Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The discussion of our results of operations reported in the unaudited, consolidated statements of operations compares the three and six months ended June 30, 2022 with the three and six months ended June 30, 2021. The results of operations discussion is combined for Tanger Factory Outlet Centers, Inc. and Tanger Properties Limited Partnership because the results are virtually the same for both entities. The following discussion should be read in conjunction with the unaudited consolidated financial statements appearing elsewhere in this report. Historical results and percentage relationships set forth in the unaudited, consolidated statements of operations, including trends which might appear, are not necessarily indicative of future operations. Unless the context indicates otherwise, the term “Company” refers to Tanger Factory Outlet Centers, Inc. and subsidiaries and the term “Operating Partnership” refers to Tanger Properties Limited Partnership and subsidiaries. The terms “we”, “our” and “us” refer to the Company or the Company and the Operating Partnership together, as the text requires.
Cautionary Statements
Certain statements made in this Management's Discussion and Analysis of Financial Condition and Results of Operations below are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995 and included this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies, beliefs and expectations, are generally identifiable by use of the words "believe", "expect", "intend", "anticipate", "estimate", "project", or similar expressions. Such forward-looking statements include, but are not limited to, statements regarding: the expected impact of the novel coronavirus (“COVID-19”) pandemic, rising inflation, supply chain and labor issues, and rising interest rates on our business, financial results and financial condition; our ability to raise additional capital, including via future issuances of equity and debt, and the use of proceeds from such issuances; our results of operations and financial condition; capital expenditure and working capital needs and the funding thereof; the repurchase of the Company's common shares, including the potential use of a 10b5-1 plan to facilitate repurchases; future dividend payments; the possibility of future asset impairments; potential developments, expansions, renovations, acquisitions or dispositions of outlet centers; compliance with debt covenants; renewal and re-lease of leased space; the outlook for the retail environment, potential bankruptcies, and other store closings; consumer shopping trends and preferences; the outcome of legal proceedings arising in the normal course of business; and real estate joint ventures. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other important factors which are, in some cases, beyond our control and which could materially affect our actual results, performance or achievements.
Other important factors which may cause actual results to differ materially from current expectations include, but are not limited to: risks related to the economic performance and market value of our outlet centers, including changes in the national, regional and local economic climate, inflation and rising interest rates; our inability to develop new outlet centers or expand existing outlet centers successfully; the relative illiquidity of real property investments; impairment charges affecting our properties; our dispositions of assets may not achieve anticipated results; competition for the acquisition and development of outlet centers, and our inability to complete outlet centers we have identified; environmental regulations affecting our business; risk associated with a possible terrorist activity or other acts or threats of violence, public health crises and threats to public safety; risks related to the COVID-19 pandemic; risks associated with supply chain disruptions and labor shortages; our dependence on rental income from real property; our dependence on the results of operations of our retailers; the fact that certain of our properties are subject to ownership interests held by third parties, whose interests may conflict with ours; risks related to climate change; investor and regulatory focus on environmental, sustainability and social initiatives; risks related to uninsured losses; risks associated with our Canadian investments; risks associated with attracting and retaining key personnel; risks associated with debt financing; risk associated with our guarantees of debt for, or other support we may provide to, joint venture properties; the effectiveness of our interest rate hedging arrangements; uncertainty relating to the phasing out of LIBOR; our potential failure to qualify as a REIT; our legal obligation to make distributions to our shareholders; legislative or regulatory actions that could adversely affect our shareholders; our dependence on distributions from the Operating Partnership to meet our financial obligations, including dividends; the risk of a cyber-attack or an act of cyber-terrorism and other important factors which may cause actual results to differ materially from current expectations include, but are not limited to, those set forth under Item 1A - “Risk Factors” in the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2021.
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This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of our management regarding our financial condition and results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in the following sections:
• General Overview
• Leasing Activity
• Results of Operations
• Liquidity and Capital Resources of the Company
• Liquidity and Capital Resources of the Operating Partnership
• Critical Accounting Estimates
• Recent Accounting Pronouncements
• Non-GAAP Supplemental Measures
• Economic Conditions and Outlook
General Overview
As of June 30, 2022, we had 30 consolidated outlet centers in 18 states totaling 11.5 million square feet. We also had 6 unconsolidated outlet centers totaling 2.1 million square feet, including 2 outlet centers in Canada.
The table below details our new developments, expansions and dispositions of consolidated and unconsolidated outlet centers that significantly impacted our results of operations and liquidity from January 1, 2021 to June 30, 2022 (square feet in thousands):
Consolidated Outlet Centers Unconsolidated Joint Venture Outlet Centers
Outlet Center Quarter Opened/Disposed Square Feet Number of Outlet Centers Square Feet Number of Outlet Centers
As of January 1, 2021 11,873 31 2,212 7
Dispositions:
Jeffersonville First Quarter (412) (1) — —
Saint-Saveur First Quarter — — (99) (1)
Other (8) — — —
As of December 31, 2021 11,453 30 2,113 6
Other 1 — — —
As of June 30, 2022
11,454 30 2,113 6
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The following table summarizes certain information for our existing outlet centers in which we have an ownership interest as of June 30, 2022. Except as noted, all properties are fee owned.
Consolidated Outlet Centers Legal Square %
Location Ownership % Feet Occupied
Deer Park, New York 100 739,148 95.6
Riverhead, New York (1)
100 729,281 91.8
Foley, Alabama 100 554,649 92.3
Rehoboth Beach, Delaware (1)
100 549,890 94.1
Atlantic City, New Jersey (1) (3)
100 487,718 78.6
San Marcos, Texas 100 471,816 96.1
Sevierville, Tennessee (1)
100 447,810 100.0
Savannah, Georgia 100 429,089 99.5
Myrtle Beach Hwy 501, South Carolina 100 426,523 95.8
Glendale, Arizona (Westgate) 100 410,753 99.1
Myrtle Beach Hwy 17, South Carolina (1)
100 404,710 100.0
Charleston, South Carolina 100 386,328 100.0
Lancaster, Pennsylvania 100 375,883 100.0
Pittsburgh, Pennsylvania 100 373,863 95.9
Commerce, Georgia 100 371,408 99.5
Grand Rapids, Michigan 100 357,133 88.7
Fort Worth, Texas 100 351,741 95.0
Daytona Beach, Florida 100 351,721 99.4
Branson, Missouri 100 329,861 98.5
Southaven, Mississippi (2) (3)
50 324,801 98.8
Locust Grove, Georgia 100 321,082 99.3
Gonzales, Louisiana 100 321,066 95.4
Mebane, North Carolina 100 319,762 96.9
Howell, Michigan 100 314,438 78.6
Mashantucket, Connecticut (Foxwoods) (1)
100 311,229 79.5
Tilton, New Hampshire 100 250,558 88.4
Hershey, Pennsylvania 100 249,696 97.6
Hilton Head II, South Carolina 100 206,564 97.1
Hilton Head I, South Carolina 100 181,687 99.4
Blowing Rock, North Carolina 100 104,009 100.0
Totals 11,454,217 94.8
(1) These properties or a portion thereof are subject to a ground lease.
(2) Based on capital contribution and distribution provisions in the joint venture agreement, we expect our economic interest in the venture’s cash flow to be greater than our legal ownership percentage. We currently receive substantially all the economic interest of the property.
(3) Property encumbered by mortgage. See Notes 6 and 7 to the consolidated financial statements for further details of our debt obligations.
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Unconsolidated joint venture properties Legal Square %
Location Ownership % Feet Occupied
Charlotte, North Carolina (1)
50 398,698 98.9
Ottawa, Ontario 50 357,209 95.4
Columbus, Ohio (1)
50 355,245 96.0
Texas City, Texas (Galveston/Houston) (1)
50 352,705 95.1
National Harbor, Maryland (1)
50 341,156 100.0
Cookstown, Ontario 50 307,883 89.8
Total 2,112,896 96.0
(1) Property encumbered by mortgage. See Note 5 to the consolidated financial statements for further details of the joint venture debt obligations.
Leasing Activity
In the fourth quarter of 2021, we revised our rent spread presentation from a commenced basis to an executed basis and we are presenting it for comparable and non-comparable space. Comparable space excludes leases for space that was vacant for more than 12 months (non-comparable space). We believe that this presentation provides additional information and improves comparability to other retail REITs. Prior period results have been revised to conform with the current period presentation.
The following table provides information for our consolidated outlet centers related to leases for new stores that opened or renewals that were executed during the respective trailing twelve month periods ended June 30, 2022 and 2021:
Comparable Space for Executed Leases (1) (2)
Leasing Transactions Square Feet
(in 000’s) New
Initial Rent
(psf) (3)
Rent
Spread
% (4)
Tenant
Allowance
(psf) (5)
Average
Initial Term
(in years)
Total space
2022 267 1,455 $ 30.62 4.0 % $ 4.24 3.76
2021 296 1,390 $ 26.09 (5.7) % $ 4.58 2.71
Comparable and Non-Comparable Space for Executed Leases (1) (2)
Leasing Transactions Square Feet
(in 000’s) New
Initial Rent
(psf) (3)
Tenant
Allowance
(psf) (5)
Average
Initial Term
(in years)
Total space
2022 318 1,653 $ 31.35 $ 13.30 4.31
2021 334 1,529 $ 25.99 $ 5.72 2.95
(1) For consolidated properties owned as of the period-end date. Represents leases for new stores or renewals that were executed during the respective trailing 12-month periods and excludes license agreements, seasonal tenants, month-to-month leases and new developments.
(2) Comparable space excludes leases for space that was vacant for more than 12 months (non-comparable space).
(3) Represents average initial cash rent (base rent and common area maintenance (“CAM”)).
(4) Represents change in average initial and expiring cash rent (base rent and CAM).
(5) Includes other landlord costs.
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RESULTS OF OPERATIONS
Comparison of the three months ended June 30, 2022 to the three months ended June 30, 2021
NET INCOME (LOSS)
Net income increased $18.2 million in the 2022 period to $20.8 million as compared to net income of $2.6 million for the 2021 period. Significant items impacting the comparability for the two periods include the following:
• the current period had a higher average occupancy rate,
• the current period includes $2.4 million of executive severance costs,
• the current period includes a gain of $2.4 million related to the sale of a non-real estate asset,
• the prior year period included a loss on the early extinguishment of debt of $14.0 million, and
• we sold one operating property in the first quarter of 2021, as discussed below.
In the tables below, information set forth for properties disposed includes our Jeffersonville, Ohio outlet center sold in January 2021.
RENTAL REVENUES
Rental revenues increased $4.6 million in the 2022 period compared to the 2021 period. The following table sets forth the changes in various components of rental revenues (in thousands):
2022 2021 Increase/(Decrease)
Rental revenues from existing properties $ 101,058 $ 97,405 $ 3,653
Rental revenues from properties disposed 59 (85) 144
Straight-line rent adjustments 302 (478) 780
Lease termination fees 35 127 (92)
Amortization of above and below market rent adjustments, net (45) (145) 100
$ 101,409 $ 96,824 $ 4,585
Rental revenues increased primarily due to an increase in occupancy rate for the consolidated portfolio to 94.8% as of June 30, 2022 compared to 93.0% as of June 30, 2021.
MANAGEMENT, LEASING AND OTHER SERVICES
Management, leasing and other services increased $77,000 in the 2022 period compared to the 2021 period. The following table sets forth the changes in various components of management, leasing and other services (in thousands):
2022 2021 Increase/(Decrease)
Management and marketing $ 552 $ 537 $ 15
Leasing and other fees — 103 (103)
Expense reimbursements from unconsolidated joint ventures 884 719 165
$ 1,436 $ 1,359 $ 77
OTHER REVENUES
Other revenues decreased $97,000 in the 2022 period as compared to the 2021 period. The following table sets forth the changes in various components of other revenues (in thousands):
2022 2021 Increase/(Decrease)
Other revenues from existing properties $ 2,993 $ 3,088 $ (95)
Other revenues from properties disposed — 2 (2)
$ 2,993 $ 3,090 $ (97)
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PROPERTY OPERATING EXPENSES
Property operating expenses increased $1.4 million in the 2022 period compared to the 2021 period. The following table sets forth the changes in various components of property operating expenses (in thousands):
2022 2021 Increase/(Decrease)
Property operating expenses from existing properties $ 31,255 $ 31,562 $ (307)
Properties operating expenses from properties disposed — (1,726) 1,726
Expenses related to unconsolidated joint ventures 884 719 165
Other property operating expenses 558 695 (137)
$ 32,697 $ 31,250 $ 1,447
Property operating expenses increased in the 2022 period primarily because property operating expenses for the 2021 included $1.7 million in net proceeds received from the successful appeal of property taxes for tax years prior to disposition. The 2022 period included no such refunds.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $3.6 million in the 2022 period compared to the 2021 period. The increase was primarily due to $2.4 million of compensation costs related to executive severance that occurred in the 2022 period. In addition, expenses increased on a comparative basis from the hiring of certain executives and other key employees during the second half of 2021 to drive operational and growth initiatives.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization costs decreased $1.5 million in the 2022 period compared to the 2021 period, primarily due to certain construction and development related assets, as well as lease related intangibles recorded as part of the acquisition price of acquired properties, which are amortized over shorter lives, became fully depreciated during the reporting periods.
INTEREST EXPENSE
Interest expense decreased $1.8 million in the 2022 period compared to the 2021 period for the following reasons:
• During August and September 2021, we completed a public offering of $400.0 million 2.750% of senior notes and completed the early redemption of $100.0 million of 3.875% senior notes and $250.0 million of 3.75% senior notes.
• During April 2021, we completed the redemption of $150.0 million of 3.875% senior notes.
• During 2021, we paid down approximately $50.0 million of borrowings under our unsecured term loan.
LOSS ON EARLY EXTINGUISHMENT OF DEBT
In April 2021, we completed a partial redemption of $150.0 million of 3.875% senior notes. As part of completing the redemption, we paid a make-whole premium of $13.0 million and expensed approximately $1.0 million of unamortized debt origination costs and debt discount related to the senior notes.
OTHER INCOME (EXPENSE)
Other income (expense) increased approximately $1.9 million in the 2022 period, primarily due to the gain on sale of a non-real estate asset for $2.4 million.
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EQUITY IN EARNINGS OF UNCONSOLIDATED JOINT VENTURES
Equity in earnings of unconsolidated joint ventures decreased approximately $501,000 in the 2022 period compared to the 2021 period. The decrease is primarily due to the 2021 period including the recognition of termination rents at two joint venture centers and the increase in variable interest rates in 2022 that has negatively impacted two of our joint ventures that have variable rate mortgages.
Comparison of the six months ended June 30, 2022 to the six months ended June 30, 2021
NET INCOME
Net income increased $35.3 million in the 2022 period to $42.3 million as compared to net income of $6.9 million for the 2021 period. Significant items impacting the comparability for the two periods include the following:
• the current period had a higher average occupancy rate and an increase in lease termination fees,
• the 2021 period included a loss on the early extinguishment of debt of $14.0 million,
• the 2021 period included a foreign currency loss of approximately $3.6 million in other income (expense), which had been previously recorded in other comprehensive income associated with the sale of our RioCan joint venture outlet center in Saint-Sauveur,
• the current period includes a gain of $2.4 million related to the sale of a non-real estate asset,
• the 2022 period included $2.4 million of executive severance costs and the 2021 period included $2.4 million of compensation cost related to a voluntary retirement plan offer which required eligible participants to give notice of acceptance by December 1, 2020 for an effective retirement date of March 31, 2021 and other executive severance, and
• we sold one operating property in the first quarter of 2021, as discussed below.
In the tables below, information set forth for properties disposed includes the Jeffersonville outlet center sold in January 2021.
RENTAL REVENUES
Rental revenues increased $11.7 million in the 2022 period compared to the 2021 period. The following table sets forth the changes in various components of rental revenues (in thousands):
2022 2021 Increase/(Decrease)
Rental revenues from existing properties $ 204,548 $ 194,476 $ 10,072
Rental revenues from properties disposed 2 375 (373)
Straight-line rent adjustments (1,035) (1,521) 486
Lease termination fees 2,631 800 1,831
Amortization of above and below market rent adjustments, net (128) 161 (289)
$ 206,018 $ 194,291 $ 11,727
Rental revenues increased primarily due to an increase in occupancy rate for the consolidated portfolio to 94.8% as of June 30, 2022 compared to 93.0% as of June 30, 2021. Termination fees were recognized for several tenants in the 2022 period. The 2021 period had fewer tenants with termination fees. Additionally, rental revenues were also impacted by the reversal of revenue reserves in the 2022 period of approximately $3.7 million, compared to $2.4 million in the same period of the prior year.
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MANAGEMENT, LEASING AND OTHER SERVICES
Management, leasing and other services increased $232,000 in the 2022 period compared to the 2021 period. The following table sets forth the changes in various components of management, leasing and other services (in thousands):
2022 2021 Increase/(Decrease)
Management and marketing $ 1,088 $ 1,045 $ 43
Leasing and other fees 35 159 (124)
Expense reimbursements from unconsolidated joint ventures 1,840 1,527 313
Total Fees $ 2,963 $ 2,731 $ 232
OTHER REVENUES
Other revenues increased $780,000 in the 2022 period as compared to the 2021 period. The following table sets forth the changes in other revenues (in thousands):
2022 2021 Increase/(Decrease)
Other revenues from existing properties $ 5,725 $ 4,929 $ 796
Other revenues from property disposed — 16 (16)
$ 5,725 $ 4,945 $ 780
Other revenues from existing properties increased in the 2022 period due to an increase in other revenue streams, such as paid media, sponsorships and on-site signage, on a local and national level.
PROPERTY OPERATING EXPENSES
Property operating expenses increased $2.9 million in the 2022 period as compared to the 2021 period. The following table sets forth the changes in various components of property operating expenses (in thousands):
2022 2021 Increase/(Decrease)
Property operating expenses from existing properties $ 66,396 $ 65,506 $ 890
Property operating expenses from property disposed — (1,155) 1,155
Expenses related to unconsolidated joint ventures 1,840 1,527 313
Other property operating expense 1,219 683 536
$ 69,455 $ 66,561 $ 2,894
Property operating expenses from existing properties increased in the 2022 period compared to the 2021 period, primarily due to the timing of certain advertising and promotional costs and higher property insurance costs. The 2021 period for properties disposed includes net proceeds received from the successful appeal of property taxes for tax years prior to disposition.The 2022 period included no such refunds.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $2.3 million in the 2022 period compared to the 2021 period. The increase is primarily driven by the hiring of certain executives and other key employees throughout 2021 to drive operational and growth initiatives. The 2022 period included $2.4 million of executive severance costs and the 2021 period included $2.4 million of compensation cost related to employees that accepted a voluntary retirement plan with an effective retirement date of March 31, 2021 and other executive severance. In addition, travel costs have increased compared to 2021 with the decrease in restrictions from COVID-19 and other corporate employee benefit costs have increased as well.
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DEPRECIATION AND AMORTIZATION
Depreciation and amortization costs decreased $3.4 million in the 2022 period compared to the 2021 period. The following table sets forth the changes in various components of depreciation and amortization costs from the 2021 period to the 2022 period (in thousands):
2022 2021 Increase/(Decrease)
Depreciation and amortization expenses from existing properties $ 52,463 $ 55,844 $ (3,381)
Depreciation and amortization from property disposed — 38 (38)
$ 52,463 $ 55,882 $ (3,419)
Depreciation and amortization costs decreased at existing properties as certain construction and development related assets, as well as lease related intangibles recorded as part of the acquisition price of acquired properties, which are amortized over shorter lives, became fully depreciated during the reporting periods.
INTEREST EXPENSE
Interest expense decreased $4.5 million in the 2022 period compared to the 2021 period for the following reasons:
• During August and September 2021, we completed a public offering of $400.0 million 2.750% of senior notes and completed the early redemption of $250.0 million of 3.875% senior notes and $250.0 million of 3.75% senior notes.
• During April 2021, we completed the redemption of $150.0 million of 3.875% senior notes.
• During 2021, we paid down approximately $50.0 million of borrowings under our unsecured term loan.
LOSS ON EARLY EXTINGUISHMENT OF DEBT
In April 2021, we completed a partial redemption of $150.0 million of 3.875% senior notes. As part of completing the redemption, we paid a make-whole premium of $13.0 million and expensed approximately $1.0 million of unamortized debt origination costs and debt discount related to the senior notes.
OTHER INCOME (EXPENSE)
Other income (expense) increased approximately $5.6 million in the 2022 period compared to the 2021 period. The increase was primarily due to a $2.4 million gain on sale of a non-real estate asset and the 2021 period including a $3.6 million foreign currency loss from the sale by the RioCan joint venture of its outlet center in Saint-Sauveur, Quebec in which we had a 50% ownership interest.
EQUITY IN EARNINGS OF UNCONSOLIDATED JOINT VENTURES
Equity in earnings of unconsolidated joint ventures increased approximately $243,000 in the 2022 period compared to the 2021 period. In the table below, information set forth for properties disposed includes the Saint-Sauveur, Quebec outlet center in our Canadian joint venture, which was sold in March 2021.
2022 2021 Increase/(Decrease)
Equity in earnings from existing properties $ 4,740 $ 4,307 $ 433
Equity in earnings from property disposed — 190 (190)
$ 4,740 $ 4,497 $ 243
The increase in equity in earnings from existing properties is primarily due to strong variable rent performance at certain joint ventures in 2022 partially offset by the 2021 period including the recognition of termination rents at two joint venture centers and the increase in variable interest rates in 2022 that has negatively impacted two of our joint ventures that have variable rate mortgages.
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LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
In this “Liquidity and Capital Resources of the Company” section, the term “the Company” refers only to Tanger Factory Outlet Centers, Inc. on an unconsolidated basis, excluding the Operating Partnership.
The Company’s business is operated primarily through the Operating Partnership. The Company issues public equity from time to time, but does not otherwise generate any capital itself or conduct any business itself, other than incurring certain expenses in operating as a public company, which are fully reimbursed by the Operating Partnership. The Company does not hold any indebtedness, and its only material asset is its ownership of partnership interests of the Operating Partnership. The Company’s principal funding requirement is the payment of dividends on its common shares. The Company’s principal source of funding for its dividend payments is distributions it receives from the Operating Partnership.
Through its status as the sole general partner of the Operating Partnership, the Company has the full, exclusive and complete responsibility for the Operating Partnership’s day-to-day management and control. The Company causes the Operating Partnership to distribute all, or such portion as the Company may in its discretion determine, of its available cash in the manner provided in the Operating Partnership’s partnership agreement. The Company receives proceeds from equity issuances from time to time, but is required by the Operating Partnership’s partnership agreement to contribute the proceeds from its equity issuances to the Operating Partnership in exchange for partnership units of the Operating Partnership.
We are a well-known seasoned issuer (as defined in the Securities Act) with a shelf registration that expires in February 2024 that allows the Company to register unspecified various classes of equity securities and the Operating Partnership to register unspecified, various classes of debt securities. As circumstances warrant, the Company may issue equity from time to time on an opportunistic basis, dependent upon market conditions and available pricing. The Operating Partnership may use the proceeds to repay debt, including borrowings under its lines of credit, to develop new or existing properties, to make acquisitions of properties or portfolios of properties, to invest in existing or newly created joint ventures or for general corporate purposes.
The liquidity of the Company is dependent on the Operating Partnership’s ability to make sufficient distributions to the Company. The Operating Partnership is a party to loan agreements with various bank lenders that require the Operating Partnership to comply with various financial and other covenants before it may make distributions to the Company. The Company also guarantees some of the Operating Partnership’s debt. If the Operating Partnership fails to fulfill its debt requirements, which trigger the Company’s guarantee obligations, then the Company may be required to fulfill its cash payment commitments under such guarantees. However, the Company’s only material asset is its investment in the Operating Partnership.
The Company believes the Operating Partnership’s sources of working capital, specifically its cash flow from operations and cash on hand, are adequate for it to make its distribution payments to the Company and, in turn, for the Company to make any minimum dividend payments to its shareholders and to finance its continued operations, growth strategy and additional expenses we expect to incur for at least the next twelve months. However, there can be no assurance that the Operating Partnership’s sources of capital will continue to be available at all or in amounts sufficient to meet its needs, including its ability to make distribution payments to the Company. The unavailability of capital could adversely affect the Operating Partnership’s ability to pay its distributions to the Company which will, in turn, adversely affect the Company’s ability to pay cash dividends to its shareholders. Our ability to access capital on favorable terms as well as to use cash from operations to continue to meet our liquidity needs, all of which are highly uncertain and cannot be predicted, could be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic, macroeconomic conditions, including rising interest rates and inflation, and other risks detailed in “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2021.
For the Company to maintain its qualification as a REIT, it must pay dividends to its shareholders aggregating annually at least 90% of its taxable income (excluding capital gains). While historically the Company has satisfied this distribution requirement by making cash distributions to its shareholders, it may choose to satisfy this requirement by making distributions of cash or other property, including, in limited circumstances, the Company’s own shares.
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As a result of this distribution requirement, the Operating Partnership cannot rely on retained earnings to fund its on-going operations to the same extent that other companies whose parent companies are not real estate investment trusts can. The Company may need to continue to raise capital in the equity markets to fund the Operating Partnership’s working capital needs, as well as potential new developments, expansions and renovations of existing properties, acquisitions, or investments in existing or newly created joint ventures.
The Company currently consolidates the Operating Partnership because it has (1) the power to direct the activities of the Operating Partnership that most significantly impact the Operating Partnership’s economic performance and (2) the obligation to absorb losses and the right to receive the residual returns of the Operating Partnership that could be potentially significant. The Company does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities and the revenues and expenses of the Company and the Operating Partnership are the same on their respective financial statements, except for immaterial differences related to cash, other assets and accrued liabilities that arise from public company expenses paid by the Company. However, all debt is held directly or indirectly at the Operating Partnership level, and the Company has guaranteed some of the Operating Partnership’s unsecured debt as discussed below. Because the Company consolidates the Operating Partnership, the section entitled “Liquidity and Capital Resources of the Operating Partnership” should be read in conjunction with this section to understand the liquidity and capital resources of the Company on a consolidated basis and how the Company is operated as a whole.
In February 2021, we established an at-the-market share offering program (“ATM Offering”) under our shelf registration statement on Form S-3. We may offer and sell our common shares, $0.01 par value per share (“Common Shares”), having an aggregate gross sales price of up to $250.0 million (the “Shares”). We may sell the Shares in amounts and at times to be determined by us but we have no obligation to sell any of the Shares. Actual sales, if any, will depend on a variety of factors to be determined by us from time to time, including, among other things, market conditions, the trading price of the Common Shares, capital needs and determinations by us of the appropriate sources of its funding. The Operating Partnership currently intends to use the net proceeds from the sale of shares pursuant to the ATM Offering for working capital and general corporate purposes. As of June 30, 2022, we had approximately $60.1 million remaining available for sale under the ATM Offering program.
The following table sets forth information regarding settlements under our ATM Offering program:
Three months ended June 30, Six months ended June 30,
2022 2021 2022 2021
Number of common shares settled during the period (1)
— 2,810,503 — 9,677,581
Average price per share (1)
$ — $ 18.85 $ — $ 18.97
Aggregate gross proceeds (in thousands) $ — $ 52,977 $ — $ 183,615
Aggregate net proceeds after selling commissions and fees (in thousands) (1)
$ — $ 52,221 $ — $ 180,876
(1) In July 2021, we had an additional 331,682 shares settle at an average price per share of $18.85 with aggregate net proceeds after commissions and fees of $6.2 million.
In May 2021, the Company’s Board of Directors authorized the repurchase of up to $80.0 million of the Company’s outstanding shares through May 31, 2023. This authorization replaced a previous repurchase authorization for approximately $80 million that expired in May 2021. The Company temporarily suspended share repurchases for the twelve months starting July 1, 2020 and ending on June 30, 2021 in light of a repurchase covenant. On July 1, 2021, a covenant in the Company’s debt agreements (the “repurchase covenant”) prohibiting share repurchases expired. Repurchases may be made from time to time through open market, privately-negotiated, structured or derivative transactions (including accelerated share repurchase transactions), or other methods of acquiring shares. The Company intends to structure open market purchases to occur within pricing and volume requirements of Rule 10b-18. The Company may, from time to time, enter into Rule 10b5-1 plans to facilitate the repurchase of its shares under this authorization. The Company did not repurchase any shares for both the three and six months ended June 30, 2022 and 2021. The remaining amount authorized to be repurchased under the program as of June 30, 2022 was approximately $80.0 million.
In April 2022, the Company's Board of Directors declared a $0.20 cash dividend per common share payable on May 13, 2022 to each shareholder of record on April 29, 2022, and in its capacity as General Partner of the Operating Partnership a $0.20 cash distribution per Operating Partnership unit to the Operating Partnership's unitholders.
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LIQUIDITY AND CAPITAL RESOURCES OF THE OPERATING PARTNERSHIP
In this “Liquidity and Capital Resources of the Operating Partnership” section, the terms “we”, “our” and “us” refer to the Operating Partnership or the Operating Partnership and the Company together, as the text requires.
Summary of Our Major Sources and Uses of Cash and Cash Equivalents
General Overview
Property rental income represents our primary source to pay property operating expenses, debt service, capital expenditures and distributions, excluding non-recurring capital expenditures and acquisitions. To the extent that our cash flow from operating activities is insufficient to cover such non-recurring capital expenditures and acquisitions, we finance such activities from borrowings under our unsecured lines of credit, to the extent available, or from the proceeds from the Operating Partnership’s debt offerings and the Company’s equity offerings.
We believe we achieve a strong and flexible financial position by attempting to: (1) maintain a prudent leverage position relative to our portfolio when pursuing new development, expansion and acquisition opportunities, (2) extend and sequence debt maturities, (3) manage our interest rate risk through a proper mix of fixed and variable rate debt, (4) maintain access to liquidity by using our unsecured lines of credit in a conservative manner and (5) preserve internally generated sources of capital by strategically divesting of underperforming assets and maintaining a conservative distribution payout ratio. We manage our capital structure to reflect a long term investment approach and utilize multiple sources of capital to meet our requirements.
Our ability to access capital on favorable terms as well as to use cash from operations to continue to meet our liquidity needs, all of which are highly uncertain and cannot be predicted, could be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic, macroeconomic conditions, including rising interest rates and inflation, and other risks detailed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2021.
Capital Expenditures
The following table details our capital expenditures for consolidated outlet centers for the six months ended June 30, 2022 and 2021 (in thousands):
Six months ended June 30,
2022 2021 Change
Capital expenditures analysis:
New outlet center developments and expansions (1)
$ 18,596 $ 174 $ 18,422
Renovations — 75 (75)
Second generation tenant allowances 3,160 2,194 966
Other capital expenditures (2)
9,158 6,446 2,712
30,914 8,889 22,025
Conversion from accrual to cash basis (5,197) 2,947 (8,144)
Additions to rental property-cash basis $ 25,717 $ 11,836 $ 13,881
(1) The increase in new outlet center developments and expansions is primarily due to pre-development costs at our site in Nashville, TN and other projects.
(2) The increase in other capital expenditures in 2022 was primarily due to timing of projects and our decision in 2020 to defer all capital projects except essential and life-safety projects to 2021 due to the impact on cash flows caused by the COVID-19 pandemic.
New Development of Consolidated Outlet Centers
During the second quarter of 2022, we purchased land in the Nashville, Tennessee area for approximately $8.8 million and began construction on the development of our wholly-owned outlet center. The center, which will be approximately 290,000 square feet, is expected to be completed in the fall of 2023.
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Potential Future Developments, Acquisitions and Dispositions
As of the date of the filing of this report, we are in the pre-development period for other potential new developments. We may also use a joint venture arrangement to develop other potential sites. However, there can be no assurance that these potential future projects will ultimately be developed.
In the case of projects to be wholly-owned by us, we would expect to fund these projects from amounts available under our unsecured lines of credit, but may also fund them with capital from additional public debt and equity offerings. For projects to be developed through joint venture arrangements, we may use collateralized construction loans to fund a portion of the project, with our share of the equity requirements funded from sources described above.
We intend to continue to grow our portfolio by developing, expanding or acquiring additional outlet centers. However, you should note that any developments or expansions that we, or a joint venture that we have an ownership interest in, have planned or anticipated may not be started or completed as scheduled, or may not result in accretive net income or funds from operations (“FFO”). See the section “Non-GAAP Supplemental Earnings Measures - Funds From Operations” below for further discussion of FFO. In addition, we regularly evaluate acquisition or disposition proposals and engage from time to time in negotiations for acquisitions or dispositions of properties. We may also enter into letters of intent for the purchase or sale of properties. Any prospective acquisition or disposition that is being evaluated or which is subject to a letter of intent may not be consummated, or if consummated, may not result in an increase in earnings or liquidity.
Unconsolidated Real Estate Joint Ventures
From time to time, we form joint venture arrangements to develop outlet centers. As of June 30, 2022 we have partial ownership interests in six unconsolidated outlet centers totaling approximately 2.1 million square feet, including two outlet centers in Canada. See Note 5 to the consolidated financial statements for details of our individual joint ventures, including, but not limited to, carrying values of our investments, fees we receive for services provided to the joint ventures, recent development and financing transactions and condensed combined summary financial information.
We may elect to fund cash needs of a joint venture through equity contributions (generally on a basis proportionate to our ownership interests), advances or partner loans, although such funding is not typically required contractually or otherwise. We separately report investments in joint ventures for which accumulated distributions have exceeded investments in, and our share of net income or loss of, the joint ventures within other liabilities in the consolidated balance sheets because we are committed and intend to provide further financial support to these joint ventures. We believe our joint ventures will be able to fund their operating and capital needs for the next twelve months based on their sources of working capital, specifically cash flow from operations, access to contributions from partners, and ability to refinance debt obligations, including the ability to exercise upcoming extensions of near term maturities.
Our joint ventures are typically encumbered by a mortgage on the joint venture property. We provide guarantees to lenders for our joint ventures which include standard non-recourse carve out indemnifications for losses arising from items such as but not limited to fraud, physical waste, payment of taxes, environmental indemnities, misapplication of insurance proceeds or security deposits and failure to maintain required insurance. A default by a joint venture under its debt obligations may expose us to liability under the guaranty. For construction and mortgage loans, we may include a guaranty of completion as well as a principal guaranty ranging from 0% to 17% of principal. The principal guarantees include terms for release based upon satisfactory completion of construction and performance targets including occupancy thresholds and minimum debt service coverage tests. Our joint ventures may contain make whole provisions in the event that demands are made on any existing guarantees.
Our joint ventures are generally subject to buy-sell provisions which are customary for joint venture agreements in the real estate industry. Either partner may initiate these provisions (subject to any applicable lock up period), which could result in either the sale of our interest or the use of available cash or additional borrowings to acquire the other party's interest. Under these provisions, one partner sets a price for the property, then the other partner has the option to either (1) purchase their partner's interest based on that price or (2) sell its interest to the other partner based on that price. Since the partner other than the partner who triggers the provision has the option to be the buyer or seller, we do not consider this arrangement to be a mandatory redeemable obligation.
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Contractual Obligations
There were no material changes in our commitments during the six months ended June 30, 2022 under contractual obligations from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, other than the following updates to our contractual obligations for future debt and interest payments over the next five years and thereafter as of June 30, 2022.
Future Debt Obligations
As described further in Note 7 of the notes to the consolidated financial statements, as of June 30, 2022, scheduled maturities of our existing long-term debt for the remainder of 2022, 2023, 2024, 2025 and 2026 are $2.3 million, $44.9 million, $305.1 million, $1.5 million and $355.7 million, respectively. As of June 30, 2022, scheduled maturities after 2026 aggregate to $700.0 million.
Future Interest Payments
We are obligated to make periodic interest payments at fixed and variable rates, depending on the terms of the applicable debt agreements. Based on applicable interest rates and scheduled debt maturities as of June 30, 2022, these interest obligations total approximately $198.3 million and range from approximately $17.3 million to $40.4 million on an annual basis over the next five years. If prevailing interest rates continue to rise, then future interest payments related to our variable debt outstanding would increase.
Cash Flows
The following table sets forth our changes in cash flows from June 30, 2022 and 2021 (in thousands):
Six months ended June 30,
2022 2021 Change
Net cash provided by operating activities $ 89,196 $ 91,279 $ (2,083)
Net cash provided by (used in) investing activities (8,095) 4,009 (12,104)
Net cash used in financing activities (48,018) (72,761) 24,743
Effect of foreign currency rate changes on cash and equivalents (27) (73) 46
Net increase (decrease) in cash and cash equivalents $ 33,056 $ 22,454 $ 10,602
Operating Activities
In 2022, our net cash provided by operating activities decreased year over year primarily due to changes in working capital. The decrease was partially offset by an increase in rental revenues primarily due an increase in occupancy rates, variable rental revenues and reversals of revenue reserves.
Investing Activities
The decrease in net cash provided by (used in) investing activities was primarily due to the purchase of land at our new center in Nashville, Tennessee, paired with increased additions to rental properties in the 2022 period. The 2021 period included net proceeds of approximately $8.1 million received in 2021 from the sale of our Jeffersonville outlet center, while the 2022 period included lower distributions in excess of cumulative earnings from unconsolidated joint ventures and lower other investing activities. In addition, we made a $7.0 million contribution to the Galveston/Houston joint venture in 2021 to reduce the principal balance of the mortgage loan. No property sales or contributions to joint ventures occurred in 2022. The above changes were all partially offset by net proceeds on the sale of non-real estate assets of $14.6 million that occurred in 2022.
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Financing Activities
Net cash used in financing activities decreased during the first six months of 2022 primarily due to 2021 activity that included a partial redemption of $150.0 million aggregate principal amount of our $250.0 million 3.875% senior notes due December 2023, for $163.0 million in cash, which included a make-whole premium of $13.0 million. In addition, in March 2021 and June 2021, we paid down a total of $50.0 million of borrowings under our unsecured term loan with cash on hand. These decreases were partially offset by the proceeds from our common share offering of $180.9 million in 2021 under our ATM offering program. Additionally, for the six months ended June 30, 2022, there was an increase in dividends paid.
Financing Arrangements
As of June 30, 2022, unsecured borrowings represented 96% of our outstanding debt and 92% of the gross book value of our real estate portfolio was unencumbered. The Company guarantees the Operating Partnership’s obligations under our lines of credit.
As of June 30, 2022, we maintained unsecured lines of credit that provided for borrowings of up to $520.0 million. The unsecured lines of credit as of June 30, 2022 included a $20.0 million liquidity line and a $500.0 million syndicated line. The syndicated line may be increased up to $1.2 billion through an accordion feature in certain circumstances.
We intend to retain the ability to raise additional capital, including public debt or equity, to pursue attractive investment opportunities that may arise and to otherwise act in a manner that we believe to be in the best interests of our shareholders and unitholders. The Company and Operating Partnership are well-known seasoned issuers with a joint shelf registration statement on Form S-3, expiring in February 2024, that allows us to register unspecified amounts of different classes of securities. To generate capital to reinvest into other attractive investment opportunities, we may also consider the use of additional operational and developmental joint ventures, the sale or lease of outparcels on our existing properties and the sale of certain properties that do not meet our long-term investment criteria. Based on cash provided by operations, existing lines of credit, ongoing relationships with certain financial institutions and our ability to sell debt or issue equity subject to market conditions, we believe that we have access to the necessary financing to fund the planned capital expenditures for at least the next twelve months.
We anticipate that adequate cash will be available to fund our operating and administrative expenses, regular debt service obligations, and the payment of dividends in accordance with REIT requirements in both the short and long-term. Although we receive most of our rental payments on a monthly basis, distributions to shareholders and unitholders are typically made quarterly and interest payments on the senior, unsecured notes are made semi-annually. Amounts accumulated for such payments will be used in the interim to reduce the outstanding borrowings under our existing unsecured lines of credit or invested in short-term money market or other suitable instruments.
The extent to which the COVID-19 pandemic continues to impact our financial condition, results of operations and cash flows will depend on future developments which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, the timing or effectiveness of any vaccines or treatments, and the direct and indirect economic effects of the pandemic and containment measures, among others.
As of June 30, 2022, the Company’s total liquidity was approximately $714.2 million, including cash and cash equivalents on the Company’s balance sheet and the full undrawn capacity under its $520 million unsecured lines of credit. We expect to have sufficient liquidity to meet our obligations for at least the next twelve months.
We believe our current balance sheet position is financially sound; however, due to the economic uncertainty caused by the COVID-19 pandemic, rising interest rates and inflation, and the inherent uncertainty and unpredictability of the capital and credit markets, we can give no assurance that affordable access to capital will exist between now and when our next significant debt matures, which is our unsecured term loan due April 2024.
Equity Offerings under the ATM Offering Program
In February 2021, the Company established the ATM Offering program whereby it may offer and sell the Company's common shares having an aggregate gross sales price of up to $250.0 million. During 2021, under this program, the Company sold 10.0 million shares at a weighted average price of $18.97 per share, generating net proceeds of $187.1 million and leaving a remaining authorization of $60.1 million. The proceeds were contributed to the Operating Partnership and then used primarily to reduce indebtedness as described in the sections immediately below. There were no shares sold under the ATM program for the three and six months ended June 30, 2022.
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Debt Covenants
The Operating Partnership’s debt agreements require the maintenance of certain ratios, including debt service coverage and leverage, and limit the payment of dividends such that dividends and distributions will not exceed funds from operations, as defined in the agreements, for the prior fiscal year on an annual basis or 95% on a cumulative basis.
We have historically been, and at June 30, 2022 are, in compliance with all of our debt covenants. Our continued compliance with these covenants depends on many factors and could be impacted by current or future economic conditions, including those associated with the COVID-19 pandemic. Failure to comply with these covenants would result in a default which, if we were unable to cure or obtain a waiver from the lenders, could accelerate the repayment obligations. Further, in the event of default, the Company may be restricted from paying dividends to its shareholders in excess of dividends required to maintain its REIT qualification. Accordingly, an event of default could have a material and adverse impact on us. As a result, we have considered our short-term (one year or less from the date of filing these financial statements) liquidity needs and the adequacy of our estimated cash flows from operating activities and other financing sources to meet these needs. These other sources include but are not limited to: existing cash, ongoing relationships with certain financial institutions, our ability to sell debt or issue equity subject to market conditions and proceeds from the potential sale of non-core assets. We believe that we have access to the necessary financing to fund our short-term liquidity needs.
As of June 30, 2022, we believe our most restrictive covenants are contained in our senior, unsecured notes. Key financial covenants and their covenant levels, which are calculated based on contractual terms, include the following:
Senior unsecured notes financial covenants Required Actual
Total consolidated debt to adjusted total assets < 60% 41 %
Total secured debt to adjusted total assets < 40% 2 %
Total unencumbered assets to unsecured debt > 150% 236 %
Consolidated Income Available for Debt Service to Annual Debt Service Charge > 1.5 x 5.7
In addition, key financial covenants for our lines of credit and term loan, include the following as of June 30, 2022:
Required Actual
Total Liabilities to Total Adjusted Asset Value <60% 37 %
Secured Indebtedness to Adjusted Unencumbered Asset Value < 35% 5 %
EBITDA to Fixed Charges > 1.5 x 4.5
Total Unsecured Indebtedness to Adjusted Unencumbered Asset Value <60% 33 %
Unencumbered Interest Coverage Ratio > 1.5 x 5.5
Depending on the future economic impact of COVID-19, other covenants related to credit facilities, term loans, and other debt obligations could become one of our most restrictive covenants.
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Debt of unconsolidated joint ventures
The following table details information regarding the outstanding debt of the unconsolidated joint ventures and guarantees of such debt provided by us as of June 30, 2022 (dollars in millions):
Joint Venture Total Joint
Venture Debt Maturity Date Interest Rate Percent Guaranteed by the Operating Partnership Maximum Guaranteed Amount by the Company
Charlotte $ 100.0 July 2028 4.27% — % $ —
Columbus 71.0 November 2022 LIBOR + 1.85% 16.8 % 11.9
Galveston/Houston 64.5 July 2023 LIBOR + 1.85% 15.5 % 10.0
National Harbor 95.0 January 2030 4.63 % — % —
Debt origination costs (1.0)
$ 329.5 $ 21.9
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material. Management believes the Company’s critical accounting estimates are those related to impairment of long-lived assets, impairment of investments, revenue recognition and collectibility of operating lease receivables. Management considers these estimates critical because they are both important to the portrayal of the Company’s financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters. The Company’s senior management has reviewed these critical accounting estimates and related disclosures with the Audit Committee of the Company’s Board of Directors.
Our Annual Report on Form 10-K for the year ended December 31, 2021 contains a discussion of our critical accounting estimates in the Management's Discussion and Analysis of Financial Condition and Results of Operations section. There have been no material changes to these estimates during the three months and six months ended June 30, 2022, other than discussed below.
Revenue recognition and collectibility of operating lease receivables
We, as a lessor, retain substantially all of the risks and benefits of ownership of our outlet centers and account for our leases as operating leases. We accrue fixed lease income on a straight-line basis over the terms of the leases, when we believe substantially all lease income, including the related straight-line rent receivable, is probable of collection. Our assessment of collectability requires the exercise of considerable judgment and incorporates available operational performance measures such as sales and the aging of billed amounts as well as other publicly available information with respect to our tenant’s financial condition, liquidity and capital resources, including declines in such conditions due to, or amplified by, the COVID-19 pandemic. When a tenant seeks to reorganize its operations through bankruptcy proceedings, we assess the collectability of receivable balances including, among other things, the timing of a tenant’s bankruptcy filing and our expectations of the assumption by the tenant in bankruptcy proceeding of leases at the Company’s properties on substantially similar terms. In the event that we determine accrued receivables are not probable of collection, lease income will be recorded on a cash basis, with the corresponding tenant receivable and straight-line rent receivable charged as a direct write-off against lease income in the period of the change in our collectability determination.
Recent Accounting Pronouncements
See Note 19 to the consolidated financial statements for information on recently adopted accounting standards and new accounting pronouncements issued.
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NON-GAAP SUPPLEMENTAL MEASURES
Funds From Operations
Funds From Operations (“FFO”) is a widely used measure of the operating performance for real estate companies that supplements net income (loss) determined in accordance with GAAP. We determine FFO based on the definition set forth by the National Association of Real Estate Investment Trusts (“NAREIT”), of which we are a member. In December 2018, NAREIT issued “NAREIT Funds From Operations White Paper - 2018 Restatement” which clarifies, where necessary, existing guidance and consolidates alerts and policy bulletins into a single document for ease of use. NAREIT defines FFO as net income (loss) available to the Company’s common shareholders computed in accordance with GAAP, excluding (i) depreciation and amortization related to real estate, (ii) gains or losses from sales of certain real estate assets, (iii) gains and losses from change in control, (iv) impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity and (v) after adjustments for unconsolidated partnerships and joint ventures calculated to reflect FFO on the same basis.
FFO is intended to exclude historical cost depreciation of real estate as required by GAAP which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO excludes depreciation and amortization of real estate assets, gains and losses from property dispositions and extraordinary items, it provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities and interest costs, providing perspective not immediately apparent from net income (loss).
We present FFO because we consider it an important supplemental measure of our operating performance. In addition, a portion of cash bonus compensation to certain members of management is based on our FFO or Core FFO, which is described in the section below. We believe it is useful for investors to have enhanced transparency into how we evaluate our performance and that of our management. In addition, FFO is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. FFO is also widely used by us and others in our industry to evaluate and price potential acquisition candidates. We believe that FFO payout ratio, which represents regular distributions to common shareholders and unit holders of the Operating Partnership expressed as a percentage of FFO, is useful to investors because it facilitates the comparison of dividend coverage between REITs. NAREIT has encouraged its member companies to report their FFO as a supplemental, industry-wide standard measure of REIT operating performance.
FFO has significant limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
• FFO does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
• FFO does not reflect changes in, or cash requirements for, our working capital needs;
• Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and FFO does not reflect any cash requirements for such replacements; and
• Other companies in our industry may calculate FFO differently than we do, limiting its usefulness as a comparative measure.
Because of these limitations, FFO should not be considered as a measure of discretionary cash available to us to invest in the growth of our business or our dividend paying capacity. We compensate for these limitations by relying primarily on our GAAP results and using FFO only as a supplemental measure.
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Core FFO
If applicable, we present Core Funds From Operations (“Core FFO”) as a supplemental measure of our performance. We define Core FFO as FFO further adjusted to eliminate the impact of certain items that we do not consider indicative of our ongoing operating performance. These further adjustments are itemized in the table below, if applicable. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Core FFO you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Core FFO should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
We present Core FFO because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we believe it is useful for investors to have enhanced transparency into how we evaluate management’s performance and the effectiveness of our business strategies. We use Core FFO when certain material, unplanned transactions occur as a factor in evaluating management’s performance and to evaluate the effectiveness of our business strategies, and may use Core FFO when determining incentive compensation.
Core FFO has limitations as an analytical tool. Some of these limitations are:
• Core FFO does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
• Core FFO does not reflect changes in, or cash requirements for, our working capital needs;
• Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Core FFO does not reflect any cash requirements for such replacements;
• Core FFO does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; and
• Other companies in our industry may calculate Core FFO differently than we do, limiting its usefulness as a comparative measure.
Because of these limitations, Core FFO should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using Core FFO only as a supplemental measure.
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Below is a reconciliation of net income to FFO and Core FFO available to common shareholders (in thousands, except per share amounts):
Three months ended Six months ended
June 30, June 30,
2022 2021 2022 2021
Net income $ 20,819 $ 2,596 $ 42,281 $ 6,938
Adjusted for:
Depreciation and amortization of real estate assets - consolidated 25,615 27,185 51,276 54,739
Depreciation and amortization of real estate assets - unconsolidated joint ventures 2,791 2,913 5,545 5,909
Loss on sale of joint venture property, including foreign currency effect (1)
— — — 3,704
FFO 49,225 32,694 99,102 71,290
Allocation of earnings to participating securities (424) (302) (858) (694)
FFO available to common shareholders (2)
$ 48,801 $ 32,392 $ 98,244 $ 70,596
As further adjusted for:
Compensation related to voluntary retirement plan and other executive severance (3)
2,447 — 2,447 2,418
Gain on sale of non-real estate asset (4)
(2,418) — (2,418) —
Loss on early extinguishment of debt (5)
— 14,039 — 14,039
Impact of above adjustment to the allocation of earnings to participating securities — (106) — (128)
Core FFO available to common shareholders (2)
$ 48,830 $ 46,325 $ 98,273 $ 86,925
FFO available to common shareholders per share - diluted (2)
$ 0.45 $ 0.30 $ 0.90 $ 0.68
Core FFO available to common shareholders per share - diluted (2)
$ 0.45 $ 0.43 $ 0.90 $ 0.84
Weighted Average Shares:
Basic weighted average common shares 103,630 100,409 103,607 97,504
Effect of notional units 421 818 413 685
Effect of outstanding options and restricted common shares 703 771 720 728
Diluted weighted average common shares (for earnings per share computations) 104,754 101,998 104,740 98,917
Exchangeable operating partnership units 4,762 4,795 4,762 4,795
Diluted weighted average common shares (for FFO per share computations) (2)
109,516 106,793 109,502 103,712
(1) Includes a $3.6 million charge related to the foreign currency effect of the sale of the Saint-Sauveur, Quebec property by the RioCan joint venture in March 2021.
(2) Assumes the Class A common limited partnership units of the Operating Partnership held by the noncontrolling interests are exchanged for common shares of the Company. Each Class A common limited partnership unit is exchangeable for one of the Company’s common shares, subject to certain limitations to preserve the Company’s REIT status.
(3) For the 2022 period, represents executive severance costs. For the 2021 period, includes compensation costs related to a voluntary retirement plan offer that required eligible participants to give notice of acceptance by December 1, 2020 for an effective retirement date of March 31, 2021 and other executive severance costs.
(4) Represents gain on sale of the corporate aircraft.
(5) In April 2021, the Company completed a partial redemption of $150.0 million aggregate principal amount of its $250.0 million 3.875% senior notes due December 2023, for $163.0 million in cash. The loss on extinguishment of debt includes a make-whole premium of $13.0 million.
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Portfolio Net Operating Income and Same Center Net Operating Income
We present portfolio net operating income (“Portfolio NOI”) and same center net operating income (“Same Center NOI”) as supplemental measures of our operating performance. Portfolio NOI represents our property level net operating income which is defined as total operating revenues less property operating expenses and excludes termination fees and non-cash adjustments including straight-line rent, net above and below market rent amortization, impairment charges, loss on early extinguishment of debt and gains or losses on the sale of assets recognized during the periods presented. We define Same Center NOI as Portfolio NOI for the properties that were operational for the entire portion of both comparable reporting periods and which were not acquired, or subject to a material expansion or non-recurring event, such as a natural disaster, during the comparable reporting periods. We present Portfolio NOI and Same Center NOI on both a consolidated and total portfolio, including pro rata share of unconsolidated joint ventures, basis.
We believe Portfolio NOI and Same Center NOI are non-GAAP metrics used by industry analysts, investors and management to measure the operating performance of our properties because they provide performance measures directly related to the revenues and expenses involved in owning and operating real estate assets and provide a perspective not immediately apparent from net income (loss), FFO or Core FFO. Because Same Center NOI excludes properties developed, redeveloped, acquired and sold; as well as non-cash adjustments, gains or losses on the sale of outparcels and termination rents; it highlights operating trends such as occupancy levels, rental rates and operating costs on properties that were operational for both comparable periods. Other REITs may use different methodologies for calculating Portfolio NOI and Same Center NOI, and accordingly, our Portfolio NOI and Same Center NOI may not be comparable to other REITs.
Portfolio NOI and Same Center NOI should not be considered alternatives to net income (loss) or as an indicator of our financial performance since they do not reflect the entire operations of our portfolio, nor do they reflect the impact of general and administrative expenses, acquisition-related expenses, interest expense, depreciation and amortization costs, other non-property income and losses, the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, or trends in development and construction activities which are significant economic costs and activities that could materially impact our results from operations. Because of these limitations, Portfolio NOI and Same Center NOI should not be viewed in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using Portfolio NOI and Same Center NOI only as supplemental measures.
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Below is a reconciliation of net income to Portfolio NOI and Same Center NOI for the consolidated portfolio and total portfolio at pro rata share (in thousands):
Three months ended Six months ended
June 30, June 30,
2022 2021 2022 2021
Net income $ 20,819 $ 2,596 $ 42,281 $ 6,938
Adjusted to exclude:
Equity in earnings of unconsolidated joint ventures (2,227) (2,728) (4,740) (4,497)
Interest expense 11,576 13,338 23,210 27,700
Loss on early extinguishment of debt (1)
— 14,039 — 14,039
Other (income) expense (2,576) (654) (2,759) 2,851
Depreciation and amortization 26,220 27,732 52,463 55,882
Other non-property (income) expense 63 307 234 (93)
Corporate general and administrative expenses 19,328 15,746 34,813 32,517
Non-cash adjustments (2)
(157) 728 1,363 1,571
Lease termination fees (35) (127) (2,631) (800)
Portfolio NOI - Consolidated 73,011 70,977 144,234 136,108
Non-same center NOI - Consolidated
20 (1,562) 83 (1,645)
Same Center NOI - Consolidated (3)
$ 73,031 $ 69,415 $ 144,317 $ 134,463
Portfolio NOI - Consolidated $ 73,011 $ 70,977 $ 144,234 $ 136,108
Pro rata share of unconsolidated joint ventures 6,804 6,871 13,707 12,952
Portfolio NOI - total portfolio at pro rata share 79,815 77,848 157,941 149,060
Non-same center NOI - total portfolio at pro rata share 20 (1,900) 83 (1,985)
Same Center NOI - total portfolio at pro rata share (3)
$ 79,835 $ 75,948 $ 158,024 $ 147,075
(1) In April 2021, the Company completed a partial redemption of $150.0 million aggregate principal amount of its $250.0 million 3.875% senior notes due December 2023, for $163.0 million in cash. The loss on extinguishment of debt includes a make-whole premium of $13.0 million.
(2) Non-cash items include straight-line rent, above and below market rent amortization, straight-line rent expense on land leases and gains or losses on outparcel sales, as applicable.
(3) Sold outlet centers excluded from Same Center NOI:
Outlet centers sold:
Jeffersonville January 2021 Consolidated
Saint-Sauveur, Quebec March 2021 Unconsolidated JV
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Adjusted EBITDA, EBITDAre and Adjusted EBITDAre
We present Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) as adjusted for items described below (“Adjusted EBITDA”), EBITDA for Real Estate (“EBITDAre”) and Adjusted EBITDAre, all non-GAAP measures, as supplemental measures of our operating performance. Each of these measures is defined as follows:
We define Adjusted EBITDA as net income (loss) available to the Company’s common shareholders computed in accordance with GAAP before interest expense, income taxes (if applicable), depreciation and amortization, gains and losses on sale of operating properties, joint venture properties, outparcels and other assets, impairment write-downs of depreciated property and of investment in unconsolidated joint ventures caused by a decrease in value of depreciated property in the affiliate, compensation related to voluntary retirement plan and other executive officer severance, gain on sale of non-real estate asset, casualty gains and losses, gains and losses on early extinguishment of debt, net and other items that we do not consider indicative of the Company's ongoing operating performance.
We determine EBITDAre based on the definition set forth by NAREIT, which is defined as net income (loss) available to the Company’s common shareholders computed in accordance with GAAP before interest expense, income taxes (if applicable), depreciation and amortization, gains and losses on sale of operating properties, gains and losses on change of control and impairment write-downs of depreciated property and of investment in unconsolidated joint ventures caused by a decrease in value of depreciated property in the affiliate and after adjustments to reflect our share of the EBITDAre of unconsolidated joint ventures.
Adjusted EBITDAre is defined as EBITDAre excluding gains and losses on early extinguishment of debt, net, casualty gains and losses, compensation related to voluntary retirement plan and other executive officer severance, gain on sale of non-real estate asset, casualty gains and losses, gains and losses on sale of outparcels, and other items that that we do not consider indicative of the Company's ongoing operating performance.
We present Adjusted EBITDA, EBITDAre and Adjusted EBITDAre as we believe they are useful for investors, creditors and rating agencies as they provide additional performance measures that are independent of a Company’s existing capital structure to facilitate the evaluation and comparison of the Company’s operating performance to other REITs and provide a more consistent metric for comparing the operating performance of the Company’s real estate between periods.
Adjusted EBITDA, EBITDAre and Adjusted EBITDAre have significant limitations as analytical tools, including:
• They do not reflect our interest expense;
• They do not reflect gains or losses on sales of operating properties or impairment write-downs of depreciated property and of investment in unconsolidated joint ventures caused by a decrease in value of depreciated property in the affiliate;
• Adjusted EBITDA and Adjusted EBITDAre do not reflect gains and losses on extinguishment of debt and other items that may affect operations; and
• Other companies in our industry may calculate these measures differently than we do, limiting its usefulness as a comparative measure.
Because of these limitations, Adjusted EBITDA, EBITDAre and Adjusted EBITDAre should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA, EBITDAre and Adjusted EBITDAre only as supplemental measures.
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Below is a reconciliation of Net Income to Adjusted EBITDA (in thousands):
Three months ended Six months ended
June 30, June 30,
2022 2021 2022 2021
Net income $ 20,819 $ 2,596 $ 42,281 $ 6,938
Adjusted to exclude:
Interest expense 11,576 13,338 23,210 27,700
Depreciation and amortization 26,220 27,732 52,463 55,882
Loss on sale of joint venture property, including foreign currency effect (1)
— — — 3,704
Compensation related to voluntary retirement plan and other executive severance (2)
2,447 — 2,447 2,418
Gain on sale of non-real estate asset (3)
(2,418) — (2,418) —
Loss on early extinguishment of debt (4)
— 14,039 — 14,039
Adjusted EBITDA $ 58,644 $ 57,705 $ 117,983 $ 110,681
Below is a reconciliation of Net Income to EBITDAre and Adjusted EBITDAre (in thousands):
Three months ended Six months ended
June 30, June 30,
2022 2021 2022 2021
Net income $ 20,819 $ 2,596 $ 42,281 $ 6,938
Adjusted to exclude:
Interest expense 11,576 13,338 23,210 27,700
Depreciation and amortization 26,220 27,732 52,463 55,882
Loss on sale of joint venture property, including foreign currency effect (1)
— — — 3,704
Pro-rata share of interest expense - unconsolidated joint ventures 1,579 1,455 3,037 2,928
Pro-rata share of depreciation and amortization - unconsolidated joint ventures 2,791 2,913 5,545 5,909
EBITDAre $ 62,985 $ 48,034 $ 126,536 $ 103,061
Compensation related to voluntary retirement plan and other executive officer severance (2)
2,447 — 2,447 2,418
Gain on sale of non-real estate asset (3)
(2,418) — (2,418) —
Loss on early extinguishment of debt (4)
— 14,039 — 14,039
Adjusted EBITDAre $ 63,014 $ 62,073 $ 126,565 $ 119,518
(1) Includes a $3.6 million charge related to the foreign currency effect of the sale of the Saint-Sauveur, Quebec property by the RioCan joint venture in March 2021.
(2) For the 2022 period, represents executive severance costs. For the 2021 period, includes compensation costs related to a voluntary retirement plan offer that required eligible participants to give notice of acceptance by December 1, 2020 for an effective retirement date of March 31, 2021 and other executive severance costs.
(3) Represents gain on sale of the corporate aircraft.
(4) In April 2021, we completed a partial redemption of $150.0 million aggregate principal amount of our $250.0 million 3.875% senior notes due December 2023, for $163.0 million in cash. The loss on extinguishment of debt includes a make-whole premium of $13.0 million.
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ECONOMIC CONDITIONS AND OUTLOOK
We are closely monitoring the impact of the COVID-19 pandemic, along with rising inflation, supply chain and labor issues, and rising interest rates on all aspects of our business and geographies, including how it will impact our tenants and business partners.
The majority of our leases contain provisions designed to mitigate the impact of inflation. Such provisions include clauses for the escalation of base rent and clauses enabling us to receive percentage rentals based on tenants’ gross sales (above predetermined levels) which generally increase as prices rise. A component of most leases includes a pro-rata share or escalating fixed contributions by the tenant for property operating expenses, including common area maintenance, real estate taxes, insurance and advertising and promotion, thereby reducing exposure to increases in costs and operating expenses resulting from inflation.
A portion of our rental revenues are derived from rents that directly depend on the sales volume of certain tenants. Accordingly, declines in these tenants’ sales would reduce the income produced by our properties. If the sales or profitability of our retail tenants decline sufficiently, whether due to a change in consumer preferences, health concerns, legislative changes that increase the cost of their operations or otherwise, such tenants may be unable to pay their existing rents as such rents would represent a higher percentage of their sales.
In addition, certain of our lease agreements include co-tenancy and/or sales-based provisions that may allow a tenant to pay reduced rent and/or terminate a lease prior to its natural expiration if we fail to maintain certain occupancy levels or retain specified named tenants, or if the tenant does not achieve certain specified sales targets. If our occupancy declines, certain outlet centers may fall below the minimum co-tenancy thresholds and could trigger many tenants' contractual ability to pay reduced rents, which in turn may negatively impact our results of operations.
Our outlet centers typically include well-known, national, brand name companies. By maintaining a broad base of well-known tenants and a geographically diverse portfolio of properties located across the United States, we believe we reduce our operating and leasing risks. As of June 30, 2022 no one tenant (including affiliates) accounts for more than 8% of our square feet or 6% of our rental revenues.
Due to the relatively short-term nature of our tenants’ leases, a significant portion of the leases in our portfolio come up for renewal each year. During 2022, approximately 2.1 million square feet, or 17% of the total portfolio, including our share of unconsolidated joint ventures, will come up for renewal. For the total portfolio, including the Company’s pro rata share of unconsolidated joint ventures, as of July 31, 2022, we had lease renewals executed or in process for 66.4% of the space scheduled to expire during 2022 compared to 59.8% of the space scheduled to expire during 2021 that was executed or in process as of July 31, 2021.
The current challenging retail environment has impacted our business as our operations are subject to the operating results and operating decisions of our retail tenants. We are encouraged by the recent improvement in traffic and sales trends, which in many cases are exceeding 2019 levels. However, many retailers across the country are currently facing, or expect to face, potential impact of rising inflation, logistics and staffing issues. While we believe many of these retailers are proactively navigating this situation, the ultimate impact of inflation, labor and supply chain issues is unknown.
We may continue to experience pressure from current vacancies, potential additional store closures and potential rent modifications. As is typical in the retail industry, certain tenants have closed, or will close, certain stores by terminating their lease prior to its contractual expiration or as a result of filing for protection under bankruptcy laws, or may request modifications to their existing lease terms.
We believe outlet stores will continue to be a profitable and fundamental distribution channel for many brand name manufacturers. While we continue to attract and retain additional tenants, if we were unable to successfully renew or re-lease a significant amount of this space on favorable economic terms or in a timely manner, our Same Center NOI could be negatively impacted. As a result of COVID-19, inflation, rising interest rates, and other current or future economic conditions, occupancy could be negatively impacted. Occupancy for our total portfolio, including our share of unconsolidated joint ventures, was 94.9% and 93.2% as of June 30, 2022 and 2021, respectively.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.