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, 1997
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.)
1400 West Northwood Street, Greensboro, North Carolina 27408
(Address of principal executive offices)
(Zip code)
910-274-1666
(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
___ _____
7,844,886 shares of Common Stock, $.01
par value, outstanding as of October 31, 1997
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, 1997 and 1996 3
Consolidated Balance Sheets
As of September 30, 1997 and December 31, 1996 4
Consolidated Statements of Cash Flows
For the nine months ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. Other Information
Item 1. Legal proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
--------- -------- --------- -------
REVENUES
Base rentals $ 14,404 $ 12,779 $ 41,362 $ 37,497
Percentage rentals 779 566 1,482 1,164
Expense reimbursements 6,200 5,901 17,799 16,446
Other income 274 207 695 658
-------- -------- -------- --------
Total revenues 21,657 19,453 61,338 55,765
-------- -------- -------- --------
EXPENSES
Property operating 6,584 6,372 18,732 17,737
General and administrative 1,500 1,365 4,528 4,036
Interest 4,414 3,614 12,193 10,282
Depreciation and amortization 4,790 4,178 13,694 12,285
-------- -------- -------- --------
Total expenses 17,288 15,529 49,147 44,340
-------- -------- -------- --------
Income before gain on sale of land, minority
interest and extraordinary item 4,369 3,924 12,191 11,425
Gain on sale of land -- 159 -- 159
-------- -------- -------- --------
Income before minority interest and
extraordinary item 4,369 4,083 12,191 11,584
Minority interest (1,207) (1,119) (3,357) (3,137)
-------- -------- -------- --------
Income before extraordinary item 3,162 2,964 8,834 8,447
Extraordinary item - Loss on early extinguishment
of debt, net of minority interest of $270 -- -- -- (561)
-------- -------- -------- --------
Net income $ 3,162 $ 2,964 $ 8,834 $ 7,886
======== ======== ======== ========
Per common share outstanding:
Income before extraordinary item $ .40 $ .37 $ 1.11 $ 1.03
Net income .40 .37 1.11 .94
======== ======== ======== ========
Dividends paid per common share $ .55 $ .52 $ 1.62 $ 1.54
======== ======== ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
3
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
September 30, December 31,
1997 1996
----------- ----------
ASSETS
Rental property, net $ 382,737 $ 311,454
Cash and cash equivalents 3,358 2,585
Deferred charges, net 7,546 7,846
Other assets 11,393 10,253
------------- --------
Total assets $ 405,034 $ 332,138
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Long-term debt $ 218,398 $ 178,004
Construction trade payables 19,160 8,320
Accounts payable and accrued expenses 8,418 9,558
--------- ---------
Total liabilities 245,976 195,882
--------- ---------
Commitments
Minority interest 24,120 25,599
========= ========
Shareholders' equity
Preferred shares, $.01 par value, 1,000,000 shares
authorized, 90,789 and 106,419 shares issued and
outstanding at September 30, 1997 and
December 31, 1996 1 1
Common shares, $.01 par value, 50,000,000 shares
authorized, 7,763,985 and 6,602,510 shares
issued and outstanding at September 30, 1997
and December 31, 1996 77 66
Paid in capital 149,069 121,384
Distributions in excess of net income (14,209) (10,794)
--------- ---------
Total shareholders' equity 134,938 110,657
--------- ---------
Total liabilities and shareholders' equity $ 405,034 $ 332,138
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
September 30,
1997 1996
----- -----
OPERATING ACTIVITIES
Net income $8,834 $7,886
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 13,694 12,285
Amortization of deferred financing costs 780 694
Minority interest 3,357 2,867
Loss on early extinguishment of debt --- 831
Gain on sale of land --- (159)
Straight-line base rent adjustment (328) (946)
Compensation under Unit Option Plan 253 254
Increase (decrease) due to changes in:
Other assets (107) 984
Accounts payable and accrued expenses (1,140) 3,357
-------- --------
Net cash provided by operating activities 25,343 28,053
-------- --------
INVESTING ACTIVITIES
Acquisition of rental properties (37,500) ---
Additions to rental properties (36,231) (26,815)
Additions to deferred lease costs (1,489) (1,275)
Proceeds from sale of land --- 174
-------- ---------
Net cash used in investing activities (75,220) (27,916)
--------- ---------
FINANCING ACTIVITIES
Net proceeds from issuance of common shares 27,038 ---
Cash dividends paid (12,249) (11,644)
Distributions to minority interest (4,914) (4,672)
Proceeds from notes payable --- 75,000
Repayments on notes payable (856) (747)
Proceeds from revolving lines of credit 107,050 51,026
Repayments on revolving lines of credit (65,800) (107,927)
Additions to deferred financing costs (102) (3,440)
Proceeds from exercise of unit options 483 ---
-------- --------
Net cash provided by (used in) financing activities 50,650 (2,404)
--------- ---------
Net increase (decrease) in cash and cash equivalents 773 (2,267)
Cash and cash equivalents, beginning of period 2,585 5,111
--------- ---------
Cash and cash equivalents, end of period $3,358 $2,844
======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
5
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
1. Interim Financial Statements
The unaudited consolidated financial statements of Tanger Factory Outlet
Centers, Inc., (the "Company"), have been prepared pursuant to the
Securities and Exchange Commission's ("SEC") rules and regulations and
should be read in conjunction with the financial statements and notes
thereto of the Company's Annual Report on Form 10-K for the year ended
December 31, 1996. Certain information and note disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations, although management believes that the
disclosures are adequate to make the information presented not misleading.
The accompanying consolidated financial statements reflect, in the opinion
of management, all adjustments necessary for a fair presentation of the
interim financial statements. All such adjustments are of a normal and
recurring nature.
2. Acquisition and Development of Rental Properties
On February 28, 1997, the Company completed the acquisition of Five Oaks
Factory Stores, a factory outlet center in Sevierville, Tennessee,
containing approximately 123,000 square feet, for an aggregate purchase
price of $18 million. On September 30, 1997, the Company acquired Shoppes on
the Parkway, a factory outlet center in Blowing Rock, North Carolina,
containing approximately 98,000 square feet, and Soundings Factory Stores, a
factory outlet center in Nags Head, North Carolina, containing approximately
82,000 square feet, for an aggregate purchase price of $19.5 million. The
acquisitions were accounted for using the purchase method whereby the
purchase price was allocated to assets acquired based on their fair values.
The results of operations of the acquired properties have been included in
the consolidated results of operations since the acquisition date.
During the first nine months, construction was substantially completed on a
241,820 square foot expansion in Riverhead, NY, and a 26,111 square foot
expansion in Lancaster, PA. Construction has also begun on properties in
Commerce, GA (61,000 square feet); Sevierville, TN (50,000 square feet) and
San Marcos, TX (23,000 square feet) as well as a further expansion in
Riverhead, NY (60,000 square feet).
Construction in progress amounted to $17.8 million and commitments to
complete construction of expansions to existing properties amounted to
approximately $6.8 million at September 30, 1997. Commitments for
construction represent only those costs contractually required to be paid by
the Company.
Interest costs capitalized during the three months ended September 30, 1997
and 1996 amounted to $399,000 and $278,000, respectively, and during the
nine months ended September 30, 1997 and 1996 amounted to $1,451,000 and
$734,000, respectively.
3. Accumulated Depreciation
Accumulated depreciation at September 30, 1997 and December 31, 1996 was
approximately $59,722,000 and $46,907,000 respectively.
6
4. Common Shares
On September 24, 1997, the Company completed a public offering of
1,000,000 Common Shares at a price of $29.0625 per share, receiving net
proceeds of approximately $27.0 million. Subsequently, on October 15,
1997, the Company issued an additional 80,000 Common Shares pursuant to
an over-allotment option granted to the underwriters and received net
proceeds of approximately $2.2 million. The net proceeds, which were
contributed to the Company's majority owned subsidiary, Tanger
Properties Limited Partnership (the "Operating Partnership") in exchange
for 1,080,000 partnership units, were used to acquire, expand and
develop factory outlet centers and for general corporate purposes.
5. Income Per Share
Income per share is computed by dividing income, less applicable
preferred dividends, by the weighted average number of common shares
outstanding. Options outstanding are not included since their inclusion
would not be materially dilutive. 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 limited partner as of the beginning of the year, which would result
in the elimination of earnings allocated to minority interest, would
have no impact on earnings per share since the allocation of earnings to
an Operating Partnership Unit is equivalent to earnings allocated to a
common share.
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
Applicable preferred dividends $ 450,000 $ 602,000 $1,358,000 $1,885,000
Weighted average shares 6,818,959 6,402,998 6,756,073 6,371,404
========== ========== ========== ==========
In February 1997, the Financial Accounting Standards Board issued SFAS
#128, EARNINGS PER SHARE, effective for fiscal periods ending after
December 15, 1997. The new standard simplifies the computation of income
per share by replacing primary income per share with basic income per
share. Basic income per share will not include the effect of any
potentially dilutive securities, as under the current accounting
standard, and will be computed by dividing reported income available to
common shareholders by the weighted average common shares outstanding
during the period. Fully diluted income per share will now be called
diluted income per share and will reflect the dilution of all
potentially dilutive securities. Companies will be required to restate
all prior period income per share data. The adoption of this standard by
the Company will have no impact on the historical reported income per
share amounts since the effect of potentially dilutive securities have
been immaterial and, therefore, have been excluded from the historical
income per share computations.
6. Supplemental schedule of non-cash investing activities
The Company purchases capital equipment and incurs costs relating to
construction of new facilities, including tenant finishing allowances.
Expenditures included in construction trade payables as of September
30, 1997 and 1996 amounted to $19,160,000 and $6,424,000, respectively.
7
7. Subsequent Events
On October 24, the Operating Partnership issued $75 million of senior,
unsecured notes, maturing October 24, 2004, with a coupon rate of
7.875%. The notes were priced at 99.799% of par with a yield to
investors of 7.913%. The net proceeds were used to repay substantially
all amounts outstanding under its existing lines of credit. On November
3, 1997, the Company and the Operating Partnership filed a new
registration statement with the SEC to provide an issuance capacity
under existing shelf registration statements of $200 million.
In anticipation of the offering of the senior, unsecured notes, the
Company entered into an interest rate protection agreement on October
3, 1997 which fixed the index on the 10 year US Treasury rate at 5.995%
for 30 days on a notional amount of $70,000,000. The transaction
settled on October 21, 1997, the trade date of the $75 million
offering, and, as a result of an increase in the US Treasury rate, the
Company received $714,000 in proceeds. Such amount will be amortized as
a reduction to interest expense over the life of the notes and will
result in an overall effective interest rate on the notes of 7.75%.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
CAUTIONARY STATEMENTS
Certain statements contained in the discussion below, including, without
limitation, statements containing the words "believes," "anticipates,"
"expects," and words of similar import, constitute "forward-looking statements
within the meaning of the Private Securities Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: the effects of future events on the Company's
financial performance; the risk that the Company may not be able to finance its
planned development activities; risks related to the retail industry in which
the Company's outlet centers compete, including the potential adverse impact of
external factors such as inflation, tenant demand for space, consumer
confidence, unemployment rates and consumer tastes and preferences; risks
associated with the Company's development activities, such as the potential for
cost overruns, delays and lack of predictability with respect to the financial
returns associated with these development activities; the risk of potential
increase in market interest rates from current rates; risks associated with real
estate ownership, such as the potential adverse impact of changes in the local
economic climate on the revenues and the value of the Company's properties; and
the risks that a significant number of tenants may become unable to meet their
lease obligations or that the Company may be unable to renew or re-lease a
significant amount of available space on economically favorable terms. Given
these uncertainties, current and prospective investors are cautioned not to
place undue reliance on such forward-looking statements. The Company disclaims
any obligation to update any such factors or to publicly announce the result of
any revisions to any of the forward-looking statements contained herein to
reflect future events or developments.
8
OVERVIEW
The following discussion and analysis of the consolidated financial condition
and results of operations should be read in conjunction with the Consolidated
Financial Statements and Notes thereto. Historical results and percentage
relationships set forth in the Consolidated Statements of Operations, including
trends which might appear, are not necessarily indicative of future operations.
The discussion of the Company's results of operations reported in the
Consolidated Statements of Operations compares the three and nine months ended
September 30, 1997 with the three and nine months ended September 30, 1996.
Certain comparisons between the periods are also 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 and expansion or
disposition of rental properties. The computation of weighted average GLA,
however, does not adjust for fluctuations in occupancy during each period shown
since GLA is not reduced when original occupied space subsequently becomes
vacant.
The Company continues to grow principally through acquisitions, new development
and expansions of factory outlet centers. On February 28, 1997, the Company
completed the acquisition of Five Oaks Factory Stores, a factory outlet center
in Sevierville, Tennessee, containing approximately 123,000 square feet, for an
aggregate purchase price of $18 million. On September 30, 1997, the Company
acquired Shoppes on the Parkway, a factory outlet center in Blowing Rock, North
Carolina, containing approximately 98,000 square feet, and Soundings Factory
Stores, a factory outlet center in Nags Head, North Carolina, containing
approximately 82,000 square feet, for an aggregate purchase price of $19.5
million.
During the first nine months, construction was substantially completed on a
241,820 square foot expansion in Riverhead, NY, and a 26,111 square foot
expansion in Lancaster, PA. Construction has also begun on properties in
Commerce, GA (61,000 square feet); Sevierville, TN (50,000 square feet) and San
Marcos, TX (23,000 square feet) as well as a further expansion in Riverhead, NY
(60,000 square feet).
9
A summary of the operating results for the three and nine months ended September
30, 1997 and 1996, calculated on a weighted average GLA basis, is presented in
the following table.
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
------ -------- -------- ------
GLA at end of period (000's) 4,289 3,718 4,289 3,718
Weighted Average GLA(a) (000's) 4,079 3,686 3,928 3,614
Outlet centers in operation 30 27 30 27
New centers opened -- -- -- --
New centers acquired 2 -- 3 --
Centers expanded 1 2 2 6
States operated in at end of period 23 22 23 22
Per square foot
Revenues
Base rent $ 3.53 $ 3.47 $ 10.53 $ 10.38
Percentage rentals .19 .15 .38 .32
Expense reimbursements 1.52 1.60 4.53 4.55
Other income .07 .06 .18 .18
-------- --------- --------- ---------
Total revenues 5.31 5.28 15.62 15.43
--------- --------- --------- ---------
Expenses
Property operating 1.61 1.73 4.77 4.91
General and administrative .37 .37 1.15 1.12
Interest 1.08 .98 3.10 2.85
Depreciation and amortization 1.17 1.13 3.49 3.40
------- --------- --------- ---------
Total expenses 4.23 4.21 12.51 12.28
------- --------- --------- ---------
Income before gain on sale of land,
minority interest and
extraordinary item $ 1.08 $ 1.07 $ 3.11 $ 3.15
========= ========= ========= =========
(a) GLA weighted by months of operations
RESULTS OF OPERATIONS
Comparison of the three months ended September 30, 1997 to the three months
ended September 30, 1996
Base rentals increased $1.6 million, or 13%, in the 1997 period when compared to
the same period in 1996 primarily as a result of the 11% increase in weighted
average GLA. Base rentals increased approximately $200,000 due to the effect of
a full year's operation of expansions completed in 1996 and approximately $1.4
million for new or acquired leases added during 1997.
Expense reimbursements, which represent the contractual recovery from tenants of
certain common area maintenance, operating, property tax, promotional and
management expenses generally fluctuates consistently with the reimbursable
property operating expenses to which it relates. Expense reimbursements,
expressed as a percentage of property operating expenses, increased from 92% in
the 1996 period to 94% in the 1997 period due primarily to a reduction in
nonreimbursable property operating expenses.
10
Property operating expenses increased by $212,000, or 3%, in the 1997 period as
compared to the 1996 period but, on a weighted average GLA basis, decreased 7%
to $1.61 from $1.73 per square foot. The decrease in cost per foot is due
primarily to lower advertising and promotional expenses incurred during the 1997
period compared to the 1996 period.
Interest expense increased $800,000 during the 1997 period as compared to the
1996 period due to higher average borrowings outstanding during the period.
Average borrowings have increased principally to finance the acquisition of Five
Oaks Factory Stores (see "Overview" above) and expansions to existing centers.
Depreciation and amortization per weighted average GLA increased from $1.13 per
square foot to $1.17 per square foot. The increase reflects the effect of
accelerating the recognition of depreciation expense on certain tenant finishing
allowances related to vacant space.
Comparison of the nine months ended September 30, 1997 to the nine months ended
September 30, 1996
Base rentals increased $3.9 million, or 10%, in the 1997 period when compared to
the same period in 1996 primarily as a result of the 9% increase in weighted
average GLA. Base rent increased approximately $1.3 million due to the effect of
a full year's operation of expansions completed in 1996 and approximately $2.4
for new or acquired leases added during 1997.
Expense reimbursements, which represent the contractual recovery from tenants of
certain common area maintenance, operating, property tax, promotional and
management expenses generally fluctuates consistently with the reimbursable
property operating expenses to which it relates. Expense reimbursements,
expressed as a percentage of property operating expenses, increased from 93% in
the 1996 period to 95% in the 1997 period due primarily to a reduction in
nonreimbursable property operating expenses.
Property operating expenses increased by $995,000, or 6%, in the 1997 period as
compared to the 1996 period. However, on a weighted average GLA basis, property
operating expenses decreased to $4.77 from $4.91 per square foot. The decrease
is primarily due to lower advertising and promotional expenses incurred in the
1997 period compared to the 1996 period.
Interest expense increased $1,911,000 during the 1997 period as compared to the
1996 period due to higher average borrowings outstanding during the period.
Average borrowings have increased principally to finance the acquisition of Five
Oaks Factory Stores (see "Overview" above) and expansions to existing centers.
Depreciation and amortization per weighted average GLA increased from $3.40 per
square foot to $3.49 per square foot. The increase reflects the effect of
accelerating the recognition of depreciation expense on certain tenant finishing
allowances related to vacant space.
The extraordinary item in the 1996 period represents a write-off of the
unamortized deferred financing costs related to the lines of credit which were
extinguished using the proceeds from the Company's $75 million senior unsecured
notes issued in March 1996.
11
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $25.3 and $28.1 million for the
nine months ended September 30, 1997 and 1996, respectively. The decrease of
$2.8 million was primarily due to the timing of the Company's semiannual
interest payment on the senior unsecured notes issued in March 1996 with
payments due in March and September of each year. Net cash used in investing
activities increased $47.3 million the first nine months of 1997 compared to the
first nine months of 1996 due primarily to the acquisitions of the outlet
centers in Tennessee and North Carolina and the construction of the Riverhead
and Lancaster expansions. Net cash from financing activities increased $53.1
million as a result of net proceeds from the Common Share offering and the
incremental financing used for the acquisitions and the construction of the
expansions.
Management believes, based upon its discussions with present and prospective
tenants, that many tenants, including prospective tenants new to the factory
outlet business, desire to open a number of new factory outlet stores in the
next several years, particularly where there are successful factory outlet
centers in which such tenants do not have a significant presence or where there
are few factory outlet centers. During the year, the Company has substantially
completed expansions totaling approximately 268,000 square feet and has five
expansions totaling approximately 194,000 square feet currently under
construction (See "General Overview"). In addition, the Board of Directors has
approved further expansions in Riverhead, NY (44,000 square feet) and Commerce,
GA (33,000 square feet). Commitments for construction of these projects (which
represent only those costs contractually required to be paid by the Company)
amounted to $17.8 million at September 30, 1997.
The Company also is in the process of developing plans for additional expansions
for completion in 1997 and beyond and new centers for completion in 1998 and
beyond. For example, the Company is in the preleasing stages for future centers
at two potential sites located in Concord, North Carolina (Charlotte) and
Romulus, Michigan (Detroit). However, there can be no assurance that any of
these anticipated or planned developments or expansions will be started or
completed as scheduled, or that any development or, expansion will result in
accretive funds from operations. In addition, the Company regularly evaluates
acquisition proposals, engages from time to time in negotiations for
acquisitions and may from time to time enter into letters of intent for the
purchase of properties. No assurance can be given that any of the prospective
acquisitions that are being evaluated or which are subject to a letter of intent
will be consummated, or if consummated, will result in accretive funds from
operations.
Management intends to continually have access to the capital resources necessary
to expand and develop its business and, accordingly, may seek to obtain
additional funds through equity offerings or debt financing. The Company filed
shelf registration statements with the SEC in November 1995 and March 1996
providing for the issuance of up to $100 million in additional equity securities
and $100 million in additional debt securities. On September 24, 1997, the
Company completed a public offering of 1,000,000 Common Shares at a price of
$29.0625 per share, receiving net proceeds of approximately $27.0 million.
Subsequently, on October 15, 1997, an additional 80,000 Common Shares were
issued pursuant to an over-allotment option granted to the underwriters and the
Company received net proceeds of approximately $2.2 million. The net proceeds
were used to acquire, expand and develop factory outlet centers and for general
corporate purposes. On October 24, the Operating Partnership issued $75 million
of senior, unsecured notes, maturing October 24, 2004, with a coupon rate of
7.875%. The net proceeds were used to repay substantially all amounts
outstanding under the Company's existing lines of credit. On November 3, 1997,
the Company and the Operating Partnership filed a new registration statement
with the SEC to provide an issuance capacity under shelf registration statements
back to the original $200 million.
In anticipation of the offering of the senior, unsecured notes, the Company
entered into an interest rate protection agreement on October 3, 1997, which
fixed the index on the 10 year US Treasury rate at 5.995% for 30 days on a
notional amount of $70,000,000. The transaction settled on October 21, 1997, the
trade date of the $75 million offering, and, as a result of an increase in the
US Treasury rate, the Company received $714,000 in proceeds. Such amount will be
amortized as a reduction to interest expense over the life of the notes and will
result in an overall effective interest rate on the notes of 7.75%.
12
The Company maintains revolving lines of credit which provide for borrowings of
up to $100.0 million, of which $31.0 million was available for additional
borrowings as of September 30, 1997. Subsequent to September 30, 1997, the
Company used the proceeds from the issuance of the senior unsecured notes to
repay substantially all amounts outstanding under the lines of credit. Based on
existing credit facilities, ongoing negotiations with certain financial
institutions and funds available under the shelf registration statements,
management believes that the Company has access to the necessary financing to
fund the planned capital expenditures during 1997 and 1998.
The Company anticipates that adequate cash will be available to fund its
operating and administrative expenses, regular debt service obligations, and the
payment of dividends in accordance with REIT requirements in both the short and
long term. Although the Company receives most of its rental payments on a
monthly basis, distributions are made quarterly. Amounts accumulated for
distribution are invested in short-term money market or other suitable
instruments. Certain of the Company's debt agreements limit the payment of
dividends such that dividends will not exceed funds from operations ("FFO"), as
defined in the agreements, on an annual basis or 95% of FFO on a cumulative
basis from the date of the agreement.
On October 9, 1997, the Board of Directors of the Company declared a $.55 cash
dividend per common share payable on November 14, 1997 to each shareholder of
record on October 24, 1997, and caused a $.55 per Operating Partnership unit
cash distribution to be paid to the minority interests. The Board of Directors
of the Company also declared a cash dividend of $.4955 per preferred depositary
share payable on November 14, 1997 to each shareholder of record on October 24,
1997.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued SFAS #128,
EARNINGS PER SHARE, effective for fiscal periods ending after December 15, 1997.
The new standard simplifies the computation of income per share by replacing
primary income per share with basic income per share. Basic income per share
will not include the effect of any potentially dilutive securities, as under the
current accounting standard, and will be computed by dividing reported income
available to common shareholders by the weighted average common shares
outstanding during the period. Fully diluted income per share will now be called
diluted income per share and will reflect the dilution of all potentially
dilutive securities. Companies will be required to restate all prior period
income per share data. The adoption of this standard by the Company will have no
impact on the historical reported income per share amounts since the effect of
potentially dilutive securities have been immaterial and, therefore, have been
excluded from the historical income per share computations.
13
FUNDS FROM OPERATIONS
Management believes that to facilitate a clear understanding of the consolidated
historical operating results of the Company, FFO should be considered in
conjunction with net income as presented in the unaudited consolidated financial
statements included elsewhere in this report. Management generally considers FFO
to be an appropriate measure of the performance of an equity real estate
investment trust ("REIT"). 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 properties, plus depreciation
and amortization uniquely significant to real estate. The Company cautions that
the calculation of FFO may vary from entity to entity and as such the
presentation of FFO by the Company may not be comparable to other similarly
titled measures of other reporting companies. FFO does not represent net income
or cash flow from operations as defined by generally accepted accounting
principles and should not be considered an alternative to net income as an
indication of operating performance or to cash from operations as a measure of
liquidity. FFO is not necessarily indicative of cash flows available to fund
dividends to shareholders and other cash needs. Below is a computation of FFO
for the three and nine months ended September 30, 1997 and 1996.
Three months ended Nine months ended
September 30, September 30,
---------------- ----------------
1997 1996 1997 1996
-------- ------- ------ --------
(In thousands)
Income before minority interest and extraordinary $ 4,369 $ 3,924 $12,191 $11,425
item
Adjusted for:
Depreciation and amortization uniquely
significant to real estate 4,745 4,132 13,556 12,171
------- ------- ------- -------
Funds from operations before minority interest $ 9,114 $ 8,056 $25,747 $23,596
======= ======= ======= =======
Weighted average shares outstanding(1) 10,835 10,611 10,786 10,611
======= ======= ======= =======
(1) Assumes conversion of all partnership units held by the minority interest
and preferred shares to common shares.
ECONOMIC CONDITIONS AND OUTLOOK
Substantially all of the Company's leases contain provisions designed to
mitigate the impact of inflation. Such provisions include clauses for the
escalation of base rent and clauses enabling the Company to receive percentage
rentals based on tenants' gross sales (above predetermined levels, which the
Company believes often are lower than traditional retail industry standards)
which generally increase as prices rise. Most of the leases require the tenant
to pay their share of property operating expenses, including common area
maintenance, real estate taxes, insurance and promotion, thereby reducing
exposure to increases in costs and operating expenses resulting from inflation.
In addition, the Company has an interest rate protection agreement which limits
the effect of changes in interest rates on approximately $10 million of its
floating rate debt through October 1998. This agreement, combined with the
existing fixed rate mortgages and notes payable, mitigate the Company's exposure
to interest rate risk on approximately 100% of total debt outstanding as of
September 30, 1997, after giving effect to the $75 million offering of senior
unsecured notes in October 1997.
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Approximately 81,000 square feet of space is currently up for renewal during the
remainder of 1997 and approximately 426,000 square feet will come up for renewal
in 1998. In addition, 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. Certain other tenants have, or may, from time to time, request reductions
in rent to remain in operation. There can be no assurance that any tenant whose
lease expires will renew such lease or that renewals or terminated leases will
be released on economically favorable terms. Also, management may grant, from
time to time, a tenant's request for rent reduction.
The Company's portfolio is currently 98% leased. Existing tenants' sales have
remained stable and renewals by existing tenants have remained strong. In
addition, the Company has continued to attract and retain additional tenants.
The Company's factory outlet centers typically include well known, national,
brand name companies. By maintaining a broad base of credit tenants and a
geographically diverse portfolio of properties located across the United States,
the Company reduces its operating and leasing risks. No one tenant (including
affiliates) accounts for more than 10% of the Company's combined base and
percentage rental revenues. Accordingly, management currently does not expect
any material adverse impact on the Company's results of operation and financial
condition as a result of leases to be renewed or stores to be released.
CONTINGENCIES
There are no recorded amounts resulting from environmental liabilities as there
are no known material loss contingencies with respect thereto. Future claims for
environmental liabilities are not measurable given the uncertainties surrounding
whether there exists a basis for any such claims to be asserted and, if so,
whether any claims will, in fact, be asserted. Furthermore, no condition is
known to exist that would give rise to a material environmental liability for
site restoration, post-closure and monitoring commitments, or other costs that
may be incurred upon the sale or disposal of a property. Management has no plans
to abandon any of the properties and is unaware of any other material loss
contingencies.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor the Operating Partnership is presently involved in any
material litigation nor, to their knowledge, is any material litigation
threatened against the Company or the Operating Partnership or its properties,
other than routine litigation arising in the ordinary course of business and
which is expected to be covered by the liability insurance.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated September 23, 1997 to
file certain exhibits related to its offering of 1,000,000 Common Shares
on September 24, 1997.
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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.
Vice President, Chief Financial Officer
DATE: November 4, 1997
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