FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-11986
TANGER FACTORY OUTLET CENTERS, INC.
(Exact name of Registrant as specified in its Charter)
NORTH CAROLINA 56-1815473
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3200 Northline Avenue, Suite 360, Greensboro, North Carolina 27408
(Address of principal executive offices)
(Zip code)
(336) 292-3010
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
7,876,835 shares of Common Stock,
$.01 par value, outstanding as of May 1, 2000
1
TANGER FACTORY OUTLET CENTERS, INC.
Index
Part I. Financial Information
Page Number
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations
For the three months ended March 31, 2000 and 1999 3
Consolidated Balance Sheets
As of March 31, 2000 and December 31, 1999 4
Consolidated Statements of Cash Flows
For the three months ended March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II. Other Information
Item 1. Legal proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended
March 31,
2000 1999
- ---------------------------------------------------------------------------------------------------------------------
(Unaudited)
REVENUES
Base rentals $17,458 $17,071
Percentage rentals 453 408
Expense reimbursements 6,963 6,358
Other income 943 326
- ---------------------------------------------------------------------------------------------------------------------
Total revenues 25,817 24,163
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES
Property operating 7,439 6,889
General and administrative 1,761 1,674
Interest 6,662 5,969
Depreciation and amortization 6,438 6,179
- ---------------------------------------------------------------------------------------------------------------------
Total expenses 22,300 20,711
- ---------------------------------------------------------------------------------------------------------------------
Income before minority interest and extraordinary item 3,517 3,452
Minority interest (848) (826)
- ---------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 2,669 2,626
Extraordinary item - Loss on early extinguishment of debt,
net of minority interest of $96 --- (249)
- ---------------------------------------------------------------------------------------------------------------------
Net income 2,669 2,377
Less applicable preferred share dividends (466) (479)
- ---------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $2,203 $1,898
=====================================================================================================================
Basic earnings per common share:
Income before extraordinary item $.28 $.27
Extraordinary item --- (.03)
- ---------------------------------------------------------------------------------------------------------------------
Net income $.28 $.24
=====================================================================================================================
Diluted earnings per common share:
Income before extraordinary item $.28 $.27
Extraordinary item --- (.03)
- ---------------------------------------------------------------------------------------------------------------------
Net income $.28 $.24
=====================================================================================================================
Dividends paid per common share $.61 $.60
=====================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
3
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, December 31,
2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Rental Property
Land $63,045 $63,045
Buildings, improvements and fixtures 507,709 484,277
Developments under construction 975 18,894
- ----------------------------------------------------------------------------------------------------------------------------
571,729 566,216
Accumulated depreciation (110,479) (104,511)
- ----------------------------------------------------------------------------------------------------------------------------
Rental property, net 461,250 461,705
Cash and cash equivalents 200 503
Deferred charges, net 8,526 8,176
Other assets 15,541 19,685
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $485,517 $490,069
============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilites
Long-term debt
Senior, unsecured notes $150,000 $150,000
Mortgages payable 90,349 90,652
Credit facilities 89,268 88,995
- ----------------------------------------------------------------------------------------------------------------------------
329,617 329,647
Construction trade payables 6,372 6,287
Accounts payable and accrued expenses 12,022 13,081
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 348,011 349,015
- ----------------------------------------------------------------------------------------------------------------------------
Commitments
Minority interest 32,303 33,290
- ----------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Preferred shares, $.01 par value, 1,000,000 shares authorized,
85,270 shares issued and outstanding at March 31, 2000
and December 31, 1999 1 1
Common shares, $.01 par value, 50,000,000 shares authorized,
7,876,835 shares issued and outstanding at March 31, 2000
and December 31, 1999 79 79
Paid in capital 136,571 136,571
Distributions in excess of net income (31,448) (28,887)
- ----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 105,203 107,764
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $485,517 $490,069
============================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
4
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
March 31,
2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
(Unaudited)
OPERATING ACTIVITIES
Net income $2,669 $2,377
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 6,438 6,179
Amortization of deferred financing costs 288 274
Minority interest 848 730
Loss on early extinguishment of debt --- 345
Straight-line base rent adjustment 9 (150)
Increase (decrease) due to changes in:
Other assets 428 1,899
Accounts payable and accrued expenses (1,059) (225)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activites 9,621 11,429
- -----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to rental properties (5,417) (11,237)
Additions to deferred lease costs (609) (549)
Insurance proceeds from casualty losses 4,046 ---
Advances to officer (411) ---
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,391) (11,786)
- -----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Repurchase of common shares --- (667)
Cash dividends paid (5,230) (5,216)
Distributions to minority interest (1,835) (1,820)
Proceeds from notes payable --- 66,500
Repayments on notes payable (303) (47,544)
Proceeds from credit facilities 31,578 26,110
Repayments on credit facilities (31,305) (42,350)
Additions to deferred financing costs (438) (786)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (7,533) (5,773)
- -----------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (303) (6,130)
Cash and cash equivalents, beginning of period 503 6,330
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $200 $200
=============================================================================================================================
Supplemental schedule of non-cash investing activities:
The Company purchases capital equipment and incurs costs relating to construction of new facilities,
including tenant finishing allowances. Expenditures included in construction trade payables as of March 31, 2000
and 1999 amounted to $6,372 and $6,468, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
5
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
1. Interim Financial Statements
The unaudited Consolidated Financial Statements of Tanger Factory Outlet
Centers, Inc., a North Carolina corporation (the "Company"), have been
prepared pursuant to generally accepted accounting principles and should be
read in conjunction with the Consolidated Financial Statements and Notes
thereto of the Company's Annual Report on Form 10-K for the year ended
December 31, 1999. Certain information and note disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
the Securities and Exchange Commission's ("SEC") rules and regulations,
although management believes that the disclosures are adequate to make the
information presented not misleading.
The accompanying Consolidated Financial Statements reflect, in the opinion
of management, all adjustments necessary for a fair presentation of the
interim financial statements. All such adjustments are of a normal and
recurring nature.
2. Development of Rental Properties
During the first quarter of 2000, the Company added 43,200 square feet to
the portfolio in Commerce, GA and Sevierville, Tennessee. In addition, the
Company has approximately 83,200 square feet of expansion space under
construction in four centers.
Commitments to complete construction of the expansions to the existing
properties and other capital expenditure requirements amounted to
approximately $1.3 million at March 31, 2000. Commitments for construction
represent only those costs contractually required to be paid by the
Company.
Interest costs capitalized during the three months ended March 31, 2000 and
1999 amounted to $238,000 and $346,000, respectively.
3. Other Assets
Other assets include a receivable totaling $3.2 million from Stanley K.
Tanger, the Company's Chairman of the Board and Chief Executive Officer.
Mr. Tanger and the Company have entered into demand note agreements whereby
he may borrow up to $3.5 million through various advances from the Company
for an investment in a separate E-commerce business venture. The notes bear
interest at a rate of 8% per annum and are collateralized by Mr. Tanger's
limited partnership interest in Tanger Investments Limited Partnership. Mr.
Tanger intends to fully repay the loans.
4. Long-Term Debt
In January 2000, the Company entered into a $20.0 million two year
unsecured term loan with interest payable at LIBOR plus 2.25%. The proceeds
were used to reduce amounts outstanding under the existing lines of credit.
Also in January 2000, the Company entered into interest rate swap
agreements on notional amounts totaling $20.0 million at a cost of
$162,000. The agreements mature in January 2002. The swap agreements have
the effect of fixing the interest rate on the new $20.0 million loan at
8.75%.
6
At March 31, 2000, the Company had revolving lines of credit with an
unsecured borrowing capacity of $100 million, of which $30.7 million was
available for additional borrowings.
5. Earnings Per Share
The following table sets forth a reconciliation of the numerators and
denominators in computing earnings per share in accordance with Statement
of Financial Accounting Standards No. 128, Earnings Per Share (in
thousands, except per share amounts):
Three Months Ended
March 31,
2000 1999
- -----------------------------------------------------------------------------------------------------------
Numerator:
Income before extraordinary item $2,669 $2,626
Less applicable preferred share dividends (466) (479)
- -----------------------------------------------------------------------------------------------------------
Income available to common shareholders -
numerator for basic and diluted earnings per share 2,203 2,147
- -----------------------------------------------------------------------------------------------------------
Denominator:
Basic weighted average common shares 7,877 7,884
Effect of outstanding share and unit options 6 ---
- -----------------------------------------------------------------------------------------------------------
Diluted weighted average common shares 7,883 7,884
- -----------------------------------------------------------------------------------------------------------
Basic earnings per share before extraordinary item $.28 $.27
===========================================================================================================
Diluted earnings per share before extaordinary item $.28 $.27
===========================================================================================================
The computation of diluted earnings per share excludes options to purchase
common shares when the exercise price is greater than the average market
price of the common shares for the period. Options excluded for the three
months ended March 31, 2000 and 1999 totaled 1,280,840 and 1,314,342,
respectively. The assumed conversion of preferred shares to common shares
as of the beginning of the year would have been anti-dilutive. The assumed
conversion of the partnership units held by the minority interest limited
partner as of the beginning of the year, which would result in the
elimination of earnings allocated to the minority interest, would have no
impact on earnings per share since the allocation of earnings to a
partnership unit is equivalent to earnings allocated to a common share.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with the consolidated
financial statements appearing elsewhere in this report. Historical results and
percentage relationships set forth in the consolidated statements of operations,
including trends which might appear, are not necessarily indicative of future
operations.
The discussion of the Company's results of operations reported in the
consolidated statements of operations compares the three months ended March 31,
2000 with the three months ended March 31, 1999. Certain comparisons between the
periods are made on a percentage basis as well as on a weighted average gross
leasable area ("GLA") basis, a technique which adjusts for certain increases or
decreases in the number of centers and corresponding square feet related to the
development, acquisition, expansion or disposition of rental properties. The
computation of weighted average GLA, however, does not adjust for fluctuations
in occupancy which may occur subsequent to the original opening date.
7
Cautionary Statements
Certain statements made below are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends 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 and expectations, are
generally identifiable by use of the words "believe", "expect", "intend",
"anticipate", "estimate", "project", or similar expressions. You should not rely
on forward-looking statements since they involve known and unknown risks,
uncertainties and other factors which are, in some cases, beyond our control and
which could materially affect our actual results, performance or achievements.
Factors which may cause actual results to differ materially from current
expectations include, but are not limited to, the following:
- - general economic and local real estate conditions could change (for example,
our tenant's business may change if the economy changes, which might effect
(1) the amount of rent they pay us or their ability to pay rent to us, (2)
their demand for new space, or (3) our ability to renew or re-lease a
significant amount of available space on favorable terms;
- - the laws and regulations that apply to us could change (for instance, a
change in the tax laws that apply to REITs could result in unfavorable tax
treatment for us);
- - availability and cost of capital (for instance, financing opportunities may
not be available to us, or may not be available to us on favorable terms);
- - our operating costs may increase or our costs to construct or acquire new
properties or expand our existing properties may increase or exceed our
original expectations.
General Overview
At March 31, 2000, the Company owned 31 centers in 22 states totaling 5.2
million square feet compared to 31 centers in 23 states totaling 5.1 million
square feet at March 31, 1999. Since March 31, 1999, the Company has acquired
one center and expanded four centers, increasing GLA by approximately 327,000
square feet. However, on May 3, 1999, a tornado destroyed the center in Stroud,
Oklahoma, reducing GLA by 198,000 square feet.
During the quarter, the Company added 43,200 square feet to the portfolio in
Commerce, GA and Sevierville, Tennessee from previous expansions that began in
1999. In addition, the Company has approximately 83,200 square feet of expansion
space under construction in four centers which are scheduled to open in the next
six months.
8
A summary of the operating results for the three months ended March 31, 2000 and
1999 is presented in the following table, expressed in amounts calculated on a
weighted average GLA basis.
Three Months Ended
March 31,
2000 1999
- ----------------------------------------------------------------------------------------------------
GLA open at end of period (000's) 5,191 5,062
Weighted average GLA (000's) (1) 5,168 5,039
Outlet centers in operation 31 31
New centers acquired -- --
Centers disposed of or sold -- --
Centers expanded -- 1
States operated in at end of period 22 23
Occupancy percentage at end of period 95 94
Per square foot
Revenues
Base rentals $3.38 $3.39
Percentage rentals .09 .08
Expense reimbursements 1.35 1.26
Other income .18 .06
- ----------------------------------------------------------------------------------------------------
Total revenues 5.00 4.79
- ----------------------------------------------------------------------------------------------------
Expenses
Property operating 1.44 1.37
General and administrative .34 .33
Interest 1.29 1.18
Depreciation and amortization 1.25 1.23
- ----------------------------------------------------------------------------------------------------
Total expenses 4.32 4.11
- ----------------------------------------------------------------------------------------------------
Income before minority interest and extraordinary item $.68 $.68
====================================================================================================
(1) GLA weighted by months of operations. GLA is not adjusted for fluctuations in occupancy
which may occur subsequent to the original opening date.
RESULTS OF OPERATIONS
Comparison of the three months ended March 31, 2000 to the three months ended
March 31, 1999
Base rentals increased $387,000, or 2%, in the 2000 period when compared to the
same period in 1999. The increase is primarily due to the effect of the
expansions and the acquisition completed since March 31, 1999, as mentioned in
the Overview above, offset by the loss of rent from the center in Stroud,
Oklahoma. Base rent per weighted average GLA decreased slightly by $.01 per
square foot from $3.38 per square foot in the first three months of 2000
compared to $3.39 per square foot in the first three months of 1999.
Percentage rentals, which represent revenues based on a percentage of tenants'
sales volume above predetermined levels (the "breakpoint"), increased $45,000,
and on a weighted average GLA basis, increased $.01 per square foot in 2000
compared to 1999. For the three months ended March 31, 2000, reported same-store
sales, defined as the weighted average sales per square foot reported by tenants
for stores open since January 1, 1999, increased by 4% when compared to the
first three months of 1999. Reported same-space sales for the rolling twelve
months ended March 31, 2000, defined as the weighted average sales per square
foot reported in space open for the full duration of each comparison period,
increased to $270, or 6%, reflecting the continued success of the Company's
strategy to re-merchandise selected centers by replacing low volume tenants with
high volume tenants.
9
Expense reimbursements, which represent the contractual recovery from tenants of
certain common area maintenance, insurance, property tax, promotional,
advertising and management expenses generally fluctuates consistently with the
reimbursable property operating expenses to which it relates. Expense
reimbursements, expressed as a percentage of property operating expenses,
increased from 92% in 1999 to 94% in 2000 primarily as a result decreases in
certain non-reimbursable expenses.
Other income increased $617,000 in 2000 compared to 1999 primarily due to the
recognition of $493,000 in business interruption insurance proceeds relating to
the Stroud center.
Property operating expenses increased by $550,000, or 8%, in the 2000 period as
compared to the 1999 period and, on a weighted average GLA basis, increased $.07
per square foot from $1.37 to $1.44. The increases are the result of certain
increases in real estate tax assessments and higher common area maintenance
expenses.
General and administrative expenses increased $87,000, or 5%, in the 2000 period
as compared to the 1999 period. However, as a percentage of total revenues,
general and administrative expenses were approximately 7% of total revenues in
both the 2000 and 1999 periods and, on a weighted average GLA basis, increased
$.01 per square foot from $.33 in 1999 to $.34 in 2000 reflecting the absorption
of the acquisition and expansions in 1999 without corresponding increases in
general and administrative expenses.
Interest expense increased $693,000 during 2000 as compared to 1999 due to the
incremental financing needed to fund the 1999 expansions and the November 1999
acquisition and due to higher interest rates on the Company's variable rate debt
and on its new $20.0 million term loan established in January 2000. Depreciation
and amortization per weighted average GLA increased slightly from $1.23 per
square foot in the 1999 period to $1.25 per square foot in the 2000 period.
The extraordinary loss recognized in the 1999 period represents the write-off of
unamortized deferred financing costs related to debt that was extinguished
during the period prior to its scheduled maturity.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $9.6 million and $11.4 million for
the three months ended March 31, 2000 and 1999, respectively. The decrease in
cash provided by operating activities is due primarily to a decrease in payables
and an increase in receivables during 2000 when compared to 1999. Net cash used
in investing activities was $2.4 and $11.8 million during 2000 and 1999,
respectively. Cash used was lower in 2000 primarily due to the decrease in cash
paid for expansion activities and due to $4.0 million received in insurance
proceeds relating to the Stroud, Oklahoma center. Net cash used in financing
activities amounted to $7.5 million and $5.8 million during the first three
months of 2000 and 1999.
During the quarter, the Company added 43,200 square feet to the portfolio in
Commerce, GA and Sevierville, Tennessee. In addition, the Company has
approximately 83,200 square feet of expansion space under construction in four
centers which are scheduled to open in the next six months. Commitments to
complete construction of the expansions to the existing properties and other
capital expenditure requirements amounted to approximately $1.3 million at March
31, 2000. Commitments for construction represent only those costs contractually
required to be paid by the Company.
The Company also is in the process of developing plans for additional expansions
and new centers for completion in 2000 and beyond. Currently, the Company is in
the preleasing stage of a second phase of the Fort Lauderdale development that
will include 130,000 square feet of GLA to be developed on the 12-acre parcel
adjacent to the existing Bass Pro Outdoor World store. If the Company decides to
develop this project, it anticipates stores in this phase to begin opening in
early 2001. Based on tenant demand, the Company also has an option to purchase
the retail portion of a site at the Bourne Bridge Rotary in Cape Cod, MA where
it plans to develop a new 300,000 square foot outlet center.
10
The entire site will contain more than 950,000 square feet of mixed-use
entertainment, retail, office and residential community built in the style of a
Cape Cod Village. The local and state planning authorities are currently
reviewing the project and the Company anticipates final approvals by early 2001.
These anticipated or planned developments or expansions may not be started or
completed as scheduled, or may not result in accretive funds from operations. In
addition, the Company regularly evaluates acquisition or disposition proposals,
engages from time to time in negotiations for acquisitions or dispositions and
may from time to time 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 also may not be consummated, or if
consummated, may not result in accretive funds from operations.
Other assets include a receivable totaling $3.2 million from Stanley K. Tanger,
the Company's Chairman of the Board and Chief Executive Officer. Mr. Tanger and
the Company have entered into demand note agreements whereby he may borrow up to
$3.5 million through various advances from the Company for an investment in a
separate E-commerce business venture. The notes bear interest at a rate of 8%
per annum and are collateralized by Mr. Tanger's limited partnership interest in
Tanger Investments Limited Partnership. Mr. Tanger intends to fully repay the
loans.
The Company maintains revolving lines of credit which provide for unsecured
borrowings up to $100 million, of which $30.7 million was available for
additional borrowings at March 31, 2000. As a general matter, the Company
anticipates utilizing its lines of credit as an interim source of funds to
acquire, develop and expand factory outlet centers and repaying the credit lines
with longer-term debt or equity when management determines that market
conditions are favorable. Under joint shelf registration, the Company and the
Operating Partnership could issue up to $100 million in additional equity
securities and $100 million in additional debt securities. With the decline in
the real estate debt and equity markets, the Company may not, in the short term,
be able to access these markets on favorable terms. Management believes the
decline is temporary and may utilize these funds as the markets improve to
continue its external growth. In the interim, the Company may consider the use
of operational and developmental joint ventures and other related strategies to
generate additional capital. The Company may also consider selling certain
properties that do not meet the Company's long-term investment criteria as well
as outparcels on existing properties to generate capital to reinvest into other
attractive opportunities. Based on cash provided by operations, existing credit
facilities, ongoing negotiations with certain financial institutions and funds
available under the shelf registration, management believes that the Company has
access to the necessary financing to fund the planned capital expenditures
during 2000.
In January 2000, the Company entered into a $20.0 million two year unsecured
term loan with interest payable at LIBOR plus 2.25%. The proceeds were used to
reduce amounts outstanding under the existing lines of credit. Also in January
2000, the Company entered into interest rate swap agreements on notional amounts
totaling $20.0 million at a cost of $162,000. The agreements mature in January
2002. The swap agreements have the effect of fixing the interest rate on the new
$20.0 million loan at 8.75%.
At March 31, 2000, approximately 73% of the outstanding long-term debt
represented unsecured borrowings and approximately 80% of the Company's real
estate portfolio was unencumbered. The weighted average interest rate on debt
outstanding on March 31, 2000 was 8.2%.
The Company anticipates that adequate cash will be available to fund its
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 the Company receives most of its rental payments on a
monthly basis, distributions to shareholders are 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 the existing lines of credit or invested in
short-term money market or other suitable
11
instruments. Certain of the Company's debt agreements limit the payment of
dividends such that dividends will not exceed funds from operations ("FFO"), as
defined in the agreements, for the prior fiscal year on an annual basis or 95%
of FFO on a cumulative basis from the date of the agreement.
On April 13, 2000, the Board of Directors of the Company declared a $.6075 cash
dividend per common share payable on May 15, 2000 to each shareholder of record
on April 28, 2000, and caused a $.6075 per Operating Partnership unit cash
distribution to be paid to the minority interests. The Board of Directors of the
Company also declared a cash dividend of $.5474 per preferred depositary share
payable on May 15, 2000 to each shareholder of record on April 28, 2000.
Market Risk
The Company is exposed to various market risks, including changes in interest
rates. Market risk is the potential loss arising from adverse changes in market
rates and prices, such as interest rates. The Company does not enter into
derivatives or other financial instruments for trading or speculative purposes.
The Company negotiates long-term fixed rate debt instruments and enters into
interest rate swap agreements to manage its exposure to interest rate changes.
The swaps involve the exchange of fixed and variable interest rate payments
based on a contractual principal amount and time period. Payments or receipts on
the agreements are recorded as adjustments to interest expense. At March 31,
2000, the Company had interest rate swap agreements effective through January
2002 with a notional amount of $20 million. Under this agreement, the Company
receives a floating interest rate based on the 30 day LIBOR index and pays a
fixed interest rate of 6.5%. These swaps effectively change the Company's
payment of interest on $20 million of variable rate debt to fixed rate debt for
the contract period at a rate of 8.75%.
The fair value of the interest rate swap agreements represent the estimated
receipts or payments that would be made to terminate the agreements. At March
31, 2000, the Company would have received $136,000 to terminate the agreements.
A 1% decrease in the 30 day LIBOR index would decrease this amount received by
approximately $324,000. The fair value is based on dealer quotes, considering
current interest rates.
The fair market value of long-term fixed interest rate debt is subject to market
risk. Generally, the fair market value of fixed interest rate debt will increase
as interest rates fall and decrease as interest rates rise. The estimated fair
value of the Company's total long-term debt at March 31, 2000 was $323.8 million
and its recorded value was $329.6 million. A 1% increase from prevailing
interest rates at March 31, 2000 would result in a decrease in fair value of
total long-term debt by approximately $4.7 million. Fair values were determined
from quoted market prices, where available, using current interest rates
considering credit ratings and the remaining terms to maturity.
New Accounting Pronouncements
During 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires entities to recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at their fair value. In June 1999, the
FASB issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133-an amendment
of the FASB Statement No. 133" that revises SFAS No. 133 to become effective in
the first quarter of 2001. Management of the Company anticipates that, due to
its limited use of derivative instruments, the adoption of SFAS No. 133 will not
have a significant effect on the Company's results of operations or its
financial position.
12
Funds from Operations
Management believes that for a clear understanding of the consolidated
historical operating results of the Company, FFO should be considered along with
net income as presented in the unaudited consolidated financial statements
included elsewhere in this report. FFO is presented because it is a widely
accepted financial indicator used by certain investors and analysts to analyze
and compare one equity real estate investment trust ("REIT") with another on the
basis of operating performance. FFO is generally defined as net income (loss),
computed in accordance with generally accepted accounting principles, before
extraordinary items and gains (losses) on sale of depreciable operating
properties, plus depreciation and amortization uniquely significant to real
estate. The Company cautions that the calculation of FFO may vary from entity to
entity and as such the presentation of FFO by the Company may not be comparable
to other similarly titled measures of other reporting companies. FFO does not
represent net income or cash flow from operations as defined by generally
accepted accounting principles and should not be considered an alternative to
net income as an indication of operating performance or to cash from operations
as a measure of liquidity. FFO is not necessarily indicative of cash flows
available to fund dividends to shareholders and other cash needs.
In October 1999, the National Association of Real Estate Investment Trusts
("NAREIT") issued interpretive guidance regarding the calculation of FFO.
NAREIT's leadership determined that FFO should include both recurring and
non-recurring operating results, except those results defined as extraordinary
items under generally accepted accounting principles and gains and losses from
sales of depreciable operating property. All REITS are encouraged to implement
the recommendations of this guidance effective for fiscal periods beginning in
2000 for all periods presented in financial statements or tables. The Company's
adoption of the new NAREIT clarification as of January 1, 2000 had no impact on
amounts previously reported as funds from operations.
Below is a calculation of funds from operations for the three months ended March
31, 2000 and 1999 as well as actual cash flow and other data for those
respective periods (in thousands):
Three Months Ended
March 31,
2000 1999
- -------------------------------------------------------------------------------------------------------
Funds from Operations:
Net income $2,669 $2,377
Adjusted for:
Extraordinary item - loss on early extinguishment of debt --- 249
Minority interest 848 826
Depreciation and amortization uniquely significant to real estate 6,378 6,121
- -------------------------------------------------------------------------------------------------------
Funds from operations before minority interest $9,895 $9,573
=======================================================================================================
Cash flows provided by (used in):
Operating activites $9,621 $11,429
Investing activities $(2,391) $(11,786)
Financing activities $(7,533) $(5,773)
Weighted average shares outstanding (1) 11,684 11,713
=======================================================================================================
(1) Assumes the partnership units of the Operating Partnership held by the minority interest, prefered
shares of the Company and share and unit options are all converted to common shares of the
Company.
13
Economic Conditions and Outlook
The majority of the Company's leases contain provisions designed to mitigate the
impact of inflation. Such provisions include clauses for the escalation of base
rent and clauses enabling the Company to receive percentage rentals based on
tenants' gross sales (above predetermined levels, which the Company believes
often are lower than traditional retail industry standards) which generally
increase as prices rise. Most of the leases require the tenant to pay their
share of 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.
While factory outlet stores continue to be a profitable and fundamental
distribution channel for brand name manufacturers, some retail formats are more
successful than others. As typical in the retail industry, certain tenants have
closed, or will close, certain stores by terminating their lease prior to its
natural expiration or as a result of filing for protection under bankruptcy
laws.
As part of its strategy of aggressively managing its assets, the Company is
strengthening the tenant base in several of its centers by adding strong new
anchor tenants, such as Polo, Nike, GAP and Nautica. To accomplish this goal,
stores may remain vacant for a longer period of time in order to recapture
enough space to meet the size requirement of these upscale, high volume tenants.
Consequently, the Company anticipates that its average occupancy level will
remain strong, but may be more in line with the industry average.
Approximately 26% of the Company's lease portfolio is scheduled to expire during
the next two years. Approximately 712,000 square feet of space is up for renewal
during 2000 and approximately 629,000 square feet will come up for renewal in
2001. If the Company were unable to successfully renew or release a significant
amount of this space on favorable economic terms, the loss in rent could have a
material adverse effect on its results of operations.
Existing tenants' sales have remained stable and renewals by existing tenants
have remained strong. Approximately 283,000, or 40%, of the square feet
scheduled to expire in 2000 have already been renewed by the existing tenants.
In addition, the Company continues to attract and retain additional tenants. The
Company's factory outlet centers typically include well known, national, brand
name companies. By maintaining a broad base of creditworthy tenants and a
geographically diverse portfolio of properties located across the United States,
the Company reduces its operating and leasing risks. No one tenant (including
affiliates) accounts for more than 7% of the Company's combined base and
percentage rental revenues. Accordingly, management currently does not expect
any material adverse impact on the Company's results of operation and financial
condition as a result of leases to be renewed or stores to be released.
Year 2000 Compliance
The Company did not experience any systems or other Year 2000 ("Y2K") problems
during the first quarter of 2000. In 1999, the Company spent approximately
$220,000 to upgrade or replace equipment or systems specifically to bring them
in compliance with Y2K. The Company is not aware of any other significant costs
to be incurred to address future Y2K problems.
There are a number of Y2K related items that may affect the Company's results of
operations. For example, the Company's spending patterns or cost relationships
may have been affected by large Y2K remediation expenditures or the postponement
of certain expenses. The Company's revenue patterns may have been affected by
unusual tenant behavior, such as delayed openings or delayed payments of rents
until after Y2K. In addition, some companies may have postponed Information
Technology projects or other capital spending in preparing for Y2K which could
impact the company's liquidity requirements. The Company has not experienced any
of these situations and does not believe that any exist which might materially
impact the Company's results of operations or liquidity.
14
The Company has third-party relationships with approximately 280 tenants and
over 8,000 suppliers and contractors. Many of these third party tenants are
publicly-traded corporations and subject to disclosure requirements. The
principal risks to the Company in its relationships with third parties are the
failure of third-party systems used to conduct business such as tenants being
unable to stock stores with merchandise, use cash registers and pay invoices;
banks being unable to process receipts and disbursements; vendors being unable
to supply needed materials and services to the centers; and processing of
outsourced employee payroll.
The Company's assessment of major third parties' Y2K readiness included sending
surveys to tenants and key suppliers of outsourced services including stock
transfer, debt servicing, banking collection and disbursement, payroll and
benefits. The majority of the Company's vendors are small suppliers that the
Company believes can manually execute their business and are readily
replaceable. Management also believes there is no material risk of being unable
to procure necessary supplies and services from third parties who have not
already indicated that they are currently Y2K compliant. The Company received
responses to approximately 73% of the surveys sent to tenants, banks and key
suppliers. Of the companies who responded, 99% indicated they were presently, or
would be by the year 2000, Y2K compliant. The Company is not aware of any
significant third parties who are not currently Y2K compliant. However, there
can be no assurance that all third parties are currently Y2K compliant and that
all will be able to continue to conduct transactions with the Company
successfully. There also can be no assurance that Y2K problems of third parties
or of the Company's own systems which did not surface in the first three months
of 2000 will not be a problem sometime in the near future.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor the Operating Partnership is presently involved in any
material litigation nor, to their knowledge, is any material litigation
threatened against the Company or the Operating Partnership or its properties,
other than routine litigation arising in the ordinary course of business and
which is expected to be covered by the liability insurance.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None
15
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
TANGER FACTORY OUTLET CENTERS, INC.
By: /s/ FRANK C. MARCHISELLO, JR.
-------------------------------
Frank C. Marchisello, Jr.
Senior Vice President, Chief Financial Officer
DATE: May 11, 2000
16