Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The discussion of our results of operations reported in the unaudited, consolidated statements of operations compares the three and nine months ended September 30, 2019 with the three and nine months ended September 30, 2018. The results of operations discussion is combined for Tanger Factory Outlet Centers, Inc. and Tanger Properties Limited Partnership because the results are virtually the same for both entities. The following discussion should be read in conjunction with the unaudited consolidated financial statements appearing elsewhere in this report. Historical results and percentage relationships set forth in the unaudited, consolidated statements of operations, including trends which might appear, are not necessarily indicative of future operations. Unless the context indicates otherwise, the term “Company” refers to Tanger Factory Outlet Centers, Inc. and subsidiaries and the term “Operating Partnership” refers to Tanger Properties Limited Partnership and subsidiaries. The terms “we”, “our” and “us” refer to the Company or the Company and the Operating Partnership together, as the text requires.
Cautionary Statements
Certain statements made below are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend for such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995 and have included this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies, beliefs and expectations, are generally identifiable by use of the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project”, or similar expressions. Such forward-looking statements include, but are not limited to, statements regarding our: ability to raise additional capital, including via future issuances of equity and debt, and the use of proceeds from such issuances; results of operations and financial condition; capital expenditure and working capital needs and the funding thereof; repurchase of the Company’s shares; potential developments, expansions, renovations, acquisitions or dispositions of outlet centers; compliance with debt covenants; renewal and re-lease of leased space; outcome of legal proceedings arising in the normal course of business; and real estate joint ventures. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other important factors which are, in some cases, beyond our control and which could materially affect our actual results, performance or achievements. Important factors which may cause actual results to differ materially from current expectations include, but are not limited to: our inability to develop new outlet centers or expand existing outlet centers successfully; risks related to the economic performance and market value of our outlet centers; the relative illiquidity of real property investments; impairment charges affecting our properties; our dispositions of assets may not achieve anticipated results; competition for the acquisition and development of outlet centers, and our inability to complete outlet centers we have identified; environmental regulations affecting our business; risk associated with a possible terrorist activity or other acts or threats of violence and threats to public safety; our dependence on rental income from real property; our dependence on the results of operations of our retailers; the fact that certain of our properties are subject to ownership interests held by third parties, whose interests may conflict with ours; risks related to uninsured losses; the risk that consumer, travel, shopping and spending habits may change; risks associated with our Canadian investments; risks associated with attracting and retaining key personnel; risks associated with debt financing; risk associated with our guarantees of debt for, or other support we may provide to, joint venture properties; the effectiveness of our interest rate hedging arrangements; uncertainty relating to the potential phasing out of LIBOR; our potential failure to qualify as a REIT; our legal obligation to make distributions to our shareholders; legislative or regulatory actions that could adversely affect our shareholders, including the recent changes in the U.S. federal income taxation of U.S. businesses; our dependence on distributions from the Operating Partnership to meet our financial obligations, including dividends; the risk of a cyber-attack or an act of cyber-terrorism and other important factors set forth under Item 1A - “Risk Factors” in the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2018.
General Overview
As of September 30, 2019, we had 32 consolidated outlet centers in 19 states totaling 12.0 million square feet. We also had 7 unconsolidated outlet centers in 6 states or provinces totaling 2.2 million square feet. During March 2019, we closed on the sale of four non-core consolidated outlet centers for total gross proceeds of $130.5 million, and total net proceeds of approximately $128.2 million. The four properties were located in Nags Head, North Carolina; Ocean City, Maryland; Park City, Utah; and Williamsburg, Iowa and represented 6.8% of the Company’s consolidated portfolio square footage. In May 2019, the RioCan joint venture closed on the sale of its outlet center in Bromont, Quebec for net proceeds of approximately $6.4 million. Our share of the proceeds was approximately $3.2 million.
The table below details our new developments, expansions and dispositions of consolidated and unconsolidated outlet centers that significantly impacted our results of operations and liquidity from January 1, 2018 to September 30, 2019 (square feet in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Outlet Centers
|
|
Unconsolidated Joint Venture Outlet Centers
|
Outlet Center
|
|
Quarter Opened/Disposed
|
|
Square Feet
|
|
Number of Outlet Centers
|
|
Square Feet
|
|
Number of Outlet Centers
|
As of January 1, 2018
|
|
|
|
12,930
|
|
|
36
|
|
|
2,370
|
|
|
8
|
|
Other
|
|
|
|
(7
|
)
|
|
—
|
|
|
1
|
|
|
—
|
|
As of December 31, 2018
|
|
|
|
12,923
|
|
|
36
|
|
|
2,371
|
|
|
8
|
|
Dispositions:
|
|
|
|
|
|
|
|
|
|
|
Nags Head
|
|
First Quarter
|
|
(82
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
Ocean City
|
|
First Quarter
|
|
(200
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
Park City
|
|
First Quarter
|
|
(320
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
Williamsburg
|
|
First Quarter
|
|
(276
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
Bromont
|
|
Second Quarter
|
|
—
|
|
|
—
|
|
|
(161
|
)
|
|
(1
|
)
|
Other
|
|
|
|
3
|
|
|
—
|
|
|
2
|
|
|
—
|
|
As of September 30, 2019
|
|
|
|
12,048
|
|
|
32
|
|
|
2,212
|
|
|
7
|
|
The following table summarizes certain information for our existing outlet centers in which we have an ownership interest as of September 30, 2019. Except as noted, all properties are fee owned.
|
|
|
|
|
|
|
|
|
|
Consolidated Outlet Centers
|
|
Legal
|
|
Square
|
|
%
|
Location
|
|
Ownership %
|
|
Feet
|
|
Occupied
|
Deer Park, New York
|
|
100
|
|
739,109
|
|
|
98
|
|
Riverhead, New York (1)
|
|
100
|
|
729,778
|
|
|
97
|
|
Rehoboth Beach, Delaware (1)
|
|
100
|
|
557,353
|
|
|
98
|
|
Foley, Alabama
|
|
100
|
|
554,583
|
|
|
90
|
|
Atlantic City, New Jersey (1) (3)
|
|
100
|
|
489,706
|
|
|
80
|
|
San Marcos, Texas
|
|
100
|
|
471,816
|
|
|
94
|
|
Sevierville, Tennessee (1)
|
|
100
|
|
447,815
|
|
|
99
|
|
Savannah, Georgia
|
|
100
|
|
429,089
|
|
|
96
|
|
Myrtle Beach Hwy 501, South Carolina
|
|
100
|
|
426,523
|
|
|
98
|
|
Jeffersonville, Ohio
|
|
100
|
|
411,867
|
|
|
92
|
|
Glendale, Arizona (Westgate)
|
|
100
|
|
410,726
|
|
|
99
|
|
Myrtle Beach Hwy 17, South Carolina (1)
|
|
100
|
|
403,425
|
|
|
100
|
|
Charleston, South Carolina
|
|
100
|
|
382,180
|
|
|
99
|
|
Lancaster, Pennsylvania
|
|
100
|
|
376,997
|
|
|
88
|
|
Pittsburgh, Pennsylvania
|
|
100
|
|
373,863
|
|
|
97
|
|
Commerce, Georgia
|
|
100
|
|
371,408
|
|
|
97
|
|
Grand Rapids, Michigan
|
|
100
|
|
357,103
|
|
|
96
|
|
Fort Worth, Texas
|
|
100
|
|
351,741
|
|
|
99
|
|
Daytona Beach, Florida
|
|
100
|
|
351,721
|
|
|
99
|
|
Branson, Missouri
|
|
100
|
|
329,861
|
|
|
100
|
|
Southaven, Mississippi (2) (3)
|
|
50
|
|
324,716
|
|
|
98
|
|
Locust Grove, Georgia
|
|
100
|
|
321,082
|
|
|
97
|
|
Gonzales, Louisiana
|
|
100
|
|
321,066
|
|
|
95
|
|
Mebane, North Carolina
|
|
100
|
|
318,886
|
|
|
100
|
|
Howell, Michigan
|
|
100
|
|
314,438
|
|
|
93
|
|
Mashantucket, Connecticut (Foxwoods) (1)
|
|
100
|
|
311,508
|
|
|
95
|
|
Tilton, New Hampshire
|
|
100
|
|
250,107
|
|
|
97
|
|
Hershey, Pennsylvania
|
|
100
|
|
249,696
|
|
|
100
|
|
Hilton Head II, South Carolina
|
|
100
|
|
206,564
|
|
|
92
|
|
Hilton Head I, South Carolina
|
|
100
|
|
181,670
|
|
|
100
|
|
Terrell, Texas
|
|
100
|
|
177,800
|
|
|
97
|
|
Blowing Rock, North Carolina
|
|
100
|
|
104,009
|
|
|
88
|
|
Totals
|
|
|
|
12,048,206
|
|
|
96
|
|
|
|
(1)
|
These properties or a portion thereof are subject to a ground lease.
|
|
|
(2)
|
Based on capital contribution and distribution provisions in the joint venture agreement, we expect our economic interest in the venture’s cash flow to be greater than our legal ownership percentage. We currently receive substantially all the economic interest of the property.
|
|
|
(3)
|
Property encumbered by mortgage. See Notes 5 and 6 to the consolidated financial statements for further details of our debt obligations.
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated joint venture properties
|
|
Legal
|
|
Square
|
|
%
|
|
Location
|
|
Ownership %
|
|
Feet
|
|
Occupied
|
|
Charlotte, North Carolina (1)
|
|
50
|
|
398,677
|
|
|
99
|
|
Ottawa, Ontario
|
|
50
|
|
357,213
|
|
|
97
|
|
Columbus, Ohio (1)
|
|
50
|
|
355,245
|
|
|
97
|
|
Texas City, Texas (Galveston/Houston) (1)
|
|
50
|
|
352,705
|
|
|
96
|
|
National Harbor, Maryland (1)
|
|
50
|
|
341,156
|
|
|
97
|
|
Cookstown, Ontario
|
|
50
|
|
307,779
|
|
|
98
|
|
Saint-Sauveur, Quebec (1)
|
|
50
|
|
99,405
|
|
|
96
|
|
Total
|
|
|
|
2,212,180
|
|
|
97
|
|
|
|
(1)
|
Property encumbered by mortgage. See Note 4 to the consolidated financial statements for further details of the joint venture debt obligations.
|
Leasing Activity
The tables below show changes in rent (base rent and common area maintenance (“CAM”)) for leases for new stores that opened or renewals that started during the respective trailing twelve month periods ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trailing twelve months ended September 30, 2019(1),(2)
|
|
# of Leases
|
Square Feet
(in 000’s)
|
Average
Annual
Straight-line Rent (psf)
|
Average
Tenant
Allowance (psf)
|
Average Initial Term
(in years)
|
Net Average
Annual
Straight-line Rent (psf) (3)
|
Re-tenant
|
106
|
|
520
|
|
$
|
34.02
|
|
$
|
42.35
|
|
8.41
|
|
$
|
28.98
|
|
Renewal
|
239
|
|
1,147
|
|
$
|
34.02
|
|
$
|
0.55
|
|
3.81
|
|
$
|
33.88
|
|
|
|
|
|
|
|
|
|
Trailing twelve months ended September 30, 2018(1)
|
|
# of Leases
|
Square Feet
(in 000’s)
|
Average
Annual
Straight-line Rent (psf)
|
Average
Tenant
Allowance (psf)
|
Average Initial Term
(in years)
|
Net Average
Annual
Straight-line Rent (psf) (3)
|
Re-tenant
|
99
|
|
478
|
|
$
|
32.92
|
|
$
|
63.74
|
|
7.86
|
|
$
|
24.81
|
|
Renewal
|
265
|
|
1,343
|
|
$
|
29.79
|
|
$
|
0.26
|
|
3.79
|
|
$
|
29.72
|
|
|
|
(1)
|
Excludes license agreements, seasonal tenants, and month-to-month leases.
|
|
|
(2)
|
Excludes outlet centers sold in March 2019 (Nags Head, Ocean City, Park City, and Williamsburg Outlets Centers).
|
|
|
(3)
|
Net average annual straight-line base rent is calculated by dividing the average tenant allowance costs per square foot by the average initial term and subtracting this calculated number from the average straight-line base rent per year amount. The average annual straight-line base rent disclosed in the table above includes all concessions, abatements and reimbursements of rent to tenants. The average tenant allowance disclosed in the table above includes other landlord costs.
|
RESULTS OF OPERATIONS
Comparison of the three months ended September 30, 2019 to the three months ended September 30, 2018
NET INCOME (LOSS)
Net income in the 2019 period increased $47.8 to $24.8 million as compared to a net loss of $23.0 million for the 2018 period. The increase in net income is primarily due to the the inclusion in the 2018 period of a $49.7 million impairment charge related to our Jeffersonville outlet center. The increase in net income was partially offset by lower net income due to the sale of four outlet centers in March 2019.
In the tables below, information set forth for properties disposed includes the Nags Head, Ocean City, Park City and Williamsburg outlet centers sold in late March 2019.
RENTAL REVENUES
Rental revenues decreased $5.2 million in the 2019 period compared to the 2018 period. The following table sets forth the changes in various components of rental revenues (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Increase/(Decrease)
|
Rental revenues from existing properties
|
|
$
|
113,013
|
|
|
$
|
113,049
|
|
|
$
|
(36
|
)
|
Rental revenues from properties disposed
|
|
79
|
|
|
6,322
|
|
|
(6,243
|
)
|
Straight-line rent adjustments
|
|
2,052
|
|
|
1,451
|
|
|
601
|
|
Lease termination fees
|
|
127
|
|
|
70
|
|
|
57
|
|
Amortization of above and below market rent adjustments, net
|
|
(221
|
)
|
|
(615
|
)
|
|
394
|
|
|
|
$
|
115,050
|
|
|
$
|
120,277
|
|
|
$
|
(5,227
|
)
|
As a result of combining all components of a lease due to the adoption of Accounting Standards Codification Topic 842 “Leases” (“ASC 842”), all fixed contractual payments, including consideration received from certain executory costs, are now recognized on a straight line basis. For the three months ended September 30, 2019, we recorded $1.6 million in rental revenues in our consolidated statements of operations to record executory costs on a straight-line basis. These incremental straight-line rents were partially offset by the adjustment of straight-line rents related to certain bankrupt tenants.
MANAGEMENT, LEASING AND OTHER SERVICES
Management, leasing and other services increased $117,000 in the 2019 period compared to the 2018 period. The following table sets forth the changes in various components of management, leasing and other services (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Increase/(Decrease)
|
Management and marketing
|
|
$
|
567
|
|
|
$
|
571
|
|
|
$
|
(4
|
)
|
Leasing and other fees
|
|
32
|
|
|
12
|
|
|
20
|
|
Expense reimbursements from unconsolidated joint ventures
|
|
757
|
|
|
656
|
|
|
101
|
|
|
|
$
|
1,356
|
|
|
$
|
1,239
|
|
|
$
|
117
|
|
PROPERTY OPERATING EXPENSES
Property operating expenses decreased $504,000 in the 2019 period compared to the 2018 period. The following table sets forth the changes in various components of property operating expenses (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Increase/(Decrease)
|
Property operating expenses from existing properties
|
|
$
|
38,074
|
|
|
$
|
36,420
|
|
|
$
|
1,654
|
|
Properties operating expenses from properties disposed
|
|
(4
|
)
|
|
1,863
|
|
|
(1,867
|
)
|
Expenses related to unconsolidated joint ventures
|
|
757
|
|
|
656
|
|
|
101
|
|
Other property operating expenses
|
|
322
|
|
|
714
|
|
|
(392
|
)
|
|
|
$
|
39,149
|
|
|
$
|
39,653
|
|
|
$
|
(504
|
)
|
Property operating expenses incurred at existing properties during the 2019 period increased due primarily to higher property taxes at certain centers and higher portfolio-wide property insurance costs.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $1.5 million in the 2019 period compared to the 2018 period, primarily as a result of $1.3 million in costs incurred due to the adoption of the lease accounting standard ASC 842 in 2019 which requires indirect internal leasing and legal costs to be expensed as incurred. In the 2018 period, a portion of these indirect costs were capitalized.
IMPAIRMENT CHARGE
During the third quarter 2018, we determined that the estimated future undiscounted cash flows of our Jeffersonville outlet center did not exceed the property's carrying value due to a decline in operating results at the center likely resulting from increased competition from the Company's center in Columbus, OH and slower than expected improvement from remerchandising activities. Therefore, we recorded a $49.7 million non-cash impairment charge in our consolidated statement of operations which equaled the excess of the property's carrying value over its estimated fair value.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization costs decreased $2.7 million in the 2019 period compared to the 2018 period. The following table sets forth the changes in various components of depreciation and amortization costs from the 2018 period to the 2019 period (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Increase/(Decrease)
|
Depreciation and amortization from existing properties
|
|
$
|
30,103
|
|
|
$
|
31,480
|
|
|
$
|
(1,377
|
)
|
Depreciation and amortization from properties disposed
|
|
—
|
|
|
1,370
|
|
|
(1,370
|
)
|
|
|
$
|
30,103
|
|
|
$
|
32,850
|
|
|
$
|
(2,747
|
)
|
Depreciation and amortization decreased at our existing properties primarily due to the lower basis in our Jeffersonville property due to the impairment recorded in the third quarter of 2018.
INTEREST EXPENSE
Interest expense decreased $1.2 million in the 2019 period compared to the 2018 period primarily from the use of the net proceeds from the sale of four properties in March 2019 to reduce amounts outstanding on our unsecured lines of credit. In addition, we utilized some of our operating cash flows to pay down the lines of credit.
EQUITY IN EARNINGS OF UNCONSOLIDATED JOINT VENTURES
Equity in earnings of unconsolidated joint ventures increased approximately $496,000 in the 2019 period compared to the 2018 period. In the table below, information set forth for properties disposed includes the RioCan joint venture’s Bromont outlet center, which was sold in May 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Increase/(Decrease)
|
Equity in earnings from existing properties
|
|
$
|
2,329
|
|
|
$
|
1,756
|
|
|
$
|
573
|
|
Equity in earnings from property disposed
|
|
—
|
|
|
77
|
|
|
(77
|
)
|
|
|
$
|
2,329
|
|
|
$
|
1,833
|
|
|
$
|
496
|
|
Equity in earnings from existing properties increased due to lease termination fees received in the 2019 period and due to rental revenues in the 2019 period including consideration received from certain executory costs, recognized on a straight line basis, as discussed above.
Comparison of the nine months ended September 30, 2019 to the nine months ended September 30, 2018
NET INCOME
Net income increased $80.2 million in the 2019 period to $105.1 million as compared to $24.9 million for the 2018 period. The increase in net income is partially due to:
|
|
•
|
the $43.4 million gain recorded on the sale of the four outlet centers in March 2019, and the
|
|
|
•
|
inclusion in the 2018 period of a $49.7 million impairment charge related to our Jeffersonville outlet center.
|
The increase was partially offset by a decrease in net income due to:
|
|
•
|
the sale of the four outlet centers in March 2019 discussed above,
|
|
|
•
|
a $4.4 million charge in the 2019 period related to the accelerated recognition of compensation cost as a result of a transition agreement (the “COO Transition Agreement”) with the Company’s President and Chief Operating Officer in connection with his planned retirement, and
|
|
|
•
|
a $3.6 million foreign currency loss recorded in the 2019 period upon the sale of the Bromont property by the RioCan Canada joint venture.
|
In the tables below, information set forth for properties disposed includes the four outlet centers sold in late March 2019.
RENTAL REVENUES
Rental revenues decreased $10.1 million in the 2019 period compared to the 2018 period. The following table sets forth the changes in various components of rental revenues (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Increase/(Decrease)
|
Rental revenues from existing properties
|
|
$
|
333,195
|
|
|
$
|
334,052
|
|
|
$
|
(857
|
)
|
Rental revenues from properties disposed
|
|
6,501
|
|
|
19,159
|
|
|
(12,658
|
)
|
Straight-line rent adjustments
|
|
6,938
|
|
|
4,744
|
|
|
2,194
|
|
Lease termination fees
|
|
1,526
|
|
|
1,134
|
|
|
392
|
|
Amortization of above and below market rent adjustments, net
|
|
(771
|
)
|
|
(1,639
|
)
|
|
868
|
|
|
|
$
|
347,389
|
|
|
$
|
357,450
|
|
|
$
|
(10,061
|
)
|
Rental revenues from existing properties decreased primarily due to lower average occupancy and rent modifications for certain tenants, in large part as a result of a number of bankruptcy filings and other tenant closures during 2018 and 2019.
As a result of combining all components of a lease due to the adoption of the lease accounting standard ASC 842, all fixed contractual payments, including consideration received from certain executory costs, are now recognized on a straight line basis. For the nine months ended September 30, 2019, we recorded $4.9 million in rental revenues in our consolidated statements of operations to record executory costs on a straight-line basis. These incremental straight-line rents were partially offset by the adjustment of straight-line rents by $1.1 million related to certain bankrupt tenants.
MANAGEMENT, LEASING AND OTHER SERVICES
Management, leasing and other services increased $363,000 in the 2019 period compared to the 2018 period. The following table sets forth the changes in various components of management, leasing and other services (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Increase/(Decrease)
|
Management and marketing
|
|
$
|
1,696
|
|
|
$
|
1,704
|
|
|
$
|
(8
|
)
|
Leasing and other fees
|
|
71
|
|
|
122
|
|
|
(51
|
)
|
Expense reimbursements from unconsolidated joint ventures
|
|
2,176
|
|
|
1,754
|
|
|
422
|
|
Total Fees
|
|
$
|
3,943
|
|
|
$
|
3,580
|
|
|
$
|
363
|
|
PROPERTY OPERATING EXPENSES
Property operating expenses decreased $1.6 million in the 2019 period as compared to the 2018 period. The following table sets forth the changes in various components of property operating expenses (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Increase/(Decrease)
|
Property operating expenses from existing properties
|
|
$
|
111,937
|
|
|
$
|
110,105
|
|
|
$
|
1,832
|
|
Property operating expenses from property disposed
|
|
2,594
|
|
|
5,945
|
|
|
(3,351
|
)
|
Expenses related to unconsolidated joint ventures
|
|
2,176
|
|
|
1,754
|
|
|
422
|
|
Other property operating expense
|
|
1,545
|
|
|
2,013
|
|
|
(468
|
)
|
|
|
$
|
118,252
|
|
|
$
|
119,817
|
|
|
$
|
(1,565
|
)
|
Property operating expenses incurred at existing properties during the 2019 period increased due primarily to higher property taxes at certain centers and higher portfolio-wide property insurance costs.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $8.0 million in the 2019 period compared to the 2018 period, primarily as a result of the $4.4 million charge related to the COO Transition Agreement. In addition, general and administrative expenses increased by approximately $3.5 million due to the adoption of the lease accounting standard ASC 842 in 2019 which requires indirect internal leasing and legal costs to be expensed as incurred. In the 2018 period, a portion of these indirect costs were capitalized.
IMPAIRMENT CHARGE
During the third quarter 2018, we determined that the estimated future undiscounted cash flows of our Jeffersonville outlet center did not exceed the property's carrying value due to a decline in operating results at the center likely resulting from increased competition from the Company's center in Columbus, OH and slower than expected improvement from remerchandising activities. Therefore, we recorded a $49.7 million non-cash impairment charge in our consolidated statement of operations which equaled the excess of the property's carrying value over its estimated fair value.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization costs decreased $5.7 million in the 2019 period compared to the 2018 period. The following table sets forth the changes in various components of depreciation and amortization costs from the 2019 period to the 2018 period (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Increase/(Decrease)
|
Depreciation and amortization expenses from existing properties
|
|
$
|
91,753
|
|
|
$
|
94,606
|
|
|
$
|
(2,853
|
)
|
Depreciation and amortization from property disposed
|
|
1,256
|
|
|
4,061
|
|
|
(2,805
|
)
|
|
|
$
|
93,009
|
|
|
$
|
98,667
|
|
|
$
|
(5,658
|
)
|
Depreciation and amortization decreased at our existing properties primarily due to the lower basis in our Jeffersonville property due to the impairment recorded in the third quarter of 2018.
INTEREST EXPENSE
Interest expense decreased $1.7 million in the 2019 period compared to the 2018 period primarily from the use of the net proceeds from the sale of four properties in March 2019 to reduce amounts outstanding on our unsecured lines of credit. In addition, we utilized some of our operating cash flows to pay down the lines of credit in the 2019 period. The decrease was partially offset by higher interest rates related to $150.0 million of interest rate swap agreements. In August 2018, certain 30-day LIBOR interest rate swaps with a rate of 1.3% expired and were replaced with new interest rate swaps with a rate of 2.2%. In addition, the average 30-day LIBOR interest rate for our unsecured lines of credit was higher in the 2019 period.
GAIN ON SALE OF ASSETS
In March 2019, we sold four outlet centers for net proceeds of approximately $128.2 million, which resulted in a gain on sale of assets of $43.4 million. The proceeds from the sale of these unencumbered assets were used to pay down balances outstanding under our unsecured lines of credit.
OTHER INCOME (EXPENSE)
In May 2019, the RioCan joint venture closed on the sale of its outlet center in Bromont for net proceeds of approximately $6.4 million. Our share of the proceeds was approximately $3.2 million. As a result of this transaction, we recorded a foreign currency loss of approximately $3.6 million in other income (expense), which had been previously recorded in other comprehensive income.
EQUITY IN EARNINGS OF UNCONSOLIDATED JOINT VENTURES
Equity in earnings of unconsolidated joint ventures decreased approximately $629,000 in the 2019 period compared to the 2018 period. In the table below, information set forth for properties disposed includes the RioCan joint venture’s Bromont outlet center, which was sold in May 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Increase/(Decrease)
|
Equity in earnings from existing properties
|
|
$
|
5,596
|
|
|
$
|
6,120
|
|
|
$
|
(524
|
)
|
Equity in earnings from property disposed
|
|
8
|
|
|
113
|
|
|
(105
|
)
|
|
|
$
|
5,604
|
|
|
$
|
6,233
|
|
|
$
|
(629
|
)
|
The decrease in equity in earnings of unconsolidated joint ventures from existing properties was primarily due to the conversion of the mortgages at both our Charlotte and National Harbor joint ventures from variable to fixed due to debt refinancings in 2018. In June 2018, the Charlotte joint venture closed on a $100.0 million mortgage loan with a fixed interest rate of approximately 4.3% and a maturity date of July 2028. This loan replaced the $90.0 million mortgage loan with an interest rate of LIBOR + 1.45%. In December 2018, the National Harbor joint venture closed on a $95.0 million mortgage loan with a fixed interest rate of approximately 4.6% and a maturity date of January 2030. This loan replaced the $87.0 million construction loan with an interest rate of LIBOR + 1.65%. In addition, the 2019 period had higher LIBOR interest rate levels on variable rate mortgages at our Columbus and Galveston unconsolidated joint ventures.
These decreases were partially offset due to lease termination fees received in the 2019 period and due to rental revenues in the 2019 period including consideration received from certain executory costs, recognized on a straight line basis, as discussed above.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
In this “Liquidity and Capital Resources of the Company” section, the term “the Company” refers only to Tanger Factory Outlet Centers, Inc. on an unconsolidated basis, excluding the Operating Partnership.
The Company’s business is operated primarily through the Operating Partnership. The Company issues public equity from time to time, but does not otherwise generate any capital itself or conduct any business itself, other than incurring certain expenses in operating as a public company, which are fully reimbursed by the Operating Partnership. The Company does not hold any indebtedness, and its only material asset is its ownership of partnership interests of the Operating Partnership. The Company’s principal funding requirement is the payment of dividends on its common shares. The Company’s principal source of funding for its dividend payments is distributions it receives from the Operating Partnership.
Through its ownership of the sole general partner of the Operating Partnership, the Company has the full, exclusive and complete responsibility for the Operating Partnership’s day-to-day management and control. The Company causes the Operating Partnership to distribute all, or such portion as the Company may in its discretion determine, of its available cash in the manner provided in the Operating Partnership’s partnership agreement. The Company receives proceeds from equity issuances from time to time, but is required by the Operating Partnership’s partnership agreement to contribute the proceeds from its equity issuances to the Operating Partnership in exchange for partnership units of the Operating Partnership.
We are a well-known seasoned issuer with a shelf registration that expires in March 2021 that allows the Company to register unspecified various classes of equity securities and the Operating Partnership to register unspecified, various classes of debt securities. As circumstances warrant, the Company may issue equity from time to time on an opportunistic basis, dependent upon market conditions and available pricing. The Operating Partnership may use the proceeds to repay debt, including borrowings under its lines of credit, to develop new or existing properties, to make acquisitions of properties or portfolios of properties, to invest in existing or newly created joint ventures or for general corporate purposes.
The liquidity of the Company is dependent on the Operating Partnership’s ability to make sufficient distributions to the Company. The Operating Partnership is a party to loan agreements with various bank lenders that require the Operating Partnership to comply with various financial and other covenants before it may make distributions to the Company. The Company also guarantees some of the Operating Partnership’s debt. If the Operating Partnership fails to fulfill its debt requirements, which trigger the Company’s guarantee obligations, then the Company may be required to fulfill its cash payment commitments under such guarantees. However, the Company’s only material asset is its investment in the Operating Partnership.
The Company believes the Operating Partnership’s sources of working capital, specifically its cash flow from operations and borrowings available under its unsecured lines of credit, are adequate for it to make its distribution payments to the Company and, in turn, for the Company to make its dividend payments to its shareholders and to finance its continued operations, growth strategy and additional expenses we expect to incur for at least the next twelve months. However, there can be no assurance that the Operating Partnership’s sources of capital will continue to be available at all or in amounts sufficient to meet its needs, including its ability to make distribution payments to the Company. The unavailability of capital could adversely affect the Operating Partnership’s ability to pay its distributions to the Company which will, in turn, adversely affect the Company’s ability to pay cash dividends to its shareholders.
For the Company to maintain its qualification as a REIT, it must pay dividends to its shareholders aggregating annually at least 90% of its taxable income (excluding capital gains). While historically the Company has satisfied this distribution requirement by making cash distributions to its shareholders, it may choose to satisfy this requirement by making distributions of cash or other property, including, in limited circumstances, the Company’s own shares.
As a result of this distribution requirement, the Operating Partnership cannot rely on retained earnings to fund its on-going operations to the same extent that other companies whose parent companies are not real estate investment trusts can. The Company may need to continue to raise capital in the equity markets to fund the Operating Partnership’s working capital needs, as well as potential new developments, expansions and renovations of existing properties, acquisitions, or investments in existing or newly created joint ventures.
The Company currently consolidates the Operating Partnership because it has (1) the power to direct the activities of the Operating Partnership that most significantly impact the Operating Partnership’s economic performance and (2) the obligation to absorb losses and the right to receive the residual returns of the Operating Partnership that could be potentially significant. The Company does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities and the revenues and expenses of the Company and the Operating Partnership are the same on their respective financial statements, except for immaterial differences related to cash, other assets and accrued liabilities that arise from public company expenses paid by the Company. However, all debt is held directly or indirectly at the Operating Partnership level, and the Company has guaranteed some of the Operating Partnership’s unsecured debt as discussed below. Because the Company consolidates the Operating Partnership, the section entitled “Liquidity and Capital Resources of the Operating Partnership” should be read in conjunction with this section to understand the liquidity and capital resources of the Company on a consolidated basis and how the Company is operated as a whole.
In February 2019, the Company’s Board of Directors authorized the repurchase of an additional $44.3 million of our outstanding common shares for an aggregate authorization of $169.3 million until May 2021. Repurchases may be made from time to time through open market, privately-negotiated, structured or derivative transactions (including accelerated share repurchase transactions), or other methods of acquiring shares. The Company intends to structure open market purchases to occur within pricing and volume requirements of Rule 10b-18. The Company may, from time to time, enter into Rule 10b5-1 plans to facilitate the repurchase of its shares under this authorization.
Shares repurchased were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Total number of shares purchased
|
|
650,929
|
|
|
—
|
|
|
1,209,328
|
|
|
919,249
|
|
Average price paid per share
|
|
$
|
15.34
|
|
|
$
|
—
|
|
|
$
|
16.52
|
|
|
$
|
21.74
|
|
Total price paid exclusive of commissions and related fees (in thousands)
|
|
$
|
9,987
|
|
|
$
|
—
|
|
|
$
|
19,976
|
|
|
$
|
19,980
|
|
The remaining amount authorized to be repurchased under the program as of September 30, 2019 was approximately $80.0 million. For more information, see “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” in Part II of this Quarterly Report on Form 10-Q.
In October 2019, the Company's Board of Directors declared a $0.355 cash dividend per common share payable on November 15, 2019 to each shareholder of record on October 31, 2019, and the Trustees of Tanger GP Trust declared a $0.355 cash distribution per Operating Partnership unit to the Operating Partnership's unitholders.
LIQUIDITY AND CAPITAL RESOURCES OF THE OPERATING PARTNERSHIP
General Overview
In this “Liquidity and Capital Resources of the Operating Partnership” section, the terms “we”, “our” and “us” refer to the Operating Partnership or the Operating Partnership and the Company together, as the text requires.
Property rental income represents our primary source to pay property operating expenses, debt service, capital expenditures and distributions, excluding non-recurring capital expenditures and acquisitions. To the extent that our cash flow from operating activities is insufficient to cover such non-recurring capital expenditures and acquisitions, we finance such activities from borrowings under our unsecured lines of credit or from the proceeds from the Operating Partnership’s debt offerings and the Company’s equity offerings.
We believe we achieve a strong and flexible financial position by attempting to: (1) maintain a conservative leverage position relative to our portfolio when pursuing new development, expansion and acquisition opportunities, (2) extend and sequence debt maturities, (3) manage our interest rate risk through a proper mix of fixed and variable rate debt, (4) maintain access to liquidity by using our unsecured lines of credit in a conservative manner and (5) preserve internally generated sources of capital by strategically divesting of underperforming assets and maintaining a conservative distribution payout ratio. We manage our capital structure to reflect a long term investment approach and utilize multiple sources of capital to meet our requirements.
The following table sets forth our changes in cash flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
2019
|
|
2018
|
|
Change
|
Net cash provided by operating activities
|
|
$
|
158,971
|
|
|
$
|
179,968
|
|
|
$
|
(20,997
|
)
|
Net cash provided by (used in) investing activities
|
|
107,943
|
|
|
(36,815
|
)
|
|
144,758
|
|
Net cash used in financing activities
|
|
(271,299
|
)
|
|
(144,782
|
)
|
|
(126,517
|
)
|
Effect of foreign currency rate changes on cash and equivalents
|
|
(32
|
)
|
|
(60
|
)
|
|
28
|
|
Net decrease in cash and cash equivalents
|
|
$
|
(4,417
|
)
|
|
$
|
(1,689
|
)
|
|
$
|
(2,728
|
)
|
Operating Activities
The decrease in net cash provided by operating activities in the 2019 period was due to the sale of the four outlet centers in March 2019 as well as changes in working capital.
Investing Activities
The primary cause for the increase in net cash provided by investing activities was due to the net proceeds of approximately $128.2 million from the sale of the four outlet centers in the 2019 period. In addition, the 2019 period had lower levels of development activity than the 2018 period.
Financing Activities
The primary cause for the increase in net cash used in financing activities was due to the use of the proceeds from the sale of the four outlet centers to pay down our unsecured lines of credit.
Capital Expenditures
The following table details our capital expenditures (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
2019
|
|
2018
|
|
Change
|
Capital expenditures analysis:
|
|
|
|
|
|
|
New outlet center developments and expansions
|
|
$
|
6,913
|
|
|
$
|
6,398
|
|
|
$
|
515
|
|
Major outlet center renovations
|
|
919
|
|
|
1,973
|
|
|
(1,054
|
)
|
Second generation tenant allowances
|
|
15,171
|
|
|
11,588
|
|
|
3,583
|
|
Other capital expenditures
|
|
15,135
|
|
|
15,929
|
|
|
(794
|
)
|
|
|
38,138
|
|
|
35,888
|
|
|
2,250
|
|
Conversion from accrual to cash basis
|
|
(2,930
|
)
|
|
17,461
|
|
|
(20,391
|
)
|
Additions to rental property-cash basis
|
|
$
|
35,208
|
|
|
$
|
53,349
|
|
|
$
|
(18,141
|
)
|
Potential Future Developments, Acquisitions and Dispositions
As of the date of this filing, we are in the initial study period for potential new developments, including a potential site in Nashville, Tennessee. We may also use joint venture arrangements to develop other potential sites. There can be no assurance, however, that these potential future projects will ultimately be developed.
In the case of projects to be wholly-owned by us, we expect to fund these projects from amounts available under our unsecured lines of credit, but may also fund them with capital from additional public debt and equity offerings. For projects to be developed through joint venture arrangements, we may use collateralized construction loans to fund a portion of the project, with our share of the equity requirements funded from sources described above. See “Off-Balance Sheet Arrangements” for a discussion of unconsolidated joint venture development activities.
We intend to continue to grow our portfolio by developing, expanding or acquiring additional outlet centers. However, you should note that any developments or expansions that we, or a joint venture that we have an ownership interest in, have planned or anticipated may not be started or completed as scheduled, or may not result in accretive net income or funds from operations (“FFO”). See the section “Non-GAAP Supplemental Earnings Measures - Funds From Operations” below for further discussion of FFO. In addition, we regularly evaluate acquisition or disposition proposals and engage from time to time in negotiations for acquisitions or dispositions of properties. We may also enter into letters of intent for the purchase or sale of properties. Any prospective acquisition or disposition that is being evaluated or which is subject to a letter of intent may not be consummated, or if consummated, may not result in an increase in earnings or liquidity.
Financing Arrangements
As of September 30, 2019, unsecured borrowings represented 95% of our outstanding debt and 92% of the gross book value of our real estate portfolio was unencumbered. The Company guarantees the Operating Partnership’s obligations under our lines of credit. As of September 30, 2019, we had $595.7 million available under our unsecured lines of credit after taking into account outstanding letters of credit of $170,000.
We intend to retain the ability to raise additional capital, including public debt or equity, to pursue attractive investment opportunities that may arise and to otherwise act in a manner that we believe to be in the best interests of our shareholders and unitholders. The Company is a well-known seasoned issuer with a joint shelf registration on Form S-3 with the Operating Partnership, expiring in March 2021, that allows us to register unspecified amounts of different classes of securities. To generate capital to reinvest into other attractive investment opportunities, we may also consider the use of additional operational and developmental joint ventures, the sale or lease of outparcels on our existing properties and the sale of certain properties that do not meet our long-term investment criteria. Based on cash provided by operations, existing lines of credit, ongoing relationships with certain financial institutions and our ability to sell debt or issue equity subject to market conditions, we believe that we have access to the necessary financing to fund the planned capital expenditures for at least the next twelve months.
We anticipate that adequate cash will be available to fund our operating and administrative expenses, regular debt service obligations, and the payment of dividends in accordance with REIT requirements in both the short and long-term. Although we receive most of our rental payments on a monthly basis, distributions to shareholders and unitholders are made quarterly and interest payments on the senior, unsecured notes are made semi-annually. Amounts accumulated for such payments will be used in the interim to reduce the outstanding borrowings under our existing unsecured lines of credit or invested in short-term money market or other suitable instruments.
We believe our current balance sheet position is financially sound; however, due to the uncertainty and unpredictability of the capital and credit markets, we can give no assurance that affordable access to capital will exist between now and when our next significant debt matures, which is our unsecured lines of credit. The unsecured lines of credit expire in 2021, with a one-year extension option that may extend the maturity to 2022. At September 30, 2019, amounts outstanding under our unsecured lines of credit, which provide for borrowings up to $600.0 million, totaled $4.1 million.
The interest rate spreads associated with our unsecured lines of credit and our unsecured term loan are based on the higher of our two investment grade credit ratings. Changes to our credit ratings could cause our interest rate spread to adjust accordingly.
The Operating Partnership’s debt agreements require the maintenance of certain ratios, including debt service coverage and leverage, and limit the payment of dividends such that dividends and distributions will not exceed funds from operations, as defined in the agreements, for the prior fiscal year on an annual basis or 95% on a cumulative basis. We have historically been and currently are in compliance with all of our debt covenants. We expect to remain in compliance with all of our existing debt covenants; however, should circumstances arise that would cause us to be in default, the various lenders would have the ability to accelerate the maturity on our outstanding debt.
We believe our most restrictive covenants are contained in our senior, unsecured notes. Key financial covenants and their covenant levels, which are calculated based on contractual terms, include the following:
|
|
|
|
|
Senior unsecured notes financial covenants
|
Required
|
Actual
|
|
Total consolidated debt to adjusted total assets
|
<60%
|
48
|
%
|
Total secured debt to adjusted total assets
|
<40%
|
3
|
%
|
Total unencumbered assets to unsecured debt
|
>150%
|
199
|
%
|
OFF-BALANCE SHEET ARRANGEMENTS
We have partial ownership interests in seven unconsolidated outlet centers totaling approximately 2.2 million square feet, including three outlet centers in Canada. See Note 4 to the consolidated financial statements for details of our individual joint ventures, including, but not limited to, carrying values of our investments, fees we receive for services provided to the joint ventures, recent development and financing transactions and condensed combined summary financial information.
We may elect to fund cash needs of a joint venture through equity contributions (generally on a basis proportionate to our ownership interests), advances or partner loans, although such funding is not typically required contractually or otherwise. We separately report investments in joint ventures for which accumulated distributions have exceeded investments in, and our share of net income or loss of, the joint ventures within other liabilities in the consolidated balance sheets because we are committed and intend to provide further financial support to these joint ventures. We believe our joint ventures will be able to fund their operating and capital needs for the next twelve months based on their sources of working capital, specifically cash flow from operations, access to contributions from partners, and ability to refinance debt obligations, including the ability to exercise upcoming extensions of near term maturities.
Our joint ventures are typically encumbered by a mortgage on the joint venture property. We provide guarantees to lenders for our joint ventures which include standard non-recourse carve out indemnifications for losses arising from items such as but not limited to fraud, physical waste, payment of taxes, environmental indemnities, misapplication of insurance proceeds or security deposits and failure to maintain required insurance. A default by a joint venture under its debt obligations may expose us to liability under the guaranty. For construction and mortgage loans, we may include a guaranty of completion as well as a principal guaranty ranging from 5% to 100% of principal. The principal guarantees include terms for release based upon satisfactory completion of construction and performance targets including occupancy thresholds and minimum debt service coverage tests. Our joint ventures may contain make whole provisions in the event that demands are made on any existing guarantees.
RioCan Canada
In May 2019, the RioCan joint venture closed on the sale of its outlet center in Bromont, for net proceeds of approximately $6.4 million. Our share of the proceeds was approximately $3.2 million. As a result of this transaction, we recorded a foreign currency loss of approximately $3.6 million in other income (expense), which had been previously recorded in other comprehensive income.
Debt of unconsolidated joint ventures
The following table details information regarding the outstanding debt of the unconsolidated joint ventures and guarantees of such debt provided by us as of September 30, 2019 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joint Venture
|
|
Total Joint
Venture Debt
|
|
Maturity Date
|
|
Interest Rate
|
|
Percent Guaranteed by the Operating Partnership
|
|
Maximum Guaranteed Amount by the Company
|
Charlotte
|
|
$
|
100.0
|
|
|
July 2028
|
|
4.27%
|
|
|
—
|
%
|
|
$
|
—
|
|
Columbus (1)
|
|
85.0
|
|
|
November 2019
|
|
LIBOR + 1.65%
|
|
|
7.5
|
%
|
|
6.4
|
|
Galveston/Houston
|
|
80.0
|
|
|
July 2020
|
|
LIBOR + 1.65%
|
|
|
12.5
|
%
|
|
10.0
|
|
National Harbor
|
|
95.0
|
|
|
January 2030
|
|
4.63
|
%
|
|
—
|
%
|
|
—
|
|
RioCan Canada
|
|
9.1
|
|
|
May 2020
|
|
5.75
|
%
|
|
33.0
|
%
|
|
3.0
|
|
Debt premium and debt origination costs
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
367.9
|
|
|
|
|
|
|
|
|
$
|
19.4
|
|
|
|
(1)
|
In October 2019, the joint venture exercised its option to extend the mortgage loan for one year to November 2020 under the same terms. The mortgage loan has one remaining one-year extension option.
|
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Refer to our 2018 Annual Report on Form 10-K of the Company and the Operating Partnership for a discussion of our critical accounting policies which include principles of consolidation, acquisition of real estate, cost capitalization, impairment of long-lived assets and revenue recognition. There have been no material changes to these policies in 2019, other than the adoption of the Accounting Standards Codification Topic 842, Leases, described in Note 17 -Leases to the unaudited consolidated financial statements in Part I, Item I of this Quarterly Report on Form 10-Q.
NON-GAAP SUPPLEMENTAL MEASURES
Funds From Operations
FFO is a widely used measure of the operating performance for real estate companies that supplements net income (loss) determined in accordance with GAAP. We determine FFO based on the definition set forth by the National Association of Real Estate Investment Trusts (“NAREIT”), of which we are a member. In December 2018, NAREIT issued “NAREIT Funds From Operations White Paper - 2018 Restatement” which clarifies, where necessary, existing guidance and consolidates alerts and policy bulletins into a single document for ease of use. NAREIT defines FFO as net income/(loss) available to the Company’s common shareholders computed in accordance with generally accepted accounting principles in the United States (“GAAP”), excluding (i) depreciation and amortization related to real estate, (ii) gains or losses from sales of certain real estate assets, (iii) gains and losses from change in control, (iv) impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity and (v) after adjustments for unconsolidated partnerships and joint ventures calculated to reflect FFO on the same basis.
FFO is intended to exclude historical cost depreciation of real estate as required by GAAP which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO excludes depreciation and amortization of real estate assets, gains and losses from property dispositions and extraordinary items, it provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities and interest costs, providing perspective not immediately apparent from net income.
We present FFO because we consider it an important supplemental measure of our operating performance. In addition, a portion of cash bonus compensation to certain members of management is based on our FFO or Adjusted Funds From Operations (“AFFO”), which is described in the section below. We believe it is useful for investors to have enhanced transparency into how we evaluate our performance and that of our management. In addition, FFO is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. FFO is also widely used by us and others in our industry to evaluate and price potential acquisition candidates. We believe that FFO payout ratio, which represents regular distributions to common shareholders and unit holders of the Operating Partnership expressed as a percentage of FFO, is useful to investors because it facilitates the comparison of dividend coverage between REITs. NAREIT has encouraged its member companies to report their FFO as a supplemental, industry-wide standard measure of REIT operating performance.
FFO has significant limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
|
|
•
|
FFO does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
|
|
|
•
|
FFO does not reflect changes in, or cash requirements for, our working capital needs;
|
|
|
•
|
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and FFO does not reflect any cash requirements for such replacements; and
|
|
|
•
|
Other companies in our industry may calculate FFO differently than we do, limiting its usefulness as a comparative measure.
|
Because of these limitations, FFO should not be considered as a measure of discretionary cash available to us to invest in the growth of our business or our dividend paying capacity. We compensate for these limitations by relying primarily on our GAAP results and using FFO only as a supplemental measure.
Adjusted Funds From Operations
We present AFFO as a supplemental measure of our performance. We define AFFO as FFO further adjusted to eliminate the impact of certain items that we do not consider indicative of our ongoing operating performance. These further adjustments are itemized in the table below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating AFFO you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of AFFO should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
We present AFFO because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we believe it is useful for investors to have enhanced transparency into how we evaluate management’s performance and the effectiveness of our business strategies. We use AFFO when certain material, unplanned transactions occur as a factor in evaluating management’s performance and to evaluate the effectiveness of our business strategies, and may use AFFO when determining incentive compensation.
AFFO has limitations as an analytical tool. Some of these limitations are:
|
|
•
|
AFFO does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
|
|
|
•
|
AFFO does not reflect changes in, or cash requirements for, our working capital needs;
|
|
|
•
|
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and AFFO does not reflect any cash requirements for such replacements;
|
|
|
•
|
AFFO does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; and
|
|
|
•
|
Other companies in our industry may calculate AFFO differently than we do, limiting its usefulness as a comparative measure.
|
Because of these limitations, AFFO should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using AFFO only as a supplemental measure.
Below is a reconciliation of net income to FFO available to common shareholders and AFFO available to common shareholders (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net income (loss)
|
|
$
|
24,809
|
|
|
$
|
(23,031
|
)
|
|
$
|
105,107
|
|
|
$
|
24,944
|
|
Adjusted for:
|
|
|
|
|
|
|
|
|
Depreciation and amortization of real estate assets - consolidated
|
|
29,451
|
|
|
32,237
|
|
|
91,149
|
|
|
96,841
|
|
Depreciation and amortization of real estate assets - unconsolidated joint ventures
|
|
3,058
|
|
|
3,466
|
|
|
9,453
|
|
|
10,020
|
|
Impairment charge - consolidated
|
|
—
|
|
|
49,739
|
|
|
—
|
|
|
49,739
|
|
Foreign currency loss from sale of joint venture property
|
|
—
|
|
|
—
|
|
|
3,641
|
|
|
—
|
|
Gain on sale of assets
|
|
—
|
|
|
—
|
|
|
(43,422
|
)
|
|
—
|
|
FFO
|
|
57,318
|
|
|
62,411
|
|
|
165,928
|
|
|
181,544
|
|
FFO attributable to noncontrolling interests in other consolidated partnerships
|
|
—
|
|
|
—
|
|
|
(195
|
)
|
|
278
|
|
Allocation of earnings to participating securities
|
|
(481
|
)
|
|
(560
|
)
|
|
(1,502
|
)
|
|
(1,571
|
)
|
FFO available to common shareholders (1)
|
|
$
|
56,837
|
|
|
$
|
61,851
|
|
|
$
|
164,231
|
|
|
$
|
180,251
|
|
As further adjusted for:
|
|
|
|
|
|
|
|
|
Compensation related to executive officer retirement (2)
|
|
—
|
|
|
—
|
|
|
4,371
|
|
|
—
|
|
Impact of above adjustment to the allocation of earnings to participating securities
|
|
—
|
|
|
—
|
|
|
(35
|
)
|
|
—
|
|
AFFO available to common shareholders (1)
|
|
$
|
56,837
|
|
|
$
|
61,851
|
|
|
$
|
168,567
|
|
|
$
|
180,251
|
|
FFO available to common shareholders per share - diluted (1)
|
|
$
|
0.58
|
|
|
$
|
0.63
|
|
|
$
|
1.68
|
|
|
$
|
1.83
|
|
AFFO available to common shareholders per share - diluted (1)
|
|
$
|
0.58
|
|
|
$
|
0.63
|
|
|
$
|
1.72
|
|
|
$
|
1.83
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares:
|
|
|
|
|
|
|
|
|
Basic weighted average common shares
|
|
92,514
|
|
|
93,109
|
|
|
92,999
|
|
|
93,349
|
|
Diluted weighted average common shares (for earnings per share computations)
|
|
92,514
|
|
|
93,109
|
|
|
92,999
|
|
|
93,349
|
|
Exchangeable operating partnership units
|
|
4,960
|
|
|
4,995
|
|
|
4,960
|
|
|
4,995
|
|
Diluted weighted average common shares (for FFO and AFFO per share computations) (1)
|
|
97,474
|
|
|
98,104
|
|
|
97,959
|
|
|
98,344
|
|
|
|
(1)
|
Assumes the Class A common limited partnership units of the Operating Partnership held by the noncontrolling interests are exchanged for common shares of the Company. Each Class A common limited partnership unit is exchangeable for one of the Company’s common shares, subject to certain limitations to preserve the Company’s REIT status.
|
|
|
(2)
|
Represents the accelerated recognition of compensation cost entitled to be received by the Company’s President and Chief Operating Officer per the terms of a transition agreement executed in connection with his planned retirement.
|
Portfolio Net Operating Income and Same Center NOI
We present portfolio net operating income (“Portfolio NOI”) and same center net operating income (“Same Center NOI”) as supplemental measures of our operating performance. Portfolio NOI represents our property level net operating income which is defined as total operating revenues less property operating expenses and excludes termination fees and non-cash adjustments including straight-line rent, net above and below market rent amortization, impairment charges and gains or losses on the sale of assets recognized during the periods presented. We define Same Center NOI as Portfolio NOI for the properties that were operational for the entire portion of both comparable reporting periods and which were not acquired or subject to a material expansion or non-recurring event, such as a natural disaster, during the comparable reporting periods.
We believe Portfolio NOI and Same Center NOI are non-GAAP metrics used by industry analysts, investors and management to measure the operating performance of our properties because they provide performance measures directly related to the revenues and expenses involved in owning and operating real estate assets and provide a perspective not immediately apparent from net income, FFO or AFFO. Because Same Center NOI excludes properties developed, redeveloped, acquired and sold; as well as non-cash adjustments, gains or losses on the sale of outparcels and termination rents; it highlights operating trends such as occupancy levels, rental rates and operating costs on properties that were operational for both comparable periods. Other REITs may use different methodologies for calculating Portfolio NOI and Same Center NOI, and accordingly, our Portfolio NOI and Same Center NOI may not be comparable to other REITs.
Portfolio NOI and Same Center NOI should not be considered alternatives to net income (loss) or as an indicator of our financial performance since they do not reflect the entire operations of our portfolio, nor do they reflect the impact of general and administrative expenses, acquisition-related expenses, interest expense, depreciation and amortization costs, other non-property income and losses, the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, or trends in development and construction activities which are significant economic costs and activities that could materially impact our results from operations. Because of these limitations, Portfolio NOI and Same Center NOI should not be viewed in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using Portfolio NOI and Same Center NOI only as supplemental measures.
Below is a reconciliation of net income to Portfolio NOI and Same Center NOI for the consolidated portfolio (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net income (loss)
|
|
$
|
24,809
|
|
|
$
|
(23,031
|
)
|
|
$
|
105,107
|
|
|
$
|
24,944
|
|
Adjusted to exclude:
|
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated joint ventures
|
|
(2,329
|
)
|
|
(1,833
|
)
|
|
(5,604
|
)
|
|
(6,233
|
)
|
Interest expense
|
|
15,197
|
|
|
16,367
|
|
|
46,638
|
|
|
48,348
|
|
Gain on sale of assets
|
|
—
|
|
|
—
|
|
|
(43,422
|
)
|
|
—
|
|
Other non-operating (income) expense
|
|
(227
|
)
|
|
(261
|
)
|
|
2,966
|
|
|
(661
|
)
|
Impairment charge
|
|
—
|
|
|
49,739
|
|
|
—
|
|
|
49,739
|
|
Depreciation and amortization
|
|
30,103
|
|
|
32,850
|
|
|
93,009
|
|
|
98,667
|
|
Other non-property expense
|
|
160
|
|
|
457
|
|
|
491
|
|
|
832
|
|
Corporate general and administrative expenses
|
|
12,265
|
|
|
10,521
|
|
|
41,032
|
|
|
32,223
|
|
Non-cash adjustments(1)
|
|
(1,729
|
)
|
|
(702
|
)
|
|
(5,829
|
)
|
|
(2,707
|
)
|
Lease termination fees
|
|
(127
|
)
|
|
(70
|
)
|
|
(1,526
|
)
|
|
(1,134
|
)
|
Portfolio NOI
|
|
78,122
|
|
|
84,037
|
|
|
232,862
|
|
|
244,018
|
|
Non-same center NOI(2)
|
|
(82
|
)
|
|
(4,579
|
)
|
|
(4,190
|
)
|
|
(13,505
|
)
|
Same Center NOI
|
|
$
|
78,040
|
|
|
$
|
79,458
|
|
|
$
|
228,672
|
|
|
$
|
230,513
|
|
|
|
(1)
|
Non-cash items include straight-line rent, above and below market rent amortization, straight-line rent expense on land leases and gains or losses on outparcel sales, as applicable.
|
|
|
(2)
|
Excluded from Same Center NOI:
|
|
|
|
Outlet centers sold:
|
Nags Head, Ocean City, Park City, and Williamsburg
|
March 2019
|
ECONOMIC CONDITIONS AND OUTLOOK
The majority of our leases contain provisions designed to mitigate the impact of inflation. Such provisions include clauses for the escalation of base rent and clauses enabling us to receive percentage rentals based on tenants’ gross sales (above predetermined levels) which generally increase as prices rise. A component of most leases includes a pro-rata share or escalating fixed contributions by the tenant for property operating expenses, including common area maintenance, real estate taxes, insurance and advertising and promotion, thereby reducing exposure to increases in costs and operating expenses resulting from inflation.
A portion of our rental revenues are derived from rents that directly depend on the sales volume of certain tenants. Accordingly, declines in these tenants’ sales would reduce the income produced by our properties. If the sales or profitability of our retail tenants decline sufficiently, whether due to a change in consumer preferences, legislative changes that increase the cost of their operations or otherwise, such tenants may be unable to pay their existing rents as such rents would represent a higher percentage of their sales.
Our outlet centers typically include well-known, national, brand name companies. By maintaining a broad base of well-known tenants and a geographically diverse portfolio of properties located across the United States, we believe we reduce our operating and leasing risks. No one tenant (including affiliates) accounts for more than 8% of our square feet or 7% of our rental revenues.
Due to the relatively short-term nature of our tenants’ leases, a significant portion of the leases in our portfolio come up for renewal each year. As of January 1, 2019, we had approximately 1.3 million square feet, or 11% of our consolidated portfolio at that time coming up for renewal during 2019, excluding the outlet centers sold in March 2019. As of September 30, 2019, we had renewed approximately 71% of this space. In addition, for the rolling twelve months ended September 30, 2019, we completed renewals and re-tenanted space totaling 1.7 million square feet at a blended 2.5% increase in average base rental rates compared to the expiring rates.
The current challenging retail environment has impacted our business as our operations are subject to the operating results and operating decisions of our retail tenants. As is typical in the retail industry, certain tenants have closed, or will close, certain stores by terminating their lease prior to its natural expiration or as a result of filing for protection under bankruptcy laws, or may request modifications to their existing lease terms. As of September 30, 2019, we recaptured approximately 195,000 square feet within the consolidated portfolio related to bankruptcies and brand-wide restructurings by retailers during the year, compared to 123,000 square feet by this time last year. Largely due to the number of bankruptcy filings, store closings and rent adjustments in 2018 and 2019, we currently expect our Same Center NOI for 2019 to decline compared to 2018.
We expect other store closings will impact our operating results. For example, Dressbarn plans to close all of their stores at the beginning of 2020. In our consolidated portfolio, this comprises 22 stores with approximately 177,000 square feet. Kitchen Collection has also announced plans to close all of their retail stores. We currently have 30 stores in our consolidated portfolio representing 93,000 square feet. Forever 21 and Destination Maternity filed for bankruptcy court protection in October. The current potential store closure lists for stores in our consolidated portfolio include two Forever 21 Stores, and five Destination Maternity locations. Together, these seven stores represent 33,000 square feet. We do not know exactly how many stores will close and when, and if there will be any early termination fees or any rent adjustments at stores that remain open.
We believe outlet stores will continue to be a profitable and fundamental distribution channel for many brand name manufacturers. While we continue to attract and retain additional tenants, if we were unable to successfully renew or re-lease a significant amount of this space on favorable economic terms or in a timely manner, the loss in rent and our Same Center NOI could be further negatively impacted in 2020.
Occupancy at our consolidated centers was 95.9% and 96.4% as of September 30, 2019 and 2018, respectively.