provide the audience with 3 reasons why investors should buy your stock today, and then I will kick off the Q&A.

Good morning.

Morning.

Joining me today is Cyndi Holt, our Vice President of Investor Relations. Our company, Tanger Outlets, is the only publicly...

Yes. We're going to bring it a little closer.

Let me reset.

Perfect.

Good morning. Joining me today is Cyndi Holt, our Vice President of Investor Relations. Our company, Tanger Outlets, is the only publicly traded REIT specializing solely in the development, leasing, marketing and operation of outlet centers in the United States and in Canada. There are 3 primary things that make Tanger an attractive investment today. These are: our outlets remain among the most profitable distribution channels for our tenants; two, our fortress balance sheet, low leverage should continue to provide us with maximum financial flexibility in today's retail environment; and three, our dividend is extremely well covered. With a tenant occupancy cost of 10% in 2019, Tanger continues to have lower occupancy cost than any of the other public mall REITs. Many of our tenants report that outlet stores remain one of their most profitable and important retail distribution channels. The demand associated with this level of profitability has supported our long track record of high occupancy. At year-end, our consolidated portfolio increased 20 basis points over the prior year to 97% occupied. This occupancy level was higher than any of the mall REITs and marked our 39th consecutive year of occupancy of at least 95% at the year-end. We achieved this milestone despite having recaptured over 5% of our consolidated portfolio over the last 4 years due to bankruptcies and restructurings by retailers. In addition, many of our tenants tell us that the outlet business, their margins are higher and their customer acquisition and logistics costs are lower than in other distribution channels. Outlets provide retailers a direct touch point to the consumer and allow our tenants to maintain brand integrity through control of product placement and pricing. Furthermore, shoppers have continued to frequent Tanger Centers with traffic up 100 basis points in 2019 compared to the prior year. The curated assortment of sought-after brands and consistent value we provide, along with targeted and compelling offers, are clearly resonating with consumers. Our balance sheet has always been conservative with a great emphasis on maintaining liquidity to be able to withstand any potential headwinds and also maintain the flexibility to be opportunistic where appropriate. At year-end, our line of credits were undrawn, with $600 million of unused capacity. For the year, we maintained a strong interest coverage ratio of 4.3x and a debt-to-EBITDA ratio of approximately 5.7x. Also at year-end, our average term to maturity was 5.5 years. Our weighted average interest rate was 3.5%. We have no significant debt maturities until December of 2023. Finally, we believe our dividend is well covered after a modest increase of $0.01 per share annually or 0.7% in January. This increase, which required less than $1 million of incremental capital, represented the 27th consecutive year we have raised our dividend. We expect our 2020 cash flow or put another way, cash-based FFO to exceed our dividend by approximately $75 million, of which we expect to allocate $40 million to $45 million to reinvest in our portfolio in the form of lease-up cost to install new tenants and CapEx costs to ensure our properties are vibrant and well maintained. The $29 million residual at the midpoint, combined with $18 million of cash on hand at year-end, gives us an expected $45 million of excess internally generated cash flow. Currently, we anticipate allocating this capital to begin funding of our predevelopment site in Nashville, Tennessee without increasing outstanding debt balances. Our initial pre-leasing is meeting our expectations and on schedule. And if we move forward with this development and begin construction during 2020, we would aim for a holiday 2021 opening. Now I'd be happy to answer any of your questions.

Great. So we'll kick it off with the opening question that we've been asking in all of these sessions. ESG is of increasing importance for all company stakeholders. What is the one thing that your company is doing to improve your overall ESG score over the next 12 months?

We are dedicated to enhancing ESG reporting and have just published our third annual report and continuing to embed ESG awareness into our corporate culture. We have established an executive ESG committee, and our Board of Directors increased its engagement by assigning primary responsibility for oversight of select ESG matters to our nominating and corporate governance and our human capital committees. Tanger is committed to setting the tone at the top that fosters a robust ESG program, demonstrates our commitment to good corporate citizenship and builds long-term resilience for our stakeholders.

Great. So I wanted to start with just kind of getting this out of the way. So in terms of fears around coronavirus and market disruption, there's a couple of different things people are thinking about in relation to department or I'm sorry, shopping centers. There is the impact on traffic at the centers, and we actually have a question on Veracast about the percentage of sales that you derive from international tourism. And so that's kind of one part of the question, right? The other part of the question is just generally, people's visits to shopping centers. And then the third part of the question is about the impact on retailers' supply chain disruption. So maybe you can -- I'll remind you if -- but sort of 3 different aspects and ways of looking at it. Can you provide your thoughts on what could be the implications of this?

Sure. Very little of our traffic is derived from international visitors. Before the coronavirus became prevalent, international travel was or has been reduced because of the strength of the dollar. We have no shopping centers in gateway markets. We don't enjoy the benefit when the dollar is weak and the United States is on sale, nor have we suffered the downturn when the dollar is strong and it's more difficult for people to afford travel from around the world. The overlay of international travel with the coronavirus, I think, is still yet to be determined. The short-term impact is obviously in the news every day. We have not felt that impact. Our centers are located in American drive-to resorts like Branson, Missouri; Myrtle Beach, South Carolina; Foley, Alabama. They have not been impacted by foreign travel. And Christy, if you could ask the rest of the questions, I'd be happy to respond to those.

Sure. I would say the kind of last piece of it is the disruption to retailers' supply chains, right? So as far as your retailers sourcing their inventory and how that impacts from a retailer perspective.

The conversations we've had with the CEOs of our tenant partners, so far, that still is undetermined. Most have moved their production facilities of apparel, shoes, women's accessories out of China for various reasons in the past 5 years. But right now, it's still early for the supply chain disruption to be evident or known in the outlets.

Do we have any questions in the room? So just going into some follow-up questions from when you reported earnings and just an update because it's been about a month. You reported early this year. Space recapture at that point was 303,000 square feet as of January 27. Recognizing that you have another 350,000 square feet of unknown or unresolved built into your forecast, can you update us on where that stands today? Is that number higher today?

The number is not higher. The 303,000 feet we got back January 1 was a residual from 2019. Most of the space we got back was from private equity-financed specialty retailers, where they layered on tremendous debt and the companies could not afford it and went bankrupt. That is the known bucket. We are in the process and have various teams out leasing the space, trying to fill the space. We're comfortable that we're well along that process. The unknown or the unresolved bucket of about 325,000 to 375,000 feet is getting more clarity as the year goes by. Keep in mind, we announced at the end of January, 30 to 40 days ago, one of the tenants in that group was Forever 21. When we announced, there were no bidders for Forever 21, and we had to anticipate they would go into Chapter 7 and liquidate, which we did. Now a group has purchased the brand, a high-quality group that we anticipate will keep the stores open. Strangely, they're installing and have hired a merchant to provide good product at the right price. They're focused on their supply chain to get the right product in. Forever 21 is still a brand that resonates with a group of consumers. It went bankrupt because of bad merchandising, bad real estate, bad management decisions, not because the stuff didn't sell. So we're confident that we're in very late-stage negotiations with the new management team. And hopefully, we'll keep those stores open.

So how much of the -- I'm sorry, go on.

There's been nothing new added since the 1st of the year to our expectation for vacant space.

How much of the 350,000 was comprised of unresolved Forever 21 space?

We have 11 stores totaling 120,000 square feet. We probably, of the large landlords, have the smallest Forever 21 per store footprint, an average size of about 10,000 feet. I want to just reiterate that our centers are effectively like the table in front of you. They are long rectangles, one floor, on grade, 100 feet deep. It's easy for us to move the demising wall in between these stores to reconfigure the space. We don't have any multiple level, odd-shaped boxes that need tremendous tenant allowance or landlord work to put in shape to lease to a new person.

So you're in late-stage negotiation. They're not filing for 7. So in all likelihood, that 350,000 will come down when we get an update next quarter because presumably, it will be resolved by then. But there will also be some component of those stores that you'll provide rent relief, I would imagine. So from an expectations perspective, we'll need to gain clarity. And hopefully, you'll give us clarity on, this is how much space we expect to lose, but this is how much rent relief we're providing in that.

We certainly will give you clarity at the end of April when we have better visibility on the rest of the year.

Okay. So in terms of -- just from a new demand perspective as you're looking to backfill the space because it's quite a bit of space that you've either gotten back in January or you expect to get back or potentially could get back on a go-forward basis. Can you talk about the new demand environment? And are your current tenants opening more stores? Are you seeing new tenants come to your stores? And we also received a question on Veracast that's very similar, which tenants are taking space that currently have no footprint with Tanger?

Let me put it in perspective, in the last 4 years ending December 31, 2019, we got back about 5% of our space. And during that period, we were successful in re-leasing the space and ended last year at 97% occupied. To my knowledge, that's the highest occupancy rate of any in the mall sector, proves the strength of our leasing team, the resilience of our leasing team and the demand for space in outlet centers. We start this year with 300,000 feet. We have various teams out now leasing to entertainment users, food users, digital native users. We have a whole wide range of people that are looking to come into the outlet space. We have and have had the lowest cost of occupancy of any retail distribution system. And that's attractive to people. We have about 180 million shopping visits a year to Tanger Centers around the country, which is attractive to new groups of people. So our expectation is that during the year, we will fill most of the space. And I'm happy again to give you more of an update at the end of April. We had to give guidance at the point in time we made the release, which was probably maybe 3 weeks ahead of our normal cadence. As far as new tenants, I'm happy to give you names with the caveat that whatever names I give you, I'm sure I'm going to leave out a lot and get some calls, why didn't you mention our name, but people like Sperry, Columbia Sportswear, Vans, Tory Burch, American Eagle, Polo, adidas, Michael Kors. These are traditional fashion tenants, apparel tenants, footwear tenants that are expanding their footprint in the outlet division. We're talking to a lot of new tenants that so far are not signed. And I don't like to announce any names until the lease is actually signed and they're open for business.

On the 303,000 square feet, some of that was Dressbarn, which you've known about for quite some time. How much of that is already pre-leased at this point?

Dressbarn was about 200,000 of the 300,000 feet. And we re-leased about half that space.

And when does that space commence? When do those leases commence?

Some of it's already been refilled and some will be refilled during the course of the year, normally, during the course of the first 6 months.

Do we have any questions in the audience? From a CapEx perspective, you guided to $44 million to $48 million of recurring CapEx in 2020. I believe you said on the call that $17 million to $19 million of that is related to tenant allowances, which is about in line with last year. So I'm wondering, that total number is about $4 million to $8 million higher in 2020 than in 2019. What's driving the rest of it?

We're refreshing more of our properties to keep them up-to-date and relevant to our visitors that come. This is a normal process for us. We've put a lot of money each year into keeping our properties fresh and reducing any deferred maintenance. We also are working with West Elm, Pottery Barn and Nike and installing new stores for them in Lancaster, Pennsylvania. So that's basically it.

So Lancaster is the bulk of it or are there any other centers that are specific to that number?

Lancaster is a part of it. But we have 39, 40 shopping centers and it's spread out through them. We're happy to put tenants in place. And the tenant allowance to do that is part of business to generate more cash flow. It's been consistent ever since we started in business. Our goal is to keep the lights on. And we've been successful in doing that for a long period of time. Our strategy is to maintain a vibrant shopping center. When our guests arrive, they see exciting, new, relevant tenants. And we're successful in doing that.

Jeffersonville was one that came up. You had written down the asset and I think you're expecting a same-store NOI impact of about 70 basis points from that asset alone this year. Are you putting capital into that asset or do you expect to turn it around or do you plan to sell it at some point?

We put capital into that asset 4 or 5 years ago. We have great tenants in that center, like T.J. Maxx, Polo, H&M on and on and on, Pottery Barn, Williams-Sonoma. Sadly that center, virtually, every one of the retailers that went bankrupt was located in that center or at least had a store. So looking ahead, we marked it down as we felt appropriate based on not only today's occupancy, but the future occupancy. And we review every one of our assets every quarter with our auditors to be sure that it properly reflects what the anticipated value is.

You framed this asset as sort of a non-tourist, non-top 50 MSA. I think you have a total of 5 in your portfolio that also qualifies that. Is there any risk that we should consider in thinking about what happened at Jeffersonville to happen to any of those 5?

Jeffersonville was purchased within the last 10 years so it had a higher cost basis. Some of the other ones you may be referring to are ones we've built over a longer period of time ago and they're depreciated. But again, we look at every asset. The accountants look at every asset. We don't anticipate any further impairments on assets, at least as I sit here today.

As you think about Nashville and you're still in the pre-leasing process for this center, can you give us a sense for -- I mean, look, I've been covering your company for a long time and I remember you've always had this discipline in place in regard to ground-up development in terms of pre-leasing. We're not going to put a shovel on the ground until -- we're not going to commit significant capital until we get to this percentage pre-leased. I think it used to be 50%, maybe now it's 60%. How have your standards changed, especially in this kind of environment and given retail challenges as far as putting that shovel on the ground and committing capital to new development. How has that evolved over time?

We size this property at 300,000 feet as opposed to an average of 350,000 to reflect the size of the market. Our underwriting criteria, which is a self-discipline, we do not use construction financing. We finance these from our own balance sheet. Is it 60% committed and all non-appealable permits? It's been that way for years, and we intend to stick to that discipline.

Have you provided any cost and yield targets on this asset?

We'd be happy to do that when we're ready to break ground and I have more accurate numbers based on the revenue side from the tenants and the actual construction costs and raw material costs at the time we anticipate building.

And your value-enhancing CapEx has been about $10.5 million per year the last 2 years. How could that change as you potentially move forward with Nashville?

I'm sorry. I didn't hear the first part of your question.

So your value-enhancing CapEx, so in the different CapEx buckets that you provide, it's been about $10.5 million per year. I'm just trying to think about the capital commitment associated and how that plays into sort of your sources and uses in the next few years?

This year, we'll generate about $75 million of free cash flow after the payment of our dividend. We have about $18 million in the bank. And about half of that is spent on second-generation capital expenditures and refurbishing and updating our properties. The balance will be spent raising our dividend, paying down our debt, buying back our stock and starting the construction in Nashville. I'm having trouble hearing. There's an echo in here.

Sorry about that. Maybe we can talk about your long-term strategy with regard to your Canada JV, the 50% interest that you have in the RioCan JV. I think there's 3 assets in there today. I know that one asset was sold last year. How do you think about your investment there and future capital commitments? And is this an interest that you would monetize at some point?

The 2 larger centers, the one in Ottawa and the one north of Toronto are well leased and doing on target. We have a well-funded, large JV, 50% partner in RioCan who specializes in Canadian retail. The smaller asset around Quebec, we may monetize during the balance of the year.

Monetize this year, potentially, the one asset?

That's our plan.

Okay. Any sense for potential proceeds from something like that?

No. After we close, we're happy to share the numbers with you.

Can you provide an update on your President, COO search? What sort of candidate are you looking for at this point? And how does this fit in with your longer-term view around succession planning?

We are looking for and hopefully, we found someone to come in as our President and Chief Operating Officer. The plan is on January 1, 2021, that this person will become the CEO. And if the Board extends my contract and wants me to, I will become the Executive Chairman and work side-by-side with our new person to be sure that there's a smooth, orderly transition, both internally and externally. I'm looking forward to it. And we hope to have an announcement certainly by this summer.

So timing of announcement would be this summer and timing of that person joining would be summertime as well, I would imagine?

Hopefully, before that but I don't want to set expectations that I can't meet.

And how did the Board think about this decision just from a strategic perspective? How does this kind of bring you into the next chapter of your company?

We have succession planning for everybody in our company, including our Board of Directors. We have 3 new directors and 3 of our long-tenured directors will not stand for election in May. So our Board will be rolling over. Everybody in our company has a designated successor and everybody in our company knows their path to future growth. This person coming in will work with me and transition the company to the next chapter.

Has this person signed? Is it fully committed or is it still uncertain at this point?

I'll let you know when it's signed and certain.

Can you give us a sense?

No. We don't talk in speculation.

Can you give us a sense for their background?

I'm happy to tell you everything about the person when we're ready to announce they're coming on board.

And I'm guessing that when this person does come on and they ultimately transition into that CEO role that the company will still be looking for some sort of a COO and rounding out the management team?

I'll let you know when the person's on board and we have that information available.

Got it. Any questions? Everyone's hungry for lunch. So you had talked on the call about selling or leasing some outparcels to hotel, food and multifamily users. Are you working on any mixed-use entitlements currently? And are you thinking about this in the context of just the outparcels or are you looking at putting some of the food and beverage uses into the inline space in your centers?

The outparcels you're talking about are to sell to third-party specialists in that area. We're not specialists in building multifamily or hotels. The process for their due diligence and entitlements takes some time. We don't pay for that. And we hope by the end of the year that those will be monetized.

But in terms of food and beverage, how do you think about putting those types of uses in the inline space of your centers and using that or doing more food and beverage on the outparcels?

We installed in the last year over 40 restaurants. We have over 200 restaurants within 100 yards of our shopping centers around the country. So we continue to work with food and beverage. We have a team that brings in food and beverage people. We like local food operators. We're not building big, single-use restaurants. We much prefer the type of food in line with a local vendor.

Great. Questions? We'll do rapid fire, only have a couple of minutes left. All right. Will the U.S. mall, outlet sector have more or fewer companies a year from now?

Fewer.

What will same-store NOI growth be for the property sector overall in 2021?

Within the mall sector, I think it will be down 1% to plus 1% depending on the quality of the asset.

What will the 10-year Treasury yield be 1 year from today?

1.5%.

And in what year will the U.S. enter a recession?

2021.

Great. Thank you very much.

Thank you, everybody.