Hello, everybody. I'm Juan Sanabria, senior REIT analyst at BMO Capital Markets. I am pleased to have Tanger joining us today, sitting to my left. In the middle, Stephen Yalof, President and CEO. To his right, my left, Michael Bilerman, Chief Financial Officer and Chief Investment Officer. All the way to my left is Doug McDonald, SVP, Treasurer and Head of Investments. Stephen, I'll hand it off to you to maybe say a few words to tell the audience who Tanger is and what you're all about.
Thanks, Juan. I think we flipped a coin, and Bilerman actually won the toss, so he's going to give us the setup today.
Thanks-
Face off, I believe.
Yeah, face off, exactly. We're Tanger. We're a $4.3 billion equity, $6.1 billion enterprise value REIT. We own and operate 42 open-air shopping centers across the country, including two up in Canada. That's comprised of 38 outlet centers. Has anyone shopped an outlet before? No? Okay. Two hands. Everyone loves value. Four open-air lifestyle centers, which we've acquired over the last number of years. The company is positioned for sustainable growth, and that's really coming after a number of years of positive both earnings, cash flow, and top-line growth. A lot of that's being driven by three pillars, which is driving our internal growth, continuing to push both our revenues and managing our operating expenses. It's intensifying the real estate that we already own.
We have a significant amount of peripheral land around our centers, so being able to activate that with new uses and new retailers is another component. The last piece has been external growth. Over the last number of years, we've deployed about $1 billion into eight new assets, four which were outlets, four which were lifestyle centers, seven that we bought, and one that we built. All of this is backed by a fortress balance sheet. When I talked at the beginning, over $4 billion of equity, $1.8 billion of net debt, we're running at 4.7x debt to EBITDA, which is the lowest level in our 42-year history, as well as the lowest in our sector. That capacity provides not only security against volatility, but it provides significant opportunity to deploy capital.
Most recently, we announced a $60 million acquisition last week at a very attractive 8.5% going in yield. We're positioned for future growth, not only from that balance sheet capacity, but as a REIT, we do pay a dividend. Our dividend today is at $1.25, which has seen very strong growth over the last number of years. Our payout ratio is only at 55%. When you look at other REITs, the sector is running at about 75%-80% dividend over free cash flow. Not only do we have the under-leveraged capacity, but we are retaining more of the free cash flow that we generate to be able to reinvest in our business, and drive additional growth. With that, Juan, we're happy to take questions.
Thanks, Michael. If there's a question from the audience as we go, just raise your hand. I guess just generally speaking, how is the business performing with the question marks, again, on the consumer with higher gas prices and I guess where does Tanger try to meet the customer to deliver what they're seeking out in value, et cetera? If you could just comment on that.
Sure. Well, first of all, the retail business seems to be extraordinarily resilient, especially in 2026. We entered the year thinking that we were going to have a number of really significant tailwinds. U.S. travel was anticipated to be far more domestic this year. At the beginning of the year, as we all recall, there was the crisis in the Caribbean, and there were some issues with folks that were traveling to Mexico, had thought that this was going to be a year where we're going to see a lot more domestic tourism coming to our shopping centers, and that one seems to be proving out. The higher gas prices, obviously, a sort of counter to that domestic travel. What we're finding is, particularly in the outlet sector, the customers are investing in the trip.
I think where folks would look at outlet centers, if we're going back 15- 20 years, that those are really destination properties that required a real thoughtful visit. I think what we've seen, particularly post-COVID, is that a lot of the geographies where these shopping centers were built, and they were built at a time where they were purposely built far away from the regional malls, far away from the other cities. Now, as we see most folks, this demographic shift of population where people are moving closer and closer to those geographies, our centers have become sort of the regional mall of the geographies in which they sit. Places like Myrtle Beach and Hilton Head, Savannah, Georgia, Charleston, South Carolina.
Markets like that, we've engaged in adding a host of new retailers and brands and uses into those centers, which have really activated them, not only for that tourist that's coming to shop us, but really for that local consumer that's looking for a more diverse experience when they come to the centers themselves.
Is leasing demand, you guys just came off of ICSC, is that diminished at all, or is there more leases sitting in committee, or how is the forward pipeline of opportunity looking?
Yeah, no, I think there's a tremendous amount of opportunity. A couple of drivers of that opportunity, first of which is the lack of new shopping center development that's happening in the country right now. That curve has sort of flattened out substantially, with the exception of a few markets, there's really not a lot of new development. I think the economics of acquisition are far more supported than the economics of a new development. In fact, we built a center about four years ago in Nashville, Tennessee, that was about $400 a sq ft to build a new center. Plus, now you have to lease 300,000 sq ft from a zero base when you can buy a new center at $200 a sq ft, which is something like 40%-50% of the replacement value.
We're finding the economics of acquiring are far better than the economics of developing today. That seems to be one of those big demand drivers, coupled with the shifting population, coupled with a consolidating department store business. We all saw the Saks OFF 5THs, which were big drivers to a lot of the geographies where we have shopping centers, and now retailers are looking for a place to get their product in front of the consumer. That's caused a big shift of retailers that were principally East Coast, West Coast-based, now looking at places like Cleveland, Ohio, where we just signed a deal with Aritzia.
A fashion retailer that we've seen pop up all over New York and L.A. is now looking for mid-tier markets, such as where our shopping centers reside. We're getting a look at much better quality retailers coming into our business right now.
For the tenant health, how is that at this point? I know there was some closures. You mentioned Saks.
Yeah.
Just curious on how that's impacting the business and the ability to backfill space.
Well, first of all, I think the watch list, we pay very close attention to retailers. It starts with if I'm walking a center today and I see no inventory in a store, I'm picking up the phone and calling these guys and saying, "Hey, are they paying their bills?" We're pretty active and proactive. We're out. We're looking at what's going on. I think our watch list right now is the smallest it's been. The three tenants that just came off the watch list are those that just filed for recent bankruptcies. Francesca, which has about a 2,000 sq ft store. Eddie Bauer, which is probably a 4,000 sq ft store, and then the Saks OFF 5TH stores, which we can talk about in greater detail.
Again, in a high demand where retailers are looking for stores to get back product of 2,000 or 4,000 sq ft, we're having far less trouble re-leasing that space than we might have in an environment where there was a lot of new shopping centers being developed and popping up.
How should we think about that impact for Saks and the closures relative to your first quarter same store NOI trend and how that should trend through the cadence, through the balance of the year?
Yeah. It was a pretty complex deal for us that Doug was actually on the front end of that. You want to sort of take the group through the Saks OFF 5TH transaction?
Sure. From an NOI and occupancy standpoint, we typically peak in the fourth quarter, trough in the first quarter, build back up throughout the year. There could be a little bit slower ramp throughout the summer this year as we work through some of those backfills on the larger boxes. We look at the NOI coming out the back end as a considerable improvement versus where we were previously with those stores.
Let me just sort of add a little bit more color. The Saks OFF 5TH boxes that we had in our portfolio, there was a lot of opportunity in those boxes. You go back to a supply-constrained environment, now 25,000 sq ft of Saks OFF 5TH, that's an anchor in an outlet center. It's not like a 250,000 sq ft anchor department store. Our average store size is about 5,000 sq ft. Those old anchor boxes that were built at a time where we were building new centers 15 or 20 years ago, they encumbered a lot of space. They had a lot of lease rights. They paid very little rent.
Aside from the fact that there's great mark-to-market on that space, the lease terms that came with an anchor box, just the ability to free that up, whether it's years- and- years of options or no-build zones or exclusive provisions, to get rid of those provisions, it's really a big win. The mark-to-market is what Doug is talking about, and that's where there's going to be a lot of that NOI upside in the future for us, for sure.
Is there any sort of range of mark-to-market you can provide on what you'd expect as you release that space?
I set you up for that one.
Backfilling in the short term with temp tenants can replace the existing rent that we were getting, and we've talked about oftentimes with temp, we can go two to four times the rent that they're paying when we put a permanent in there. I wouldn't expect this situation to be much different from that.
Yeah, the Saks boxes were in our best centers. Our best centers are the ones that carry the highest occupancy. They're the ones with the most retailer demand. Now, it could take some time to backfill some boxes because we have to make some smart choices who we want to put in. There's some work that we have to do in order to create them and make them ready for the next retailer to come in. If you're playing the long game, those are great boxes to invest in.
From a same-center NOI perspective, the first quarter had no impact from what we're talking about. It snowed everywhere in the U.S. in the first quarter. We talked about in the first quarter call how our operating expenses are variable and most of our rent is fixed and growing. We had higher snow removal costs in the first quarter, which dampened same-center NOI. As our expense growth was 4% year-over-year, we would not expect that expense growth to end up in that space, which is why we reiterated our guidance despite these headwinds from bankruptcy that always happen and are largely offset, as Doug talked about, our temp program. These anchor boxes also sit, those that have walked our assets, these are not separate anchor boxes that are sitting there literally in the lease line.
We have a tremendous amount of opportunity to backfill those, very different than a lot of the store closures that you find in big box retail, where it takes a lot of time, it takes a lot of capital, and you are very limited in being able to cut up the box because they tend to be small from the front with very large backs, where we have a significant amount of frontage and the same bay depth as all of our in-line space that's on average 5,000 sq ft.
I guess how should we think about leasing spreads going forward? Your occupancy costs are below 10%. Just curious on what you think that long-term opportunity is, and has that ceiling at all changed as you've introduced more food, beverage, and entertainment? Dwell times at your centers?
We think about internal growth, and our ability to drive NOI. From a revenue perspective, we are currently at a health ratio rent over the tenant sales of 9.7%. We feel that we can push that into the double digits. Assuming everything stays the same and we don't touch anything on our retailers, we feel that there's growth there. However, a big part of our strategy has been remerchandising and effectively eliminating the poorer performers, which some of it's our choice, some of it's the retailer's performance, and replacing them with tenants that can do much higher productivity. When you look at our portfolio, pre-COVID, we were 385 a foot. Today, we're 485 a foot. Even if OCR remains the same at 9.7%, we are going to be able to grow NOI as we bring more productive retailers in and see those other exit.
A big part of driving that incremental is the food, beverage, entertainment tenants, is continued growth of our apparel, accessories, footwear, bringing in health, beauty, bookstores, the expanding amount of tenants and brands that are coming to our portfolio driven by the significant population growth in our markets, which have grown 2x the national average. When you look at the 10 mi ring around our assets, that growth in terms of population has been one and a quarter of what the MSA is. When you think about that, our assets for the last 15 years have had 2x the amount of population growth than the U.S. overall, and where our centers are have seen 25% greater than the MSA, which effectively says these centers were built in the path of demand, and that growth and demand has come, which is allowing us to really drive that leasing.
We feel we have two levers, being able to drive OCR and drive productivity, and then continue to drive a lot of the other revenues at our centers. Right now, about 4% of our NOI is percentage rent, and as sales move up, we're able to get more on that as we share in our tenants' success. The second part is a lot of the other revenues that we're able to drive at our centers by leveraging our assets as marketing mediums, to be able to then make money outside the lease line, as well as drive incremental traffic. If we drive incremental traffic, sales follow.
How big is that opportunity, the marketing medium, and just taking advantage of the foot traffic and all the eyeballs you guys are generating in the dwell times?
Yeah, it's pretty unique being a real estate company that's consumer-focused that has their own app. Most real estate companies you're going to go pay your bills, but we have a loyalty program, and we have a text messaging program. Being able to connect with the customer where we don't sell any product, but we're selling everybody's favorite brands at unbeatable values every day within our outlet channel. A lot of those other mediums from a marketing perspective, not only through our loyalty, but when you come to our center, there's a lot of signage. We talked a little bit about the Saks situation. They had free signage also in these deals. Being able to recapture that space on a sign, not only the mark-to-market that we're getting on the space, but that allows us to generate additional income.
When a new store opens in our portfolio, the retailer can buy into all the programs that we offer, whether it's vinyl signage on the, what are these called? The pole? The tent cards?
Sign tents.
The sign tents. Still learning. That gets sold, being able to tap into our marketing and offering that. All of that comes with additional revenue. Some of it requires investment, but we get a very high return on that investment relative to the real estate side. Right now we're about half a million dollar on average per asset. That's been growing at a double-digit rate. Other revenues only make up 4% of our total NOI, but it's an added source of growth.
Just going back to the consumer, you guys have made a concerted effort on the food and beverage side. How are those restaurants performing, and is their OCR different than the average? How should we think about that opportunity?
The restaurant economics, aside from perhaps a little bit more capital investment on our side, the economics themselves are not dissimilar to typical rents that we're getting from tenants, particularly in the outlet space. I think there's a tremendous amount of customer demand for that use, particularly in our centers. I talked earlier about a lot of our shopping centers that had historically shopped exclusively touristically now shop a lot more locally. I think that the restaurants themselves are doing a great job of driving that local consumer to our centers. It's really about customer visits. The shopping center business is all about the ability to drive customer visits, because customer visits creates the flywheel that everything spins off of. Sales performance, the better your center sales performance, the more retailers are paying attention and want to come in.
The sales performance also is the main component upon which our market or asking rents are derived. There's a lot of things that happen from that customer visit. If you can figure out ways to get more cars in your parking lot, get them to stay there longer when they're there, get them to shop more frequently, and if you take a look at our Net Promoter Score, how likely is the consumer to say to a friend, "Hey, this is a great place to come and shop." Our Net Promoter Scores are close to the highest in the industry right now. It's because we're creating something special with that variety, the use variety, and I think the restaurants have a lot to do with it.
A lot of people who raised their hand earlier that said that they had shopped in outlet probably don't remember a great food experience in the outlets. When the outlet centers were 40 or 50 mi away in a fairly big drive, it would be so heavily weekend-shopped that the restaurants couldn't really sustain that business. That local customer is so critically important to increasing the quality of not only the retailers, but also the quality of the restaurants that we bring into the centers.
Maybe if we could switch up the conversation a bit just on the investment side. Maybe if you could tell us a little bit about the asset you acquired in Toledo, Levis Commons, and the history behind that deal and where it fits into the overall portfolio.
As I mentioned in the opening, we've brought on eight additional assets into the portfolio over the last three years, four outlets and four lifestyle centers. The two most recent transactions was we bought an outlet in Kansas City, in the fourth quarter, The Legends Outlets, that has seen already a significant amount of growth from our leasing, operating, and marketing platforms. Announced last week the acquisition of The Town Center at Levis Commons in Toledo, Ohio. The asset sits in the wealthier suburb of Perrysburg, just south of the main part of the city. This is where families, professionals, live, shop, work, and play. The center was developed about 20 years ago in a market that has seen some consolidation from the mall, as well as another open-air center that was built after this one that tried to compete and wasn't able to.
When we look at it and the momentum that the asset has had, most recently bringing in Shake Shack, Lulu, J.Crew, Sephora, we feel that our ability to come in and continue to elevate that merchandising mix to drive further NOI, based off of our national leasing team, combined with our ability to operate the center under our national contracts, and then being able to really lean in from a marketing perspective, to really elevate that customer experience. It sits within a 400 acre mixed-use district, which has class A apartments, hotels, headquarters of office, is the place to be. With our portfolio, we can operate single assets in a lot of markets because we have boots on the ground at every one of our assets, supported by this national platform that's able to drive a lot of growth.
Very similar to our acquisition in Little Rock, Arkansas, The Promenade at Chenal, aesthetically and drivers, Levis Commons fits very well to that strategy.
Is there a significant mark-to-market on the leases or a densification opportunity or outparcels that you could harvest over time?
In this particular asset, yeah, absolutely. I think when we take a look at this asset, even though we bought it at a pretty substantial yield, 8.5%, when we look at an asset for us, we'll pick up the phone and call a number of our friendly retailer partners. Number one, the most important thing is if somebody was there and left, I want to know why, because that's a red flag to me. More importantly, if there's a number of retailers that aren't there that never have been, the asset's been around for quite some time, what is it that's keeping them from coming into this marketplace? We get a lot of really good intelligence from the retailers that we do business with every day. When they raise their hand and say, well, sometimes it was just the operations themselves.
We bought a number of these assets from one-off operators. We have great scale. We'll go into a shopping center, not only will we be able to bolt on our operational model, which allow us to save a couple 100 basis points in expense right there, but that leasing team that we've developed of 15- 20 leasing representatives that are speaking to the retailers on a regular basis, you pick up the phone and say, "Hey, this is something that we're considering buying." They're saying, "Well, that's definitely on my open- to- buy.
Maybe we'll give it a higher priority if that's something that you'll invest in, because they understand the quality of the asset that they're going to get when Tanger's operating that asset.
Michael, maybe you could talk a little bit more about the broader investment market and opportunity set and kind of coming out of ICSC, we heard a lot more interest in retail and competition, so just curious on yields or cap rate trends.
Yeah. Retail is doing well right now. Steve talked about the dearth of supply, which is not just a new phenomenon this year. You go back pretty much to the GFC in 2008, where construction starts fell from, call it 1.5%- 2% of stock, down to 40 basis points. We've been at that level for 18 years. There's nothing being developed and we've gone through a number of cycles. The demand for bricks and mortar by the retailers is significant. We get the other benefit from a consolidating department store industry where those brands need a place to connect with their direct to consumer. We've seen that tailwind combine with all the population growth in our markets. From an external perspective, retail, there is definitely more product being brought to market.
There's also more competition as capital is seeking where they have historically been underweight retail now. You've seen a lot of competition. We feel, given our unique strategy of both playing in outlets where it's a heavily consolidated industry, but being able to pick up outlets and bring them into our portfolio and drive a lot of growth is one avenue. The other avenue has been expanding our platform into open-air lifestyle centers. The addressable market of lifestyle centers in the country is vast. At our size, we're $6.2 billion, doing a $60 million deal, 1% of our assets at an 8.5 relative to how we financed it, we think is good business. We're going to lean into where we can really find the value opportunities. We know we can't control our stock price. We know we can't control our dividend yield.
The only thing we can control is our capital allocation decisions and how we market, and how we operate. We don't look at the market sending us a signal that it's time to grow or not grow, because no one controls the market. The market is not one person. To hone in on just external growth as green light, red light, it's not the way we think about it. We talked at the beginning how our balance sheet is really well-positioned. If we find an attractive opportunity, we should be able to capitalize it in different sources. We shouldn't be more aggressive because the market is pricing our security at an attractive level, because we want to own these assets forever, and that's the decisions, the lens that we look at when we're making an acquisition. We're hopeful we'll continue to find transactions.
Is there any questions from the audience?
Yeah, a follow on Mike, for you. What's your current target leverage today, and what's your upper limit for comfort? What's your view with regards to variable debt?
Thank you, David.
Repeat the question.
The question was just about balance sheet target leverage and floating rate debt. Right now we're running at, I is 4.7, 4.8x . Our target's been five to six , so we have leverage capacity. As part of that, because of our free cash flow generation and strong EBITDA growth, we're pretty much generating additional leverage capacity. I mentioned $100 million. You take that and you lever it, well, that provides capacity. EBITDA growth has been very strong. We've been driving about 5.5% same-center growth over the last four years. Our G&A has been relatively flat because we built the platform and we're getting all the synergies from it. That means EBITDA growth has been greater. The EBITDA growth provides that additional leverage capacity. From a floating rate debt perspective today, we're 100% hedged.
We have swaps in place on our variable rate debt on our term loans, and we've built out a laddered swap schedule, we don't want to have any swaps burning off that are substantial, similar to building a position in a stock, we dollar cost average in our swaps. We already have forward starting swaps because we don't think we get paid to make an interest rate call so we're trying to maintain that conservative financial profile on the right-hand side of our balance sheet.
Mike, do you use variable debt, at least short term, which you use to fund an acquisition when you put a swap in place?
When you look at our balance sheet today, we completed a number of financing transactions at the beginning of the year. We did a convert, and we also did an upsize unsecured term loan, which had a delayed draw feature. Where we sit today is we're sitting on basically $270 million of cash, less $60 that we just bought Levis for, and $150 million of delayed draw term loans. We haven't pre-swapped the $150 of delayed draws, if we take that on, we can make the decision whether we want to stay floating or fixed. The deals that Doug and the team did at the beginning of the year reduced our cost of capital, we were able to reduce our spread on SOFR, on our unsecured term loans, and we were also able to push out duration.
From a balance sheet perspective, the only thing that we have right now is a $300 million loan coming due July of 2027. We have nothing else until 2030. We feel we're really well positioned. We're coming off trailing 8% FFO growth the last three years. The midpoint of our guidance this year is 6.3%, the highest in the sector, and we feel we're extraordinarily well positioned given our financial profile, the business dynamics. Value, everyone loves value. Value never goes out of fashion. We want to continue to be able to provide strong cash flow and dividend growth.
I think we're at time.
We did it.
You dropped a mic on that.
Thank you.
Value never goes out of style.
Good one, man.
Oh, well.
Tagline. Advertise it.
Yeah. That's a Bilerman one now.
Yeah.
Thank you, guys.