Tanger Inc.

Good morning. This is Ashley Curtis, Assistant Vice President of Investor Relations, and I would like to welcome you to the Tanger Factory Outlet Center's second quarter 2022 conference call. Yesterday evening, we issued our earnings release as well as our supplemental information package and investor presentation. This information is available on our Investor Relations website, investors.tangeroutlets.com. Please note that during this conference call, some of management's comments will be forward-looking statements that are subject to numerous risks and uncertainties, and actual results could differ materially from those projected. We direct you to our filings with the Securities and Exchange Commission for a detailed discussion of these risks and uncertainties. During the call, we will also discuss non-GAAP financial measures as defined by SEC Regulation G, including funds from operations, or FFO, core FFO, same-center net operating income, adjusted EBITDA REG and net debt. Reconciliations of these non-GAAP measures to the most directly comparable GAAP financial measures are included in our earnings release and in our supplemental information. This call is being recorded for rebroadcast for a period of time in the future. As such, it is important to note that management's comments include time-sensitive information that may only be accurate as of today's date, August 9, 2022. At this time, all participants are in listen-only mode. Following management's prepared comments, the call will be opened for your questions. We request that everyone ask only one question and one follow-up to allow as many of you as possible to ask questions. If time permits, we are happy for you to re-queue for additional questions. On the call today will be Stephen Tanger, our Executive Chair, Stephen Yaloff, President and Chief Executive Officer, and Doug McDonald, Senior Vice President, Finance and Capital Markets. In addition, other members of our leadership team will be available for Q&A. I will now turn the call over to Steven Tanger. Please go ahead, Steve.

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

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

We delivered solid results for the second quarter of 2022 with core FFO per share of 45 cents, up 4.7% compared to the same period last year. Same center NOI for the total portfolio at share increased 5.1% to $79.8 million, primarily driven by growth in occupancy and rental rates. Our balance sheet is well positioned. We have no significant debt maturities until April of 2024, And as of June 30th, our net debt to adjusted EBITDA REIT was 5.3 times for the trailing 12 months, down from 5.6 times a year ago. Our weighted average interest rate was 3.2%, and 93% of our outstanding debt was fixed. At June 30th, we had cash of $194 million and full availability on our $520 million revolving credit facility. We have always prioritized maintaining a strong financial position by utilizing a disciplined and prudent approach to capital allocation. In May, we broke ground on our new center in Nashville and have incurred costs of $18.3 million. Based on current construction costs, our estimated total cost will be between $135 and $145 million, with a projected stabilized yield in the low to mid-7% range. Our dividend was well covered with a FAD payout ratio of 47% for the second quarter, and we continue to evaluate opportunities to grow our dividend as our operating performance improves. Due to the combination of better than anticipated financial results and our leasing execution year-to-date, we are increasing the midpoint of our full-year guidance. We now expect core FFO per share to be in the range of $1.73 to $1.79. implying a midpoint increase of one cent from our prior range. In addition, we expect same center NOI growth at a range of three to four and a half percent compared to our prior expectation of two and a half to four and a half percent. And as Steve alluded to when discussing our higher than expected tenant retention, we also lowered our projected CapEx range for the year. For additional details on our key assumptions, please see our release issued last night. I'd now like to open it up for questions. Operator, can we please take our first question?

Thank you. If you'd like to ask a question at this time, you may press star 1 from your telephone keypad. Please press star 1. If you'd like to remove your question, you may press star 2. Our first question will be coming from the line of Todd Thomas with KeyBank Capital Markets. Please receive your question.

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

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

Okay. Do you think that there's room for two outlet centers in the Nashville, you know, the greater Nashville market there? And with regards to the pre-leasing that you've completed, you know, do the tenants have, you know, certain flexibility around their leases there, either outright cancellation clauses or, you know, kick-out clauses, you know, early on that would be worth No.

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

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

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

Okay. All right. Thank you.

Thanks, Todd.

Thank you. Our next question is from the line of Craig Mailman with Citi. Please proceed with your question.

Good morning, everybody. Steve, maybe just a clarification to endure to the story. 70% committed. Are those signed leases or are those just indications of interest?

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

Okay. Of that 70, how much is executed?

We typically report the committed number.

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

Sure, Craig. I'm actually going to turn that over to Doug to take you through some of that.

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

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

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

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

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

That's helpful. So if I think about maybe a penny per share of FFO and another 12, you guys could almost raise FFO by, you know, 5% to 7% with very little capex. Is that sort of the way to think about this over the next couple of years?

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

OK, great. Thank you.

The next question comes from the line of Craig Schmidt with Bank of America. Please receive your questions.

Thank you. First quarter and second quarter, same-star NOIs were 9.9% and 5.1%. But for the year, your goal is 3% to 4.5%, which would suggest a slowing down of same-star NOI. What's tempering your same-star NOI growth in the second half of the year?

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

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

Sure. The occupancy is in the high 90s. The sales per square foot are in I'd say they'd be in the top third of our portfolio, but we'll be able to share more of that once we start really operating the asset.

Thank you.

Our next question is from the line of Greg McInnis with Scotiabank. Please proceed with your question.

Hey, good morning. So the midpoint of FFO per share guidance implies a bit of a slowdown in the back half of the year to 43 cents a share per quarter. Could you just touch on maybe potential headwinds or conservatism that's built into that number?

Sure. That's similar to the how I answer that we just gave. The first half of the year benefited from a few one-time items, reserve reversals. There were also a couple terminations in the first quarter. Those helped. They helped overstate the first half relative to the second half. But in terms of the core business, we see continued growth in the second half of the year. And then, like we said, we're trying to be prudent with the guidance given the economic backdrop, but we're optimistic about the business.

Okay. That's fair. And could you touch on the The change in tenant sales numbers that we've seen over the last couple quarters in terms of that number coming down sequentially obviously still every year, but it seems to imply that maybe the shopper isn't spending quite as much money, which I think we've probably been reading about in headlines anyways. I'm just curious what you're seeing in terms of shopper foot traffic, tenant sales, and especially in the most recent quarter versus the trailing 12 months.

Greg, I don't know when the last time you visited our centers, but if you were there last year this time versus this year, you would have seen the parking lots are just as full this year as they were last year, but the major difference is promotional activity in stores. Last year, this time, we talked about it several calls ago, but in Q3 and Q4 of last year, retailer pricing with supply chain issues was at an all-time high. Even though we're value every day, we're still the best value for the famous brands that we sell in our shopping centers. But if you would visit one of our shopping centers, especially starting in the summer, the promotional activity is much different. which would imply that a shopper who spent $500 in our shopping center last year and bought a number of units could buy more units for slightly less than that amount this year because of the major promotional activity that you see.

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

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

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

Thanks, Greg.

The next question comes from the line of Floris Van Dyke with CompassPoint. Please proceed with your questions.

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

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

And in terms of the rent bumps that you're getting, and maybe if you can also touch upon the sign not open, I think last quarter was about 40 basis points. Has that gone up a bit in the last quarter?

It has. It's about 50 basis points now. But the rent bumps, yeah, we've got our rent bumps for our base rents are in that 3% range, and our rent bumps for our CAM can be somewhere between 4% and 5%, depending on the lease.

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

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

Thanks, Steve.

Thanks, Horst.

Thank you. As a reminder, you may press star 1 to ask a question. When you ask, please zoom yourself to one question and one follow-up. And if you have additional questions, time permitting, they'll be addressed. The next question is from the line of Emily Arft with Green Street. Please receive your questions.

Thank you. So with your updated guidance, it assumes no meaningful change in your share count, but I was hoping you could discuss how you're thinking about share buybacks given where your stock is trading.

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

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

Sure. Sorry, Emily, I didn't quite hear the question.

Can you hear me now?

I heard you ask about Nashville and cash. I just want to make sure I hear everything correct.

Yeah, so outside of Nashville, would you mind walking us through your plans for your high cash balance and the free cash flows that you're generating? I'm assuming the thought process is aligned with the share repurchase thought process as well, but if you have any additional color.

Yeah, that's right. There's a lot of investment opportunities in our portfolio. We've talked about peripheral land. We've talked about some of the sustainability initiatives with solar, with EV charging stations, different value-enhancing opportunities within the existing portfolio. And then we're looking at opportunities to grow the portfolio and leverage our platform, bring our scale, create value outside of the existing portfolio. So we'll continue to... pursue opportunities to grow the company and invest these dollars accretively.

Great. Thank you.

Our next question is from the line of Mike Muller with J.P. Morgan. Please proceed with your question.

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

I'll take the second question first, and then I'll give you the answer to the first question. Obviously, construction costs are much higher than they were when we first identified this land five years ago. The fortunate thing about that is that rents continue to grow in the Nashville market as well. So our construction costs continue to rise. And now I think we're pretty stable where we are right now. So, we're pretty comfortable with the range that we've provided. But what is growing is rent. So, in that market, we're confident about the yield that we posted. And then the first question that you asked again, the tent to perm.

Yeah, tent to perm leasing.

Yeah. Well, look, you know, we've grown our permanent occupancy sequentially. But as I look at temp to perm leasing, what's important to us is if we have a temp tenant in a great space in our shopping center, that temp lease has a right for us to terminate and replace it with a permanent lease when we've got an appropriate tenant paying us an appropriate rent for that space. But we're never going to look to get rid of a temp tenant if there's still a vacant square foot in that shopping center. And typically what we'll do is we'll just move the temp tenant to another vacancy in a center if a vacancy, if it exists in that particular center. With regard to retailers or more high-profile retailers that have done temp deals with us to so-called test the waters before they become perm, we had great success this quarter converting some Columbia deals some late crusade deals, and some of deals from temp tenants in our space to long-term permanent deals in our space.

Got it. Okay. Thank you.

Thanks, Mike.

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

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

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