Tanger Factory Outlet Centers Inc. (NYSE:SKT) announced second-quarter 2017 results on Tuesday after the market closed, highlighting a modest year-over-year increase in average tenant sales and steady funds from operations (FFO). But that wasn't enough to appease the market. With shares of the outlet-mall real estate investment trust (REIT) down nearly 5% today as of this writing, let's take a closer look at how Tanger Factory Outlets capped the first half of the year.

A Tanger Outlet's mall with a large tower sign

IMAGE SOURCE: TANGER FACTORY OUTLETS.

Tanger Factory Outlets results: The raw numbers

Metric

Q2 2017

Q2 2016

Year-Over-Year Growth

Revenue

$119.6 million

$111.3 million

7.4%

Net income available to Tanger common shareholders

$29.1 million

$72.7 million

(60%)

Net income per diluted share

$0.31

$0.76

(59.2%)

Data source: Tanger.

What happened with Tanger Factory Outlets this quarter?

  • Adjusted for unusual items -- namely, the positive impact of gains on the sale of assets or acquisitions of interests in previously held joint ventures -- net income per share was flat on a year-over-year basis, at $0.24.
  • Adjusted funds from operations were $59.4 million, or $0.59 per share, also flat from last year's second quarter.
  • Tanger is in the process of remerchandising six outlet centers, and expects a 7% yield on the roughly $24.3 million in planned capital investments for the projects. The effort should be completed at five centers before the end of this year, with the final center slated for completion in the fourth quarter of 2018.
  • Through the first six months of 2017, blended average base rental rates climbed 11.7% year over year on 265 leases totaling roughly 1,187,000 square feet, including eight leases currently undergoing major remerchandising projects. Including those eight leases, which total roughly 150,000 square feet, blended average base rental rates climbed 7.9%.
  • Consolidated portfolio occupancy stood at 96.1% at the end of the quarter.
  • Same-center net operating income rose 2.2%, excluding centers undergoing major remerchandising projects, and rose 0.7% including those centers.
  • Average tenant sales were $383 per square foot for the year ended June 30, 2017.
  • Same-center tenant sales increased 1.2% for Tanger's consolidated portfolio during the quarter, and rose 1.1% for the overall portfolio.
  • Base rents increased an average of 10.1% on lease renewals totaling 1,001,000 square feet through the first six months of the year.
  • Recaptured 80,000 square feet within the consolidated portfolio related to bankruptcies and brandwide restructurings by retailers.
  • In May, closed on the $40 million sale of a 22-year-old non-core outlet center in Westbrook, Connecticut. Tanger recorded a $6.9 million gain on the transaction this quarter.
  • Ongoing construction projects include:
    • A 123,000 square-foot expansion in Lancaster, Pennsylvania that's expected to be 90% leased, and scheduled to open on Sept. 1, 2017.
    • A 352,000 square-foot outlet center in Fort Worth, Texas that's expected to be 90% leased, and scheduled to open on October 27, 2017.

What management had to say

Tanger CEO Steven Tanger stated:

Outlets remain a very important and profitable channel of distribution for brand name and designer retailers and manufacturers, as evidenced by our high level of occupancy, 96.1% as of June 30, 2017, and our streak of 55 consecutive quarters of same center net operating income growth. Another indicator of the resiliency of the outlet channel is that if retailers announce plans to close stores, historically, outlets have accounted for a disproportionately small number of those stores compared to other retail formats. Given the outlet channel's appeal with retailers and our fortress balance sheet, we believe Tanger is well-positioned to weather the current headwinds in the retail environment and emerge stronger when the cycle turns positive.

Looking forward

For the full year of 2017, Tanger now expects diluted net income per share in the range of $0.70 to $0.75, FFO per share in the range of $2.04 to $2.09, and adjusted FFO per share in the range of $2.40 to $2.45. The first two ranges represent reductions from Tanger's guidance provided last quarter, which called for net income per share of $1.04 to $1.09, as well as diluted FFO per share and adjusted FFO per share in the range of $2.40 to $2.45.

Tanger explained that the guidance reduction primarily reflects a $300 million public bond offering of 3.875% unsecured senior notes due July 15, 2027, completed subsequent to the end of the quarter. The offering will be $0.36 per share dilutive to net income, $0.34 per share dilutive to FFO, and $0.015 accretive to adjusted FFO. The proceeds of the offering will be used to redeem $300 million of outstanding 6.125% unsecured senior notes due June 1, 2020.

In the end, that guidance reduction notwithstanding, this certainly wasn't a bad quarter from Tanger Factory Outlets. And it's hard to blame the company for effectively reshuffling some of its debt to lower-interest, longer-term notes. As Tanger Factory Outlet Centers continues to position itself for long-term success, I think patient investors should be happy with where it stands.

Steve Symington has no position in any stocks mentioned. The Motley Fool recommends Tanger Factory Outlet Centers. The Motley Fool has a disclosure policy.