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 March 31, 2002
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
8,001,605 shares of Common Stock,
$.01 par value, outstanding as of May 1, 2002
1
TANGER FACTORY OUTLET CENTERS, INC.
Index
Part I. Financial Information
Page Number
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations
For the three months ended March 31, 2002 and 2001 3
Consolidated Balance Sheets
As of March 31, 2002 and December 31, 2001 4
Consolidated Statements of Cash Flows
For the three months ended March 31, 2002 and 2001 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 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended
March 31,
2002 2001
- -----------------------------------------------------------------------------------------
(Unaudited)
REVENUES
Base rentals $18,589 $18,278
Percentage rentals 597 351
Expense reimbursements 7,449 7,571
Other income 573 520
- -----------------------------------------------------------------------------------------
Total revenues 27,208 26,720
- -----------------------------------------------------------------------------------------
EXPENSES
Property operating 8,804 8,697
General and administrative 2,275 2,069
Interest 7,129 7,633
Depreciation and amortization 7,173 7,211
- -----------------------------------------------------------------------------------------
Total expenses 25,381 25,610
- -----------------------------------------------------------------------------------------
Income before minority interest and extraordinary item 1,827 1,110
Minority interest (382) (185)
- -----------------------------------------------------------------------------------------
Income before extraordinary item 1,445 925
Extraordinary item - Loss on early extinguishment of debt,
net of minority interest of $50 --- (130)
- -----------------------------------------------------------------------------------------
Net income 1,445 795
Less applicable preferred share dividends (444) (442)
- -----------------------------------------------------------------------------------------
Net income available to common shareholders $1,001 $353
=========================================================================================
Basic earnings per common share:
Income before extraordinary item $.13 $.06
Extraordinary item --- (.02)
- -----------------------------------------------------------------------------------------
Net income $.13 $.04
=========================================================================================
Diluted earnings per common share:
Income before extraordinary item $.12 $.06
Extraordinary item --- (.02)
- -----------------------------------------------------------------------------------------
Net income $.12 $.04
=========================================================================================
Dividends paid per common share $.61 $.61
=========================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
3
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, December 31,
2002 2001
- -------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Rental Property
Land $60,196 $60,158
Buildings, improvements and fixtures 541,010 539,108
- -------------------------------------------------------------------------------------------------------
601,206 599,266
Accumulated depreciation (155,614) (148,950)
- -------------------------------------------------------------------------------------------------------
Rental property, net 445,592 450,316
Cash and cash equivalents 210 515
Deferred charges, net 11,084 11,413
Other assets 12,183 14,028
- -------------------------------------------------------------------------------------------------------
Total assets $469,069 $476,272
=======================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Debt
Senior, unsecured notes $155,609 $160,509
Mortgages payable 176,176 176,736
Lines of credit 27,786 20,950
- -------------------------------------------------------------------------------------------------------
359,571 358,195
Construction trade payables 3,934 3,722
Accounts payable and accrued expenses 11,278 16,478
- -------------------------------------------------------------------------------------------------------
Total liabilities 374,783 378,395
- -------------------------------------------------------------------------------------------------------
Commitments
Minority interest 20,386 21,506
- -------------------------------------------------------------------------------------------------------
Shareholders' equity
Preferred shares, $.01 par value, 1,000,000 shares authorized,
80,590 and 80,600 shares issued and outstanding
at March 31, 2002 and December 31, 2001 1 1
Common shares, $.01 par value, 50,000,000 shares authorized,
7,998,001 and 7,929,711 shares issued and outstanding
at March 31, 2002 and December 31, 2001 80 79
Paid in capital 137,684 136,529
Distributions in excess of net income (63,370) (59,534)
Accumulated other comprehensive loss (495) (704)
- -------------------------------------------------------------------------------------------------------
Total shareholders' equity 73,900 76,371
- -------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $469,069 $476,272
=======================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
4
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
March 31,
2002 2001
- -------------------------------------------------------------------------------------------
(Unaudited)
OPERATING ACTIVITIES
Net income $1,445 $795
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 7,173 7,211
Amortization of deferred financing costs 343 633
Minority interest 382 (28)
Loss on early extinguishment of debt --- 180
Straight-line base rent adjustment 41 104
Increase (decrease) due to changes in:
Other assets 1,641 1,576
Accounts payable and accrued expenses (4,909) (1,889)
- -------------------------------------------------------------------------------------------
Net cash provided by operating activites 6,116 8,582
- -------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to rental properties (1,725) (7,071)
Additions to investments in joint ventures (15) ---
Additions to deferred lease costs (437) (700)
Proceeds from sale of real estate --- 723
Collections from officers 92 318
- -------------------------------------------------------------------------------------------
Net cash used in investing activities (2,085) (6,730)
- -------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Cash dividends paid (5,281) (5,252)
Distributions to minority interest (1,850) (1,843)
Proceeds from issuance of debt 34,062 169,804
Repayments of debt (32,686) (161,362)
Additions to deferred financing costs (3) (3,619)
Proceeds from exercise of unit options 1,422 ---
- -------------------------------------------------------------------------------------------
Net cash used in financing activities (4,336) (2,272)
- -------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (305) (420)
Cash and cash equivalents, beginning of period 515 634
- -------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $210 $214
===========================================================================================
Supplemental schedule of non-cash investing activities:
We purchase capital equipment and incur costs relating to construction of new
facilities, including tenant finishing allowances. Expenditures included in
construction trade payables as of March 31, 2002 and 2001 amounted to $3,934 and
$6,853, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
5
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(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. Unless the context indicates otherwise,
the term the "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 our Annual Report on Form 10-K for the year ended December 31,
2001. 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
our net equity in the venture's income (loss) and cash contributions and
distributions. Our investments are included in other assets in our Consolidated
Balance Sheets and our equity in the venture's income (loss) is included in
other income in our Consolidated Statements of Operations.
The accompanying unaudited Consolidated Financial Statements reflect, in the
opinion of management, all adjustments necessary for a fair presentation of the
interim Consolidated Financial Statements. All such adjustments are of a normal
and recurring nature.
3. Development of Rental Properties
During the first quarter of 2002, we did not open any square feet of expansion
space. However, currently through our joint venture, TWMB Associates, LLC
("TWMB") with Rosen-Warren Myrtle Beach LLC ("Rosen-Warren"), we continued
construction on the first phase of our new 400,000 square foot Tanger Outlet
Center in Myrtle Beach, South Carolina. Stores in the 260,000 square foot first
phase are expected to begin opening in July of 2002.
Interest costs capitalized during the three months ended March 31, 2002 and 2001
amounted to $79,000 and $371,000, respectively. The interest capitalized in 2002
relates to the on going construction of TWMB's Myrtle Beach, SC center.
6
4. Investments in Real Estate Joint Ventures
Effective August 7, 2000, we announced the formation of a joint venture with C.
Randy Warren Jr., former Senior Vice President of Leasing of the Company. The
new entity, Tanger-Warren Development, LLC ("Tanger-Warren"), was formed to
identify, acquire and develop sites exclusively for us. We agreed to be
co-managers of Tanger-Warren, each with 50% ownership interest in the joint
venture and any entities formed with respect to a specific project. As of March
31, 2002, our investment in Tanger-Warren amounted to approximately $9,000 and
the impact of this joint venture on our results of operations has been
insignificant.
In September 2001, we established a joint venture, TWMB, with respect to our
Myrtle Beach, South Carolina project with Rosen-Warren. Rosen-Warren and we each
own 50% of TWMB. Also, in September 2001 TWMB began construction on the first
phase of a new 400,000 square foot Tanger Outlet Center in Myrtle Beach, SC. The
first phase totals approximately 260,000 square feet and includes over 50 brand
name outlet tenants. In conjunction with the beginning of construction, 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 March 31, 2002, the
construction loan had an $8.3 million balance. All debt incurred by this
unconsolidated joint venture is secured by its property as well as joint and
several guarantees by us and by our respective venture partner.
We receive fees from TWMB for our respective development, leasing and other
services and, upon the opening of phase one of the Myrtle Beach property, will
receive on-going asset management fees. Since this project was under
construction during the quarter, the impact of this joint venture to our
consolidated results of operations was insignificant.
At March 31, 2002, our investment in unconsolidated real estate joint ventures,
of which we own 50%, was $4.2 million. These investments are recorded initially
at cost and subsequently adjusted for our net equity in the venture's income
(loss) and cash contributions and distributions. Our investments are included in
other assets and equity in the venture's income (loss) is included in other
income. Our investment in real estate joint ventures is reduced by 50% of the
profits earned for services we provided to the joint ventures.
Summary unaudited financial information of joint ventures accounted for using
the equity method as of March 31, 2002 and December 31, 2001 is as follows (in
thousands):
2002 2001
- ------------------------------------------------ -------------- --------------
Assets:
Investment properties at cost, net $18,445 $7,348
Cash and cash equivalents 57 136
Other assets 2,260 2,199
- ------------------------------------------------ -------------- --------------
Total assets $20,762 $9,683
================================================ ============== ==============
Liabilities and Owners' Equity
Debt $ 8,345 $ 10
Accounts payable and other liabilities 3,713 1,030
- ------------------------------------------------ -------------- --------------
Total liabilities 12,058 1,040
Owners' equity 8,704 8,643
- ------------------------------------------------ -------------- --------------
Total liabilities and owners' equity $20,762 $9,683
================================================ ============== ==============
7
5. Other Comprehensive Income - 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"). In
accordance with the provisions of FAS 133, our interest rate swap agreement has
been designated as a cash flow hedge and is carried on the balance sheet at fair
value. At March 31, 2002, the fair value of the hedge is recorded as a liability
of $682,000. For the three months ended March 31, 2002, the change in the fair
value of the derivative instrument was recorded as a $209,000 gain, net of
minority interest of $82,000, to accumulated other comprehensive income.
Total comprehensive income for the three months ended March 31, 2002 and 2001
is as follows (in thousands):
2002 2001
- ---------------------------------------------------------------------- -------------- ---------------
Net income $ 1,445 $ 795
Other comprehensive income:
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 $82 and $121 209 (314)
- ---------------------------------------------------------------------- -------------- ---------------
Other comprehensive income (loss) 209 (425)
- ---------------------------------------------------------------------- -------------- ---------------
Total comprehensive income $ 1,654 $ 370
====================================================================== ============== ===============
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):
2002 2001
-------------------- ------------------------------------- ------------ ------------
NUMERATOR:
Income before extraordinary item $ 1,445 $ 925
Less applicable preferred share dividends (444) (442)
---------------------------------------------------------- ------------ ------------
Income available to common shareholders-
numerator for basic and diluted earnings per share 1,001 483
---------------------------------------------------------- ------------ -----------
DENOMINATOR:
Basic weighted average common shares 7,948 7,919
Effect of outstanding share and unit options 80 35
---------------------------------------------------------- ------------ -----------
Diluted weighted average common shares 8,028 7,954
---------------------------------------------------------- ------------ -----------
Basic earnings per share before extraordinary item $ .13 $ 0.06
---------------------------------------------------------- ------------ ------------
Diluted earnings per share before extraordinary item $ .12 $ 0.06
---------------------------------------------------------- ------------ ------------
The computation of diluted earnings per share excludes options to purchase
common shares when the exercise price is greater than the average market price
of the common shares for the period. Options excluded for the three months ended
March 31, 2002 and 2001 totaled 519,667 and 1,246,870, 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 which 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 months ended March 31,
2002 with the three months ended March 31, 2001. Certain comparisons between the
periods are made on a percentage basis as well as on a weighted average gross
leasable area ("GLA") basis, a technique which adjusts for certain increases or
decreases in the number of centers and corresponding square feet related to the
development, acquisition, expansion or disposition of rental properties. The
computation of weighted average GLA, however, does not adjust for fluctuations
in occupancy which may occur subsequent to the original opening date.
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);
- the level and volatility of interest rates may fluctuate in an
unfavorable manner;
- our operating costs may increase or our costs to construct or acquire
new properties or expand our existing properties may increase or
exceed our original expectations.
General Overview
At March 31, 2002, we owned 29 centers in 20 states totaling 5.33 million square
feet compared to 29 centers in 20 states totaling 5.28 million square feet at
March 31, 2001. The increase is primarily due to the completion of the expansion
at our San Marcos, TX center during 2001. The center now contains over 441,000
square feet of gross leasable space.
9
In September 2001, we established a 50% ownership joint venture, TWMB
Associates, LLC ("TWMB"), with respect to our Myrtle Beach, South Carolina
project with Rosen-Warren Myrtle Beach LLC ("Rosen-Warren") and began
construction on the first phase of a 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 50 brand name outlet tenants. Stores are
tentatively expected to begin opening in July of 2002.
A summary of the operating results for the three months ended March 31, 2002 and
2001 is presented in the following table, expressed in amounts calculated on a
weighted average GLA basis.
2002 2001
--------------------------------------------------------- --------- ---------
GLA open at end of period (000's) 5,332 5,282
Weighted average GLA (000's) (1) 5,332 5,255
Outlet centers in operation 29 29
Centers expanded --- 1
States operated in at end of period 20 20
Occupancy percentage at end of period 95 95
Per square foot
Revenues
Base rentals $3.49 $3.48
Percentage rentals .11 .07
Expense reimbursements 1.40 1.44
Other income .11 .10
--------------------------------------------------------- --------- ---------
Total revenues 5.11 5.09
--------------------------------------------------------- --------- ---------
Expenses
Property operating 1.65 1.66
General and administrative .43 .39
Interest 1.34 1.45
Depreciation and amortization 1.35 1.37
--------------------------------------------------------- --------- ---------
Total expenses 4.77 4.87
--------------------------------------------------------- --------- ---------
Income before minority interest and extraordinary item $ .34 $ .22
========================================================= ========= =========
(1) GLA weighted by months of operations. GLA is not adjusted for fluctuations
in occupancy that may occur subsequent to the original opening date.
10
The table set forth below summarizes certain information with respect to our
existing centers as of March 31, 2002.
GLA %
Date Opened Location (sq. ft.) Occupied
- ------------------ ------------------------------- ----------- ---- ------------
Jun. 1986 Kittery I, ME 59,694 100
Mar. 1987 Clover, North Conway, NH 11,000 100
Nov. 1987 Martinsburg, WV 49,252 73
Apr. 1988 LL Bean, North Conway, NH 50,745 100
Jul. 1988 Pigeon Forge, TN 94,558 100
Aug. 1988 Boaz, AL 80,730 93
Jun. 1988 Kittery II, ME 24,703 94
Jul. 1989 Commerce, GA 185,750 84
Oct. 1989 Bourne, MA 23,417 100
Feb. 1991 West Branch, MI 112,420 100
May 1991 Williamsburg, IA 277,230 97
Feb. 1992 Casa Grande, AZ 184,768 89
Dec. 1992 North Branch, MN 134,480 100
Feb. 1993 Gonzales, LA 245,199 97
May 1993 San Marcos, TX 441,432 97
Aug. 1994 Riverhead, NY 729,238 98
Aug. 1994 Terrell, TX 177,490 96
Sep. 1994 Seymour, IN 141,051 73
Oct. 1994 (1) Lancaster, PA 255,059 94
Nov. 1994 Branson, MO 277,494 94
Nov. 1994 Locust Grove, GA 248,854 100
Jan. 1995 Barstow, CA 105,950 59
Dec. 1995 Commerce II, GA 342,556 95
Feb. 1997 (1) Sevierville, TN 353,977 100
Sept. 1997 (1) Blowing Rock, NC 105,448 100
Sep. 1997 (1) Nags Head, NC 82,254 100
Mar. 1998 (1) Dalton, GA 173,430 90
Jul. 1998 (1) Fort Meyers, FL 198,789 96
Nov. 1999 (1) Fort Lauderdale, FL 165,000 100
- ------------------ ------------------------------ ------------ ---- --------
Total 5,331,968 95
================== ============================== ============ ==== ========
(1) Represents date acquired by us.
RESULTS OF OPERATIONS
Comparison of the three months ended March 31, 2002 to the three months
ended March 31, 2001
Base rentals increased $311,000, or 2%, in the 2002 period when compared to the
same period in 2001. The increase is primarily due to the effect of the
completed expansion at our San Marcos, TX center during 2001 as mentioned above
in the General Overview. Base rent per weighted average GLA increased by $.01
per square foot from $3.48 per square foot in the first three months of 2001
compared to $3.49 per square foot in the first three months of 2002. The slight
increase is the result of the addition of the San Marcos expansion to the
portfolio which had a higher average base rent per square foot compared to the
portfolio average. While the overall portfolio occupancy at March 31, 2002
remained constant with the prior year quarter at 95%, a number of centers
experienced negative occupancy trends which were offset by positive occupancy
gains in other centers.
11
Percentage rentals, which represent revenues based on a percentage of tenants'
sales volume above predetermined levels (the "breakpoint"), increased $246,000,
and on a weighted average GLA basis, increased $.04 per square foot in 2002
compared to 2001. For the three months ended March 31, 2002, same-space sales
increased 10% compared to the same period in 2001. Same-space sales are defined
as the weighted average sales per square foot reported in space open for the
full duration of each comparison period. Reported same-space sales per square
foot for the rolling twelve months ended March 31, 2002 were $300 per square
foot, representing a 6% increase compared to the same period in 2001. The
increases are attributable to our continued ability to attract high volume
tenants to our centers which improves the average sales per square foot
throughout our portfolio. Reported same-store sales for the quarter ended March
31, 2002, defined as the weighted average sales per square foot reported by
tenants for stores open since January 1, 2001, increased 5% compared to the same
period in the prior year.
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 to 85% in 2002 from 87% in 2001 primarily as a result of higher real
estate taxes due to revaluations, increases in property insurance premiums and
increases in other non-reimbursable expenses.
Other income increased $53,000 in 2002 compared to 2001 primarily due to
increases in vending income and the recognition of development and lease fee
revenue from our TWMB joint venture offset by decreases in interest income from
2001 which related to cash proceeds from the February 2001 bond offering.
Property operating expenses increased by $107,000, or 1%, in the 2002 period as
compared to the 2001 period and, on a weighted average GLA basis, decreased $.01
per square foot from $1.66 to $1.65. The decrease is the result of a
company-wide effort to improve operating efficiencies and reduce costs in common
area maintenance and marketing partially offset by increases in real estate
taxes, property insurance and other non-reimbursable expenses.
General and administrative expenses increased $206,000, or 10%, in the 2002
period as compared to the 2001 period. Also, as a percentage of total revenues,
general and administrative expenses were 8% in the 2002 and 2001 periods and, on
a weighted average GLA basis, increased $.04 per square foot from $.39 in 2001
to $.43 in 2002 due in part to an increase in professional fees and reserves for
bad debts related to bankruptcy filings.
Interest expense decreased $504,000 during 2002 as compared to 2001 due
primarily due to lower average interest rates during 2002. Beginning in the
fourth quarter of 2001 and continuing through the first quarter of 2002, we
purchased at par or below, approximately $19.4 million of our outstanding 7.875%
senior, unsecured public notes that mature in October 2004. The purchases were
funded by amounts available under our unsecured lines of credit which do not
mature until June 2003. The replacement of the 2004 bonds with funding through
lines of credit provides us with a significant interest expense reduction as the
lines of credit have a lower interest rate. Also, the 2001 results included
$295,200 paid to terminate certain interest rate swap agreements during that
period. Depreciation and amortization per weighted average GLA decreased from
$1.37 per square foot in the 2001 period to $1.35 per square foot in the 2002
period.
The 2001 extraordinary loss relates to debt that was extinguished with a portion
of the February 2001 bond offering proceeds prior to its scheduled maturity.
12
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $6.1 million and $8.6 million for
the three months ended March 31, 2002 and 2001, respectively. The decrease in
cash provided by operating activities is due primarily to a decrease in accounts
payable in 2002 when compared to 2001. Net cash used in investing activities was
$2.1 and $6.7 million during 2002 and 2001, respectively. Cash used was higher
in 2001 primarily due to the increase in cash paid for expansion activities at
our San Marcos, TX center. Net cash used in financing activities amounted to
$4.3 million and $2.3 million during the first three months of 2002 and 2001,
respectively.
Joint Ventures
Effective August 7, 2000, we announced the formation of a joint venture with C.
Randy Warren Jr., former Senior Vice President of Leasing of the Company. The
new entity, Tanger-Warren Development, LLC ("Tanger-Warren"), was formed to
identify, acquire and develop sites exclusively for us. We agreed to be
co-managers of Tanger-Warren, each with 50% ownership interest in the joint
venture and any entities formed with respect to a specific project. As of March
31, 2002, our investment in Tanger-Warren amounted to approximately $9,000 and
the impact of this joint venture on our results of operations has been
insignificant.
In September 2001, we established a joint venture, TWMB, with respect to our
Myrtle Beach, South Carolina project with Rosen-Warren. We and Rosen-Warren,
each as 50% owners, contributed $4.3 million in cash for a total initial equity
in TWMB of $8.6 million. In September 2001, TWMB began construction on the first
phase of a new 400,000 square foot Tanger Outlet Center in Myrtle Beach, SC. The
first phase is projected to cost $34.6 million and will consist of approximately
260,000 square feet and include over 50 brand name outlet tenants. Currently,
leases for approximately 238,000 square feet, or 91% of the first phase are
fully executed. Stores are tentatively expected to begin opening in July of
2002. We currently anticipate construction of a 140,000 square foot second, and
final phase to cost $13.7 million. Prior to beginning construction on the second
phase, Rosen-Warren and we each will be required to contribute an additional
$1.75 million in cash for a total equity contribution in phase two of TWMB of
$3.5 million. Upon the opening of phase one of the Myrtle Beach property, we
will receive on-going asset management fees.
In conjunction with the beginning of construction, 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 March 31, 2002, the construction loan had an
$8.3 million balance. All debt incurred by this unconsolidated joint venture is
secured by its property as well as joint and several guarantees by Rosen-Warren
and us. We do not expect events to occur that would trigger the provisions of
the guarantee because our properties have historically produced sufficient cash
flow to meet the related debt service requirements.
Either owner in TWMB has the right to initiate the sale or purchase of the other
party's interest no sooner than October 25, 2002. If such action is initiated,
one owner would determine the fair market value purchase price of the joint
venture and the other would determine whether they would take the role of seller
or purchaser. The owner who is to designate the fair market value purchase price
would be determined by the toss of a coin. If either Rosen-Warren or we enacted
this provision and depending on our role in the transaction as either seller or
purchaser, we could potentially incur a cash outflow for the purchase of
Rosen-Warren's interest. However, we do not expect this event to occur in the
near future based on the positive expectations of developing and operating an
outlet center in the Myrtle Beach area.
<
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Other Developments
We have an option to purchase the retail portion of a site at the Bourne Bridge
Rotary in Cape Cod, Massachusetts. Obtaining appropriate approvals for the
Bourne project from the local authorities continues to be a challenge and
consequently, we are reviewing the viability of maintaining an option on the
property.
Any developments or expansions that we, or a joint venture that we are involved
in, 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 of properties. 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
During the first quarter of 2002, we purchased at par or below, $4.9 million of
our outstanding 7.875% senior, unsecured public notes that mature in October
2004. The purchases were funded by amounts available under our unsecured lines
of credit which do not mature until June 2003. These purchases were in addition
to $14.5 million of the October 2004 notes that were purchased in the fourth
quarter of 2001 at par.
At March 31, 2002, 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 three months ended March 31,
2002 was 7.95%.
We intend to retain the ability to raise additional capital, including public
debt or equity, 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 the use of operational and
developmental joint ventures, 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 unsecured, revolving lines of credit that provide for unsecured
borrowings up to $75 million at March 31, 2002. During 2001, we extended the
maturity of each of our three $25 million lines to June 30, 2003. Based on cash
provided by operations, existing credit facilities, ongoing negotiations with
certain financial institutions and our ability to sell debt or equity subject to
market conditions, we believe that we have access to the necessary financing to
fund the planned capital expenditures during 2002.
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.
On April 11, 2002, our Board of Directors declared a $.6125 cash dividend per
common share payable on May 15, 2002 to each shareholder of record on April 30,
2002, and caused a $.6125 per Operating Partnership unit cash distribution to be
paid to the minority interests. The Board of Directors also declared a cash
dividend of $.5518 per preferred depositary share payable on May 15, 2002 to
each shareholder of record on April 30, 2002.
14
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 long-term 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 March 31, 2002,
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 March 31,
2002, we would have paid approximately $682,000 to terminate the agreement. A 1%
decrease in the 30 day LIBOR index would increase the amount paid by us by
$188,000 to approximately $870,000. The fair value is based on dealer quotes,
considering current interest rates and remaining term to maturity. We do not
intend to terminate our interest rate swap agreement prior to its maturity. This
derivative is currently recorded as a liability; however, if held to maturity,
the value of the swap will be zero at that time.
The fair market value of long-term fixed interest rate debt is subject to market
risk. Generally, the fair market value of fixed interest rate debt will increase
as interest rates fall and decrease as interest rates rise. The estimated fair
value of our total long-term debt at March 31, 2002 was $355.4 million and its
recorded value was $359.6 million. A 1% increase from prevailing interest rates
at March 31, 2002 would result in a decrease in fair value of total long-term
debt by approximately $11.5 million. Fair values were determined from quoted
market prices, where available, using current interest rates considering credit
ratings and the remaining terms to maturity.
New Accounting Pronouncements
In 2001, the FASB issued SFAS No. 143, "Accounting for Obligations Associated
with Retirement of Long-Lived Assets" ("FAS 143"). FAS 143 establishes
accounting standards for the recognition and measurement of an asset retirement
obligation and its associated asset retirement costs. It also provides
accounting guidance for legal obligations associated with the retirement of
tangible long-lived assets. FAS No. 143 is effective for fiscal years beginning
after June 15, 2002. We believe the provisions of FAS No. 143 will not have a
significant effect on our results of operations or our financial position.
Also in 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("FAS 144"), which replaces SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("FAS 121"). FAS 144 retains the requirements of FAS 121 to
recognized an impairment loss only if the carrying amount of a long-lived asset
is not recoverable from its undiscounted cash flows and to measure an impairment
loss as the difference between the carrying amount and fair value of the asset.
The provisions of FAS 144 are effective for financial statements issued for
fiscal years beginning after December 15, 2001. We implemented the provisions of
FAS 144 on January 1, 2002. FAS 144 did not have an effect on our results of
operations or our financial position.
15
Under both FAS No. 121 and 144, real estate assets designated as held for sale
are stated at their fair value less costs to sell. We classify real estate as
held for sale when our Board of Directors approves the sale of the assets and we
have commenced an active program to sell the assets. Subsequent to this
classification, no further depreciation is recorded on the assets. Under FAS No.
121, the operating results of real estate assets held for sale are included in
continuing operations. Upon implementation of FAS No. 144 in 2002, the operating
results of newly designated real estate assets held for sale will be included in
discontinued operations in our results of operations. We currently do not have
any assets that are held for sale.
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 the proposal would limit the amount of overhead costs companies
capitalize to certain payroll or payroll related costs. If this proposal is
adopted, the amount of costs we capitalize will be less than would have been
capitalized before the adoption of this proposal. The expected effective date of
the final SOP is expected in late 2002 or 2003.
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 or disposal of depreciable operating
properties, plus depreciation and amortization uniquely significant to real
estate and after adjustments for unconsolidated partnerships and joint ventures.
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 funds from operations for the three months ended March
31, 2002 and 2001 as well as actual cash flow and other data for those
respective periods (in thousands):
2002 2001
- --------------------------------------------------------------------- --------- ------------------
Funds from Operations:
Net income $ 1,445 $ 795
Adjusted for:
Extraordinary item-loss on early extinguishment of debt --- 130
Minority interest 382 185
Depreciation and amortization uniquely significant to real estate 7,100 7,122
- --------------------------------------------------------------------- ------------ ---------------
Funds from operations before minority interest $ 8,927 $ 8,232
Cash flow provided by (used in):
Operating activities $ 6,116 $ 8,582
Investing activities $ (2,085) $ (6,730)
Financing activities $ (4,336) $ (2,272)
Weighted average shares outstanding (1) 11,787 11,713
===================================================================== ============ ===============
(1) Assumes our preferred shares, share and unit options and partnership units
of the Operating Partnership held by the minority interest are all converted to
our common shares.
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.
Approximately 33% of our lease portfolio is scheduled to expire during the next
two years. Approximately, 935,000 square feet of space is up for renewal during
2002, 20% of which is located in our dominant center in Riverhead, NY, and
approximately 848,000 square feet will come up for renewal in 2003. If we were
unable to successfully renew or release a significant amount of this space on
favorable economic terms, the loss in rent could have a material, adverse effect
on our results of operations.
As of March 31, 2002, we have renewed approximately 404,000 square feet, or 43%
of the square feet scheduled to expire in 2002. The existing tenants have
renewed at an average base rental rate approximately 5% higher than the expiring
rate. We also re-tenanted 94,000 square feet of vacant space during the first
three months of 2002 at a 9% increase in the average base rental rate from that
which was previously charged. Our factory outlet centers typically include
well-known, national, brand name companies. By maintaining a broad base of
creditworthy tenants and a geographically diverse portfolio of properties
located across the United States, we reduce our operating and leasing risks. No
one tenant (including affiliates) accounts for more than 6% of our combined base
and percentage rental revenues. Accordingly, we do not expect any material
adverse impact on our results of operation and financial condition as a result
of leases to be renewed or stores to be released.
As of March 31, 2002, our centers were 95% occupied. Consistent with our
long-term strategy of remerchandising 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.
17
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 liability insurance.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None.
(b) Reports on Form 8-K - None.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
TANGER FACTORY OUTLET CENTERS, INC.
By: /s/ FRANK C. MARCHISELLO, JR.
-------------------------------
Frank C. Marchisello, Jr.
Senior Vice President, Chief Financial Officer
DATE: May 2, 2002
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