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 September 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 November 1, 2001
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 and nine months ended September 30, 2001 and 2000 3
Consolidated Balance Sheets
As of September 30, 2001 and December 31, 2000 4
Consolidated Statements of Cash Flows
For the nine months ended September 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 10
Part II. Other Information
Item 1. Legal proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 20
2
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
REVENUES
Base rentals $ 18,801 $ 17,492 $ 55,643 $ 52,912
Percentage rentals 598 898 1,448 1,902
Expense reimbursements 7,240 7,791 22,512 22,138
Other income 846 1,165 1,923 3,501
- -------------------------------------------------------------------------------------------------------------------------------
Total revenues 27,485 27,346 81,526 80,453
- -------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Property operating 8,448 8,751 26,103 24,458
General and administrative 2,012 1,862 6,097 5,489
Interest 7,546 6,852 22,837 20,451
Depreciation and amortization 7,202 6,537 21,339 19,512
- -------------------------------------------------------------------------------------------------------------------------------
Total expenses 25,208 24,002 76,376 69,910
- -------------------------------------------------------------------------------------------------------------------------------
Income before loss on sale of real estate,
minority interest and extraordinary item 2,277 3,344 5,150 10,543
Loss on sale of real estate --- --- --- (5,935)
- -------------------------------------------------------------------------------------------------------------------------------
Income before minority interest and extraordinary item 2,277 3,344 5,150 4,608
Minority interest (507) (803) (1,057) (895)
- -------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 1,770 2,541 4,093 3,713
Extraordinary item - Loss on early extinguishment of debt,
net of minority interest of $50 --- --- (130) ---
- -------------------------------------------------------------------------------------------------------------------------------
Net income 1,770 2,541 3,963 3,713
Less applicable preferred share dividends (443) (449) (1,328) (1,382)
- -------------------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 1,327 $ 2,092 $ 2,635 $ 2,331
===============================================================================================================================
Basic earnings per common share:
Income before extraordinary item $ .17 $ .26 $ .35 $ .30
Extraordinary item --- --- (.02) ---
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ .17 $ .26 $ .33 $ .30
===============================================================================================================================
Diluted earnings per common share:
Income before extraordinary item $ .17 $ .26 $ .35 $ .29
Extraordinary item --- --- (.02) ---
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ .17 $ .26 $ .33 $ .29
===============================================================================================================================
Dividends paid per common share $ .61 $ .61 $ 1.83 $ 1.82
===============================================================================================================================
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)
September 30, December 31,
2001 2000
- -------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Rental Property
Land $ 59,858 $ 59,858
Buildings, improvements and fixtures 538,342 505,554
Developments under construction --- 19,516
- -------------------------------------------------------------------------------------------------------------
598,200 584,928
Accumulated depreciation (142,182) (122,365)
- -------------------------------------------------------------------------------------------------------------
Rental property, net 456,018 462,563
Cash and cash equivalents 198 634
Deferred charges, net 11,666 8,566
Other assets 16,406 15,645
- -------------------------------------------------------------------------------------------------------------
Total assets $ 484,288 $ 487,408
=============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilites
Debt
Senior, unsecured notes $ 175,000 $ 150,000
Mortgages payable 177,285 135,313
Term note, unsecured --- 20,000
Lines of credit 10,628 41,530
- -------------------------------------------------------------------------------------------------------------
362,913 346,843
Construction trade payables 6,431 9,784
Accounts payable and accrued expenses 14,191 12,807
- -------------------------------------------------------------------------------------------------------------
Total liabilities 383,535 369,434
- -------------------------------------------------------------------------------------------------------------
Commitments
Minority interest 22,302 27,097
- -------------------------------------------------------------------------------------------------------------
Shareholders' equity
Preferred shares, $.01 par value, 1,000,000 shares authorized,
80,600 shares issued and outstanding
at September 30, 2001 and December 31, 2000 1 1
Common shares, $.01 par value, 50,000,000 shares authorized,
7,929,711 and 7,918,911 shares issued and outstanding
at September 30, 2001 and December 31, 2000 79 79
Paid in capital 136,529 136,358
Distributions in excess of net income (57,403) (45,561)
Accumulated other comprehensive loss (755) ---
- -------------------------------------------------------------------------------------------------------------
Total shareholders' equity 78,451 90,877
- -------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 484,288 $ 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)
Nine Months Ended
September 30,
2001 2000
- ----------------------------------------------------------------------------------------------------------------------
(Unaudited)
OPERATING ACTIVITIES
Net income $ 3,963 $ 3,713
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 21,339 19,512
Amortization of deferred financing costs 1,299 928
Minority interest 1,007 895
Loss on early extinguishment of debt 180 ---
Loss on sale of real estate --- 5,935
Gain on sale of outparcels of land --- (908)
Straight-line base rent adjustment 269 170
Increase (decrease) due to changes in:
Other assets 608 (534)
Accounts payable and accrued expenses 340 549
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activites 29,005 30,260
- ----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to rental properties (16,595) (25,896)
Additions to investments in joint ventures (4,044) (20)
Additions to deferred lease costs (1,232) (1,894)
Net proceeds from sale of real estate 723 8,598
Insurance proceeds from casualty losses --- 4,046
Repayments from (advances to) officers 1,422 (358)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (19,726) (15,524)
- ----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Cash dividends paid (15,805) (15,734)
Distributions to minority interest (5,543) (5,520)
Proceeds from issuance of debt 243,853 140,084
Repayments of debt (227,783) (132,683)
Additions to deferred financing costs (4,638) (1,184)
Proceeds from exercise of unit options 201 ---
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (9,715) (15,037)
- ----------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (436) (301)
Cash and cash equivalents, beginning of period 634 503
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 198 $ 202
======================================================================================================================
Supplemental schedule of non-cash investing activities:
The Company purchases capital equipment and incurs costs relating to contruction
of new facilities, including tenant finishing allowances. Expenditures included
in construction trade payables as of September 30, 2001 and 2000 amounted to
$6,431 and $13,110, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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.
Investments in real estate joint ventures that represent non-controlling
ownership interests are accounted for using the equity method of accounting.
These investments are recorded initially at cost and subsequently adjusted for
net equity in income (loss) and cash contributions and distributions and are
included in other assets in our Consolidated Balance Sheets. Equity in income
(loss) is included in other income in our Consolidated Statements of Operations.
Certain amounts previously reported for 2000 have been reclassified to conform
to classifications used in 2001.
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 nine months of 2001, we added 91,100 square feet to the
portfolio in San Marcos, Texas. In addition, we have approximately 6,000 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
$1.1 million at September 30, 2001. Commitments for construction represent only
those costs contractually required to be paid by us.
Interest costs capitalized during the three months ended September 30, 2001 and
2000 amounted to $48,000 and $328,000, respectively, and for the nine months
ended September 30, 2001 and 2000 amounted to $471,000 and $687,000,
respectively.
6
Through our joint venture, TWMB Associates, LLC ("TWMB"), with Rosen-Warren
Development LLC, we began construction in September 2001 on the first phase of
our 400,000 square foot center in Myrtle Beach, South Carolina. The first phase
will consist of approximately 260,000 square feet with stores tentatively
expected to begin opening in late 2002.
4. Investments in Real Estate Joint Ventures
At September 30, 2001, our investment in unconsolidated real estate joint
ventures, of which we own 50%, was $4.2 million and is included in other assets.
Our investment in real estate joint ventures is reduced by 50% of the profits
earned for services we provided for the joint ventures.
The acquisition and development of the venture properties are subject to, among
other things, completion of due diligence and various contingencies, including
those inherent in development projects, such as zoning, leasing and financing.
There can be no assurance that such transactions will be consummated. On
September 17, 2001, TWMB closed on a construction loan in the amount of $36.2
million with Bank of America, NA (Agent) and SouthTrust Bank, the proceeds of
which will be used to develop the Tanger Outlet Center in Myrtle Beach, SC. As
of September 30, 2001, the construction loan had a zero balance. All debt
incurred by unconsolidated joint ventures is secured by their respective
properties as well as various joint and several guarantees by us and by our
respective venture partners.
Summary unaudited financial information of joint ventures accounted for using
the equity method is as follows (in thousands):
September 30,
Balance Sheets 2001
- --------------------------------------------------------------------------
Assets:
Investment properties at cost, net $ 1,986
Cash and cash equivalents 5,440
Other assets 2,453
------------------
Total Assets $ 9,879
==================
Liabilities and Venturers' Equity:
Accounts payable and other liabilities $ 1,249
------------------
Total liabilities 1,249
Venturers' equity 8,630
Total liabilities and venturers' equity $ 9,879
==================
5. 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.
7
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, we 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 September 30, 2001, we had revolving lines of credit with an unsecured
borrowing capacity of $85 million, of which $74.4 million was available for
additional borrowings. During the first nine months of 2001, we extended the
maturity on two $25 million lines of credit from June 30, 2002 to June 30, 2003.
On October 3, 2001 we cancelled a $10 million revolving credit facility which
reduced our unsecured lines of credit borrowing capacity to $75 million. This
credit facility had been reduced from $25 million to $10 million on July 1,
2001. Accordingly, approximately $26,000 of unamortized costs associated with
the credit facility will be written off during the fourth quarter of 2001.
6. 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"). Upon
adoption we recorded a cumulative effect adjustment of $216,500 loss, net of
minority interest of $83,000, in other comprehensive income (loss). As discussed
in Note 5, 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
September 30, 2001, the fair value of the hedge is recorded as a liability of
$1,044,000 in accounts payable and accrued expenses. For the three and nine
months ended September 30, 2001, the change in the fair value of the remaining
derivative instrument was recorded as a $320,000 and $644,000 loss, net of
minority interest of $122,000 and $247,000, respectively, to accumulated other
comprehensive income. Total comprehensive income for the three and nine months
ended September 30, 2001 is as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, 2001 September 30, 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,770 $ 3,963
Other comprehensive 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 $122 and $247 (320) (644)
- ----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive loss (320) (755)
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 1,450 $ 3,208
==================================================================================================================================
8
7. 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 Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Numerator:
Income before extraordinary item $ 1,770 $ 2,541 $ 4,093 $ 3,713
Less applicable preferred share dividends (443) (449) (1,328) (1,382)
- ------------------------------------------------------------------------------------------------------------------------------------
Income available to common shareholders -
numerator for basic and diluted earnings per share $ 1,327 $ 2,092 $ 2,765 $ 2,331
- ------------------------------------------------------------------------------------------------------------------------------------
Denominator:
Basic weighted average common shares 7,930 7,905 7,925 7,886
Effect of outstanding share and unit options 24 52 24 27
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted weighted average common shares 7,954 7,957 7,949 7,913
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share before extraordinary item $ .17 $ .26 $ .35 $ .30
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share before extaordinary item $ .17 $ .26 $ .35 $ .29
- ------------------------------------------------------------------------------------------------------------------------------------
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 shares for the period. Options excluded
totaled 1,243,000 and 663,000 for the three months ended September 30, 2001 and
2000, respectively, and 1,245,000 and 1,276,000 for the nine months ended
September 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.
9
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 nine months ended
September 30, 2001 with the three and nine months ended September 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.
10
General Overview
At September 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 September 30, 2000. Since September 30, 2000, we have
expanded our Sevierville, Tennessee; Lancaster, Pennsylvania; and San Marcos,
Texas centers, increasing GLA by a net of approximately 322,000 square feet.
During the first nine months of 2001, we added 91,100 square feet to the
portfolio in San Marcos, TX. Currently, we have an additional 6,000 square feet
of expansion space substantially complete in San Marcos, TX, which is scheduled
to open during the remainder of 2001.
Through TWMB, our joint venture with Rosen-Warren Development LLC, we began
construction in September 2001 on the first phase of our 400,000 square foot
center in Myrtle Beach, SC. The first phase will consist of approximately
260,000 square feet with stores tentatively expected to begin opening in late
2002.
A summary of the operating results for the three and nine months ended September
30, 2001 and 2000 is presented in the following table, expressed in amounts
calculated on a weighted average GLA basis.
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------
GLA open at end of period (000's) 5,326 5,004 5,326 5,004
Weighted average GLA (000's) (1) 5,317 5,010 5,289 5,117
Outlet centers in operation 29 29 29 29
Centers sold --- --- --- 2
Centers expanded --- --- 1 ---
States operated in at end of period 20 20 20 20
Occupancy percentage at end of period 95% 95% 95% 95%
Per square foot
Revenues
Base rentals $ 3.54 $ 3.49 $ 10.52 $ 10.34
Percentage rentals .11 .18 .27 .37
Expense reimbursements 1.36 1.56 4.26 4.33
Other income .16 .23 .36 .68
- ------------------------------------------------------------------------------------------------------------------------
Total revenues 5.17 5.46 15.41 15.72
- ------------------------------------------------------------------------------------------------------------------------
Expenses
Property operating 1.59 $ 1.75 4.94 4.78
General and administrative .38 .37 1.15 1.07
Interest 1.42 1.37 4.32 4.00
Depreciation and amortization 1.35 1.30 4.03 3.81
- ------------------------------------------------------------------------------------------------------------------------
Total expenses 4.74 4.79 14.44 13.66
- ------------------------------------------------------------------------------------------------------------------------
Income before loss on sale of real estate,
minority interest and extraordinary item $ .43 $ .67 $ .97 $ 2.06
- ------------------------------------------------------------------------------------------------------------------------
(1) GLA weighted by months of operations. GLA is not adjusted for fluctuations
in occupancy which may occur subsequent to the original opening date.
11
RESULTS OF OPERATIONS
Comparison of the three months ended September 30, 2001 to the three months
ended September 30, 2000
Base rentals increased $1.3 million, or 7%, in the 2001 period when compared to
the same period in 2000. The increase is primarily due to the effect of the
expansions during the fourth quarter of 2000 and continuing into the first half
of 2001 in our San Marcos, TX center as mentioned in the General Overview above.
Base rent per weighted average GLA increased by $.05 per square foot from $3.49
per square foot in the three months ended September 30, 2000 to $3.54 per square
foot in the three months ended September 30, 2001. The increase is mainly
attributable to the slightly higher than average base rent in the expanded
centers.
Percentage rentals, which represent revenues based on a percentage of tenants'
sales volume above predetermined levels (the "breakpoint"), decreased $300,000,
and on a weighted average GLA basis, decreased $.07 per square foot in 2001
compared to 2000. September 2001 same-store sales decreased by 5% as a result of
the effects on consumer spending caused in part by the tragic events of
September 11, 2001. For the first nine 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, 2001, decreased by 3% resulting in a decrease
in percentage rental income.
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
non-reimbursable expenses.
Other income decreased $319,000 in 2001 compared to 2000. The 2000 period
included gains on sales of outparcels of land of $482,000 compared to no
outparcel sales in 2001. This decrease was offset in part by higher vending
income in 2001.
Property operating expenses decreased by $303,000, or 3%, in the 2001 period as
compared to the 2000 period and, on a weighted average GLA basis, decreased $.16
per square foot from $1.75 to $1.59. The decrease is the result of a
company-wide effort to improve operating efficiencies and reduce costs in common
area maintenance and marketing.
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 $694,000 during the 2001 period as compared to the
2000 period due primarily to our increased debt levels attributable to the
additional 326,000 square feet of development completed since September 2000.
Depreciation and amortization per weighted average GLA increased from $1.30 per
square foot in the 2000 period to $1.35 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).
12
Comparison of the nine months ended September 30, 2001 to the nine months ended
September 30, 2000
Base rentals increased $2.7 million, or 5%, 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 September 30, 2000, as mentioned in the General
Overview above, offset by the loss of rent from the sales of the centers in
Lawrence, Kansas and McMinnville, Oregon in June 2000. Base rent per weighted
average GLA increased by $.18 per square foot from $10.34 per square foot in the
nine months ended September 30, 2000 to $10.52 per square foot in the nine
months ended September 30, 2001. The increase is the result of the expansions
which had a higher average base rent per square foot compared to the portfolio
average and the sales of the centers in Lawrence, KS and McMinnville, OR which
had a lower average base rent per square foot compared to the portfolio average.
Percentage rentals decreased $454,000, and on a weighted average GLA basis,
decreased $.10 per square foot in 2001 compared to 2000. September 2001
same-store sales decreased by 5% as a result of the effects on consumer spending
caused in part by the tragic events of September 11, 2001. For the first nine
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, 2001,
decreased by 3% resulting in a decrease in percentage rental income. Reported
same-space sales for the rolling twelve months ended September 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 $284, reflecting the
continued success of our strategy to re-merchandise selected centers by
replacing low volume tenants with high volume tenants. Reported tenant sales for
the first nine months of 2001 for all Tanger Outlet Centers increased by 10% to
$968 million compared to $880 million in 2000.
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 90% in 2000 to 86% in 2001 primarily as a result of higher
non-reimbursable expenses.
Other income decreased $1.6 million in 2001 compared to 2000. The 2000 period
included gains on sales of land outparcels totaling $908,000 and the recognition
of business interruption insurance proceeds relating to the Stroud, Oklahoma
center totaling $985,000 which were recognized in the first six month of 2000.
These items were offset in part by increases in the 2001 period in vending and
interest income.
Property operating expenses increased by $1.6 million, or 7%, in the 2001 period
as compared to the 2000 period and, on a weighted average GLA basis, increased
$.16 per square foot from $4.78 to $4.94. The increases are the result of
certain increases in real estate tax assessments and higher common area
maintenance expenses.
General and administrative expenses increased $608,000, or 11%, 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 $2.4 million during the 2001 period as compared to
the 2000 period due primarily to our increased debt levels attributable to the
additional 326,000 square feet of development completed since September 2000.
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 6% from $3.81 per square foot in the 2000
period to $4.03 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).
13
The extraordinary loss recognized in the 2001 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 $29.0 million and $30.3 million
for the nine months ended September 30, 2001 and 2000, respectively. The $1.3
million decrease in cash provided by operating activities is due primarily to an
increase in interest expense in 2001 when compared to 2000 offset by a decrease
in certain other assets. Net cash used in investing activities was $19.7 million
and $15.5 million during 2001 and 2000, respectively. Cash used in investing
activities in 2000 was favorably impacted by the receipt of insurance proceeds
from casualty losses. Net cash used in financing activities decreased to $9.7
million during the first nine months of 2001 from $15.0 million in 2000 due to
the increase in overall debt offset by additions to deferred financing costs
related to the February bond offering and other debt issuances during the first
nine months of the year.
During the first nine months of 2001, we added 91,100 square feet to the
portfolio in San Marcos, TX. Currently, we have an additional 6,000 square feet
of expansion space substantially complete in San Marcos, TX, 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 $1.1 million at September 30, 2001.
Commitments for construction represent only those costs contractually required
to be paid by us.
Future Developments
On September 20, 2001 through TWMB, our joint venture with Rosen-Warren
Development LLC, we began construction on the first phase of our new 400,000
square foot Tanger Outlet Center in Myrtle Beach, SC. The first phase will
consist of approximately 260,000 square feet and include over 60 brand name
outlet tenants. Currently, leases for over 195,000 square feet, or 75% of the
first phase are fully executed. Stores are tentatively expected 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.
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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.
At September 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 nine months ended September
30, 2001 was 8.82%.
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. During the second quarter of 2001, 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.
We maintain revolving lines of credit that provide for unsecured borrowings up
to $85 million, of which $74.4 million was available for additional borrowings
at September 30, 2001. During the first nine months of 2001, we extended the
maturity on two $25 million lines of credit from June 30, 2002 to June 30, 2003.
On October 3, 2001 we cancelled a $10 million revolving credit facility which
reduced our unsecured lines of credit borrowing capacity to $75 million. This
credit facility had been reduced from $25 million to $10 million on July 1,
2001.
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.
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.
15
On October 12, 2001, our Board of Directors declared a $.61 cash dividend per
common share payable on November 15, 2001 to each shareholder of record on
October 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
November 15, 2001 to each shareholder of record on October 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. As a way to manage
interest rate market risk and reduce our current average interest rate, we may
repurchase a portion of our public debt from time to time based upon market
conditions.
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 September 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 September
30, 2001, we would have paid approximately $1,044,000 to terminate the
agreement. A 1% decrease in the 30 day LIBOR index would increase the amount
paid by us by $314,000 to approximately $1,358,000. 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 September 30, 2001 was $362.1 million and the
recorded value was $362.9 million. A 1% increase from prevailing interest rates
at September 30, 2001 would result in a decrease in fair value of total debt by
approximately $12.9 million. Fair values were determined from quoted market
prices, where available, using current interest rates considering credit ratings
and the remaining terms to maturity.
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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
September 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 September 30, 2001, the fair
value of the hedge is recorded as a liability of $1,044,000 in accounts payable
and accrued expenses.
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.
On October 4, 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS
144"), which is required to be adopted as of January 1, 2002. FAS 144 addresses
the financial accounting and reporting for impairment of long-lived assets and
for long-lived assets to be disposed of. We have evaluated the effects of
adoption of FAS 144 and have determined that the adoption will have no effect on
our results of operations and financial position.
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. General and administrative and overhead costs which are not payroll or
payroll related and not directly related to the project are to 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.
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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 nine months ended September 30,
2001 and 2000 as well as actual cash flow and other data for those respective
periods (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Funds from Operations:
Net income $ 1,770 $ 2,541 $ 3,963 $ 3,713
Adjusted for:
Extraordinary item - loss on early extinguishment of debt --- --- 130 ---
Minority interest 507 803 1,057 895
Depreciation and amortization uniquely significant to real estate 7,133 6,470 21,115 19,323
Loss on sale of real estate --- --- --- 5,935
- ---------------------------------------------------------------------------------------------------------------------------------
Funds from operations before minority interest (1) $ 9,410 $ 9,814 $ 26,265 $ 29,866
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding (2) 11,713 11,730 11,708 11,705
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows provided by (used in):
Operating activities $ 29,005 $ 30,260
Investing activities (19,726) (15,524)
Financing activities (9,715) (15,037)
__________________
(1) Includes gain on sales of outparcels of land of $482 for the three months
ended and $908 for the nine months ended September 30, 2000. Also, includes
$985 in business interruption proceeds for the nine months ended
September30, 2000.
(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.
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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 684,000 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 September 30, 2001, we have renewed approximately 529,000 feet, or 77% of
the square feet scheduled to expire in 2001. The existing tenants have renewed
at an average base rental rate approximately 7% higher than the expiring rate.
We also have re-tenanted 231,000 feet of vacant space during the first nine
months of 2001 at an 11% increase in the average base rental rate from that
which was previously charged.
As of September 30, 2001 and 2000, our centers were 95% occupied. 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.
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: November 14, 2001
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