Tanger Inc

SWB:T6O

Earnings Call Analysis

Company Increases 2023 Guidance on Strong Q2

The company announced higher than expected Q2 results, raising its 2023 guidance due to strong leasing activity and occupancy gains. The strategic plan led to a 4.3% increase in same-center NOI, occupancy rates reached 97.2%, and rental rates grew by 13.2%. Renewals accounted for 64% of expiring leases, matching the previous year, signaling a commitment from retailers. They have highlighted the success in their re-tenanting strategy, seeing a 30.9% increase in re-tenanting spreads and a 12.1% increase in renewal rent spreads. The company's financial position is solid, expecting a 7.5% to 8% stabilized yield from the Nashville project and projecting core FFO at $1.85 to $1.92 per share, with same-center NOI growth range raised to 3.5% to 5%. The anticipated recurring CapEx for 2023 has been reduced to a range of $45 million to $55 million, signaling efficient capital management.

Solid Growth and Strategic Confidence Amid Economic Pressures

In the recent earnings call, the company reported a notable same center Net Operating Income (NOI) increase of 4.3% for the second quarter, representing a better-than-anticipated performance which led to heightened full-year guidance. This is accompanied by the highest occupancy rate since before the pandemic at 97.2%, a boost of 230 basis points year-over-year, adding to the firm’s powerful market position while also emphasizing a leasing strategy focused on higher fixed rents. This strategy seems to be paying off as blended average rental rates surged 13.2% over the trailing 12 months ending June 30, 2023.

Robust Leasing Dynamics Signaling Retailer Commitment

The earnings report also highlighted substantial growth in re-tenanting spreads by 30.9% and renewal rent spreads by 12.1%, indicating strong retailer confidence in the company’s branded open-air portfolio and allowing the company to realize significant rent upside. Lease renewals executed or in process accounted for an impressive 64% of leases set to expire this year, mirroring the previous year’s figure and reflecting a proactive approach towards future rollovers into 2024.

Balanced Operational Efficiency with ESG Commitment

Operational metrics revealed an increased occupancy cost ratio from 8.5% to 9%, a level that remains competitive in the industry. The slight dip in traffic and a focus on optimizing tenant performance underline the company's ongoing strategies to enhance portfolio NOI. In addition to these operational strategies, the company takes pride in its commitment to environmental sustainability and a people-first culture, factors increasingly important to investors.

Expansion and Customer Engagement Initiatives

Adding to its growth narrative, a new shopping center, Tanger Nashville, is set to open with 95% of its leases executed, reinforcing the company's expansion capabilities and commitment to providing a diverse tenant mix. Coupled with this, the company is honing its marketing through the launch of a new digital-first loyalty program, aimed at driving customer engagement and retailer interaction by offering tailored shopping experiences and rewards.

Strategic Outlook amidst Macroeconomic Pressures

Amidst ongoing macroeconomic uncertainties, the firm has reiterated confidence in its foundational strategy, which focuses on organic growth, portfolio renewal, diversification, and leveraging its strong balance sheet to pursue growth opportunities such as shopping center expansions.

Financial Performance and Dividend Sustainability

Financial performance exceeded expectations with core Funds From Operations (FFO) reaching $0.47 per share versus the prior year's $0.45. A standout feature of the company's financial health is its well-covered cash dividend, sustained by a low payout ratio that frees up cash for further growth investments.

Forward-Looking Projections and Guidance Adjustments

Anticipating continuous success, the projected stabilized yield for new projects has been improved by 50 basis points to a range of 7.5% to 8%, largely due to effective leasing activities and a strong outlook for the center. Reflecting this optimism and the solid second-quarter results, the company raised its core FFO forecast to a new range of $1.85 to $1.92 per share, and increased same center NOI growth expectations to 3.5% to 5%.

Earnings Call Transcript 2023-Q2

[Ashley Curtis, Assistant VP, IR]

Good morning. This is Ashley Curtis, and I would like to welcome you to the Tanger Factory Outlet Centers Second Quarter 2023 Conference Call. Yesterday evening, we issued our earnings release as well as our supplemental information package and investor presentation. This information is available on our Investor Relations website, investors.tanger.com.

Please note that during this conference call, some of management's comments will be forward-looking statements that are subject to numerous risks and uncertainties, and actual results could differ materially from those projected. We direct you to our filings with the Securities and Exchange Commission for a detailed discussion of these risks and uncertainties.

During the call, we will also discuss non-GAAP financial measures as defined by SEC Regulation G, including funds from operations or FFO, Core FFO, funds available for distribution, or FAD, same-center net operating income, adjusted EBITDAre and net debt. Reconciliations of these non-GAAP measures to the most directly comparable GAAP financial measures are included in our earnings release and in our supplemental information.

This call is being recorded for rebroadcast for a period of time in the future. As such, it is important to note that management's comments include time-sensitive information that may only be accurate as of today's date, August 4, 2023. At this time, all participants are in listen-only mode. Following management's prepared comments the call will be opened for your question. [Operator Instructions].

On the call today will be Steven Tanger, our Executive Chair; Stephen Yalof, President and Chief Executive Officer; and Michael Bilerman, Executive Vice President, Chief Financial Officer and Chief Investment Officer. In addition, other members of our leadership team will be available for Q&A.

I will now turn the call over to Steven Tanger. Please go ahead, Steve.

[Steven Tanger, Executive Chair]

Good morning, and thank you for joining us for our second quarter 2023 earnings call.

The team continues to unlock the value of the Tanger platform to drive attractive organic and external growth. We look forward to the opening of our newest center in Nashville, Tennessee and we remain confident in our outlook.

I will now turn the call over to Steve Yalof.

[Stephen Yalof, President and CEO]

Thanks, Steve, and good morning.

We're pleased to announce another quarter of strong results that demonstrate the continued execution of our strategic plan to elevate and diversify our tenant mix, drive total rents and leverage our platform and balance sheet to realize additional growth. We delivered a same center NOI increase of 4.3% for the second quarter, which was better than anticipated and contributed to our increased guidance for the full year.

Leasing activity continues to be a highlight. The successful execution of our leasing strategy has enabled us to rebuild occupancy, drive rent expense recovery growth and curate a portfolio with sought after brands that create an experience, shoppers seek.

In the second quarter, we marked our 6th consecutive quarter of positive lease spreads and another quarter of occupancy gains. Occupancy stood at 97.2% on June 30 up 230 basis points year-over-year and 70 basis points sequentially giving us our highest occupancy since pre-COVID.

As we discussed our leasing strategy incorporates a commitment to locking in higher fixed rents and expense recoveries. Blended average rental rates increased 13.2% to the trailing 12 months ending June 30, 2023. Re-tenanting spreads grew 30.9% and renewal rent spreads grew 12.1%. Our ability to drive solid increases in renewal rents is the clearest demonstration of our retailers' commitment to our Tanger branded open air portfolio, allowing us to capture rent upside.

As of the end of the second quarter, renewals executed or in process represented 64% of leases expiring this year consistent with last year. And we are actively addressing our role to 2024. We have rebuilt our occupancy, grown our rents and are confident in our ability to sustain this growth. We have prioritized diversifying our tenant mix and continue to add new brands to our portfolio.

One example is in San Marcos, Texas, We have recently opened multiple home furnishing brands, including restoration hardware, design within reach, West Elm and Wayfair. This newly created outlet furniture destination coupled with the recent opening of Shake Shack has proven a great generator of traffic to our center delivering on our mission to draw a new customers and have been stay longer when they visit.

Our continued focus on adding new brands and converting temporary spaced permanent has contributed to our occupancy gains in the quarter. We will continue to strategically utilize our 10th leasing strategy to introduce new tenants to the portfolio with the objective of filling our centers with the most compelling brands overtime.

Furthermore, we've increased our occupancy cost ratio by 50 basis points from the prior period from 8.5% to 9% which is still one of the lowest in the industry supporting our confidence in our ability to continue to grow rest. We continue to focus on enhancing our portfolio NOI by reducing or downsizing underperforming tenants and optimizing highly productive brands across our portfolio to achieve maximum productivity. Traffic was largely in line with the prior year quarter and we saw a slight decline in average tenant sales.

In the second quarter, our shoppers gravitated to brands that provided better promotions and everyday value pricing consistent with our outlet model. The introduction of our new Tanger Loyalty Program launched last month with a strong start as members of our Tanger Club can enjoy even greater value across the participating store network.

Our new digital first loyalty program provides for our customized experience and retail offers specifically tailored to each member's interests and enables them to unlock rewards for increasing levels of purchases and engagement. This program also provides an opportunity for us to better interact with our retailer partners and for retailers to drive visits from these valuable shoppers by delivering targeted offers. I invite each of to join the new Tanger Club to experience it.

In the second quarter, we published our latest ESG report. We remain committed to reducing our environmental impact cultivating a people first employee culture and fostering healthier, more resilient communities where we do business. In the report, we highlighted some of our 2022 achievements, including doubling our solar infrastructure, reducing energy use and greenhouse gas emissions, doubling EV charging capabilities, electrifying 100% of our security fleet of vehicles and certifying over half of our GLA to meet LEED's high standards.

Lastly, I'm extremely pleased to share that Tanger Nashville our 37th Shopping Center will grand open on October 27 of this year. As of today, with just under 90 days until opening, we are currently 95% lease executed with an amazing assortment of the very best national and international fashion accessories, athletic, home furnishing and cosmetic brands many of which are new to Tanger and new to the outlet channel.

Tanger Nashville will also feature a combination of famous national and local iconic food and beverage offerings with indoor and outdoor dining terraces surrounding a half-acre central park community space that serves as the project's centerpiece.

The center will qualify for LEED silver certification. As we look ahead we are aware of the continued macroeconomic pressures but are confident in our proven strategy of driving organic and external growth as we renew and retenant our existing portfolio while diversifying our tenant mix, monetizing our peripheral land, expanding select centers and growing incremental revenue streams. Our people, platform and strong balance sheet provides us opportunity to execute on these initiatives. I want to thank our entire team, our shoppers, retailers and all of our stakeholders for their continued support.

I'd now like to turn the call over to Michael.

[Michael Bilerman, EVP, CFO and Chief Investment Officer]

Thank you, Steve.

Today I'm going to discuss our financial results, which came in ahead of our budget, our strong balance sheet position, our external growth initiatives, and I'm going to end with our increased 2023 guidance.

Our second quarter results came in ahead of our expectations with core FFO of $0.47 per share compared to $0.45 in the prior year period. Same center NOI for the total portfolio increased 4.3% for the quarter and 5.9% year-to-date driven by the gains in occupancy from our robust leasing activity that Steve talked about, strong rent spreads, which have led to higher base rents and higher expense recoveries, as well as the benefits from operating expense efficiencies and the timing of some of our expenditures.

Our operating results reflect our ongoing strategy of structuring leases to grow total rental revenues and higher CAM contributions, while also converting percentage rents to fixed rents. We continue to maintain a conservatively leveraged, well laddered balance sheet with the liquidity and the flexibility to pursue our growth objectives. We have no significant debt maturities until late in 2026, and we've been proactively addressing the February 24, expiration of our current $300 million of interest rate swaps.

At the end of the first quarter, we had $1.6 billion pro rata debt and we had $234 million of cash and cash equivalents and our short-term investments. We also had full availability on our $520 million unsecured lines of credit, which in aggregate provides Tanger with over $750 million of immediate liquidity.

Our net debt to adjusted EBITDAre was 5.2 times for the 12 months ended June 30, were in the lowest in the retail sector and importantly, we are carrying $90 million of incurred costs to-date for Nashville without the commensurate EBITDA, which is going to come on next year.

During the quarter, we are pleased to receive further validation of our balance sheet strength with an investment grade BBB rating from Fitch, which adds to our existing investment grade ratings by both Moody's and S&P. With the addition of this rating, we're going to realize an improved cost of debt with a 25 basis point reduction on our unsecured lines of credit as well as our term loan which is factored into our updated guidance range.

Now in terms of our $300 million of interest rate swaps that will be expiring in February 2024, we have executed attractive forward starting swap agreements, on $125 million of these expirations and we've locked in adjusted SOFR at a rate of 3.4% up from the current swap rate of 0.5%. Our new swaps will start at the expiration of the current swaps next February and carry an average duration of 2.3 years, which would take us into mid-twenty '26. There is no impact from these swaps in 2023. And our next debt maturity isn't until September 2026.

Our quarterly cash dividend remains well covered with a continued low payout ratio providing the company with additional free cash flow after dividends to drive our growth. With our low leverage balance sheet and our strong liquidity position along with the continued free cash flow that we're delivering. We have significant optionality to pursue additional growth opportunities, including expanding our centers, by activating our peripheral land, new development and the acquisitions of Open Air Shopping Centers.

Now in terms of our immediate cash needs, the largest use is the maining funding for our Nashville development. And to-date through the end of the second quarter, we have incurred costs of $89 million against our narrowed cost range of $143 million to $147 million which leaves $56 million to spend at the midpoint and the majority of the, spend will be incurred during the third and fourth quarters.

And we are very pleased to note that, we are also increasing our projected stabilize yield on this project, by 50 basis points to a range of 7.5% to 8% primarily due to our successful leasing activity and forward outlook for the center.

And now turning to our increased 2023 guidance, which reflects the better than anticipated performance in the second quarter and our outlook for the remainder of the year. We are increasing our expectations for core FFO by $0.025 at midpoint to a revise range of $1.85 to $1.92 a share.

We are also increasing the same center NOI growth expectations by 50 basis points at the midpoint to a range 3.5% to 5% and at the increased interest and other income by $2 million at the midpoint as interest rates have remained elevated.

We're also reducing the anticipated recurring CapEx in 2023 to a range of $45 million to $55 million, which is down $5 million at the midpoint largely due to the higher renewal activity, which in turn reduces our second generation tenant allowances. For additional details on our key assumptions, please see our release issued last night.

And now I'd like to open the call up for questions. Operator?

[Operator]

Thank you. [Operator Instructions] Thank you, again. And our first question comes from the line of Greg McGinnis with Scotiabank. Please proceed with your questions.

[Greg McGinnis, Scotiabank]

Hi, good morning. Michael, could you just touch on, the factors that could drive Tanger to the top or bottom end of the guidance range in addition to expectations on full year impact of bad debt and what you guys have seen so far?

[Michael Bilerman, EVP, CFO and Chief Investment Officer]

Sure. Thanks, Greg. So, if you look at the assumptions in the release, really the majority of it is top and bottom range of our same-store guidance and all the other elements, whether it's G&A, interest, interest and other income, that's going to get you to the low and the high end of our guidance range. In terms of bad debt, when we initiated our guidance beginning the year. If you remember, we started the year at $1.80 to $1.88.

We increased that guidance last quarter by $0.02 where we lifted our same-store guidance range by about 75 basis points to the midpoint, and now we've increased guidance again raising that same-store guidance by 50 basis points And we talked about, how we were being prudent in our approach on bad debt, and we continue on that level, as we sit here today, with a low watch list, and we're just mindful of the overall environment.

[Greg McGinnis, Scotiabank]

Okay. Thanks. And just moving on to Nashville real quick. Nice to see that, that 95% lease rate there. Could you touch on the expected initial yield when it opens and what the path to achieving the full 7.5% to 8% stabilized yield looks like in terms of time?

[Michael Bilerman, EVP, CFO and Chief Investment Officer]

Sure. We're really excited about the Nashville execution where the center is going to open in late October, 95% leased. We did increase our stabilized yield by 50 basis points. Based on all the leasing that we've been able to do to-date, and the forward outlook that we see. Coming out of the ground, we still expect as we said in the, I think, last call or maybe in the call before, coming out in the 6% in the 6s as a start.

I remember a few of the dreams, where they said if you build it will they come, there's a lot of marketing and opening our center to ensure the customers know there's new center in town. So there's just that ramp from a marketing expense perspective as well as sales that are going to build over the course of the number of years, building to that stabilized yield of 7.5% to 8%.

[Greg McGinnis, Scotiabank]

Fair. Okay. Final question from me. So based on our math, more than 80% of newly leased GLA in Q2 went to tenants outside the top 25. Just give any color on the new tenants in the portfolio who's growing fastest with you. And any you know, I appreciate you're talking about the furniture, outlet destinations, but is there any other tenants that you can point to, as being ones that you're - proud to have in the portfolio and growing with you faster than others?

[Stephen Yalof, President and CEO]

Yes, sure. I'd love to focus on category, more than retailers themselves, but I'll share some things with you. First of all, just make sure in your numbers, our renewal rates have been extremely high. So a lot of that leasing velocity that you've seen is really our existing tenants voting to stay in our portfolio and pay rent increases averaging around 12% in order to do so. And remember, when we do a lot of that renewals, we do it relatively low capital cost.

With regard to new tenants in the portfolio and tenants that are quite active, a lot of the athletic brands, as you can probably imagine, we've done a number of deals with Adidas in the apparel business, Victoria's Secret has been a big contributor of a lot of the new leasing for us. We talked a lot about the furniture brands. I've listed them in my remarks earlier.

And then at food and beverage, which we've been saying for the last year and a half, two years, has become a far more important part of our business We just opened up our first Shake Shack in Santa Marcos, and we'll have Shake Shack joining us in a number of our other centers moving forward.

So that's just a quick random sampling, just other categories, direct to consumer brands. We're finding a lot of success with direct to consumer brands coming into the outlet channel now and they're growing with us.

So there's a number of brands that we've leased. Their first ever store Sevierville is a great example of a direct to consumer brand, opened their first store in Myrtle Beach and now is expanding with us rapidly throughout our portfolio.

[Greg McGinniss]

Thanks, Steve.

[Operator]

Our next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed with your questions.

[Todd Thomas, KeyBanc Capital Markets]

Hi, thanks. Good morning. First question, I wanted to ask about the higher expense recovery income and lower operating expenses in the quarter. I know it's been an initiative to drive total overall revenue, not just the base rent component, which you talked about. And your expense reimbursement rate is higher by over 1,000 basis points compared to '21 and '22 which is good. So you're making really good progress there. Is this sustainable as we think about the back end of the year and heading into 2024?

[Stephen Yalof, President and CEO]

Thanks, Todd. There's a couple of things going on. So as you articulate and as we've been talking about, we've been structuring our leases to drive total rent, which has driven an increase in our fixed CAM. And so that's part of what's flowing in the numbers over the course of this year relative to last year, right, which we are driving total NOI with the retailers paying us both in base, as well as in fixed CAM.

Now, in terms of the timing of that, obviously when you go to fixed CAM, it's fixed over the course of the whole year, where our operating expenses given our business are more variable. There's obviously things like snow, which we had in the first quarter, which was much lighter It didn't snow that much and so we didn't have a snow expenses, but we still got the same amount of fixed CAM and so the percentage recovery will look very high.

We had a continued amount this quarter where we've continued to mitigate as much of our expenses, but also the timing of those expenses. So another example would be like our marketing expenses, which tend to be heavier in the back half of the year relative to the first half of the year. Therefore, you should expect our expense recovery rate on average in the back half of the year is probably more in the low 80s in terms of percentage relative to being in the high 80s that we've had in the first half. And as we think about our same center NOI growth, we really believe this on a full year basis And at 3.5 to 5, that's what we're sort of guiding to for the entire year.

[Todd Thomas, KeyBanc Capital Markets]

Okay. That's helpful. Then are you able to share, since this initiative, maybe was implemented or you've been driving a little harder at it a little bit more recently, it seems. Can you share what the sort of expense recovery rate or the target rate looks like on leases that you've executed over the last few quarters. I'm not sure, if you're achieving a, you know, sort of a greater than 100% margin on new leases if we could potentially see the expense recovery rate continue to move higher and kind of climb up another 500 or 1000 basis points over the couple of years. Maybe you could talk about that a little bit.

[Doug McDonald, SVP]

Hi, Todd, it's Doug. We are continuing to drive total rent, like Michael said, but, and we do expect the recovery rate to move higher over the next few years. But we're not at a point that we can provide guidance on where we would target that recovery rate in future years.

[Todd Thomas, KeyBanc Capital Markets]

Okay. And then if I could, just last question. I just wanted to touch on Nashville is on track slated to open in October I think in your prepared remarks, you talked about being positioned for additional opportunities and external growth. Just wanted to see if you could speak to any new developments or external growth initiatives that you're beginning to say.

[Stephen Yalof, President and CEO]

Todd, as we mentioned in prior quarters, we're definitely out there looking at a number of transactions, lands. We think that the outlet business is - continues to be a very strong business evidenced by how quickly we're able to lease Nashville. I mean, with about 90 days until opening 95% lease executed, I've been doing this for a long time. I think that that's one of the highest leased that I've seen. So we're excited about that. And we think that there's room to grow this platform across the country. Obviously, nothing to announce on this call today, but as that changes, we're looking forward to sharing with you what we're thinking about and where we're looking to grow and build.

[Todd Thomas, KeyBanc Capital Markets]

Okay. All right. Thank you.

[Operator]

Our next question comes from the line of Samir Khanal with Evercore. Please proceed with your questions.

[Samir Khanal, Evercore ISI]

Good morning, everyone. Steve, can you talk about your ability to continue to push rents here. I mean, sales were down a little bit here. I mean, even if sales are flat and I understand occupancy cost ratios are still low, but what is your ability to still push rents here? Thanks.

[Stephen Yalof, President and CEO]

Thanks. I look at the sales number. I mean, obviously, that's an important metric for us, but I think a lot of that sales impact has a lot to do with higher price point products in the market across all channels, higher price point product happens to be struggling. What is in favor right now is great brands, promotionally priced. And we see that through our platform.

If you take a look at our sales productivity and compare 2019, we're still up to 15% and manage to be holding at that 15% rate. We're truly optimistic about the second half of the year and we think there'll be some positive sales impact in the second half of the year.

But, you know, that said, if you look at the product that we're actually selling is real estate. And we continue to push the pricing on our real estate. We've seen great growth. Our re-tenanting is 30% increase, 6 consecutive quarters of rent spread growth we still think there's a lot of runway, a lot of headroom for us to push our rents going forward.

You mentioned occupancy cost ratio, when I first started here, in the middle of COVID, extremely low. We talked about pushing our occupancy cost ratio was a huge focus of ours. We're now up to about 9%. But our historic highs are, over 100 basis points - over 100 basis points greater than that and because of that, we think that there's plenty of room for us to continue to push. Our leasing team is extremely focused on pushing rents. Our occupancy is 97.2%, although very high, if we have to trade, rent for occupancy at this point, rent and growing NOI is really our main focus.

[Samir Khanal, Evercore ISI]

Got it. And Michael, I know the uncollectible tenant revenue, I think there was about $1 million in there. I mean, what was that related to? And when you think about the watch list as it sits today, it feels like you're in a good position, but maybe just a bit long-term looking at maybe into even next year any sort of early reads on that, you think?

[Michael Bilerman, EVP, CFO and Chief Investment Officer]

I think the bad debt in this quarter is just consistent with some things that we have within the portfolio, that we're just mindful of. It's all embedded within our guidance, nothing out of the ordinary and our watch list remains low.

[Samir Khanal, Evercore ISI]

Thank you.

[Operator]

Our next question is from the line of Craig Mailman with Citi. Please proceed with your questions.

[Craig Mailman, Citi]

Hi, good morning. Just want to follow-up on the capital deployment opportunities. Michael, you know, that you guys have more than $750 million of cash. Clearly part of that earmarked for, to finish Nashville and then, probably some leasing costs and other things on deals that you've done. But I'm just kind of curious as you look at your opportunities set here, vis-a-vis - the cost of capital, which your equity has improved, but the debt costs continue to rise here. How would you rank, the attractive - of the different options that you have right now?

[Michael Bilerman, EVP, CFO and Chief Investment Officer]

Sure. Thanks, Craig. I'm really happy you're so curious about our external growth strategy. At the end of the day, deals that we're going to do have to be prudent and disciplined and where we want to do something, we want to create value. We have significant optionality given, the capital that's on our balance sheet to deploy. And we're looking at a lot of different opportunities that Steve sort of highlighted.

And when we get the deal, we'll evaluate its long-term IRR relative to our current cost of capital in terms of how we're financing it as well as sort of how we see capital evolving over the future. We feel that there's a significant opportunity to really add value with our operating strategy or leasing strategy or marketing strategy and the Tanger platform that we've built. And we're looking at a lot of different opportunities across acquisitions as well as development.

[Craig Mailman, Citi]

I guess if you have - if you think about, the risk adjusted returns of doing in outparcel right on an existing asset, what kind of IRR would you be targeting there? And then what kind of differential would you need to do something outside the portfolio either a new, another outlet or potentially going to kind of open their shopping centers?

[Michael Bilerman, EVP, CFO and Chief Investment Officer]

So adding density to our existing sites where we already own the land, obviously has a very high return, but just in terms of capital size, doing it outparcel is very different than building a center or acquiring a center. And the opportunity set as we look at larger scale, you know, those are two different things. The real estate intensification is part of our business. And we have a significant amount of free cash flow that, allows us to fund those initiatives as well as our liquidity.

And then as we look at things that are truly strong growth, we're either we're buying something or we're developing something or we're going to a joint venture with someone, you know, every deal, Craig's got a stand on its own. And we got to look at what the economics are and what the opportunity is over time with whatever center that we're buying.

[Craig Mailman, Citi]

Okay. I think just one last quick one. You guys are sitting on cash, deposit rates are going up, right so you're getting a nice lift from interest income here. But as we think about '24 and kind of a sustainable run rate here. Do you feel like you have enough in the hopper from commencements to offset kind of potentially deploying that capital, losing that that interest income that you guys aren't going to have any diminution, sort of in the run rates we had in '24, knowing that you guys haven't given guidance yet, just trying to get a sense?

[Michael Bilerman, EVP, CFO and Chief Investment Officer]

Look, our cash is currently, we're earning interest income on it. Our hope is, and I think you would hope that this is true, that anything we go out and buy is going to be a higher yield than our cash. So, we should be able, that should be a decent hurdle for us to get over. So as we deploy that cash, we are going to see accretion from it as we put additional capital out. We feel we are in a great spot right now with $234 million of cash and only $56 million left to fund on Nashville, that's the main capital commitment.

And then if you look at our dividend payout ratio, which was in the 50% range in the first half, because we were able to retain more cash flow in the first half. That just adds to that liquidity as we go forward over the next 12 months as we deploy.

[Craig Mailman, Citi]

Thank you.

[Michael Bilerman, EVP, CFO and Chief Investment Officer]

Thanks, Craig.

[Operator]

Our next questions are from the line of Caitlin Burrows with Goldman Sachs. Please proceed with your question.

[Caitlin Burrows, Goldman Sachs]

Hi. Good morning, everyone. Maybe just following up on that last point, Michael, it sounded like you were suggesting outlet expansion could be possible. So just wondering when you look at the centers that are 100% occupied or high 90s, I guess, is there extra land at places like, Deer Park, Foley, San Marcos, Myrtle Beach? There's a number that fall into that category of high 90s to 100, but just wondering if there is that opportunity. I guess from a land and demand perspective?

[Stephen Yalof, President and CEO]

Right. Caitlin, it's Steve Yalof. So just to answer that question, embedded in a lot of that occupancy, also is some of our temp tenants. So I understand in the past, we've been, if we marked our temp space to market, there is three to four times rent opportunity. So, I think that's really important part of our organic growth story, particularly in some of those locations that you shared.

Also in the case of a Deer Park where we have a Christmas tree shops as an example. We all know what's happening with Christmas tree shops, but we don't look at that as a burden. We look at that as great opportunity. So, we have 100% occupied shopping center in Long Island - in Deer Park. We find ourselves with a great opportunity to get that space back and engineer it into a number of shops and definitely drive additional rent there.

With regard to our peripheral lands, we have a lot of unmonetized peripheral across our portfolio. We've got a team in place focused solely on generating revenue, peripherally. So that's just, we call that our organic growth story. And we've got great, anecdotes of that occurring all across our portfolio. So that is a great example where we've recently and we're under construction on and outparcel with Dave & Buster's.

As part of the Dave & Buster's build, we also build in addition to our small shops. So, for us, that Savanna market has been a great success story for us. There's a number of other outparcels and opportunities to monetize. The additional land there and expand that shopping center. So, those are things that we're looking to do from an organic growth point of view.

[Caitlin Burrows, Goldman Sachs]

Got it. And just a quick follow-up on the temp occupancy, is it still around, 10% today? Just trying to figure out how that opportunity is that you mentioned?

[Stephen Yalof, President and CEO]

It's probably around that, but a lot of that occupancy growth that you've seen in this last quarter has, where we've been able to trade a lot of that temporary tenants into permanent tenants we're seeing a - we're seeing growth in our permanent occupancy as well.

[Caitlin Burrows, Goldman Sachs]

Got it. Okay. And then just, you've mentioned the focus on increased seeing base rents and reimbursements, which makes sense. I was wondering if you could talk some about percent rents. It seems like percent rents are still high now versus is pre COVID level. So wondering what's driving it and should we expect the numbers of the ratios to come down and kind of if they do, to what extent should we expect they shift into base rents versus experience some leakage?

[Stephen Yalof, President and CEO]

Well look, what's driving better percentage rents is our ability and our pricing power as a company to make better real estate deals. Historically percentage rent pay ratios were far less than they are today. And we've - essentially asked for greater percentages on a lot of the new transactions that we've done, whether they're in our new center in Nashville, or as we're re-tenanting or renewing deals going forward.

And retailers have been far more agreeable to pay those higher rates. With those higher rates, as a natural break point is calculated, the rate at which the break points also come down. So we find those higher percentages will be achievable at a lower sales volume than historic in our company.

So as I said earlier, we're optimistic about sales in the back half of the year. So we're actually optimistic about the contribution of overage rent as well.

[Caitlin Burrows, Goldman Sachs]

Got it. Thanks.

[Stephen Yalof, President and CEO]

Thanks Caitlin.

[Operator]

Our next question comes from the line of Floris van Dijkum with Compass Point. Please proceed with your questions.

[Floris van Dijkum, Compass Point]

Good morning, guys. Steve, I think the, the playbook is playing out as you laid out in terms of increasing cash flow from the operations. So I'm curious, a couple of things. I guess my two questions for you are, your guide implies that same-store NOI is going to slow in the second half. What's going to be the biggest factor for that expected slowing in the second half? Is it the fact that occupancy can't be pushed much or is it the fact that you think your temp to perm conversion, which again has been driving some of the growth is going to slow down going forward simply because you'll have less temp to convert although 10% still sounds like it's a pretty high number, probably twice what it normally is. Maybe you can give some more color. And then I want to delve into the OCR a little bit more as well, please.

[Stephen Yalof, President and CEO]

Right. So Michael is going to just handle the first half of that question and then we'll talk about the OCR piece.

[Michael Bilerman, EVP, CFO and Chief Investment Officer]

Yes. And so, you know, Floris, when we think about our same-store NOI, we really think about this on an annual basis. In part, you know, what we were talking about, I think it was with Todd earlier on the call, fixed CAM is fixed during the year, but our operating expenses are variable. And given two factors, one, we had better operating expenses in the first quarter and second quarter in part driven by the mild of winter and all the operating expense savings and flip over to having a little bit higher expense load in the back half, that's really what's impacting the sequential or the quarterly same-store NOI, but really think about this business on an annual basis and the trajectory into 2024, just like the trajectory into 2023, if you remember, we had positive same-store growth last year.

We started this year thinking it was going to be 2 to 4. We're now up to 3.5 to 5 based on all of the drivers that we've been talking about, that's going to impact the run rate into 2024. And we're not getting into - we don't give quarterly same-store guidance. And we are very - as we think about where we're going into '24, all of the drivers of our business are supportive of that on an annual basis.

And I'll let Steve go on with OCR.

[Stephen Yalof, President and CEO]

So do you want toc frame your question on OCR?

[Floris van Dijkum, Compass Point]

Yes, no. You sort of alluded to this earlier. I mean, I think one of the upside drivers potentially for you guys is the fact that your OCR, again, it was in the 8s and the low 8s, I think as recently as a couple of quarters ago, but it's now at 9% You've talked about the fact that your peak OCR ratio is in the 10%, 10.5% maybe as high as 11% range. How is that progressing and how much of that increase in OCR is going to be from that temp to permanent conversion. How much of that is going to be driving rates and other things around the lease structure?

[Stephen Yalof, President and CEO]

Look, it's coming across all of the - all of our business, I mean, if you take a look - you just have to look at the rent spreads, you know, for this quarter alone, 12% on renewal, 30% on re-tenanting. So I mean, that's just - and that's just sort of - and that's without 290,000 square feet that we just leased to Nashville.

So we'll continue to press rents. We still think there's plenty of headroom, 50 basis points of increase since the last quarter, we continue to grow these number. Our leasing team is extremely aggressive. We're going after retailers that are far more productive, far more productive retailers can pay better rents.

And that's how we're merchandising and leasing our portfolio. We're going to continue to do that. And as I mentioned to Greg at the beginning of the call, I rattled off a number of the brands that are doing new deals with us. These are highly productive retailers that are enjoying great sales in our portfolio.

[Floris van Dijkum, Compass Point]

Can I follow-up on one aspect of that, Steve, if you don't mind, so if I correct your rent spreads include your CAM in there as well. Obviously, CAM has - your operating costs have increased significantly over the last couple of years. What would that - have you guys looked at what that spread would be if you exclude the increased CAM portion of that?

[Stephen Yalof, President and CEO]

It's really - it's a question of how we allocate our rents. So, you know, there's a - Floris there's a lot of there's a lot of math in those numbers, you know, and, perhaps offline, we can go through that math. But at the end of the day, a lot of the retailers are paying us rent based on their occupancy cost. Based on the sales volume that they're doing and what percentage of that sales volume are they going to pay us in rent and that's really the critical part of the negotiation.

We allocate a portion of that to our CAM expense because we happen to pride ourselves on managing what we believe are our best-in-class booking, maintained and operated shopping centers. So that's just how we elect to operate our business.

[Floris van Dijkum, Compass Point]

Thanks, Steve. Keep up the results.

[Stephen Yalof, President and CEO]

Thanks Floris.

[Operator]

[Operator Instructions] Our next question come from the line of Mike Mueller with JPMorgan. Please proceed with your questions.

[Mike Mueller, JPMorgan]

Thanks. Hi. I have two quick ones here. One, can you talk a little bit about what's going on with some of the, I guess, the portfolio occupancy outliers that look to be in, looks like Michigan, New Hampshire and maybe Fox woods. And then second, what are the typical rent reset mechanisms that are in your legacy options versus the lock options that you're signing today?

[Stephen Yalof, President and CEO]

Well, first of all, very few of our leases have options. So when we're renewing leases, those are pure new deals that we're negotiating from scratch with our existing retailers. With regard to the other properties that you just pointed out, we're seeing meaningful progress on leasing in all of those properties. They're all cash flow positively. And, we're very optimistic about to continuing to push our leasing in those properties.

[Mike Mueller, JPMorgan]

Okay. Thank you.

[Operator]

Thank you. Our next question is from the line of Emily Arft with Green Street. Please proceed with your questions.

[Emily Arft, Green Street]

Hi there. I was wondering if you could describe what the refinancing process is like for Houston and what banks are looking for with respect to lending requirements today? And do you need double digit set yields or certain quality property? Any sort of color there would be helpful.

[Doug McDonald, SVP]

Emily, it's Doug. That was a unique asset because it's given the vintage, it was at a period where it had higher role than usual. That limited some of the options, but there were still a wide variety of CMBS providers and certain banks that were willing to bid on that.

One of the things that we were targeting though is a shorter term with that deal. We believe that as the project stabilizes off of the higher role than usual, that there will be additional refinancing opportunities at what we would deem better rates, better terms.

[Stephen Yalof, President and CEO]

And Emily at Tanger, we are predominantly an unsecured borrower. We predominantly use secured debt in our joint ventures. And on the unsecured side, that's where we feel our cost of capitals and an advantage, especially with the recent decline in our line of credit cost and our term loan cost, and overall

[Emily Arft, Green Street]

All right. Thanks. And then kind of moving on to the leasing pipeline. Can you remind us where your current lease to physical spread is at? And then looking at the retailers, how quickly are they opening up today? What does the cadence of openings look like in your pipeline for the next 12 months?

[Stephen Yalof, President and CEO]

Well, first of all, 95% renewals, there's no downtime. So I think that's a really important thing to keep in the back of your mind. We're where we're doing a lot of our existing retailers at much higher rents, and 0we lose absolutely no downtime and no capital when we renew those.

As far as new tenants, the time from them to take occupancy and open up a store, obviously varies based on the complexity and the size of the store going in. But I think the mitigating factors, our ability to keep those rooms occupied until the very last minute.

So, we talked about our temp leasing strategy, which I think is a really important one here. If we have a tenant that's leaving a shopping center, and a new tenant that's taking the space. And if there's as little as a month of downtime between those, we're going to make sure that we keep that room lit occupied and cash flowing during that period of time.

[Emily Arft, Green Street]

Great. Thanks.

[Operator]

Thank you. At this time we've reached the end of our question-and-answer session. And I will also conclude today's teleconference. Thank you for your participation. You may now disconnect your lines and log off your computers. Thank you.