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Tanger Factory Outlets (NYSE: SKT) Mohit Hajarnis & Carter Chen

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Tanger Factory Outlets owns and operates, or has part ownership in, 46 outlet malls in 26 states and Canada, located along highways or near popular tourist destination. Tanger is the only pure-play outlet center REIT, and the outlet format offers unique advantages to tenants and their customers, and by extension, Tanger’s investors.

Investment Thesis • Tanger is a well-run business with strong brand

value, superior corporate strategy, and management.

• Tanger has stewarded capital well in comparison to its competitors: a low DSCR and debt/equity ratio give Tanger room to grow using extra debt without compromising shareholder’s equity.

• Demand for outlet space has increased dramatically since 2008 because retailers have come to view outlets as part of their market segmentation strategy, not just a channel to off-load extra inventory.

• Tanger’s long-lived leases are locked-in at low historical rates, but a historical premium of 20% for renewals and 70%+ premium for re-tenanted leases will drive revenue through 2018.

• Tanger’s intrinsic value is obscured by accounting and valuation intricacies.

Recommendation: Long-term Buy

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Key Drivers • Outlet sales have grown at 10% CAGR since

2008, and rent has grown at 3.1% CAGR • Tanger generates revenues across economic

cycles: recessions drive consumers to seek discounts at outlet stores.

• Tanger’s rents represent ~ 5% of tenant costs (2Q2014), compared to mall rents, which represent ~ 12% of tenant costs.

• Tanger benefits from economic moats arising from barriers to entry and brand value.

Bulls Say • Tanger is focusing on saturating the US outlet

market while competitors Simon and GGP are focusing on saving their mall franchises.

• Tanger has maintained 95%+ occupancy for the past 10 years.

• Tanger has a strong pipeline of ~1.5M square feet GLA in the next five years, which is already financed and will require no additional debt.

Bears Say • Tanager faces threats from e-commerce sites

like Gilt.com, which offers similar discount sales on luxury goods.

• Discounting luxury merchandise is an unsustainable business because it damages brand value and cannibalizes sales.

Summary Company: Tanger Premium Outlets 52-week low: $31.40 Ticker: NYSE: SKT 52-week high: $36.77 Shares Outstanding: 95,439,454 Analyst low: $32.00 Market Cap ($BB): $3.41B Analyst high: $38.00 Price: $35.67 Implied Price: $51.27

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Business Overview & Analysis Business Model Tanger generates revenues by collecting base rents, percentage rents, and expense reimbursement from its tenants. Base rents represent minimum rent charged per square foot to tenants. The average base rental rate has grown at 1.5% between 2012 and 2013, and 7.4% between 2011 and 2012. This is largely because Tanger does not adjust rents yearly, but rather provides long-term fixed leases, which are attractive to established tenants looking to manage costs. The growth in base rent is reflective of lease renewals and re-tenanting (footnote for definition): In 2012, 2.1 M sq ft of space was renewed or re-tenanted, and in 2011, 2.0 M sq ft was renewed or re-tenanted. The rates Tanger charges on renewed or re-tenanted leases reflect wider demand for Outlet mall space and various economic factors. In 2013, average new rent for re-tenanted space was $30.57, less than the $31.72 new rent in 2012. This drop is reflective of additional supply in the market from expansions by Tanger and its competitors. Tanger also collects percentage rent: a percentage of tenants’ sales volume above predetermined levels. As base rents are fixed higher, the predetermined levels are set higher as well – reflecting Tanger’s commitment to keeping tenant costs low. Tanger’s second largest revenue segment is Expense Reimbursements. Contractually, tenants are responsible for certain common expenses such as common area maintenance, insurance, tax, advertising, and other property management

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expenses. These expenses are offset by equivalent property maintenance and some SG&A expenses – and have no effect on Net Income; if expense reimbursements increased or decreased, certain maintenance and SG&A expenses would increase or decrease equivalently. Nonetheless, the expense reimbursement strategy helps widen Tanger’s margins and keep base rents – the most observed metric – low. Strategy Tanger’s strategy is centered on capturing strong macro fundamentals (see page 4), conservative business practices and capital stewardship, and strong property development. One of Tanger’s strengths as a business is the constant demand for Outlet stores across economic cycles and fashion preferences. Despite the sharp downturn in 2007 – 2009, Tanger continued to grow its dividend because consumers switched to shopping at Outlets for discounted brands instead of department stores. Tanger’s tenants’ ability to deliver savings for customers drives additional business during economic turmoil, and provides counter-cyclical drivers for growth. Additionally, Tanger’s portfolio is immune to changes in fashion: its largest tenants are retailers with experience in fashion and span the fashion spectrum: Gap, Banana Republic, Old Navy, Tommy Hilfiger, Nike, Nautica, and Polo Ralph Lauren. Additionally, it has been refreshing its portfolio with new brands such as H&M, Forever 21,

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and Under Armour (3Q 2014 Earnings Call). According to management, as business in a brand dies down, business in another brand picks up; according to CEO Steven Tanger, “For every Coach there is a Michael Kors.” Tanger is unique amongst competitors Simon and GGP, which operate malls and outlets under individual names, because it operates all of its outlets under the Tanger brand. The brand has generated value with retailers and consumers, as demonstrated by its industry leading occupancy rates and traffic growth. Tanger has maintained occupancy greater than 98% for the past three years, because Tanger maintains a strong brand. Additionally, Tanger has built strong retailer relationships over its 30+ year history; the typical Tanger tenant is a large national chain, and stable over the long term. This insulates Tanger from bankruptcies and fluctuations in consumer preferences. Additionally, it eliminates the need for a provision for doubtful accounts, which competitors Simon and GGP have needed to account for loses from tenants going out of business. Tanger’s long-term leases provide value to tenants through locked-in rates and managed costs, making them an attractive partner to retailers. Tanger’s percentage rentals have also increased over the last three years – reflective of “higher tenant sales,” and Tanger brand value with shoppers. REITs can be a risky investment because capital mismanagement can wipe out common equity and suffocate strong revenues with high interest payments. However, Tanger’s management is notably conservative, and a strong asset for shareholders. Tanger focuses on growth solely in the United States and Canada, seeking “under-served markets” as sources of future growth, while competitor Simon has undertaken a joint venture in China to expand its footprint. While the risk/reward may be higher for Simon, Tanger’s management has been dependable in delivering consistent returns to shareholders. Since its IPO, Tanger has increased its dividend every single year – even through the financial crisis. According to Morningstar, Tanger has developed roughly 10% ROREA for the past 15 years, moving between 7.8% in 2003 to 12.3% in 2002. The highly dependable nature of Tanger’s management is reflective of its roots: current CEO Stephen Tanger founded the business alongside his

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father, Stanley Tanger in 1981, and the company has the longest history in the outlet business: 33 years. Stephen Tanger has been in senior management positions at Tanger since 1986, and was paid 61%, 79%, and 67% of total compensation in restricted stock units in 2011, 2012, and 2013, respectively – reflecting a “skin-in-the-game” mentality. Tanger has consistently grown its property portfolio by targeting specific markets that would be best served by an outlet mall. Management considers a variety of factors in building or acquiring new properties. The typical market has an average household income of $65,000, access to major highways, excellent visibility, or sees at least 5 million visitors a year. The company typically adds between 600K and 700K square feet every year, and has expanded consistently over the past five years. Simultaneously, the company has maintained strong financial health by reducing Debt/Equity from 5.20X in 2008 to 1.95X in 2010, and then slowly increasing it to 2.54X in 2013. The slow, yet consistent, expansion of Tanger’s portfolio reflects its commitment to manageable growth without overextending the balance sheet. The company is committed to long-term growth: while interest rates are low and the company can refinance or borrow, it is investing in new properties and a strong “shadow pipeline” of properties – promising greater revenues in the future. This commitment to strong capital stewardship is one of Tanger’s defining traits. Tanger owns 44 (including joint ventures) outlet properties, while Simon owns 66, but Tanger has a superior DSCR (2.46X vs. 2.12X), and Debt/Equity ratio (2.54X vs. 4.03X). Additionally, ~ 80% of Tanger’s debt is fixed. Tanger has stewarded capital much better than its competitors; REITs are troublesome for some investors because they often issue new shares to fund projects because they have very little retained earnings. Tanger has diluted common equity twice in the past 10 years: July 2011 and August 2009 for a total of $244.1 M. However, Tanger’s competitors, Simon and General Growth Properties, have issued over $350 M in preferred shares to special investors over the past 10 years, and declared bankruptcy – wiping out common equity, respectively. However, this conservative leadership has sacrificed opportunities for additional return in return for


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additional risk. Tanger’s focus on North American expansion has caused it to ignore foreign expansion into markets like China and the Middle East, where competitors, like Simon, have opened new outlets. Tanger has sufficient room in its balance sheet to raise debt and take on riskier, high-yield projects. Additionally, by focusing on the business and long-term growth (a positive, no doubt), the company is ignoring medium term investors by front-loading Capital Expenditures and diluting Free Cash Flow. Although this strategy guarantees bigger dividends for long-term shareholders, it colors the market’s perception of the company’s long-term profitability, leading the market to price the company at a discount to its peers. Industry Overview The modern outlet center first appeared in the early 1970s and outlet stores have been an effective and unique distribution channel for retailers ever since. Today, the US is home to 368 outlet centers, housing ~13,000 stores for a total of 78 million square feet of retail space. The first factory stores—built in the 1930s—were established to unload excess inventory and damaged goods. The value proposition was simple: provide a channel to dispose of problem merchandise that is remote enough from flagship stores so it does not dilute brand value. That value proposition still exists today: brands like Nike use outlets to sell hard-to-move merchandise, i.e. shoes with flashy colors or abnormal sizes. But the value of outlet malls has vastly expanded since then. The central value proposition of the modern outlet center comes from effective price discrimination. Outlet centers are simply made and remote enough to

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avoid patronage from affluent costumers. However, bargain hunters will make the hike for the discounted merchandise (the average discount at an outlet store was 38% in 2012). Merchandise varies, but effective costumer segmentation remains the driving force behind retailers’ selections of offerings. To this effect, retailers offer a variety of goods in their outlet stores. These range from items identical to those in their full price channels, to items specifically made for outlet stores—Brooks Brothers 346 line is a good example of this. The outlet industry continues to grow at a healthy pace. US outlet center gross leasable area (GLA) has grown at a 5.3% CAGR over the past 6 years, and now stands at 86 million square feet. During the same period, sales per square foot have notched a 4.8% CAGR, growing from $301/sq. ft. in 2008 to $398/sq. ft. in March of this year. Average rents have kept pace, growing from $28/sq. ft to $34/sq. ft., a CAGR of 3.1%. The unique outlet model makes it somewhat a-cyclical. When full-price retailers are doing well, they do not feel the need to cut prices, and hence outlets’ deep discounts are all the more attractive. From the 2Q14 conference call with PVH Corp. CEO Manny Chirico: “[T]he healthiest environment for the outlet channel is when regular retail is doing well, because there’s not a compelling message going on at regular retail from a promotional point of view.” Outlets’ value proposition for both the consumer and retailer is at its most robust in good times. However even in

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mean times, outlet centers’ value proposition is still intact. There is only so much full-price stores are willing to discount, and hence outlet traffic is steadier in bad economic times than traffic at full-price stores. Industry Risks Despite robust growth, the outlet industry has its share of naysayers. Bears’ wariness can be boiled down to two concerns. 1) Effective price discrimination is unachievable, and outlet stores cannibalize sales from full price channels. 2) Outlets

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dilute brand value. These concerns give rise to questions about whether outlet malls are a truly effective and sustainable retail channel, or whether they inflate sales at the expense of margins and brand identity. To address these concerns, We think it is important to draw a distinction between brands that are considered luxury (or “accessible luxury”) and brands that are not. Part of the appeal of a luxury brand, like Coach, Michael Kors, or Burberry, is its exclusivity. For the consumers of these brands, there is an appeal from the sense of luxury that comes from a high price tag. So discounts on these luxury brands have the potential to dilute brand value, as they make these items less exclusive. We believe that this phenomenon exists. The decline of the Coach brand over the past few years is evidence of this trend. However, we believe that brands that are not traditionally considered luxury—Gap, Banana Republic, Van Heusen, and other core constituents of outlet malls—are not subject to this brand dilution. For the consumer of these items, exclusivity is not a concern—and so dilution should not be feared for these brands. And in fact, these luxury brands make up only a small portion of outlet storefronts—14% by our calculations. We also see no evidence of ineffective price discrimination. Like we mentioned above, outlets are a complement to full-price retailers, especially when full price retailers are doing well. Glenn Murphy, CEO of Gap, Inc. notes during their 2Q14 conference call “this incredible relationship between the specialty business and our outlet business.” He goes on to comment that “The only place that we’re seeing real estate growing and square footage increasing as in lifestyle centers after being converted to the power centers, or being converted to outlet centers.”

Largest Outlet Chains by Store Count in 2014 Dressbarn/Dressbarn Woman 205 Carter’s Outlets 160 Gymboree 156 Tommy Hilfiger 155 Van Heusen 154 Gap Outlet 152 Wilsons Leather Outlet 150 OshKosh B’Gosh Outlet 142 Polo Ralph Lauren Factory Stores 139 Banana Republic Factory Stores 128 Levi’s Outlet 128 Aeropostale Outlet 126 Brooks Brothers Factory Store 125 Children’s Place Outlet 124 Lane Bryant Outlet 118 Izod 117 PacSun 112 Guess? Factory Store 110 Jockey Outlet 110 Calvin Klein 107

Names in Red represent Luxury Brands % of Total Stores that are Luxury: 14% Source: Value Retail News

Outlet Stores from a Retailer’s Perspective Luxury

Everyday Upscale Everyday

Regular Consumers Cannibalize Sales Cannibalize Sales Grow Sales Discount Consumers Grow # of Customers Grow # Customers Grow Sales


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Key Value Generators Market Rent and a Growing Portfolio Tanger’s profitability in the next five years, and beyond, will be primarily driven by the renewal of long-lived leases in its portfolio and strong pipeline of new properties and expansions. The industry average for outlet center base rent is $33.72 psf (Value Retail News), but Tanger charges $20.40 psf. We assert that there are no material differences between Tanger’s properties and competitors’ properties, but in fact Tanger properties may be more valuable because the Tanger brand name drives customer traffic. In Y/E 2013, Tanger received a 19.3% premium on its renewed leases and a 37.8% premium on re-leased properties. The discrepancy between Tanger’s base rent and the market rent suggests that Tanger can capture a significant premium on renewals – and an even higher premium on properties that are re-leased (current tenant leaves and a new tenant leases the property). A forward prediction of the revenue increases from renewed and re-leased properties in Y/E demonstrates 11.9% projected revenue growth. We divided total properties up for renewal/re-tenanting into 25% re-tenanted and 75% renewed, reflective of the traditional mix. We anticipate that this ratio may lean more towards re-tenanted properties this year because of the Coldwater Creek bankruptcy, which should open additional space. We estimated that all renewed leases would be charged a 20% premium, and all re-tenanted / new properties would earn the market rate for base rent - $33.72. All other revenues were estimated using Revene/psf ratios and keeping them fixed over the long term (Additional information on valuation is available on page 8). Most beneficial to Tanger’s long-term revenue growth is its robust pipeline of new and renovated outlet properties. Over the next three year, Tanger plans to open 2.5 million square feet (weighted for ownership). Assuming Tanger receives the market rent for these properties, average rents for Tanger’s portfolio should increase, and given the 8-year average term of its expiring leases this year, these rates should remain lock in for a considerable period of time – protecting the company from macroeconomic retail trends. We used the company’s estimates for renewals, the historical ratio of renewal / re-tenanting, and company’s stated

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portfolio expansions from press releases and earnings calls. Tanger is growing their portfolio faster than their historical pace because they were able to raise debt at low rates between 2010 and 2014, and spend it on capital expenditures over the next five years. Balance Sheet Health Tanger’s portfolio growth is especially remarkable because the company has not overextended its balance sheet to fund growth. Tanger’s DSCR is 2.46X, compared to Simon’s 2.12X and GGP’s 1.13X DSCRs. The DSCR ratio reflects the company’s ability to take on additional debt; Tanger can take on a maximum of $1.9B of new debt, doubling total debt and (assuming new debt is spent on new properties at $292 psf), growing the total portfolio by 6.3 million square feet – growing its portfolio by 50%. The same is not true for Tanger’s competitors because their DSCRs are pushing the limits set in their debt covenants. Tanger’s ability to take on

Renewal 2014 (E) Square Feet 838,181 Average Expiring Rent $19.38

Average New Rent $23 Premium 20% Release 2014 (E) Square Feet 902,819 Average Expiring Rent -

Average New Rent $34 Premium - Total Square Feet* 13,010,000 *Including new properties Revenue Breakdown ($KK) 2014 (E)

Base Rentals $280,290.12 Percentage Rentals $11,804.31 Expense reimbursement $115,046.67

Other Income $11,228.31 Total Income $418,369.43 Base Rentals / Sq Ft $21.50 Percentage Rentals / Sq Ft $0.91

Expense reimbursement / Sq Ft

$8.83

Other Income / Sq Ft $0.86


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additional debt and grow the portfolio is an important component of its value generating process. We can objectively see the health of Tanger’s balance sheet from its recent balance sheet activity. Tanger refinanced its $250M Sr. Loan (I) down from 6.15% to 3.75% due 2024. These 10-year loans incur a ~ 150 bps premium to 10-year US treasuries, suggesting a low estimated probability of default. A similar Sr. Loan issued by CBL & Associates for $300MM in October 2014 was priced at 4.60% - 85 bps above Tanger’s debt. Risks & Other Considerations Tanger’s biggest concerns are competition with malls, other REITs, and online shopping. At a fundamental level, malls and outlet centers rarely compete for customers because consumers go to Outlet malls seeking the deep discounts that retailers do not provide at malls. However, Tanger strategically builds properties far from urban centers, so most customers make a day-trip out to outlet centers, instead of competing for business with local malls, and spending more than they do at traditional malls.

Tanger (SKT) Simon (SPG) GGP Macerich (MAC) CBL Average

$ Rent / Sq Ft $20.40 $42.34 $71.29 $44.51 $42.48 $44.20 Tenant $ Sales / Sq Ft $387.00 $582.00 $564.00 $527.25 $356 $483.25

Occupancy Cost % 5.27% 7.27% 12.64% 8.44% 11.93% 9.11%

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The demand for outlet malls has increased amongst other investors. However, Tanger believes that it maintains an economic moat because of its long-standing partner relationships, which are necessary for high occupancy properties. However, outlet developers like Simon and General Growth Properties, compete with Tanger for prime properties to build outlet malls, which Tanger cannot protect against. Moreover, with Simon and GGP’s larger, albeit less healthy, balance sheets, they can acquire properties or out-bid Tanger on key properties. Moreover, the rapid growth of outlet malls in the US may reduce profitability per property and decrease the company’s ROREA. Tanger has faced constant competition from online shopping, but historical financial results have proven the company’s resilience to new entrants. However, the advent of new discount luxury online retailers like Gilt.com proves problematic for Tanger’s business model of offering luxury goods at discount prices. Gilt.com generated $550 M in sales in 2012, compared to $450 M in 2011 (http://www.bloomberg.com/news/2013-07-31/gilt-groupe-ceo-seeks-to-prove-flash-sales-are-no-fad.html), demonstrating a clear demand for the

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Lease Expirations and Projected Premiums

Avg. Premium on New Rents Industry Average Rent


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product. However, Gilt.com services a different need than Tanger outlets. Foremost, Gilt.com is geared toward younger consumers with high incomes, while Tanger Outlets are marketed to older, middle-income Americans. Additionally, Gilt.com seeks to off-load retailers excess inventory, not provide the same exposure to new consumers or grow existing consumers. Finally, retailers view Gilt.com as a means of reducing inventory risk; by selling the discounted inventory at, or below, cost, it reduces the risk that it will be unable to sell the merchandise eventually. Outlet malls serve an entirely different need than Gilt.com. Valuation To understand the value in Tanger, we modeled Tanger in two ways: a DCF valuation and a Discounted Dividend Model. We chose to expand our valuation by including a DDM because the tangible cash flows that Tanger’s investors receive are dividends, while free cash flows are the hypothetical funds available to investors each year. Today’s low interest rate environment is providing opportunities for Tanger to expand its portfolio, which requires high capital expenditures today. Those capital expenditures, a cash expense, are diluting Free Cash Flow, but are not affecting Adjusted Funds from Operations, the metric which the company uses to decide dividend payouts. Historically, the company has paid out roughly 50%

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to 60% of AFFO, and our model assumed a fixed payout over the long-term. Our valuation depended on our projecting the average rent a new tenant would be charged, as well as the total square footage in Tanger’s portfolio. We estimated that the average new rent for 2014 would be the market rate of $33.72 (via research report) and would grow at 3% a year. Total square footage for Tanger’s portfolio was estimated in future years by taking into account all developing projects Tanger disclosed, and then adding 700,000 square feet in 2017 and 2018 – in line with historical portfolio growth. We also took into account the total square footage renewed each year based on company estimates in the 10-K. The total square footage was divided into renewals – which garnered a 20% premium on expiring rent, and re-tenanting, which were charged the market rent. All new properties were charged the average market rent as well. Other line items were estimated in the following manners: Percentage rentals: percentage rentals per square foot (2013) multiplied by square feet for each year. Expense reimbursements: expense reimbursements per square foot (2013) multiplied by square feet for each year. Other Income: other income per square foot (2013) multiplied by square feet for each year. SG&A: SG&A margin was kept constant.

Projections

$KK 2014 (E) 2015 (E) 2016 ( E) 2017 (E) 2018 (E) Total Revenues $418,369 $475,145 $514,206 $553,698 $598,343

Operating Expenses $137,563 $156,231 $169,074 $182,059 $196,739 D&A $100,455 $108,716 $113,918 $119,313 $124,707 SG&A $44,019 $49,993 $54,102 $58,258 $62,955

Operating Income $136,333 $160,206 $177,112 $194,069 $213,942 Interest Expense $59,373 $59,373 $64,921 $70,675 $70,675 Other Income / GoS $0 $52,004 $0 $0 $52,004

Income before taxes $76,960 $152,837 $112,190 $123,394 $195,271 Equity in earnings of

unconsolidated ventures* $0 $0 $0 $0 $0

Noncontrolling Income from Operating Partnership $0 $0 $0 $0 $0

Net Income $76,960 $152,837 $112,190 $123,394 $195,271 Capital Expenditures $108,133 $116,800 $167,900 $153,300 $153,300 AFFO (Calculated) $18,010.94 $10,001.00 $123,129.59 $160,081.19 $110,592.72 FCF (Calculated) 2014 (E) 2015 (E) 2016 ( E) 2017 (E) 2018 (E)

*Represents earnings in joint ventures - accounted in Total Revenues in this model


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D&A: D&A per square foot (2013) multiplied by total square footage for the year. Interest Expense: Interest expense divided by total debt (2013), 4.54%, multiplied by total debt for each year. Total Debt: Stated asset value dividend by square feet (2013) multiplied by new square feet not already financed (2017 – 2018). Debt is raised in the same year capital expenditures are incurred. Although CapEx is $292 per square foot, New Debt is roughly $1,000 per square foot given the cost of land and carrying value of the finished asset. Capital Expenditures: Building expenses per square foot (2013), $292, multiplied by half of total square footage added in the given year, and in the following

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year. Cost of Debt: dividing interest expense by total debt for the year, 4.54% - kept constant given high percentage of fixed debt. Cost of Equity: CAPM. See model for breakdown. The terminal value is estimated in two ways: using a terminal growth rate, of 2%, and a growth multiple, which is the current P/E of 31.57X. Our DCF output was $21.73 (terminal growth rate) and $39.28 (terminal multiple). The $39.28 value is close to the current market price, lending credence to our assertion that the market believes Tanger is fairly valued because its DCF models indicate a fair value near $35 - $37. However, our DDM output was $50.31 (terminal growth rate) and $52.60 (terminal

Growth Rate Method Enterprise Value $4,801,340 Debt - Market Value $4,801,340 Implied Price $50.31 Upside 40.8%

Terminal Dividend Yield Method Enterprise Value $4,985,953 Debt - Market Value $4,985,953 Implied Price $52.24 Upside 46.3%

Sensitivity Analysis

Market Return

$50.31 6.0% 6.5% 7.0% 7.5% 8.0%

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R

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1.0% $43.32 $40.59 $38.18 $36.03 $34.11 1.5% $50.15 $46.49 $43.32 $40.55 $38.11 2.0% $59.89 $54.69 $50.31 $46.57 $43.34 2.5% $74.90 $66.85 $60.35 $54.99 $50.49 3.0% $101.04 $86.76 $76.00 $67.60 $60.85

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dividend yield), which we think is an accurate representation of Tanger’s intrinsic value. While front-loading cash expenses when it is easy and cheap to raise debt is a strong strategy for long-term investors, it depresses calculated Free Cash Flow, and thereby underprices the intrinsic value of the business. The tangible cash flows investors receive are dividends, and we estimate a 40% - 45% upside. This valuation is attractive to the 3 – 5 year investor because it provides the market with sufficient time to

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move the price closer to intrinsic value, but nonetheless provide a healthy 2.7% dividend yield over the next 3 – 5 years, guaranteeing 8.1% to 13.5% return in realized dividends, plus reinvestment gains. The margin of safety generated by the dividends is attractive to the conservative investor.

Market Return

$52.24 6.0% 6.5% 7.0% 7.5% 8.0%

SK

T Yi

eld

2.1% $65.68 $65.01 $64.35 $63.70 $63.06 2.3% $59.01 $58.41 $57.82 $57.24 $56.67 2.6% $53.67 $53.13 $52.60 $52.07 $51.55 2.9% $49.31 $48.82 $48.33 $47.85 $47.37 3.1% $45.67 $45.22 $44.77 $44.32 $43.88


Revenue Breakdown ($KK) Y/E 2011 Y/E 2012 Y/E 2013 1Q 2013 2Q 2013 Base Rentals $207,637 $235,233 $253,402 $66,976 $68,160

Percentage Rentals $9,084 $11,172 $11,251 $2,083 $1,915

Expense reimbursement $89,620 $101,110 $109,654 $31,542 $29,452

Other Income $8,882 $9,482 $10,702 $2,241 $2,749

Total Income $315,223 $356,997 $385,009 $102,842 $102,276 Base Rentals / Sq Ft $18.72 $20.10 $20.40 $5.39 $5.49

Percentage Rentals / Sq Ft $0.82 $0.95 $0.91 $0.17 $0.15

Expense reimbursement / Sq Ft $8.08 $8.64 $8.83 $2.54 $2.37

Other Income / Sq Ft $0.80 $0.81 $0.86 $0.18 $0.22

Real Estate Assets / Debt Y/E 2011 Y/E 2012 Y/E 2013 Maturity Rate Assets

Land $141,577 $148,002 $230,415 Buildings, Improvements &

Fixtures $1,434,637 $1,799,350 $2,019,404 Total $1,576,214 $1,947,352 $2,249,819 Accumulated Depreciation $453,145 $582,859 $654,631 Liabilities Senior notes

Senior notes (1)* $249,490 $249,683 $249,789 Nov '15 6.15%

Senior notes (2) $298,019 $298,350 $298,531 Jun '20 6.13%

Senior notes (3) $245,928 Dec '23 3.88%

Senior exchangeable notes $7,107 Aug '11 3.75%

Mortgages

Atlantic City $56,707 $32,626 November '21 - December

'26 5.14% - 7.65%

Deer Park $148,522 Aug '18 2.80%

Hershey $32,213 $30,963 Aug '15 5.17% - 8.00%

Ocean City $18,825 $18,386 Jan '16 5.24%

Note Payable $9,453 $9,604 Jun '16 1.50%

Unsecured term loan $250,000 $250,000 Feb '19 LIBOR + 1.60%

Unsecured term note $7,500 Aug '17 LIBOR + 1.30%

Unsecured lines of credit $160,000 $178,306 $16,200 Oct '17 LIBOR + 1.00%

Total Debt $714,616 $1,093,537 $1,308,049 Debt Due Average Cost of Debt 3.95% Net Working Capital $861,598 $853,815 $941,770

Disclosure: We certify that all work presented is our own, and any external sources are properly cited. We have disclosed all pertinent information discovered while researching this pitch and also declare that we find this stock to be an ethical purchase.

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