Good morning.
This is Cindy Holt, Vice President of Investor Relations, and I would like to welcome you to the Tanger Factory Outlet Centers' Q3 2019 conference call. Yesterday, we issued our earnings release as well as our supplemental information package and our investor presentation. This information is available on our Investor Relations website, investors. Tangeroutlets.com. Please note that during this conference call, some of management's comments will be forward looking statements that are subject to numerous risks and uncertainties, and actual results could differ materially from those projected.
We direct you to our filings with the Securities and Exchange Commission for a detailed discussion of these risks and uncertainties. During the call, we will also discuss non GAAP financial measures as defined by SEC Regulation G, including funds from operations or FFO, adjusted funds from operations or AFFO, same center net operating income and portfolio net operating income. Reconciliations of these non GAAP financial 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, October 31, 2019.
At this time, all participants are in listen only mode following management questions. We ask you to limit your questions to 2, Vice President and Chief Financial Officer. I will now turn the call over to Steven Tanger. Please go ahead, Steve.
Good morning, and thank you for joining us. I will provide you with our Q3 results and operational and strategic highlights. Jim will review our financials and outlook for the year. For the Q3, we delivered results that exceeded our expectations. Despite facing a number of headwinds, we are encouraged by our improved outlook for 2019.
Based upon our results so far and our expectations for the remainder of the year, we are raising our guidance. The value proposition and desirability of our centers continues to resonate with shoppers. Traffic was up 1.1% in the 3rd quarter and 1.3% year to date from comparable periods. The favorable traffic momentum has continued into October. Year to date, same center NOI declined by 80 basis points and for the Q3 declined 180 basis points compared to the prior year periods.
While ahead of our expectations, these results do reflect the challenges of today's retail environment. At quarter end, our consolidated portfolio maintained a high occupancy rate of 95.9%. Leasing continues to be a top priority as we curate our centers with quality retailers to provide an optimal customer experience. Commenced leases for the trailing 12 months included 345 leases, totaling approximately 1,700,000 square feet. We had leases we had lease renewals executed or in process for 74% of the space in the consolidated portfolio scheduled to expire during 2019 calendar year.
Our blended average rental rates increased 2.5% on a straight line basis and were off 2% on a cash basis for all leases that commenced during the trailing 12 months ended September 30, 2019. For the remainder of the year, we anticipate seeing ongoing pressure on cash spreads similar to what we have seen for the current trailing 12 month period. We continue to prioritize maintaining high occupancy despite the recent unanticipated store closings that were created by recent tenant announcements. Our leasing strategy targets a mix of new and existing permanent tenants as well as new tenants that are testing the outlet strategy with pop up and temporary stores and may become long term tenants. This means as we are being more creative by allowing tenants to test a multichannel approach that works for them, while also maintaining a desirable presentation to our customers.
We believe the outlet distribution channel continues to offer a compelling value proposition to retailers because of its low cost of occupancy and high profitability. Our tenant occupancy cost ratio remains lower than any of the mall REITs at 9.9%. Some examples of recent store openings this quarter include Columbia Sportswear, Polo Ralph Lauren and American Eagle. We are seeing strength in jewelry and health and beauty categories, as well as athletics and specialty shoes. With a number of retailers looking for opportunities to expand their outlet presence into new markets.
Through the end of the third quarter, we recaptured approximately 195,000 square feet within the consolidated portfolio related to bankruptcies and brand wide restructuring by retailers, including 6,000 square feet in the 3rd quarter. With regard to anticipated closures, Dress Farm plans to close all their stores at the beginning of 2020. In our consolidated portfolio, this comprises 22 stores with approximately 100 and 77,000 square feet, about 170 basis points of annualized base rent and average sales of $140 a square foot. There have been 3 other recent tenant announcements of potential store closures. We do not know exactly how many stores will close and when and if there will be an early termination fee or any rent adjustments at stores that remain open.
Kitchen Collection has announced plans to close all their retail stores. We currently have 30 stores in our consolidated portfolio, representing 93,000 square feet, contributing approximately 70 basis points of ABR. Forever 21 and Destination Maternity filed bankruptcy court protection in October. The current potential Tanger store closure list includes 2 Forever 21 stores and 5 Destination Maternity locations. Together, these 7 stores represent only 33,000 square feet and 30 basis points of ABR.
While these situations remain fluid, we do not expect any significant impact from these in 2019. We are already in active discussions with existing retailers interested in entering or expanding in the outlet space, including for approximately half of the Dressbarn spaces, some of which are already executed. Over the past years, we have seen brands come and go. One thing that has remained consistent is that there is ongoing retailer demand for high quality and well located outlet centers. Leasing is one of our core competencies and we are confident in our ability to fill the space, although it may take some time.
Curating our tenant mix continues to be one of our top priorities, and re tenanting is an opportunity to refresh our retail offering with the most compelling brands for our customers. Sales productivity for the consolidated portfolio for the 12 months ended September 30, 2019 increased by $12 per square foot or 3 percent to $3.95 per square foot as compared to the prior year. On an NOI weighted basis, they were a healthy $4.22 per square foot, a 13.3% increase from the prior year. Same center tenant sales performance for the overall portfolio increased 170 basis points for the 12 months ended September 30 compared to the prior year. During the Q3, we drove a 1.1% increase in traffic due to our aggressive leasing efforts, highly successful marketing programs and the appeal of Tanger centers to shoppers looking for an engaging experience, including a compelling branded value offering.
Through a strategic combination of targeted direct mail, expanded digital touch points and tailored experiential programming, our marketing efforts are proving to be effective, both with consumers who are visiting our centers and with Tennant Brands who are increasingly participating in our marketing programs. We continue to refine and strengthen our digital outreach with targeted offers and content providing a compelling reason for shoppers to come to our properties. We have continued to successfully implement experiential events across the portfolio. These events are family entertainment oriented and designed to drive traffic and extend dwell time. During the Q3, some highlights include numerous back to school events at family festivals in August and holiday celebrations around the 4th July and Labor Day.
During event weekends, traffic at centers hosting events was up almost 2.5%. We also worked directly with tenants creating custom programs to support their goals, such as building excitement around a new store opening or promoting key brands to drive visits. These retailer collaboration events help drive increases of high single to double digits in comp traffic for the weekends of the promotion. We remain confident in the prospects for Tanger. The outlet business is differentiated from other retail formats for three key reasons.
It provides consumers with consistent value for the most sought after brands. It is one of the most profitable distribution channels for our tenants. And unlike other physical retail formats, the outlet industry is not overbuilt and does not have multilevel odd shaped boxes that require large capital investments to re tenant. As we look ahead, we are already proactively addressing the expected vacancies going into 2020. While it will take some time to return to sustained growth, we are having constructive conversations with new and existing retailers who value the attractive cost of occupancy and shop repeal that Tanger Outlets provide.
The retail landscape continues to evolve. Clearly, brick and mortar is changing, but it's not going away. Tanger has a great brand and high quality centers. Along with the world around us, we continue to adapt to determine our optimal value proposition. By utilizing data and emphasizing tenant productivity and customer engagement, we're working hard to ensure that Tanger retains its position as an important element of the retail landscape.
Additionally, I want to mention that we are continuing a thorough search process to identify a new President and Chief Operating Officer. While we do not have an announcement at this time, we will provide an update when we have information to share. Finally, I'd like to again thank the Tanger team for their hard work, dedication and creativity in navigating this evolving retail landscape and creating the Tanger experience for our customers and retail partners. With that, I'd like to now turn the call over to Jim to take you through our financial results and a brief balance sheet recap.
Thank you, Steve. 3rd quarter AFFO available to common shareholders was $0.58 per share compared to $0.63 per share in the Q3 of 2018. Current year period is inclusive of $0.04 dilutive impact of the 4 assets, which were sold earlier this year. Same center NOI decreased 1.8% compared to the prior year quarter, driven primarily by tenant bankruptcies, lease modifications and store closures. In terms of our financial position, we continue to maintain our solid foundation.
We have no significant debt maturities in our consolidated portfolio until December 2023, a low 3.5% weighted average interest rate and a largely undrawn line of credit. This provides us with both stability and optionality. As of September 30, approximately 94% of the square footage in our consolidated portfolio was not encumbered by mortgages. Our unsecured line of credit has 99% unused capacity or nearly $600,000,000 We maintain a substantial interest coverage ratio for the 1st 9 months of the year of 4.3 times and net consolidated debt to EBITDA was approximately 5.8 times for the trailing 12 months. Our floating rate exposure represented only 1% of total outstanding debt at September 30th and the average turn to maturity was 5.7 years.
Year to date, we have reduced our outstanding consolidated debt by $141,000,000 The strength of our balance sheet and the significant free cash flow we generate after payment of our dividend, which we expect to be nearly $95,000,000 for 2019, allows us to take advantage of selective growth opportunities that may arise. During the Q3, we were active in our share repurchase program, buying approximately 651,000 shares for $10,000,000 Year to date, we have deployed $20,000,000 of capital into share repurchases and have $80,000,000 remaining in our authorization through May 2021. Regarding our 2019 outlook, we are pleased to refine our guidance for the full year. We are increasing our same center NOI guidance for the consolidated portfolio be down in the range of 1.8% to 1.4% from the previous range of down 2.25% to 1.5%. In the Q4, we do not anticipate a deceleration in NOI relative to our year to date performance due primarily to the impact of lower overall occupancy and selective lease modifications from the previously mentioned bankruptcies and restructurings, as well as a tough comp over last year's quarter, which included some favorable expense savings, primarily from a mild winter.
Our average occupancy has trended better than we had previously anticipated, resulting in an enhanced outlook for Q4 relative to our prior expectation. We expect average occupancy for the year to be between 95.5% 95.8% compared to our prior projection of between 94.75% 95.25%, which is augmented by our strong temporary and 5 foot store program. Our guidance assumes the Dressbarn stores will remain open through the end of the year and that recently announced store closure plans by other tenants, which remain fluid at this time, will not have a significant impact on 2019 occupancy and same center NOI. Additional details regarding our guidance can be found in the release we issued last evening. We are encouraged that despite the various headwinds that we have discussed, we have prioritized and succeeded in maintaining a conservative low levered balance sheet, solid cash flows and a well covered dividend with a current FAD payout ratio of 71%.
We continually evaluate our priority uses of capital, which include reinvesting in our assets, paying our dividend, repurchasing our common shares opportunistically and deleveraging the balance sheet, while also evaluating potential opportunities for long term growth. We feel very comfortable that our strong balance sheet and this thoughtful approach to capital allocation will provide the necessary support to maintain our dividend and to continue to successfully navigate the current retail landscape. I'd now like to open it up for questions. Operator, can we take our first
Your first question comes from the line of Kristine Mahleroy from Citi. Please ask your question.
Hi, good morning everyone. Thanks for all the detail on the pending store closures. I'm counting about 300,000 square feet already, which compares to the 195,000 this year and about 270 basis points of ABR. It's a pretty big hit to 2020. And you mentioned that about half of the dressbarn space is in active discussions.
Can you kind of give us a sense for a reasonable timing for that space to get backfilled? And what does that imply for potential average occupancy in 2020 given that all that space will come online earlier in the year?
Christie. We are expecting and we have had very positive conversations with tenants to backfill the Dressbarn space. And as we've mentioned, we have commitments for about half the space, which we anticipate putting into occupancy in the first half of next year. I might mention that the Dressbarn sales were less than 50% of our portfolio average. So this gives us an opportunity to improve and curate the quality of our assets, which is one of our primary focus.
If you take that space out, we do have some headwinds headed into next year, but we have time now to prepare for them. The Chapter 11 bankruptcies and the restructurings are not Chapter 7, which vacates immediately. So we will as we have always in the past, aggressively work with our tenant partners, both new and prospective partners to fill the space. The space will be filled as in years past with existing and new permanent tenants and several pop up and tenants that are testing the outlet space. It's we're doing just fine.
It is tough out there, as you know, but we continue to perform. And we will be happy to give you guidance as to our progress at the end of February when we announce our year end results and our 2020 guidance for the year.
And so as I think about the pressure that this kind of space coming on, short term leasing in terms of what's commenced has started to come down as a percentage of space and it's decreased in terms of the impact on the spreads. But with the pickup in closures over the next few months, would you expect that short term leasing to have to pick up again? And sort of what impact does this create on leasing CapEx as well?
The space that we are getting back is easily re tenanted. It's almost entirely the same depth, 100 feet deep, and it's entirely on grade one level retail. So we're not talking about significant CapEx to re tenant the space. We do, as I mentioned, have significant interest in the space by more high volume tenants that will create excitement. And we're I'm not going to give you next year's guidance today.
We will at the end of February. But if you look at our history, for 38 years, we've never ended the year less than 95% occupied. This is not the first time we've been faced with potential new space coming on the market. And we've been successful and we plan to continue to be successful and re tenant in this space.
But we can reasonably expect that short term leasing will pick up?
Again, I'm not going to guide you on that. I'll have more facts on 2020 and the makeup of the different leases when we visit again either at a conference or in a public forum at our next conference call.
Okay. Thank you, Steve. Your next question comes from the line of Greg McGinnis from Deutsche Bank. Please ask your question.
Hey, good morning. We just got a couple of questions on Forever 21. So first, are they current on rent? What are the expectations on recovering any lost rent? And then how did that how is the bankruptcy process
February 'twenty one file for bankruptcy. Consumers still like their product. And as with regard to financial impact, we have not been paid for September rents and have taken have written that off in Q3. We have been paid in October. So we're working with Forever 21 on their ongoing strategy.
As I'm sure you've seen, they have revised their potential store closing list significantly. We have 2 stores on that list. It remains a fluid situation. We expect those 2 stores to close in the Q4, but not certain.
Okay. And then second, I've learned from other company earnings calls not to necessarily trust everything we've read in the Forever 21 bankruptcy documents, but I believe they originally listed 11 Panger leases up for negotiation. So based on the expected closure of 2 stores, can we assume that there was roll downs in the other locations? Just kind of curious what rent reduction they have been on those leases, when those leases would go into effect. So any details on the process and outcome would be appreciated, Steve.
Greg, we'd be happy to give you guidance at the end of February with regard to the facts with regard to Forever 21. This filing occurred 2 weeks ago, and it is and remains a complicated fluid situation. So I don't want to give you an answer that may not prove to be correct.
All right. Well, I can appreciate that. Thanks, Steve.
Your next question comes from the line of Todd Thomas from KeyBanc Capital Markets. Please ask your question.
Hi, thanks. Good morning. First question, so for the pop up in temporary tenants in the portfolio, where did that stand at the end of September as a percent of the portfolio's GLA? And then Steve, I realize the goal of the pop up and temporary tenants in the portfolio is to fill space and then try to convert some to permanent leases. Historically, what percent of pop up in temp tenants convert to permanent lease deals if you kind of look back over time?
Good morning, Todd. Right now, pop up temporary seasonal tenants account for about 5% of our occupancy. This is slightly elevated from an average of 4% over the past many years. Our long term strategy is to maintain occupancy and an exciting presentation to our consumers. As far as the conversion to permanent stores, some of them do convert like Vineyard Vines, which now is in a lot of our different centers.
Some of them are local tenants, which provide local color and stay for long term, but don't execute long term leases. They stay at the temporary tenant for years, which gives us the opportunity to repossess the space if we have a different tenant we want to put in.
Okay. And then in terms of timing, I guess, to see some of those convert or potentially not renew or stay in occupancy, I guess. Is the timing generally sort of a post holiday decision? Is that something that happens historically in January?
Todd, we're focused on a really small percentage of the portfolio. Again, I'd be happy to give you the facts when we get together again in the public forum the end of February. And we'll know with certainty what the situation is with those tenants. And we will be happy to give you guidance and our thoughts for 2020. I just want to reiterate, this is a long standing important part of our strategy to present a compelling experience to customers when they come to our properties.
There is no landlord contribution or expense. These value temporary tenants and pop up stores take vacant space and create value and excitement. So we will continue to have that as an important part of our strategy.
Okay. And then just a question for Jim. I think you said that in your comments, you made a comment about growth opportunities. And I don't know if you were referring to Nashville or expansions or comment. And also, with regards to Nashville, maybe we could you could give us a comment.
And also with regards to Nashville, maybe we could you could give us an update on that potential project.
Todd, I'll take that one. Nashville is progressing on schedule. We are working with the master developer as they do their mask rating and install a new interchange. I want to just point out that this is a large development. We will be the hub of this development, which is currently zoned for 3,000,000 square feet of mixed use.
It will include office, apartments and the outlet center as a very important hub, and we're the first one to go in. So we are, as far as I'm concerned, on target. And hopefully, with the disciplines that we've maintained over many years, we will have the 60% pre leased and all non appealable permits by this time next year and be able to start construction.
Your next question comes from the line of Caitlin Burrows from Goldman Sachs. Please ask your question.
Hi, good morning. Maybe just as part of the 2019 guidance, you guys increased the SG and A part a little bit. So could you go through what's driving that and whether we should think about it being onetime in nature or more permanent?
Caitlin, I had trouble hearing you. What were you kind of Jim will take that.
He's got better ears than I do. I'll take that question. Yes, Caitlin in the Q4, the G and A increase from previous guidance was there are several small components, not necessarily recurring. A part of that is including some additional expense related to the accelerated vesting of some share based compensation related to the
And then on the dividend, you guys have talked about your payout ratio in the past as being around 60% on an FFO basis, maybe mid to high 60s on an FAD basis, but now we're getting above those levels. So just wondering as we go forward, do you expect to moderate dividend increases until that gets lower? Or how should we think about dividend growth going forward?
Caitlin, there's not much difference between the high 60s, 68%, 69% 71%. So we are certainly our payout ratio, with the exception of 1 of our valued competitors in our sector is the lowest in the sector, as you know. Our dividend policy will be reviewed by our Board based on management's outlook for 2020. We will provide that disclosure when we give you our 2020 guidance next February. The Board takes seriously its dividend policy and management is responsible for the allocation of our free cash flow each year.
The dividend is one of or dividend increases is only one of the many priorities that we have. But we'll it's really premature to announce a dividend strategy at this time.
Okay. Thanks. Your next question comes from the line of Craig Schmidt from Bank of America. Please ask your question.
Thank you. Good morning. I wonder roughly in 2019, what percent of the drag on same store NOI is due to lease modifications versus store closings?
Greg, as we guided earlier in the year, that's a complicated question, and I'm sure they're interrelated. We had expected and guided that we would receive back about 225,000 square feet of space through tenant restructurings and bankruptcies. And with that, of course, is the associated NOI with that space being occupied. We gave you our best guidance in February of this year based on our view of the landscape at that time, and we will do it again next year. We are delighted that we've been able to continue to exceed expectations with regard to our NOI, same center NOI, and we've increased our guidance for the 4th quarter.
I don't want to lessen the fact that it's tough out there. There are challenges, but we are doing pretty well compared to our expectations and are delighted to continue to raise guidance as we had as we did last quarter going into the Q4.
Okay. And then just looking back at history, on average, how many months between a store closing and a space is backfilled in rent paying?
That's tenant specific. If we get advanced notice as we did with Dressbarn, who were honorable and gave the tenant gave us and other landlords 6 to 7 months notice of their plan and paid rent and will pay rent through the closing date, it gives us time to install a new tenant. We have some tenants that will take occupancy weeks after Dressbarn departs. Some space could take 9 to 12 months. So it's very hard to give you one answer.
But looking at the entire portfolio, we still we've just updated our guidance for year end occupancy, which incorporates the space we get back and filling that space with new and exciting tenants. We will give you occupancy guidance next year, which will incorporate the ability to re lease and install new tenants. All of that will be in our guidance, both the NOI guidance, same center NOI guidance, FFO guidance and occupancy guidance. So it's a complicated question, Craig, and I can't give you a simple answer other than the one I gave
you. No, I appreciate it. Thank you.
Your next question comes from the line of Michael Mueller from JPMorgan. Please ask your question.
Yes, hi. I guess following up on the one of the earlier questions about just store closures in 2020. I appreciate that you're going to give more detailed guidance in February or so. But your expectation that at this point that 2020 from a closure, I guess lease amendment perspective could be worse than what we see this year, similar or better? Just any high level color would be appreciated.
Good morning, Michael. Certainly, the announced closures in the past 3 weeks in Dressbarn give us a challenge for next year. As I mentioned previously, the situation is fluid. The original store closing list for Forever 21 had many stores closing and now the revised list is 2. The other situations are fluid.
So I really I am reluctant to give you any sort of guidance for next year. We are totally focused right now on filling the space with exciting high volume tenants to go into the holiday season and end our year. That's our focus. Our focus is on providing really a fabulous experience for our shoppers and maintaining a strong balance sheet. So that if you'll bear with us, I'm happy we'd be happy to give you as much detail as appropriate when we give you 2020 guidance.
Got it. Okay. And then, I guess going to the better guidance for the balance of this year, Is it I mean, should we what exactly were the drivers of the better guidance? I mean, is it you were you've laid out you could have closures, bankruptcy closures of up to, I think it was 225,000 square feet or so. Is it you're now expecting less there or is it something else where you were something happening on the leasing side or percentage rents or just any other color there would be great?
Hi, Michael. This is Jim. Yes, some of the primary drivers were better expected occupancy, as you pointed out. And so it's somewhat supported by a strong temporary unit and pop up shore program is certainly making contributions to that. And variable rents is also contributing to the improved outlook for same scenario guidance.
Okay. That's it. Thank you.
Your next question comes from the line of Vince Tibone from Green Street Advisors. Your line is open. Please ask your question.
Hi, good morning. Could you talk a little bit about the rationale for the share buybacks over the past few quarters? I'm just like you to get a sense of why share buybacks are a more attractive use of capital than maybe reducing debt, just given debt to enterprise value is now in excess of 50%.
We have 4 major capital allocation buckets. One is to invest in our assets. 2 is to maintain and pay and occasionally raise our dividend as we have for each of the 26 years we've been public, buying back our stock on a measured, selected basis and paying down debt. So far this year, we bought back $20,000,000 worth of stock, and we paid down our debt by over $140,000,000 Our ratios are very attractive. I think that they're better than most of them all REITs.
And we take great pride in our investment grade ratings, and we will continue to appropriately and conservatively allocate capital to maintain or attempt to maintain those ratings and selectively buyback our stock.
That makes sense. Is there any criteria you can share that like what made the buyback attractive? The discount to NAV or is it really the fact that you're comfortable with the balance sheet, you've done a lot of deleveraging this year and that was the next place, best place to put the capital or is it your view that there is a sizable discount to fair value here and that's the arbitrage you're trying to capitalize on?
I think it's probably all of the above. I mean, let's put it in perspective. In the Q3, we only bought back $10,000,000 worth of stock. And at the end of the second quarter, we only bought back $10,000,000 worth of stock. So at the same time, we paid down $140,000,000 in debt.
We it is a balanced approach, and I don't want to get into our internal calculations of asset value, but you can assume since we bought back our stock that we thought it was undervalued.
There are no further questions at this time. Presenters, please continue.
Okay. Well, I want to thank everybody for joining us this morning. We will see you either at NAREIT or being hosted at an investor conference next week in New York. And I wish you all a very happy day and thank you again. Goodbye now.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.