Good morning. This is Cindy Holt, Vice President of Investor Relations, and I would like to welcome you to the Tanger Factory Outlet Center's Q2 2019 conference call. Yesterday, 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. Tangerallis.com.
Please note that during this call, some of management's comments will be forward looking statements that are subject to numerous risks and uncertainties and actual results could differ materially from those projected. We direct you to our filings with the Securities and Exchange Commission for a detailed discussion of these risks and uncertainties. During the call, we will also discuss non GAAP financial measures as defined by SEC Regulation G, including funds from operations or FFO, adjusted funds from operations or AFFO, same center net operating income and portfolio net operating income. Reconciliations of these non GAAP measures to the most directly comparable GAAP financial measures are included in our earnings release and in our supplemental information. This call is being recorded for rebroadcast for a period of time in the future.
As such, it is important to note that management's comments include very sensitive information that may only be accurate as of today's date, August 1, 2019. At this time, all participants are in listen only mode. Following management's prepared comments, the call will be opened for your questions. We ask you to limit your questions to 2, so that all callers will have the opportunity to ask questions. On the call today will be Steven Tanger, Chief Executive Officer and Jim Williams, Executive Vice President and Chief Financial Officer.
I will now turn the call over to Steve. Please go ahead, Steve.
Thank you for joining us this morning. Today, I will provide you with our 2nd quarter results and operational and strategic highlights. Jim will then review our financials and outlook for the year. We are delighted that we delivered 2nd quarter results that exceeded our plan with positive performance across a number of metrics, including occupancy, tenant sales, customer traffic and loyalty program growth. Based upon stronger than expected year to date results, we are raising our annual guidance for same center NOI, occupancy and AFFO.
For the 2nd quarter, same center NOI declined by 10 basis points compared to the Q2 of last year, which represents a 40 basis point sequential improvement from our performance in the Q1. Year to date, same center NOI declined by 30 basis points due to the impact of prior bankruptcies, lease modifications and store closures. Our better than anticipated second quarter results were driven primarily by stronger than expected variable rental contributions and higher occupancy, including pop up and temporary stores to test new exciting brands in our centers, which fill vacant space with long term until long term tenants fill occupancy. We ended the 2nd quarter with 96% occupancy in our consolidated portfolio, which represents an increase of 60 basis points from the end of last quarter and 40 basis points from this time last year. We maintain an unwavering emphasis on leasing as we understand that filling the vacant space produces instant revenue and elevated customer experience and same center NOI improvement.
Our blended average rental rates increased 3.5% on a straight line basis and were off 60 basis points on a cash basis for all leases that commenced during the trailing 12 months ended July 30, 2019. These included 338 leases, totaling approximately 1,600,000 square feet. We had lease renewals executed or in process for 72.6 percent of the space and the consolidated portfolio scheduled to expire during 2019 calendar year and anticipate that our renewal rate for the space expiring this year will be in the mid-seventy percent range, partially due to the impact of expiring leases with bankrupt tenants. For leases which have been executed and will commence this year, we continue to expect rent spreads to be flat to slightly up. Just as the retail landscape has continued to evolve, so has our approach to leasing.
We have strengthened our leasing teams and put increased emphasis on prospecting for new and unique tenants. The outlet distribution channel continues to offer a compelling value proposition to retailers because of its low cost of occupancy and high profitability. Curating our tenancy continues to be one of our top priorities. Among our traditional tenants, we are seeing strength in footwear and health and beauty categories with a number of retailers looking for opportunities to expand their outlet presence into new markets. We are also continuing to look forward to look toward new categories to further diversify our tenant mix with retailers who have not traditionally utilized the outlet channel and add value oriented brands who attract a similar customer base as Tanger.
For example, additions to the tenant roster include TJ Maxx, Marshalls and HomeGoods, a health and wellness company and several food and beverage outlets, including restaurants, bakeries and even a distillery. An interesting concept that we will be testing in our Riverhead, New York Center is a new pop up store, which will offer consumers the opportunity to interact with digitally native direct to consumer and licensed brands. Our tenant will bring will be bringing in rotating brands and exciting experiential events. During the first half of twenty nineteen, we recaptured approximately 187,000 square feet within the consolidated portfolio, including 105,000 feet in the 2nd quarter related to bankruptcies and brand wide restructurings by retailers. Most of the bankruptcies in the last 3 to 4 years can be attributed to leveraged buyout of specialty retailers by private equity firms that did not invest in merchandising or their stores, not because of a flaw in the outlet distribution channel.
We continue to maintain our watch list and have a cautious view on a select number of tenants. We anticipate that Dressbarn will close all their stores at the end of the year, outside of the normal lease expirations. We currently have 22 Dressbarn stores, including the Ross and Ali concept in our consolidated portfolio with approximately 177,000 square feet and average sales of only $140 per square foot. They represent approximately 1.7 percent of our annualized base rent and prior to their wind down announcement were expected to contribute $6,800,000 in total revenue in 2020. We are already in active negotiations with several tenants to fill some of the space that they will vacate.
We believe the new tenants give us an opportunity to further upgrade our tenant mix with vibrant new higher volume retailers. We also generated positive results with regard to our marketing strategy, highlighting the sustained appeal of our centers. Our marketing efforts are proving to be effective as we continue to test different ways to reach consumers and craft promotional programs with our tenants. Traffic at our consolidated centers was up 2.3% in the quarter and up 1.5% in the first half of the year from comparable last year periods. Additionally, sales productivity increased by $12 per square foot to $3.95 per square foot for the trailing 12 months ended June 30, 2019.
And on an NOI weighted basis, they are a healthy $4.21 per square foot, a $12 per square foot or 3% increase from the prior year. Same center tenant sales performance for the overall portfolio increased 150 basis points for the 12 months ended June 30 compared to the prior year period. With a strategic and aggressive combination of media, direct mail, digital and experiential programming, we successfully continue to optimize the mix of how we reach our consumers. Digital is certainly a key element of that and we are able to use data to provide increasingly relevant and timely messages to drive shopping visits. Providing fun and engaging events for our shoppers continues to be very successful.
In particular, we have drawn customers to our centers with more than 200 experiential events during the 1st 6 months of the year, during key holidays and beyond, including block parties, festivals, food trucks and many more. Finally, we also continue to generate great success with our loyalty program. Membership in Tanger Club is 12% higher than it was at the end of Q2 last year. Tanger Club members spend an average of 63% more annually than non club members. As we look ahead, we have some known closings going into 2020 and we are already proactively addressing the planned vacancies.
We are continuing our aggressive approach to leasing and are having constructive conversations with new and existing retailers. We anticipate that it may take time to find long term replacement tenants and to provide sustained internal growth. Nonetheless, we remain confident in the prospects for Tanger. The outlet business is differentiated from other retail formats for 3 key reasons. It provides consumers with consistent value for the most sought after brand.
It is one of the most profitable distribution channels for our tenants. And finally, unlike other physical retail formats, the outlet industry is not overbuilt. We understand the challenges are not over, and we remain committed and laser focused on enhancing our growth prospects for the near and long term as we continue to position Tanger to be the first choice among tenants and consumers. As a brief update on our search for a new President and Chief Operating Officer, we are working with a large international search firm to find the appropriate candidate. We want to fill the position in a timely manner, but more importantly, with the right person who will bring an outside perspective to help effectively navigate the ever changing retail landscape.
I am proud to announce the ongoing Board of Directors refreshment process that is well underway with another recent addition to the Board, along with our longstanding practice of rotating the Board Chair position. Enhancements are described in more detail in a separate press release earlier this week. We believe we have a well diversified Board in terms of gender, ethnicity and career experience, and we remain committed to refreshment and diversity. Finally, I'd like to again thank the talented and hardworking Tanger team for their loyalty and commitment to making Tanger first choice with our employees, our tenants and our customers and our stakeholders. I'd also like to take a minute to thank Cindy Holt and introduce you to Ashley Curtis, the newest member of our IRR team.
They have worked tirelessly to put this program together this morning, and I appreciate it. With that, I'd like to turn the call over to Jim to take you through our financial results and a brief balance sheet recap.
Thank you, Steve. 2nd quarter AFFO available to common shareholders was $0.57 per share compared to $0.60 per share in the Q2 of 2018. Same center NOI decreased 10 basis points compared to the prior year quarter, driven primarily by the impact of prior bankruptcies, lease modifications and store closures, partially offset by contributions from pop up and seasonal store occupancy. Maintaining a strong balance sheet remains a strategic priority for us. As of June 30, approximately 94% of the square footage in our consolidated portfolio was not encumbered by mortgages.
As of quarter end, only $19,000,000 was outstanding on our unsecured lines of credit, leaving 97% unused capacity or approximately $581,000,000 We maintained a substantial interest coverage ratio for the first half of the year of 4.2 times and net consolidated debt to EBITDA was approximately 5.8 times for the trailing 12 months. Our floating rate exposure represented only 3% of total debt or less than 2% of total enterprise value as of June 30. Weighted average interest rate for our outstanding consolidated debt as of quarter end was 3.6% and the average term maturity was 5.9 years with no significant debt maturities until December 2023. Year to date, we have reduced our outstanding consolidated debt by $126,600,000 The strength of our balance sheet provides us with stability and the significant free cash flow after payment of our dividend would allow us to take advantage of selective external opportunities that may arise. In the first half of twenty nineteen, we repurchased approximately 558,000 common shares or approximately $10,000,000 At quarter end, we had $90,000,000 remaining under the current repurchase authorization through May 2021.
In terms of our outlook for 2019, we are pleased to raise our guidance for the full year. We are increasing our same center NOI guidance for the consolidated portfolio to a range of down 1.5% to down 2.25% from the previous range of down 2% to down 2.75%. The increase is attributable to the outperformance in the first half of the year. Our outlook for the second half of the year remains unchanged until we get more clarity on unknown bankruptcies or corporate restructurings by tenants on our watch list and variable rents for the year. We are increasing our average occupancy to a range of 94.75 percent to 95.25 percent from our prior range of 94% to 94.5%.
Our guidance also assumes projected 2019 store closings related to tenant bankruptcies and restructurings of up to 225,000 square feet for the consolidated portfolio, which primarily includes closures known at this time. Later in the year, these possible vacancies occur, but less impact on our metrics for 2019. Our guidance excludes the Dressbarn stores, which will remain open through December 31, 2019. Additional details regarding our guidance can be found in the release we issued last evening. As we progress through 2019, we will remain thoughtful in our capital allocation decisions.
We continue to generate significant free cash flow and do not anticipate a meaningful increase in CapEx spend to complete our planned leasing. Therefore, we feel comfortable in our ability to maintain a strong balance sheet with low leverage. Our FAD payout ratio is 69%, which gives us significant liquidity to maintain the safety of our dividend. We continually evaluate our prior 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. Throughout our long and successful history, we have taken a thoughtful approach, maintained a conservative balance sheet and delivered solid cash flows.
This strategy has allowed us to support a well covered dividend and provided us with a combination of stability and financial flexibility. Today, our balance sheet is in better shape than ever with low leverage, plenty of liquidity, limited floating rate debt exposure, no near term maturities, a large unencumbered asset pool and dual investment grade ratings. As we move forward, we plan to continue to pursue a similarly thoughtful balanced approach through the evolving retail landscape. I'd now like to open it up for questions. Operator, can we take our first question?
At this time, your first question comes from Greg McGinnis with Scotiabank.
Hey, good morning. Steve, could you talk about the occupancy guidance a little bit more? It seems to imply an uncharacteristic 200 basis point drop in occupancy for the back half of the year. Just wondering if that's related to specific tenants or negotiations? Any details would be helpful.
Good morning, Greg. We have a lot of unknown potential bankruptcy in the second half of the year that we are just being appropriately cautious in our guidance. We've been very successful so far this year in filling space with exciting new pop up tenants that add vibrancy to the center. That strategy will continue in the second half of the year, but we don't want to get ahead of ourselves. We had a great first half, great second quarter.
We have got some momentum going, but we are still being, I think appropriately, I think our guidance is appropriate for the second half until some of the unknowns become known.
Okay. Thanks. And then I guess might as well head into a pop up question. I'm just curious, how much space is pop up and tenants currently taking? How does this compare to the historical average?
And then if you could address your success on converting these tenants into permanent ones? That would be appreciated. And then if you could just remind us on the difference in rent between tenant and permanent tenants too, please? Thank you.
Currently, our pop up strategy is a way to test new concepts and it's consistent with what we've always done in the past. We maintain pop up stores. We have pop up stores to maintain an appealing presentation to our consumers so that they have a better experience on our properties. These pop up stores and temporary tenants are a combination of national brands and local brands that we test. Right now, it's about, give or take, 5% of our portfolio, which is slightly higher than previously, but still a very important part of our tenant mix.
We have had really pretty good success converting these pop up test stores into longer term permanent stores, such as Vineyard Dines, which started as a pop up test. With regard to the rent, the rent is fantastic because it's compared to 0. And we use these temporary tenants to fill space and create revenue and NOI until we can curate the center and find an appropriate longer term tenant. It's been a very successful strategy for the 38 years we've been in business and it's a successful strategy, I believe, used by every successful retail company. Retail real estate.
Thank you, Steve. Appreciate it.
Your next question comes from Christy McElroy with Citi.
Hi, good morning, everyone. Thanks. Just wanted to follow-up on Greg's question with regard to the occupancy in the guidance. I just want to reconcile that a bit better. And it seems like obviously you're projecting right now guidance is projecting a steeper decline in the same store NOI growth rate.
It's obviously occupancy, but it doesn't reconcile with the 225,000 square feet of closures that are in your guidance that says up to 225,000,000 given that 187,000 looks like it's already in the occupancy number. So I just wanted to reconcile that. Does that mean that if worst case scenario kind of plays out in the second half that the closures will be meaningfully higher than the 225? And then Jim, you also mentioned something about variable rents potentially being a factor. Maybe you can just sort of give us a little bit more clarity there.
Yes, sure. Christy, there are several things that go into average occupancy. One piece of that is the known or likely store closings that you are talking about, which we have guided up to 225. Another piece of that is natural lease rollover. But we've provided the renewal rate will be approximately 75% this year.
So you've got some of that coming into your occupancy. And the other piece is for unknown closures, which given in this retail environment, we think it's prudent to maintain and incorporate some of that into our guidance.
Okay. So I think that's a piece that we're missing there is kind of the what's embedded in there for unknown closures, which would be higher than the 225?
That's exactly right.
Okay. And then just on Ascena, it looks like the store count came down by 13 stores and the ABR exposure declined by 50 basis points quarter over quarter. What was the driver of that? And then just on with regard to Dress Barn, what is the date that you're expecting for those closures? I know you expect them to be in there through year end, but I'm assuming that you don't have any in sort of that 1st August round that they're closing?
Christy, Ascena sold their Maurices nameplate earlier in the year. So the Maurices stores are out of the Ascena count.
Got it.
2nd, we have a settlement agreement with Dressbarn that the stores will remain open until December 31st. They will be included in 2019 occupancy. I just want to mention that they have been cooperative and professional in the process. We have had probably 6, 7 months of advance notice and are in the process of filling some of the vacant space with much more productive tenants going forward. As I mentioned in my prepared remarks, their sales productivity is only about 50% of our average.
So we are cautiously optimistic that this situation will lead to higher sales productivity and a better presentation to our visitors by new replacing tenants for the Dressbarn concept.
Thank you. Your next question comes from Todd Thomas with KeyBanc Capital Markets.
Just following up on a little bit with Dressbarn. So you mentioned 177,000 square feet that will hit, I guess, at the very beginning of 2020? And then separately, I think you commented that there are known closures heading into 2020. Are there additional closures in addition to Dressbarn that you're aware of at this time? And would you expect the space recaptured in 2020 to be higher than in 2019?
Good morning, Todd. If we knew them, we'd be happy to tell you. But right now, we don't. We will give more guidance on 2020 certainly later in the year or early in 2020. So there is nothing more to tell you.
I don't want to speculate. We are in a business where new tenants come in to fill space and tenants that are over leveraged, poorly merchandised and don't reinvest in their stores tend to lead. It's just the retail real estate business we have been in for a long time. And I wish I could give you more guidance. We just that's why we call them unknown, because we just don't know.
Okay. And then you mentioned that you are bringing in some TJX, HomeGoods, Marshalls, retail and things like that. Are these traditional stores for the TJX banners or is this a different format? And how does that work with the brands that they're clearing merchandise for that also have locations within the centers. It seems like a little bit of competition.
And I know you have some TJX banners in some centers already. So maybe can just talk about that dynamic and how that works a little bit?
The folks at TJ Maxx and their various nameplates are extremely professional. We tested the idea in Foley, Alabama 5 or 6 years ago, where we have virtually every one of our major tenants represented and a lot of the tenants represented in the TJ Maxx store. We wanted to test it to be sure that they would be compatible and our consumers would find them exciting. They are 2 different shopping experiences, although they might be next to each other. PJ's, Marshalls, HomeGoods has perfected the thrill of the hunt.
They have lots of different brands. We have stores owned by the company whose brand is displayed. We may have 10,000 square feet in the environment of the brand with full colors, full assortments and a full size range. TJ may have the brand in limited sizes and limited colors, but many more brands. They are just 2 different shopping experiences that coexist beautifully.
The TJ store and Foley is doing well and our tenants are doing well. And we are hopeful that we will continue to expand our relationship with that great company.
Okay. All right. Thank you.
Your next question comes from Craig Schmidt with Bank of America.
Good morning. I was wondering in your active approach to releasing, does that include a number of shorter term leases?
Yes, Craig, it does. We use and have always used pop up in temporary stores to fill vacant space until we can find the appropriate longer term tenant. It's been part of our business strategy since we started 38 years ago.
Great. And then I noticed the average size Dressbarn store is about a little over 8,000 square feet. Do you think you will be able to lease that space to a single user or would you be breaking it up?
It's very site specific. Keep in mind that most, if not all of the Dress Farm stores are 100 feet deep and single level on grade is very easy and inexpensive to split it into 2 or 3 stores. Obviously, we would like to replace an 8,000 foot tenant with an 8,000 foot tenant going out. That's our first goal. But the flexibility to subdivide the space is relatively easy and inexpensive.
And keep in mind to put it in perspective, this is an 8,000 foot box versus some of the other mid to large department store boxes, which are 10, 20 times larger.
Okay. Thank you.
Your next question comes from Samir Khanal with Evercore ISI.
Hey, good morning. Steve, I guess just kind of on a high level, can you just generally talk about, I mean, you touched on a little bit about leasing discussions, but how are leasing discussions going on with potential tenants? I mean, I know there's Dressbarn, you've had other vacancies. Just, I mean, you mentioned possible further fallout this year. So obviously, those potential tenants are also looking are aware of that information.
So just trying to get some color from a high level of how these leasing discussions are going?
Good morning, Samir. Look, we have always had tenant turnover every year. It's a fact of life. And 10 years from now, we still will be talking about tenant turnover. The names of our major tenants are totally different today than they were 10 years ago.
Fact of the matter is, we are still 96% occupied. The conversations with our tenants are very constructive. Our tenants tell us that the outlet distribution channel is amongst their most profitable divisions with their lowest cost of occupancy and they plan to continue to invest in the outlets. End of the way, with 96% occupancy, having tenant turnover provides us with space to attract new higher volume exciting tenants. So we look at it as an opportunity.
I think our tenants look at it as an opportunity and we are looking forward to enhancing our tenant mix.
Okay. Thanks for that. And I guess my second question is around traffic. You mentioned in the release traffic was up, I think it was 1.5%. I'm just trying to gauge as to how you're actually measuring that?
We measure it consistently every year the same way. We have nomadic counters at every one of our properties and the location is consistent. So it's an increase in store count I am sorry, car count going into our centers measured the same way year after year.
Okay. Thanks for that.
Your next question comes from Caitlin Burrows with Goldman Sachs.
Hi, good morning. I think earlier in the comments, maybe it was Jim you mentioned that you're expecting a renewal rate of either 70% or 75% later this year. I'm just wondering if you could tell us what that's historically been?
Go ahead, Jim. Yes, sure. It's historically been in the range of around 80% to 85%, so a little bit lower this year.
Got it. And then sorry if I missed this, I dropped off a little in the beginning. But on the occupancy in the second quarter, it does seem like it was stronger than you had laid out previously just due to 1Q late closures that you knew of and April closures. So I'm just wondering if you could give some more detail on what was different versus your own expectation. Did some move outs not happen?
Was timing just different, backfill more quickly or anything else like that?
I think it's a combination of the various things you mentioned. We were able to keep some tenants that we had anticipated losing. Their sales improved and they decided to stay on occupancy longer. We have a very robust pop up and temporary tenant program where we continue to fill spaces and we will continue to do that. So we are pleased to be at 96% at the end of Q2 and we are working very hard to keep the space filled and our centers vibrant and an exciting experience for tenants when they for our customers when they come visit a Tanger Center.
Got it. And then just looking at the lease expiration schedule, it does seem like the portion that's set to expire in 20202021 has increased over the past couple of years. So I was wondering, do you think that's due to increased usage of pop up and tenants or is it potentially something else?
I don't think that our lease rollover schedule has increased dramatically. It usually ranges between 15% to 18% a year. I don't think that the pop ups we have into potential vacant space and if they are, we will continue to fill.
Okay. Thanks.
I would just say, same as 5.4% like 13% to 15% is what the annual lease rollover would be and that's really what if you look on it in our supplement what we're showing and expecting for next year.
That's why Jim is the CFO.
I guess I was just looking at when you look at it as a percent of rents as of year end 2017, I think it was 10% 12%. Now it's about 14%, which is close to his 13%. But it sounds like from what you're saying, that's natural?
Yes.
Okay. Thanks.
Your next question comes from Michael Mueller with JPMorgan.
Hi, this is Hong on for Mike. I was wondering if you could provide an update on your Nashville site, if there's any changes to plans or retailer sentiment on the potential development?
Good morning. Nashville is a vibrant market. We are excited about the potential of delivering an outlet center in the southern part of Nashville. We are continuing the master developer is continuing the mass grading of the site and the interchange, the new interchange that will feed our development site is under construction. We are in the process of scheduling and visiting the site with our key tenants.
The initial reaction has been stronger than we had anticipated and we will continue to update you every quarter as we progress. But right now, it's moving as planned.
Your next question comes from Caitlin Burrows with Goldman Sachs.
Hi, again. I just have 2 quick follow ups. I know just in terms of the closures you're expecting could happen in 2020 and the proactive activity that you're doing ahead of that, I guess I'm just wondering, could you give some comment on what you're seeing in terms of interest in pricing for that space at this point?
We really don't talk about pricing on individual spaces. We have 3,200 different spaces. And as they are I don't want to speculate, Caitlin, as we fill the space, they will be incorporated into our metrics that we will report as appropriate and timely.
Okay. And then just on the increased traffic and sales that you guys reported, I know when you look, you have a lot of tenants, but when you look at some of the public ones and what they're telling the market in terms of traffic and sales at their outlet centers, you are doing better than what they're reporting. So I was just wondering if you have any view on how that could be different. Is it that you don't own every outlet center in the country or something else that could be an explanation for how the retailers are reporting something different than what you're seeing?
First of all, I would encourage you to speak to individual retailers you are talking about. Their CEOs have had conference calls and we've read their scripts and we've talked to them. Some of their announced closures are international. We don't have any international stores. 2nd, some of them have announced closures for lower producing outlets in their chain.
Thankfully, we've not been advised that any of those are ours. So I think the CEOs of our retail partners are making global strategic comments on a public conference call. They're not talking about specifics to any individual developer.
There are no further questions at this time.
Thank you, operator, and thank everybody for their interest in our company. We look forward to seeing you soon. Have a great day. Goodbye.