Tanger Factory Outlet Centers Inc. (NYSE:SKT) announced third-quarter 2017 results earlier this week, detailing the benefits of recent remerchandising efforts, modest growth in adjusted funds from operations (AFFO), and the completion of recent moves to materially improve its debt profile.

With shares up around 7% on the heels of the report, let's take a closer look at how the outlet mall real estate investment trust (REIT) kicked off the second half of the year.

A Tanger Outlet mall in Grand Rapids, Michigan, at night

Image source: Tanger Factory Outlet Centers.

Tanger Factory Outlets results: The raw numbers

Metric

Q3 2017

Q3 2016

Year-Over-Year Growth

Revenue

$120.8 million

$119.1 million

1.4%

Net income (loss) available to Tanger common shareholders

($15.5 million)

$68.5 million

N/A

Net income (loss) per diluted share

($0.17)

$0.72

N/A

Data source: Tanger Factory Outlet Centers. 

What happened with Tanger Factory Outlets this quarter?

  • As Tanger announced with its second-quarter report in August, this quarter's results recognized a $0.36-per-share (or $35.6 million) charge related to the redemption of $300 million of outstanding 6.125% unsecured senior notes due on June 1, 2020. In order to fund the redemption, in early July Tanger completed a $300 million public offering of 3.875% unsecured senior notes due July 15, 2027. Tanger extended the average term to maturity of its debt to 6.5 years in the process while reducing average interest on that debt to 3.3% -- a move that should save the company roughly $6.8 million per year in interest payments.
  • This quarter also included a $0.09-per-share charge related to impairment of assets in the company's Canadian unconsolidated joint venture.
  • Note last year's third quarter benefited from a $47.7 million, or $0.47-per-share gain on the sale of an outparcel and acquisition of interests of a previously held joint venture.
  • Adjusted FFO -- a metric that essentially measures Tanger's cash flow from operations -- was $61.9 million, or $0.63 per share, compared to $62.3 million, or $0.63 per share in the same year-ago period.
  • Tanger is on track to complete major remerchandising efforts at five outlet centers by the end of this year, and expects a yield of roughly 8% on its $20.6 million in planned capital investments for the projects.
  • Trailing-12-month blended average rental rates climbed 15.4% on 334 leases totaling 1,404,000 square feet, excluding six centers undergoing major remerchandising. Including those six centers, which together total 102,000 square feet, blended average rental rates rose 11.8%.
  • Consolidated portfolio occupancy stood at 96.9% as the end of the quarter, up from 96.1% three months earlier.
  • Same-center tenant sales declined 0.9% year over year, and average tenant sales were $381 per square foot.
  • Hurricanes caused eight outlet centers, or 17% of Tanger's overall portfolio, to each close for a day or more during the quarter, for a cumulative total of 22 days. 
  • Recaptured 166,000 square feet within the consolidated portfolio through the first three quarters of the year, including 25,000 square feet this quarter related to bankruptcies and restructurings by retailers. Tanger now believes it will recapture a total of 200,000 square feet for the full year.
  • Completed the two construction projects that were ongoing last quarter, including a 123,000-square-foot expansion in Lancaster, Pennsylvania, and a 352,000-square-foot outlet center in Fort Worth, Texas. Both opened at 93% leased, above initial expectations for 90%.

What management had to say

Tanger CEO Steven Tanger noted that the 93% lease rates of those two centers was "an extraordinary achievement in a challenging retail environment." He also stated that recent remerchandising efforts at five centers have improved the overall quality of Tanger's portfolio. But that also meant increasing capital expenditures and second-gen tenant allowances to over $50 million this year. Next year, however, those investments should normalize to roughly $30 million, giving the company added flexibility to allocate free cash flow to boosting its dividend, repurchasing shares, and paying down debt.

Tanger elaborated:

Outlets remain an important and profitable channel of distribution for our tenants, as evidenced by our high level of occupancy[...]. For 56 consecutive quarters our same center net operating income has increased, a feat accomplished by very few public REITs. 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 retail cycle turns positive.

Looking forward

In the meantime, Tanger now expects full-year 2017 diluted net income per share of $0.61 to $0.65 (down from $0.70 to $0.75 previously), FFO per share of $2.05 to $2.09 (a reiteration of previous guidance), and adjusted FFO per share of $2.41 to $2.45 (compared to $2.40 to $2.45 previously).

All things considered, this was a busy quarter for Tanger Factory Outlets as the company restructured debt, made progress in several large remerchandising projects, and continued to otherwise effectively manage its core property portfolio. But as the modest update to guidance indicates, this report also contained no big surprises -- and that's a great thing for astute investors willing to continue holding shares as Tanger's long-term story plays out.

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