FORM 10-Q
UNITED STATES
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 June 30, 2001
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
7,929,711 Common Shares, $.01 par value,
outstanding as of August 1, 2001
TANGER FACTORY OUTLET CENTERS, INC.
Index
Part I. Financial Information
Page Number
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations
For the three and six months ended June 30, 2001 and 2000 3
Consolidated Balance Sheets
As of June 30, 2001 and December 31, 2000 4
Consolidated Statements of Cash Flows
For the six months ended June 30, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other Information
Item 1. Legal proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
2
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
REVENUES
Base rentals $ 18,564 $ 17,962 $ 36,842 $ 35,420
Percentage rentals 499 551 850 1,004
Expense reimbursements 7,701 7,384 15,272 14,347
Other income 557 1,393 1,077 2,336
- -------------------------------------------------------------------------------------------------------------------------------
Total revenues 27,321 27,290 54,041 53,107
- -------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Property operating 8,958 8,268 17,655 15,707
General and administrative 2,016 1,866 4,085 3,627
Interest 7,658 6,937 15,291 13,599
Depreciation and amortization 6,926 6,537 14,137 12,975
- -------------------------------------------------------------------------------------------------------------------------------
Total expenses 25,558 23,608 51,168 45,908
- -------------------------------------------------------------------------------------------------------------------------------
Income before loss on sale of real estate,
minority interest and extraordinary item 1,763 3,682 2,873 7,199
Loss on sale of real estate --- (5,935) --- (5,935)
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest and extraordinary item 1,763 (2,253) 2,873 1,264
Minority interest (365) 756 (550) (92)
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item 1,398 (1,497) 2,323 1,172
Extraordinary item - Loss on early extinguishment of debt,
net of minority interest of $50 --- --- (130) ---
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 1,398 (1,497) 2,193 1,172
Less applicable preferred share dividends (443) (467) (885) (933)
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to common shareholders $ 955 $ (1,964) $ 1,308 $ 239
===============================================================================================================================
Basic earnings per common share:
Income (loss) before extraordinary item $ .12 $ (.25) $ .18 $ .03
Extraordinary item --- --- (.02) ---
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ .12 $ (.25) $ .16 $ .03
===============================================================================================================================
Diluted earnings per common share:
Income (loss) before extraordinary item $ .12 $ (.25) $ .18 $ .03
Extraordinary item --- --- (.02) ---
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ .12 $ (.25) $ .16 $ .03
===============================================================================================================================
Dividends paid per common share $ .61 $ .61 $ 1.22 $ 1.21
===============================================================================================================================
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)
June 30, December 31,
2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
Rental Property
Land $ 59,858 $ 59,858
Buildings, improvements and fixtures 533,823 505,554
Developments under construction --- 19,516
- --------------------------------------------------------------------------------------------------------------------------------
593,681 584,928
Accumulated depreciation (135,472) (122,365)
- --------------------------------------------------------------------------------------------------------------------------------
Rental property, net 458,209 462,563
Cash and cash equivalents 216 634
Deferred charges, net 12,130 8,566
Other assets 14,422 15,645
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $ 484,977 $ 487,408
================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Debt
Senior, unsecured notes $ 175,000 $ 150,000
Mortgages payable 177,823 135,313
Term note, unsecured --- 20,000
Lines of credit 7,413 41,530
- --------------------------------------------------------------------------------------------------------------------------------
360,236 346,843
Construction trade payables 6,251 9,784
Accounts payable and accrued expenses 12,452 12,807
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 378,939 369,434
- --------------------------------------------------------------------------------------------------------------------------------
Commitments
Minority interest 23,765 27,097
- --------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Preferred shares, $.01 par value, 1,000,000 shares authorized,
80,600 shares issued and outstanding at June 30, 2001
and December 31, 2000 1 1
Common shares, $.01 par value, 50,000,000 shares authorized,
7,929,211 and 7,918,911 shares issued and outstanding at
June 30, 2001 and December 31, 2000 79 79
Paid in capital 136,522 136,358
Distributions in excess of net income (53,894) (45,561)
Accumulated other comprehensive loss (435) ---
- --------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 82,273 90,877
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 484,977 $ 487,408
================================================================================================================================
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)
Six Months Ended
June 30,
2001 2000
- ---------------------------------------------------------------------------------------------------------------------
(Unaudited)
OPERATING ACTIVITIES
Net income $ 2,193 $ 1,172
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 14,137 12,975
Amortization of deferred financing costs 973 603
Minority interest 500 92
Loss on early extinguishment of debt 180 ---
Loss on sale of real estate --- 5,935
Gain on sale of outparcels of land --- (427)
Straight-line base rent adjustment 172 101
Increase (decrease) due to changes in:
Other assets (497) 520
Accounts payable and accrued expenses (957) (1,535)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activites 16,701 19,436
- ---------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to rental properties (12,256) (13,062)
Additions to deferred lease costs (1,064) (1,378)
Net proceeds from sale of real estate 723 7,848
Insurance proceeds from casualty losses --- 4,046
Repayments from (advances to) officers 645 (571)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (11,952) (3,117)
- ---------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Cash dividends paid (10,526) (10,482)
Distributions to minority interest (3,693) (3,678)
Proceeds from issuance of debt 221,817 60,332
Repayments of debt (208,424) (62,295)
Additions to deferred financing costs (4,533) (514)
Proceeds from exercise of unit options 192 ---
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (5,167) (16,637)
- ---------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (418) (318)
Cash and cash equivalents, beginning of period 634 503
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 216 $ 185
=====================================================================================================================
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 June 30, 2001 and 2000 amounted to $6,251 and
$12,720, 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
June 30, 2001
(Unaudited)
1. Business
Tanger Factory Outlet Centers, Inc., a fully-integrated, self-administered,
self-managed real estate investment trust ("REIT"), develops, owns and operates
factory outlet centers. The factory outlet centers and other assets of the
Company's business are held by, and all of its operations are conducted by,
Tanger Properties Limited Partnership, the Company's majority owned limited
partnership. Unless the context indicates otherwise, the term "Company" refers
to Tanger Factory Outlet Centers, Inc. and the term "Operating Partnership"
refers to Tanger Properties Limited Partnership. The terms "we", "our" and "us"
refer to the Company or the Company and the Operating Partnership together, as
the context requires.
2. Basis of Presentation
Our unaudited Consolidated Financial Statements have been prepared pursuant to
accounting principles generally accepted in the United States of America 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, 2000. Certain information and note disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America 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 unaudited 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.
3. Development of Rental Properties
During the first six months of 2001, we added 70,600 square feet to the
portfolio in San Marcos, Texas. In addition, we have approximately 26,500 square
feet of expansion space substantially complete in San Marcos which is scheduled
to open during the remainder of 2001.
Commitments to complete construction of the expansions to the existing
properties and other capital expenditure requirements amounted to approximately
$114,000 at June 30, 2001. Commitments for construction represent only those
costs contractually required to be paid by us.
Interest costs capitalized during the three months ended June 30, 2001 and 2000
amounted to $52,000 and $121,000, respectively, and for the six months ended
June 30, 2001 and 2000 amounted to $423,000 and $359,000, respectively.
4. Debt
On May 1, 2001, we entered into an eight year collateralized loan with John
Hancock Life Insurance Company for $19.45 million at a fixed rate of 7.98%. The
proceeds were used to reduce amounts outstanding under existing lines of credit.
6
On March 26, 2001, we entered into a five year collateralized loan with Wells
Fargo Bank for $24.0 million at a variable rate of LIBOR plus 1.75%. The
proceeds were used to reduce amounts outstanding under existing lines of credit.
Additionally on March 26, 2001, we extended the maturity date of our existing
$29.5 million term loan with Wells Fargo Bank from July 2005 to March 2006.
On February 9, 2001, the Operating Partnership issued $100 million of 9.125%
senior, unsecured notes, maturing on February 15, 2008. The net proceeds of $97
million were used to repay all of the outstanding indebtedness under our $75
million 8.75% notes which were due March 11, 2001. The net proceeds were also
used to repay the $20 million LIBOR plus 2.25% term loan due January 2002 with
Fleet National Bank and Bank of America. The interest rate swap agreements
associated with this loan were terminated at a cost of $295,200 which has been
included in interest expense. In addition, approximately $180,000 of unamortized
costs were written off as an extraordinary item. The remaining proceeds were
used for general operating purposes.
At June 30, 2001, we had revolving lines of credit with an unsecured borrowing
capacity of $100 million, of which $92.6 million was available for additional
borrowings. During the first six months of 2001, we extended the maturity on two
$25 million lines of credit from June 30, 2002 to June 30, 2003. Effective July
1, 2001, we reduced our borrowing capacity on one of our lines of credit from
$25 million to $10 million, thereby reducing our overall capacity to $85
million. As of June 30, 2001 we had no borrowings under this line of credit.
5. Accounting Change - Derivative Financial Instruments
Effective January 1, 2001, we adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by FAS 137 and FAS 138 (collectively, "FAS 133"). The
cumulative effect of the change in accounting principle related to the adoption
of FAS 133 resulted in the recognition of a $216,500 loss, net of minority
interest of $83,000, to accumulated other comprehensive income on the date of
adoption. As discussed in Note 4, certain interest rate swap agreements were
terminated during the first quarter and the other comprehensive loss totaling
$106,000, net of minority interest of $41,000, recognized at adoption relating
to these agreements was reclassified to earnings. In accordance with the
provisions of FAS 133, our sole remaining interest rate swap agreement has been
designated as a cash flow hedge and is carried on the balance sheet at fair
value. At June 30, 2001, the fair value of the hedge is recorded as a liability
of $602,000. For the three and six months ended June 30, 2001, the change in the
fair value of the remaining derivative instrument was recorded as a $10,000 and
$324,000 loss, net of minority interest of $4,000 and $125,000, respectively, to
accumulated other comprehensive income. Total comprehensive income for the three
and six months ended June 30, 2001 is as follows (in thousands):
Three Months Ended Six Months Ended
June 30, 2001 June 30, 2001
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,398 $ 2,193
Other comprehensvie income (loss):
Cumulative effect adjustment of FAS 133 adoption,
net of minority interest of $83 --- (217)
Reclassification to earnings on termination of cash flow hedge,
net of minority interest of $41 --- 106
Change in fair value of cash flow hedge,
net of minority interest of $4 and $125 (10) (324)
- ---------------------------------------------------------------------------------------------------------------------------------
Other comprehensive loss (10) (435)
- ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 1,388 $ 1,758
=================================================================================================================================
7
6. 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 Six Months Ended
June 30, June 30,
2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
Numerator:
Income (loss) before extraordinary item $ 1,398 $ (1,497) $ 2,323 $ 1,172
Less applicable preferred share dividends (443) (467) (885) (933)
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) available to common shareholders -
numerator for basic and diluted earnings per share $ 955 $ (1,964) $ 1,438 $ 239
- ----------------------------------------------------------------------------------------------------------------------------
Denominator:
Basic weighted average common shares 7,923 7,877 7,921 7,877
Effect of outstanding share and unit options 25 44 25 20
- ----------------------------------------------------------------------------------------------------------------------------
Diluted weighted average common shares 7,948 7,921 7,946 7,897
- ----------------------------------------------------------------------------------------------------------------------------
Basic earnings per share before extraordinary item $ .12 $ (.25) $ .18 $ .03
============================================================================================================================
Diluted earnings per share before extaordinary item $ .12 $ (.25) $ .18 $ .03
============================================================================================================================
The computation of diluted earnings per share before extraordinary item excludes
options to purchase common shares when the exercise price is greater than the
average market price of the common units for the period. Options excluded
totaled 1,245,000 and 1,521,000 for the three months ended June 30, 2001 and
2000, respectively, and 1,245,000 and 1,281,000 for the six months ended June
30, 2001 and 2000, 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.
<
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with the unaudited,
Consolidated Financial Statements appearing elsewhere in this report. Historical
results and percentage relationships set forth in the unaudited, Consolidated
Statements of Operations, including trends that might appear, are not
necessarily indicative of future operations.
The discussion of our results of operations reported in the unaudited,
Consolidated Statements of Operations compares the three and six months ended
June 30, 2001 with the three and six months ended June 30, 2000. 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 that may occur subsequent to the original
opening date.
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. We intend for 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 June 30, 2001, we owned 29 centers in 20 states totaling 5.3 million square
feet of GLA compared to 29 centers in 20 states totaling 5.0 million square feet
of GLA at June 30, 2000. Since June 30, 2000, we have expanded 3 centers,
increasing GLA by approximately 284,000 square feet.
9
During the first six months of 2001, we added 70,600 square feet to the
portfolio in San Marcos, TX. Currently, we have an additional 26,500 square feet
of expansion space substantially complete in San Marcos, TX, which is scheduled
to open during the remainder of 2001.
A summary of the operating results for the three and six months ended June 30,
2001 and 2000 is presented in the following table, expressed in amounts
calculated on a weighted average GLA basis.
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------
GLA open at end of period (000's) 5,306 5,021 5,306 5,021
Weighted average GLA (000's) (1) 5,294 5,176 5,274 5,171
Outlet centers in operation 29 29 29 29
Centers sold --- 2 --- 2
Centers expanded 1 --- 1 ---
States operated in at end of period 20 20 20 20
Occupancy percentage at end of period 94% 95% 94% 95%
Per square foot
Revenues
Base rentals $ 3.51 $ 3.47 $ 6.99 $ 6.85
Percentage rentals .09 .11 .16 .19
Expense reimbursements 1.45 1.43 2.90 2.77
Other income .11 .27 .20 .45
- ------------------------------------------------------------------------------------------------------------------------
Total revenues 5.16 5.28 10.25 10.26
- ------------------------------------------------------------------------------------------------------------------------
Expenses
Property operating 1.69 1.60 3.35 3.04
General and administrative .38 .36 .77 .70
Interest 1.45 1.34 2.90 2.63
Depreciation and amortization 1.31 1.26 2.68 2.51
- ------------------------------------------------------------------------------------------------------------------------
Total expenses 4.83 4.56 9.70 8.88
- ------------------------------------------------------------------------------------------------------------------------
Income before loss on sale of real estate,
minority interest and extraordinary item $ .33 $ .72 $ .55 $ 1.38
========================================================================================================================
(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 June 30, 2001 to the three months ended
June 30, 2000
Base rentals increased $602,000, or 3%, in the 2001 period when compared to the
same period in 2000. The increase is primarily due to the effect of the
expansions discussed in the General Overview above since June 30, 2000. Base
rent per weighted average GLA increased by $.04 per square foot from $3.47 per
square foot in the three months ended June 30, 2000 to $3.51 per square foot in
the three months ended June 30, 2001. The increase is the result of the sale of
the Lawrence, Kansas and McMinnville, Oregon centers in June 2000 which had a
lower average base rent per square foot compared to the portfolio average.
Percentage rentals, which represent revenues based on a percentage of tenants'
sales volume above predetermined levels (the "breakpoint"), decreased $52,000,
and on a weighted average GLA basis, decreased $.02 per square foot in 2001
compared to 2000.
10
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,
decreased from 89% in 2000 to 86% in 2001 primarily as a result of higher
operating costs and other non-reimbursable expenses and a 1% decrease in
occupancy rate for the 2001 period compared to the 2000 period.
Other income decreased $836,000 in 2001 compared to 2000 primarily due to the
recognition in the 2000 period of gains on sale of land outparcels totaling
$427,000 and the recognition of $493,000 of business interruption insurance
proceeds relating to the Stroud, Oklahoma center which was destroyed by a
tornado in May 1999.
Property operating expenses increased by $690,000, or 8%, in the 2001 period as
compared to the 2000 period and, on a weighted average GLA basis, increased $.09
per square foot from $1.60 to $1.69. The increases are the result of certain
increases in real estate tax assessments and higher common area maintenance
expenses.
General and administrative expenses increased by $150,000, or 8%, in the 2001
period as compared to the 2000 period and, as a percentage of total revenues,
were approximately 7% of total revenues in both the 2001 and 2000 periods.
Interest expense increased $721,000 during the 2001 period as compared to the
2000 period. Our strategy to replace short-term, variable rate debt with
long-term, fixed rate debt and extend our average debt maturities has resulted
in an overall higher interest rate on outstanding debt. Depreciation and
amortization per weighted average GLA increased slightly from $1.26 per square
foot in the 2000 period to $1.31 per square foot in the 2001 period due to a
higher mix of tenant finishing allowances included in buildings and improvements
which are depreciated over shorter lives (i.e. over lives generally ranging from
3 to 10 years as opposed to other construction costs which are depreciated over
lives ranging from 15 to 33 years).
Comparison of the six months ended June 30, 2001 to the six months ended June
30, 2000
Base rentals increased $1.4 million, or 4%, in the 2001 period when compared to
the same period in 2000. The increase is primarily due to the effect of the
expansions completed since June 30, 2000, as mentioned in the General Overview
above. Base rent per weighted average GLA increased by $.14 per square foot from
$6.85 per square foot in the six months ended June 30, 2000 to $6.99 per square
foot in the six months ended June 30, 2001. The increase is the result of the
sale of the Lawrence, Kansas and McMinnville, Oregon centers in June 2000 which
had a lower average base rent per square foot compared to the portfolio average.
Percentage rentals, which represent revenues based on a percentage of tenants'
sales volume above predetermined levels (the "breakpoint"), decreased $154,000,
and on a weighted average GLA basis, decreased $.03 per square foot in 2001
compared to 2000. For the first six months of 2001, reported same-store sales,
defined as the weighted average sales per square foot reported by tenants for
stores open since January 1, 2000, decreased by 3% when compared to the first
six months of 2000. This comparison was significantly impacted by severe winter
weather during the first quarter of 2001, particularly at our centers located in
the northeast and the effect of the San Marcos expansion on that center's
existing-store sales. Reported same-space sales for the rolling twelve months
ended June 30, 2001, defined as the weighted average sales per square foot
reported in space open for the full duration of each comparison period,
increased 3% to $286, reflecting the continued success of the our strategy to
re-merchandise selected centers by replacing low volume tenants with high volume
tenants.
11
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,
decreased from 91% in 2000 to 87% in 2001 primarily as a result of higher
operating costs and other non-reimbursable expenses and a 1% decrease in
occupancy rate for the 2001 period compared to the 2000 period.
Other income decreased $1.3 million in 2001 compared to 2000 primarily due to
the recognition in 2000 of gains on sale of land outparcels totaling $427,000
and the recognition of $985,000 of business interruption insurance proceeds
relating to the Stroud, Oklahoma center which was destroyed by a tornado in May
1999.
Property operating expenses increased by $1.9 million, or 12%, in the 2001
period as compared to the 2000 period and, on a weighted average GLA basis,
increased $.31 per square foot from $3.04 to $3.35. The increases are the result
of certain increases in real estate tax assessments and higher common area
maintenance expenses.
General and administrative expenses increased $458,000, or 13%, in the 2001
period as compared to the 2000 period and, as a percentage of total revenues,
general and administrative expenses were approximately 8% and 7% of total
revenues in 2001 and 2000, respectively.
Interest expense increased $1.7 million during the 2001 period as compared to
the 2000 period. Our strategy to replace short-term, variable rate debt with
long-term, fixed rate debt and extend our average debt maturities has resulted
in an overall higher interest rate on outstanding debt. Also, $295,200 paid to
terminate certain interest rate swap agreements during the first quarter of 2001
contributed to the increase in interest expense. Depreciation and amortization
per weighted average GLA increased $.17 from $2.51 per square foot in the 2000
period to $2.68 per square foot in the 2001 period due to a higher mix of tenant
finishing allowances included in buildings and improvements which are
depreciated over shorter lives (i.e. over lives generally ranging from 3 to 10
years as opposed to other construction costs which are depreciated over lives
ranging from 15 to 33 years).
The extraordinary loss recognized in the 2001 period represents the write-off of
unamortized deferred financing costs related to debt that was extinguished with
a portion of the February 2001 bond offering proceeds prior to its scheduled
maturity.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $16.7 million and $19.4 million
for the six months ended June 30, 2001 and 2000, respectively. The decrease in
cash provided by operating activities is due primarily to an increase in
interest expense in 2001 when compared to 2000. Net cash used in investing
activities was $12.0 million and $3.1 million during 2001 and 2000,
respectively. Net cash used was lower in 2000 primarily due to the $4.0 million
received in insurance proceeds relating to the Stroud, Oklahoma center and $7.8
million received in net proceeds for the sale of our centers in Lawrence and
McMinnville. Net cash used in financing activities decreased to $5.2 million
during the first six months of 2001 from $16.6 million in 2000 due to the net
issuance of $13.3 million in long-term debt in the 2001 period versus a
repayment of $2.0 million in the 2000 period, offset by $4.5 million used for
deferred financing costs mainly related to the February 2001 bond offering.
During the quarter, we added 70,600 square feet to the portfolio in San Marcos,
TX. In addition, we currently have approximately 26,500 square feet of expansion
space substantially complete in San Marcos that is scheduled to open during the
remainder of 2001. Commitments to complete construction of the expansions to the
existing properties and other capital expenditure requirements amounted to
approximately $114,000 at June 30, 2001. Commitments for construction represent
only those costs contractually required to be paid by us.
12
Future Developments
We are in the permitting and leasing stages for the development of up to a
400,000 square foot outlet center in Myrtle Beach, South Carolina. This center
is being developed by Tanger-Warren Development, LLC ("Tanger-Warren"), a joint
venture that was formed in August 2000 to identify, acquire and develop sites
for us. Based on anticipated successful permitting and pre-leasing, we expect
stores to begin opening in late 2002.
We have an option to purchase the retail portion of a site at the Bourne Bridge
Rotary in Cape Cod, Massachusetts. Based on tenant demand, we plan to develop a
new 250,000 square foot outlet center. The entire site will contain more than
750,000 square feet of mixed-use entertainment, retail, office and residential
community built in the style of a Cape Cod Village. Obtaining appropriate
approvals from local and state planning authorities for the project continues to
be a challenge that currently prohibits us from estimating store openings.
The developments or expansions that we have planned or anticipated may not be
started or completed as scheduled, or may not result in accretive funds from
operations. In addition, we regularly evaluate acquisition or disposition
proposals and engage from time to time in negotiations for acquisitions or
dispositions. We may also enter into letters of intent for the purchase or sale
of properties. Any prospective acquisition or disposition that is being
evaluated or which is subject to a letter of intent may not be consummated, or
if consummated, may not result in accretive funds from operations.
Financing Arrangements
On May 1, 2001, we entered into an eight year collateralized loan with John
Hancock Life Insurance Company for $19.45 million at a fixed rate of 7.98%. The
proceeds were used to reduce amounts outstanding under existing lines of credit.
On March 26, 2001, we entered into a five year collateralized loan with Wells
Fargo Bank for $24.0 million at a variable rate of LIBOR plus 1.75%. The
proceeds were used to reduce amounts outstanding under existing lines of credit.
Additionally on March 26, 2001, we extended the maturity date of our existing
$29.5 million term loan with Wells Fargo Bank from July 2005 to March 2006.
On February 9, 2001, the Operating Partnership issued $100 million of 9.125%
senior, unsecured notes, maturing on February 15, 2008. The net proceeds of $97
million were used to repay all of the outstanding indebtedness under our $75
million 8.75% notes which were due March 11, 2001. The net proceeds were also
used to repay the $20 million LIBOR plus 2.25% term loan due January 2002 with
Fleet National Bank and Bank of America. The interest rate swap agreements
associated with this loan were terminated at a cost of $295,200 which has been
included in interest expense. In addition, approximately $180,000 of unamortized
costs were written off as an extraordinary item. The remaining proceeds were
used for general operating purposes.
We intend to retain the ability to raise additional capital, including public
debt as described above, to pursue attractive investment opportunities that may
arise and to otherwise act in a manner that we believe to be in our best
interest and our shareholders' interests. We maintain revolving lines of credit
that provide for unsecured borrowings up to $100 million, of which $92.6 million
was available for additional borrowings at June 30, 2001. During the first six
months of 2001, we extended the maturity on two $25 million lines of credit from
June 30, 2002 to June 30, 2003. Effective July 1, 2001, we reduced our borrowing
capacity on one of our lines of credit from $25 million to $10 million, thereby
reducing our overall capacity to $85 million. As of June 30, 2001, we had no
borrowings under this line of credit.
13
During the second quarter, we amended our shelf registration for the ability to
issue up to $200 million in debt and $200 million in equity securities. We may
also consider selling certain properties that do not meet our long-term
investment criteria as well as outparcels on existing properties to generate
capital to reinvest into other attractive investment opportunities. Based on
cash provided by operations, existing credit facilities, ongoing negotiations
with certain financial institutions, the February 2001 bond offering and funds
available under the shelf registration, we believe that we have access to the
necessary financing to fund the planned capital expenditures during 2001.
At June 30, 2001, approximately 51% of our outstanding long-term debt
represented unsecured borrowings and approximately 59% of our real estate
portfolio was unencumbered. The average interest rate, including loan cost
amortization, on average debt outstanding for the six months ended June 30, 2001
was 8.9%.
We anticipate that adequate cash will be available to fund our operating and
administrative expenses, regular debt service obligations, and the payment of
dividends in accordance with REIT requirements in both the short and long term.
Although we receive most of our rental payments on a monthly basis,
distributions to shareholders 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 instruments. Certain of our 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 July 12, 2001, our Board of Directors declared a $.61 cash dividend per
common share payable on August 15, 2001 to each shareholder of record on July
31, 2001, and caused a $.61 per Operating Partnership unit cash distribution to
be paid to the minority interests. The Board of Directors also declared a cash
dividend of $.5496 per preferred depositary share payable on August 15, 2001 to
each shareholder of record on July 31, 2001.
Market Risk
We are 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. We do not enter into derivatives or other
financial instruments for trading or speculative purposes.
We negotiate fixed rate debt instruments and enter into interest rate swap
agreements to manage our 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 June 30, 2001, we had an
interest rate swap agreement effective through January 2003 with a notional
amount of $25 million. Under this agreement, we receive a floating interest rate
based on the 30 day LIBOR index and pay a fixed interest rate of 5.97%. This
swap effectively changes our payment of interest on $25 million of variable rate
debt to fixed rate debt for the contract period at a rate of 7.72%.
The fair value of the interest rate swap agreement represents the estimated
receipts or payments that would be made to terminate the agreement. At June 30,
2001, we would have paid approximately $602,000 to terminate the agreement. A 1%
decrease in the 30 day LIBOR index would increase the amount paid by us $383,000
to approximately $985,000. The fair value is based on dealer quotes, considering
current interest rates.
The fair market value of 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 our total debt at June 30, 2001 was $359.0 million and the recorded
value was $360.2 million. A 1% increase from prevailing interest rates at June
30, 2001 would result in a decrease in fair value of total debt by approximately
$13.2 million. Fair values were determined from quoted market prices, where
available, using current interest rates considering credit ratings and the
remaining terms to maturity.
14
New Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by FAS 137 and FAS 138, (collectively, "FAS 133"). FAS
133 was effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000; accordingly, we adopted FAS 133 on January 1, 2001. Upon adoption
on January 1, 2001, we recorded a cumulative effect adjustment of $216,500, net
of minority interest of $83,000, in other comprehensive income (loss). At June
30, 2001 in accordance with the provisions of FAS 133, our sole interest rate
swap agreement has been designated as a cash flow hedge and is carried on the
balance sheet at fair value. At June 30, 2001, the fair value of the hedge is
recorded as a liability of $602,000.
The FASB also issued Statement of Financial Accounting Standards Nos. 141 and
142, "Business Combinations" and "Goodwill and Other Intangible Assets" ("FAS
141") and ("FAS 142"), respectively on June 29, 2001. The provisions of FAS 141
apply to all business combinations initiated after June 30, 2001. FAS 142 is
required to be adopted beginning January 1, 2002. We currently do not have any
assets identified as either goodwill or intangible assets.
During 2000, the American Institute of Certified Public Accountants' Accounting
Standards Executive Committee issued an exposure draft Statement of Position
("SOP") regarding the capitalization of costs associated with property, plant
and equipment. Under the proposed SOP, all property, plant and equipment related
costs would be expensed unless the costs are directly identifiable with specific
projects and general and administrative and overhead costs which are not payroll
or payroll related and not directly related to the project would be expensed as
incurred. The expected effective date of the final SOP is expected in 2002 and
currently we are evaluating the effects it may have on our results of operations
and financial position.
15
Funds from Operations
We believe that for a clear understanding of our consolidated historical
operating results, 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. We caution
that the calculation of FFO may vary from entity to entity and as such our
presentation of FFO 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.
Below is a calculation of FFO for the three and six months ended June 30, 2001
and 2000 as well as actual cash flow and other data for those respective periods
(in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
Funds from Operations:
Net income (loss) $ 1,398 $ (1,497) $ 2,193 $ 1,172
Adjusted for:
Extraordinary item - loss on early extinguishment of debt --- --- 130 ---
Minority interest 365 (756) 550 92
Depreciation and amortization uniquely significant to real estate 6,860 6,475 13,982 12,853
Loss on sale of real estate --- 5,935 --- 5,935
- ------------------------------------------------------------------------------------------------------------------------------
Funds from operations before minority interest (1) $ 8,623 $ 10,157 $ 16,855 $ 20,052
==============================================================================================================================
Weighted average shares outstanding (2) 11,707 11,722 11,705 11,698
==============================================================================================================================
Cash flows provided by (used in):
Operating activities $ 16,701 $ 19,436
Investing activities (11,952) (3,117)
Financing activities (5,167) (16,637)
__________________
(1) Includes $427 in gains on sales of outparcels of land for the three and six
months ended June 30, 2000 and $493 and $985 in business interruption
proceeds for the three and six months ended June 30, 2000, respectively.
(2) Assumes the partnership units of the Operating Partnership held by the
minority interest, preferred shares of the Company and stock and unit
options are converted to common shares of the Company.
16
Economic Conditions and Outlook
The majority of our leases contain provisions designed to mitigate the impact of
inflation. Such provisions include clauses for the escalation of base rent and
clauses enabling us to receive percentage rentals based on tenants' gross sales
(above predetermined levels, which we believe often are lower than traditional
retail industry standards) that 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 of January 1, 2001, approximately 29% of our lease portfolio was scheduled to
expire during the next two years. Approximately 675,000 square feet of space is
up for renewal during 2001 and approximately 868,000 square feet will come up
for renewal in 2002. If we are 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 our results of operations.
As of June 30, 2001, we have renewed approximately 450,000 feet, or 67% of the
square feet scheduled to expire in 2001. The existing tenants have renewed at an
average base rental rate approximately 8% higher than the expiring rate. We also
have re-tenanted 163,000 feet of vacant space during the first six months of
2001 at an 8% increase in the average base rental rate from that which was
previously charged.
As of June 30, 2001, our centers were 94% occupied compared to 95% occupied as
of June 30, 2000. Consistent with our long-term strategy of re-merchandising
centers, we will continue to hold space off the market until an appropriate
tenant is identified. While we believe this strategy will add value to our
centers in the long-term, it may reduce our average occupancy rate in the near
term.
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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 4. Submission of Matters to a Vote of Security Holders
On May 18, 2001, we held our Annual Meeting of Shareholders. The matter on which
common shareholders voted was the election of five directors to serve until the
next Annual Meeting of Shareholders. The results of the voting are shown below:
Nominees Votes For Votes Against
-------- --------- -------------
Stanley K. Tanger 7,055,009 265,203
Steven B. Tanger 7,234,521 85,691
Jack Africk 7,268,662 51,550
William G. Benton 7,281,789 38,423
Thomas E. Robinson 7,281,904 38,308
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 The Senior Indenture, dated as of March
1, 1996, among Tanger Properties Limited
Partnership, as Issuer, Tanger Factory
Outlet Centers, Inc., as Guarantor, and
State Street Bank and Trust Company, as
Trustee, incorporated by reference to Tanger
Properties Limited Partnership Form 8-K
dated January 31, 2001.
(b) Reports on Form 8-K
None
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: August 13, 2001
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