Good morning, everybody, and welcome. I'm Craig Mailman with Citi. I am the analyst that covers retail and industrial REITs for the team, and I am happy to be joined today by Tanger. Steve Yalof, CEO, is in the middle. Michael Bilerman, CIO and CFO, is to my left, and Doug McDonald, Treasurer and Head of Investments, is at the end of the table. I'm going to pass it off to Michael, who's going to give you guys a short intro, and then I'll kick it off with a few questions and open it up to the crowd.
Great. Good morning, everybody. Just a couple of just quick points on who Tanger is. If you're not familiar with us, Tanger has been around for 44 years, 32 years listed on the NYSE. We are an open-air retail-focused REIT with a significant presence in the outlet sector, with 37 outlets across the U.S., as well as 2 up in Canada. And in 2023, we made a strategic expansion into the open-air lifestyle business. We now have three open-air lifestyle centers that sit in Huntsville, Alabama, Little Rock, Arkansas, and Cleveland, Ohio. Those centers sit in the wealthiest demographics, with a lot of work, live, and play drivers around them. We are about a $4 billion equity REIT, $5.7 billion enterprise value.
So our balance sheet is low leveraged, running today at about 5x debt-to-EBITDA, as well as having numerous liquidity sources between forward equity, a largely untapped line of credit, and significant leverage capacity. Just from a growth perspective, our growth strategy is focused really on three legs of a stool. One is driving our internal growth. Our rents today are well below market, and we continue to focus on re-merchandising our centers and driving rents and operating efficiently. The second part of our growth strategy has been intensifying the real estate that we already own. Our centers sit typically on 40, 50 acres at the intersections of major highways, and that peripheral land that we already own provides us the opportunity to densify through additional uses. That is another key component of creating long-term value for shareholders.
The third part of the stool has been our external growth strategy. Over the last 18 months, we've deployed about $650 million into five new assets. One was a development of an outlet center in Nashville, Tennessee, that we delivered in the fourth quarter of 2023. We have purchased four assets, one of which was an existing outlet run by a private owner in Asheville, North Carolina, and the three lifestyle centers that I mentioned earlier. All of this has translated into very positive top-line growth. Over the last four years, we've delivered same-center NOI growth of approximately 5%. Our initial guidance for this year that we maintained after 1 Q earnings is 2%-4%.
And from an FFO growth perspective, our current guidance for this year that we also reiterated coming off of 1 Q earnings implies 4%-8% FFO growth, which at the midpoint would be the highest in the retail sector. That comes after four years of 7% compound annual FFO growth. From a dividend perspective, we recently increased our dividend about 6.5% in line with our free cash flow, but we maintain our payout ratio at very low levels. Our dividend today sits at 60, 60% of FAD, or AFFO, or every acronym that you want to use, relative to the sector being at close to 75% or greater. What that does is it provides us the free cash flow to be able to fund both our internal investments as well as external.
We are generating almost $80 million- $100 million of free cash flow a year that really supplements our overall growth profile. And we are running at the lowest leverage level that we have ever had and well below the sector. So, with that, Craig, I will turn it over to you for some questions.
Great, Michael. Appreciate the intro there. Maybe just kicking it off, you know, in Las Vegas, there was the recent ICSC Leasing Conference. Can you maybe just give us a rundown of what the activity looked like, what retailer mindsets are today, given the backdrop of tariffs and all the other issues going on in the news?
Sure. Thanks for the question. Just having attended ICSC Las Vegas about two weeks ago, probably one of the best attended ICSCs I've been to, and I've been to over 30 of them during my very short career in this business. What stuck out to me was, as we spoke to over 100 retailers during the course of the three days in our leasing suite, top of mind, obviously, is the tariff question. We're always asking retailers, you know, tell us what are the risks to your business, what are the problems that you guys are facing, and how is that going to impact your ability to either open new stores, remodel existing stores, and what does the portfolio look like going forward? It was a very optimistic group in that particular, in those sessions.
You know, I think that the retailers, as they related to tariffs, spoke very, you know, I would say over 90% of them spoke about how COVID got them thinking about the diversity of supply chain. And I think that's a critical piece. You know, one of the retailers in particular said that the retailers that are going to win in this tariff environment are going to be the ones that are the most agile, meaning they can move to market quickly, the time from placing an order to having the goods shipped to the United States. They keep those windows extraordinarily tight. You know, and there's a lot of product currently in the market. I think a lot of retailers have placed larger orders thinking that there might be some issues in the back half of the year.
You know, that said, as you think about our value portfolio, you know, should there be some of the, you know, the tariff issues strike, you know, we see that, you know, sort of equated to 2021 when there was a lack of inventory in the marketplace, yet retailers had a tendency to keep their pricing relatively high and had very good sell-throughs at the time. 2022 is a completely different story as the supply chain lock jams broke around the world and there was a lot of inventory shipped over to the United States. We saw the retail stores get that first inventory, but a lot of that excess moved through our channel. Although the pricing was compressed because, you know, even in an inflationary environment, you found that there was price deflation in the outlets, retailers were pricing the products to move.
So we anticipate if tariffs are on the worst side that, you know, we will still see a lot of product in our stores, but probably priced a little bit differently. If the tsunami of tariff is less than anybody anticipates it might be, then we'll see a tremendous amount of product in the back half of the year and it will be priced, it'll be priced to sell.
And could you talk a little bit? I know there is concern about inflation coming from tariffs and just the stress on the consumer, but maybe just walk through for those that are not familiar kind of where you guys sit in the value chain with the outlets versus even the recent move into lifestyle differentiation.
Sure. Look, the outlet business is really the foundation upon which this company was born, as Michael said, about 44 years ago. You know, Mr. Tanger was a shirt manufacturer and, you know, had some excess inventory in his manufacturing facilities and would sell the excess inventory to friends and family. That is really how the outlet business evolved. It was really a giant, the outlet business was really a giant friends and family sale. That excess inventory turned into, you know, in some instances, some first-round product that wound its way into the stores. You know, right now we have 700 different brands that are in the outlet business currently, and they use it for a whole host of different reasons. Some of them use it to clear their excess inventory, like a Lululemon or Nike. None of the products you see in those stores are manufactured for.
You have brands that are a little bit more sophisticated in that, they are manufacturing some excess inventory or placing much bigger orders than they would to the department stores in order to have enough inventory to sell to the consumers that come through the outlet centers. You know, in our 37 outlet centers, we see over 125 million visitors a year. That's a lot of people coming in to buy a lot of things. You know, the outlet business of yesterday was one where the centers were 40-50 miles away from a department store competitor. That was because these brands did not want to sell or did not want to market to the consumer to come and shop their off-price channel. They wanted to make sure that that consumer was shopping their full-price channel.
They relied very heavily on us as the owners of that center to do the marketing on their behalf and get the customers to come and shop with us. You know, one of the major paradigms that have shifted, particularly in our business, and I would say going back to 2020 and 2021, is that we're finding that, you know, a lot of the geographies that were formerly far away from that whole center of the universe, the regional malls and the larger cities, we're finding that the customers who had second homes in a lot of the markets where we had centers, those are now becoming the primary residences.
Because a lot of work from home and just the way people are, you know, managing their real estate and where they choose to live and where they choose to raise their families, we're finding that the local customer has gotten far more important to the success of outlet over the past couple of years. For us, you know, we've pivoted in a number of ways in order to accommodate that change in consumer profile. First of all, we're adding a lot of different uses to our centers. Where an outlet shopping center 15 or 20 years ago was routinely just outlet retail direct to the consumer, now you're finding a lot more vertical retail, a lot more food and beverage outlets. You're finding a lot more entertainment venues and a lot more experiential things in our centers.
Also, we've pivoted and we've gone after a number of different amenities and a loyalty program. You know, you can't really fund a loyalty program if it's going to be based on tourist visits. It's a very transient customer. That requires a very localized marketing initiative and a very localized customer base.
Any questions from the audience? Perfect. Steven, just on that re-merchandising effort and what you and the team have done since you came in, can you talk about, you know, the customer experience, but also the revenue enhancement opportunities that you guys are driving with the re-merchandising and outparcel developments and what you guys have implemented?
Yeah. You know, look, you know, we, you know, I joined the company five years ago, you know, and if you can look back at April 2020, we were, you know, 40 shopping centers, 15 million sq ft, 3,000 stores, and everyone was closed. Fun day to start work. You know, what we thought was as centers started to open, and particularly open-air lifestyle centers were the first shopping venues to open. In fact, they were the first venues to open. I mean, if you think about concert venues, theaters, museums, enclosed malls, none of those were available to the customer.
So, one of the first things that we did when I started, and the stores were all still closed, was we insisted on keeping the music on in the centers because we knew we had a very important group of people that shopped locally that wanted to come and walk in our environments. They felt safe in a shopping center environment. Then we got the coffee stores back open. Now we had places for people to gather. We had places for people to exercise. We were alive. We were watering our flowers. We were mowing our lawns. We kept our shopping centers looking beautiful. What we found was that big local population really considered these centers to be the center of their market.
They might not have been customers of ours prior to COVID, but we were training them to now come to our venues because not only were they the only places open at the time, which kind of helps, but more importantly, they were the places that they were going to feel safe, that they were going to get the products that they wanted. We started to open some of the brands that were considered, you know, acceptable to open earlier because they were, you know, I forget the official term, but things that the consumer really needed in that time. We facilitated curbside pickup. The whole thing really started to evolve.
When we built our new center in Nashville, which was going to be a regular racetrack shopping center like a lot of the outlet centers were built in that era, we decided that this new customer, this local customer, the way the customer is going to shop really is going to inform how we're going to lay out our new center, how we're going to merchandise our center and the uses that we're going to go after. In Nashville, it's a great example of a center that instead of it being a racetrack design, meaning you park on the outside and shop on the inside, it really is an open-air shopping center. It shops like a loop, all the parking is on the inside. It's centered around a center court or a community gathering space.
More importantly, we have about 20,000 ft of 300,000, which is really big for an outlet center of food and beverage users. It is a mix of local food and beverage from Prince's Hot Chicken, which is a Nashville staple, to Shake Shack, which is now sort of growing around the globe. We have the products people want to buy. We have the experiential uses that people are looking for when they come and shop with us. We have the food and beverage that people are looking for when they come and shop with us. We also have amenities. For example, we put in Ulta Beauty. Now, Ulta Beauty is not typically a store that you are going to find in an outlet. Ulta Beauty is a multi-brander, almost a small big-box department store that is selling beauty products.
Ulta really fit really well into this programming because the customer that's looking for that category might not find it in a typical outlet center, but we figured if we brought it into our center, we would get that car. That car comes far more frequently. That car stays a lot longer when they're there, and hopefully they'll cross-shop. You know, I guess at the end of the day, if we could change the outlet shopping narrative to come for the food and stay for the shopping, you know, we flip the programming on its head and that's what we're looking to do.
You know, retail, last year, this year, bankruptcies have been ticking up. Discretionary has actually sidestepped that a bit, but can you talk about Forever 21 and some of the other tenants you have in your space and maybe some of the proactive steps that you've taken to get ahead of some of these?
Yeah, look, you know, we're in a fairly enviable position right now in the retail real estate business because there's not a lot of new development taking place in the United States. As we sit in leasing meetings on a weekly basis, the one mantra that we chant to one another is every square foot of real estate in our portfolio is more expensive today than it was yesterday because there's brands that want to be there. You know, going back to your ICSC question, nobody's cutting back on open-to-buys. Brand new deals are 7-10 years. A lot of these brands have seen these cycles come before and they're definitely leasing into it.
So for us, when you've got brands that want to expand their portfolio, they want to come into the markets where we are, brands like Sephora and Ulta who weren't necessarily traditional outlet retailers who've now said, "Hey, put me in front of the 125 million people that come through Tanger every year." We're going after a whole new group of tenants to fill those spaces. Food and beverage becoming far more important than it's ever been before. You know, 7.5% of one of our shopping centers leaning into food and beverage. That's a big percentage of our area. That means that if an outlet retailer leaves, you know, their negotiation isn't like, "Well, you know, we're going to leave, who are we going to fill the space with?" The answer is there's 15 different categories of customers that can fill that space should a tenant leave.
With that said, you mentioned Forever 21. So Forever 21 had over 15 stores in our portfolio, you know, since I joined the company. And we've been replacing them. You know, they've been on a watch list of ours. We don't wait until the watch list, until the brands file bankruptcy. We're very proactive. Especially in an environment where there's not a lot of new real estate being added to the marketplace, you can be even more so. When you have a brand like a Sephora who coincidentally takes the same size store as a Forever 21, you know, there's a deal to be made even before a Forever 21 raises their hand and says, "We're going to close all of our stores." We were able to lease a number of them at considerably more rents than they were paying.
You know, as the other ones roll off, we've got a lot of traction on the rest of the portfolio as well from that, you know, that group of people, whether it's food, outlet retail, or non-traditional outlet retailers that want to put themselves in front of the 125 million people a year that come through our shopping centers.
You know, I think outlets used to be more equated with the mall group, but it feels like over the last few years that's migrated towards open-air as your peers. You know, could you walk through kind of the growth profile of your centers versus maybe even a power center, a grocery anchored, and kind of the growth trajectory that you guys have had internally, what you guys are doing with rents as they're rolling, your ability to get at rents versus maybe some of the other peers that have anchor boxes with extension options, and just talk through some of the benefits of your format versus some of the peers from a growth perspective.
Michael, why don't you take everybody through the Michael's going to we'll take you through sort of our growth strategy and what that looks like. Then afterwards, I guess if I can share some rent.
Yeah. I mean, we think about our portfolio. We said we had 40 centers, 37 outlets, 3 lifestyle centers. Our average tenant size is 4,700 sq ft. And so, Craig, when you talk about those other formats, you know, there's a place for all different forms of retail, but we are unique in that ecosystem where we're open-air, so we're not burdened by roofs and large common areas and elevators and escalators. And so just the cost of operation in an outlet is lower because of that. We're unburdened by large boxes, whether those are department store boxes that have to be backfilled or all of the large boxes that have filed for bankruptcy, which, you know, whether it's Joann, Big Lots, At Home, Party City. I was going to say Circuit City, but that was a long time ago.
You have a long roster, and we've had no exposure to that because that's not the type of tenancy that's in our portfolio. The other aspect, in addition to the operating cost, is just the CapEx load. You know, how many people have been to an outlet center in the crowd? All right. So you have been there. It is, you know, just from a, just, you know, you think about just the facades of the stores. It's not these largely built out. So from a CapEx perspective, we're running at about mid-teens, about 15% of our NOI is our tenant allowances and just our normal maintenance capital. That's well below the other retail formats that range from 20%-30% and even greater percent. Just the net economics, the return on invested capital is very positive within our outlet business.
It, you know, just from an overall channel perspective, it is different because the brands and the retailers are using it as a utility, as Steve talked about, whether it was to clear excess inventory, make product for outlet, or bring in full-price product into that outlet format. It really is an experience-driven trip, a value-driven trip where, you know, I've said value never goes out of fashion. You and I may have very different views of what that value is, but you know when you come shop one of our outlets, you're going to get value for your favorite brands every day.
Increasingly through other things that we're doing to re-merchandise the centers to bring more uses and more retailers to that carload of a family that comes to visit with us, whether they're on vacation because we're in a lot of drive-to tourist destinations, or as these centers have become their local shopping center, as some of the regional malls in those areas have weakened or the department stores have closed, we're getting that ancillary benefit as well.
Just from a location standpoint, I think the traditional view of an outlet was it was sort of in the exurbs where land was cheaper and, you know, maybe that value shopper was more located. As kind of some of your markets have expanded, right, the ring of residential, could you just talk about how you guys view the opportunity for that densification, the opportunity that comes from that from a value and merchandising perspective?
Yeah, sure. You know, if you take a look at outlet centers of the past, there were, you know, I explained earlier why they were so far away. It was really interesting because the success of an outlet center in years past was always, you know, had a lot to do with the price of gasoline because that customer was making that trip. You know, if the gasoline prices were low, we wound up seeing a lot more traffic in the centers. It just so happens that gasoline prices are extraordinarily low right now, which correlates, which will correlate really well for a lot of the folks that are doing the driving this summer. You know, they said 71% of the people that are traveling in the United States this summer will do so by car.
Now, Michael mentioned that a number of our shopping centers are in these drive-to American cities, places like Sevierville, Tennessee, that's anchored by Dollywood, or Myrtle Beach, South Carolina, which is beach and golf, Hilton Head, Daytona, Fort Worth. We've, you know, I mentioned earlier that we've seen a lot of first homes pop up in a lot of these geographies. Pooler, Georgia, where our Savannah shopping center is located, is a great example of this. The densification of our centers has really evolved to meet the customer demand and meet the customer where they are. You know, it's hard enough to get the customer off the couch and into a shopping center, especially a younger consumer who's gotten very used to doing a lot of that shopping online. We're okay if the customer wants to window shop online. In fact, we're online.
You know, we've got a great app. We've got a great website, one of which will make the shopping experience far easier for that consumer who likes to window shop online and actually do their product pickup or execution in store. I think what's become increasingly more important for us, particularly as developers of shopping centers, regardless of value or other, is to make sure that you've got the diversity of uses. You know, the food I spoke about, the restaurants, the experiences, the entertainment, movie theaters, Dave & Buster's, Main Event, things of that nature. You know, gyms in some instances. We're putting gyms on our parcels because what that does, it gets the car in the parking lot several times a week. We bought a shopping center with a Whole Foods, and now we're seeing the benefit of the traffic that a Whole Foods drives.
You know, when your cars are parked very close to the Whole Foods store, which happens to be very close to one of your biggest retailers, that retailer seems to do pretty well. So we're learning a lot from the new centers that we've bought. We're using a lot of those strategies in the older centers in our portfolio. We're spending a lot of money on some of the older centers to upgrade them. We just took a bank tour of Deer Park on Monday of this week that we've recently renovated. And you can see the difference. It's not just paint and new landscaping.
It really is the amenities and the things that we offer back to the consumer, but also that local customer who we count on coming to visit us far more frequently, stay longer when they're there, and when they're there, they'll ultimately spend a lot more money with us.
Michael, you had talked about about $650 million of capital deployment over the last year and a half, call it. Can you talk about what the landscape looks like today, maybe some of the return characteristics of what you are targeting, and then just give us an update on kind of balance sheet capacity and your ability and capacity to deploy?
Thanks, Craig. You know, historically, Tanger was a big developer of product. We talked about Nashville being our latest development. What we found just from an acquisition perspective is the ability to buy at a substantial discount to replacement cost and achieve very strong going-in yields with growth was very advantageous over the last couple of years. And so you know, being able to deploy that capital, but really leverage the platform that we've built. As we've talked about, our platform is focused on leasing, operating, and marketing our centers so that we can drive traffic. That platform, wrapped in a balance sheet that is low leverage, really provides us the opportunity of where can we add value in an acquisition. And so for the four acquisitions that we've bought, we really see the opportunity to leverage our leasing to bring in newer tenants.
In the case of our outlets in Asheville, within the first year, we were able to bring Crocs, Simply Southern, Columbia, Victoria's Secret will be opening later this year, and a number of others, and instituting it into our loyalty program with a customer base that really understands the Tanger brand and what it brings. You know, we've looked at a tremendous amount, but we've only leaned into where we really can find that value. From a returns perspective, you know, our first two acquisitions, Asheville and Huntsville, were 8.5% initial yields with growth. Our recent acquisitions in Little Rock and Pinecrest were 8% initial yields with growth. You know, that growth outlook, we're looking to buy things that are at or above our core portfolio so that it continues our ability to grow and drive value for our stakeholders.
I think there's a lot of institutional capital that is now looking at retail real estate, and that's been growing over the last two years, which is certainly a positive and I think an indication of how the sector has evolved and how a lot of institutions are underweight the retail asset class. They're looking at the fact that there's no new supply. You know, Craig, you do a supply report every month that shows that retail is running today at 30, 40 basis points of stock. That's been that way for 17 years. And at the same time, we've had massive population growth. You know, that lack of supply combined with retailers and their growth strategies, and we haven't even talked about obsolescence in that time period, is really what's creating the health overall.
Yes, there's noise and some uncertainty around tariffs, but the retail real estate business overall has a very sound backdrop. We want to be able to continue to deploy and find unique acquisitions. And then from a capacity standpoint, I mentioned at the beginning, we're running today at 5x debt-to-EBITDA, and we have $70 million of forward equity that we issued in the fourth quarter that could support, you know, $150 million-$200 million of leverage-neutral acquisition activity.
Perfect. We brought it right down to the wire. I want to thank the Tanger team for their time and thank all of you.