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 JUNE 30, 1998
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)
(336) 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 ____
7,900,040 shares of Common Stock,
$.01 par value, outstanding as of July 31, 1998
- --------------------------------------------------------------------------------
TANGER FACTORY OUTLET CENTERS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page Number
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations
For the three and six months ended
June 30, 1998 and 1997 3
Consolidated Balance Sheets
As of June 30, 1998 and December 31, 1997 4
Consolidated Statements of Cash Flows
For the three and six months ended
June 30, 1998 and 1997 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 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
------------- -------------- ------------- -------------
(Unaudited) (Unaudited)
-------------- -------------
REVENUES
Base rentals $16,469 $13,710 $32,124 $26,958
Percentage rentals 381 305 875 703
Expense reimbursements 7,125 6,202 13,485 11,599
Other income 375 239 672 421
------------- -------------- ------------- -------------
Total revenues 24,350 20,456 47,156 39,681
------------- -------------- ------------- -------------
EXPENSES
Property operating 7,397 6,523 14,049 12,148
General and administrative 1,640 1,504 3,339 3,028
Interest 5,433 3,957 10,225 7,779
Depreciation and amortization 5,545 4,615 10,679 8,904
------------- -------------- ------------- -------------
Total expenses 20,015 16,599 38,292 31,859
------------- -------------- ------------- -------------
INCOME BEFORE GAIN ON SALE OF REAL ESTATE,
MINORITY INTEREST AND EXTRAORDINARY ITEM 4,335 3,857 8,864 7,822
Gain on sale of real estate --- --- 994 ---
------------- -------------- ------------- -------------
INCOME BEFORE MINORITY INTEREST
AND EXTRAORDINARY ITEM 4,335 3,857 9,858 7,822
Minority interest (1,070) (1,043) (2,478) (2,150)
------------- -------------- ------------- -------------
INCOME BEFORE EXTRAORDINARY ITEM 3,265 2,814 7,380 5,672
Extraordinary item - Loss on early extinguishment
of debt, net of minority interest of $128 --- --- (332) ---
------------- -------------- ------------- -------------
NET INCOME $3,265 $2,814 $7,048 $5,672
============= ============== ============= =============
BASIC EARNINGS PER COMMON SHARE
Income before extraordinary item $.35 $.34 $.82 $.71
Extraordinary item --- --- (.05) ---
------------- -------------- ------------- -------------
Net income $.35 $.34 $.77 .71
============= ============== ============= =============
DILUTED EARNINGS PER COMMON SHARE:
Income before extraordinary item $.34 $.34 $.80 $.70
Extraordinary item --- --- (.04) ---
------------- -------------- ------------- -------------
Net income $.34 $.34 $.76 $.70
============= ============== ============= =============
DIVIDENDS PAID PER COMMON SHARE $.60 $.55 $1.15 $1.07
============= ============== ============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
JUNE 30, DECEMBER 31,
1998 1997
--------------- -----------------
(Unaudited)
ASSETS
Rental property
Land $49,036 $48,059
Buildings, improvements and fixtures 427,960 379,842
Developments under construction 3,457 26,807
--------------- -----------------
480,453 454,708
Accumulated depreciation (73,887) (64,177)
--------------- -----------------
Rental property, net 406,566 390,531
Cash and cash equivalents 2,956 3,607
Deferred charges, net 8,707 8,651
Other assets 14,178 13,225
--------------- -----------------
TOTAL ASSETS $432,407 $416,014
=============== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Long-term debt
Senior, unsecured notes $150,000 $150,000
Mortgages payable 73,434 74,050
Lines of credit 33,400 5,000
--------------- -----------------
256,834 229,050
Construction trade payables 6,924 12,913
Accounts payable and accrued expenses 11,265 13,526
--------------- -----------------
TOTAL LIABILITIES 275,023 255,489
--------------- -----------------
Commitments
Minority interest 37,477 38,406
--------------- -----------------
SHAREHOLDERS' EQUITY
Preferred shares, $.01 par value, 1,000,000 shares authorized, 89,310 and
90,689 shares issued and outstanding
at June 30, 1998 and December 31, 1997 1 1
Common shares, $.01 par value, 50,000,000 shares authorized,
7,897,878 and 7,853,936 shares issued and outstanding
at June 30, 1998 and December 31, 1997 79 78
Paid in capital 137,732 137,020
Distributions in excess of net income (17,905) (14,980)
--------------- -----------------
TOTAL SHAREHOLDERS' EQUITY 119,907 122,119
--------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $432,407 $416,014
=============== =================
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
(In thousands)
SIX MONTHS ENDED
JUNE 30,
1998 1997
----------------------------------
(Unaudited)
OPERATING ACTIVITIES
Net income $7,048 $5,672
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 10,679 8,904
Amortization of deferred financing costs 542 504
Minority interest 2,350 2,150
Loss on early extinguishment of debt 460 ---
Gain on sale of real of estate (994) ---
Straight-line base rent adjustment (470) (207)
Compensation under Unit Option Plan 168 169
Increase (decrease) due to changes in:
Other assets (793) (469)
Accounts payable and accrued expenses (2,261) (184)
------------ --------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 16,729 16,539
------------ --------------------
INVESTING ACTIVITIES
Acquisition of rental properties (17,000) (18,000)
Additions to rental properties (16,298) (23,010)
Additions to deferred lease costs (1,313) (1,015)
Net proceeds from sale of real estate 2,411 ---
------------ --------------------
NET CASH USED IN INVESTING ACTIVITIES (32,200) (42,025)
------------ --------------------
FINANCING ACTIVITIES
Cash dividends paid (9,973) (8,091)
Distributions to minority interest (3,488) (3,245)
Proceeds from notes payable --- ---
Repayments on notes payable (616) (564)
Proceeds from revolving lines of credit 56,190 61,875
Repayments on revolving lines of credit (27,790) (24,425)
Additions to deferred financing costs (257) (46)
Proceeds from exercise of unit options 754 ---
------------ --------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 14,820 25,504
------------ --------------------
Net increase (decrease) in cash and cash equivalents (651) 18
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,607 2,585
------------ --------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $2,956 $2,603
============ ====================
Supplemental schedule of non-cash investing activities:
The Company purchases capital equipment and incurs costs relating to
construction of new facilities, including tenant finishing allowances.
Expenditures included in construction trade payables as of June 30, 1998 and
1997 amounted to $6,924 and $13,226, respectively.
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
June 30, 1998
(In thousands, except per share and square feet data)
(Unaudited)
1. INTERIM FINANCIAL STATEMENTS
The unaudited Consolidated Financial Statements of Tanger Factory Outlet
Centers, Inc., a North Carolina corporation (the "Company"), have been
prepared pursuant to generally accepted accounting principles and should
be read in conjunction with the Financial Statements and Notes thereto
of the Company's Annual Report on Form 10-K, as amended, for the year
ended December 31, 1997. Certain information and note disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to the Securities and Exchange Commission's ("SEC") rules and
regulations, although management believes that the disclosures are
adequate to make the information presented not misleading.
The accompanying Consolidated Financial Statements reflect, in the
opinion of management, all adjustments necessary for a fair presentation
of the interim financial statements. All such adjustments are of a
normal and recurring nature.
2. ACQUISITIONS, DISPOSITIONS AND DEVELOPMENT OF RENTAL PROPERTIES
On March 31, 1998, the Company completed the acquisition of Dalton
Factory Stores, a factory outlet center in Dalton, GA containing
approximately 173,000 square feet, for an aggregate purchase price of
$17,000. The acquisition was 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 property
have been included in the consolidated results of operations since the
acquisition date.
On March 31, 1998, the Company also completed the sale of its 8,000
square foot, single tenant property in Manchester, VT for $1,850 and the
sale of two outparcels at other centers for sales prices aggregating
$690. As a result of these dispositions, the Company recognized a gain
on sale of real estate of $994 for the six months ended June 30, 1998.
During the first six months, the Company placed in service the related
assets of the expansions which were significantly underway at December
31, 1997 totaling approximately 297,000 square feet. As a result, the
balance sheet caption Developments under Construction decreased from
$26,807 as of December 31, 1997 to $3,457 at June 30, 1998. In addition,
the Company has begun construction on additional expansions to the
properties in Branson, MO (25,000 square feet) and Sevierville, TN
(96,000 square feet). Commitments to complete construction of the
expansions to the existing properties and other capital expenditure
requirements amounted to approximately $800 at June 30, 1998.
Commitments for construction represent only those costs contractually
required to be paid by the Company.
Interest costs capitalized during the three months ended June 30,1998
and 1997 amounted to $63 and $651, respectively, and during the six
months ended June 30, 1998 and 1997 amounted to $399 and $1,052,
respectively.
6
3. LONG-TERM DEBT
During the first six months, the Company amended certain of its
unsecured lines of credit to increase the maximum borrowing capacity by
an aggregate amount of $25,000. In addition, the Company terminated its
$50,000 secured line of credit and expensed the related unamortized
deferred financing costs, recognizing an extraordinary loss, net of
minority interest, of $332 in the accompanying statements of operations.
At June 30, 1998, the Company had revolving lines of credit with an
unsecured borrowing capacity of $100,000, of which $66,600 was available
for additional borrowings.
4. INCOME 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, which the Company
adopted in its financial statements for the year ended December 31,
1997.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
----------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income before extraordinary item $3,265 $2,814 $7,380 $5,672
Less: Preferred Share dividends (484) (496) (952) (908)
----------------------------------------------------------------
Income available to common shareholders $2,781 $2,318 $6,428 $4,764
Weighted average Common Shares 7,883 6,743 7,871 6,725
----------------------------------------------------------------
Basic earnings per share $.35 $.34 $.82 $.71
================================================================
DILUTED EARNINGS PER SHARE
Income before extraordinary item $3,265 $2,814 $7,380 $5,672
Less: Preferred Share dividends (484) (496) (952) (908)
----------------------------------------------------------------
Income available to common shareholders $2,781 $2,318 $6,428 $4,764
----------------------------------------------------------------
Shares:
Weighted average Common Shares 7,883 6,743 7,871 6,725
Effect of outstanding share and unit options 193 73 186 68
----------------------------------------------------------------
Weighted average Common Shares plus
assumed conversions 8,076 6,816 8,057 6,793
----------------------------------------------------------------
Diluted earnings per share $.34 $.34 $.80 $.70
================================================================
Options to purchase Common Shares which were excluded from the
computation of diluted earnings per share because the exercise price was
greater than the average market price of the Common Shares totaled 6 and
129 for both the three and six months ended June 30, 1998 and 1997,
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 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.
7
5. SUBSEQUENT EVENTS
On July 31, 1998, the Company completed the acquisition of Sanibel
Factory Stores, a factory outlet center on the Gulf coast of Florida
between Fort Myers and Sanibel Island containing approximately 186,000
square feet, for a purchase price of $27.65 million. The acquisition
will be accounted for using the purchase method whereby the purchase
price is allocated to assets acquired based on their fair values. The
acquisition was financed primarily with additional borrowings under
available lines of credit.
In addition, on July 30, 1998, the Company's Board of Directors declared
a distribution of one Preferred Share Purchase Right (a "Right") for
each then outstanding Common Share of the Company. The Rights and the
redemption price are payable to shareholders of record on August 27,
1998.
Each Right will entitle shareholders to buy one one-hundredth of a share
of a new series of Junior Participating Preferred Shares of the Company
at an exercise price of $120. The Rights will expire on August 26, 2008.
Under certain circumstances, if an acquiring person or group acquires
15% or more of the Company's outstanding Common Shares, an exercisable
Right will entitle its holder (other than the acquirer) to buy, at the
Right's then-current exercise price, Common Shares of the Company having
a market value of two times the exercise price of one Right. If an
acquirer acquires at least 15%, but less than 50%, of the Company's
Common Shares, the Board may exchange each Right (other than those of
the acquirer) for one Common Share (or one one-hundredth of a Class B
Preferred Share) per Right. In addition, under certain circumstances, if
the Company is involved in a merger or other business combination where
it is not the surviving corporation, an exercisable Right will entitle
its holder to buy, at the Right's then-current exercise price, Common
Shares of the acquiring company having a market value of two times the
exercise price of one Right. The Company may redeem the Rights at $.01
per Right at any time prior to a person or group acquiring a 15%
position.
The Rights were not adopted in response to any specific takeover threat.
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 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, acquisition
and expansion 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, acquisition and expansion 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
8
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.
OVERVIEW
The 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 six months ended
June 30, 1998 with the three and six months ended June 30, 1997. 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, acquisition, expansion or
disposition of rental properties. The computation of weighted average GLA,
however, does not adjust for fluctuations in occupancy since GLA is not reduced
when original occupied space subsequently becomes vacant.
The Company continues to grow principally through acquisitions and expansions of
existing factory outlet centers. On March 31, 1998, the Company completed the
acquisition of Dalton Factory Stores, a factory outlet center in Dalton, GA,
containing approximately 173,000 square feet, for an aggregate purchase price of
$17 million. On March 31, 1998, the Company also completed the sale of its 8,000
square foot, single tenant property in Manchester, VT for $1.85 million.
During the first six months, the Company placed in service the related assets of
the expansions which were significantly underway at December 31, 1997 totaling
approximately 297,000 square feet. As a result, the balance sheet caption
Developments under Construction decreased from $26.8 million as of December 31,
1997 to $3.5 million at June 30, 1998. In addition, the Company has begun
construction on additional expansions to the properties in Branson, MO (25,000
square feet) and Sevierville, TN (96,000 square feet).
9
A summary of the operating results for three and six months ended June 30, 1998
and 1997, calculated on a weighted average GLA basis, is presented in the
following table.
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
-------------------------------------------------------------------
GLA at end of period (000's) 4,734 3,993 4,734 3,993
Weighted Average GLA(a) (000's) 4,729 3,917 4,615 3,850
Outlet centers in operation 30 28 30 28
New centers opened --- --- --- ---
New centers acquired --- --- 1 1
Centers sold --- --- 1 ---
Centers expanded --- 1 --- 1
States operated in at end of period 22 22 22 22
Per square foot
Revenues
Base rentals $3.48 $3.50 $6.96 $7.00
Percentage rentals .08 .08 .19 .18
Expense reimbursements 1.51 1.58 2.92 3.01
Other income .08 .06 .15 .11
-------------------------------------------------------------------
Total revenue 5.15 5.22 10.22 10.30
-------------------------------------------------------------------
Expenses
Property operating 1.56 1.67 3.04 3.16
General and administrative .35 .38 .72 .79
Interest 1.15 1.01 2.22 2.02
Depreciation and amortization 1.17 1.18 2.31 2.31
-------------------------------------------------------------------
Total expenses 4.23 4.24 8.29 8.28
-------------------------------------------------------------------
Income before gain on sale of real estate,
minority interest and extraordinary item $0.92 $0.98 $1.93 $2.02
===================================================================
(A) GLA WEIGHTED BY MONTHS OF OPERATIONS. GLA IS NOT ADJUSTED FOR FLUCTUATIONS
IN OCCUPANCY AS IT IS NOT REDUCED WHEN ORIGINAL OCCUPIED SPACE SUBSEQUENTLY
BECOMES VACANT.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1998 TO THE THREE MONTHS ENDED
JUNE 30, 1997
Base rentals increased $2.8 million, or 20%, in the 1998 period when compared to
the same period in 1997 primarily as a result of a 21% increase in weighted
average GLA. The increase in weighted average GLA is due to the acquisitions in
October 1997 (180,000 square feet) and March 1998 (173,000 square feet), as well
as expansions completed in the fourth quarter of 1997 and first quarter 1998.
The decrease in base rentals per weighted average GLA of $.02 in the three
months ended June 30, 1998 compared to the same period in 1997 reflects the
impact of these acquisitions, which collectively have a lower average base
rental rate per square
10
foot. Base rentals per weighted average GLA, excluding these acquisitions,
during the 1998 period remained level with the 1997 period at $3.50 per square
foot.
Percentage rentals, which represent revenues based on a percentage of tenants'
sales volume above predetermined levels (the "breakpoint"), increased $76,000,
or 25%, due primarily to the expansions completed in 1997. On a weighted average
GLA basis, percentage rentals were level with 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,
increased slightly from 95% in the 1997 period to 96% in the 1998 period.
Property operating expenses increased by $874,000, or 13%, in the 1998 period as
compared to the 1997 period but, on a weighted average GLA basis, decreased $.11
per square foot to $1.56 from $1.67. The decrease was primarily due to a
decrease in expenses for advertising and promotion and common area maintenance
incurred during the 1998 period compared to the 1997 period.
General and administrative expenses increased $136,000, or 9%, in the 1998
quarter as compared to the 1997 quarter. As a percentage of revenues, general
and administrative expenses decreased in the 1998 period compared to the 1997
period from 7.4% to 6.7%, and on a weighted average GLA basis, decreased $.03
per square foot to $.35 in 1998.
Interest expense increased $1.5 million during the 1998 period as compared to
the 1997 period due to higher average borrowings outstanding during the period
and due to less interest capitalized during the 1998 period as a result of a
decrease in ongoing construction activity relative to the 1997 period. Average
borrowings have increased principally to finance the acquisitions and expansions
to existing centers (see "Overview" above). Depreciation and amortization per
weighted average GLA decreased slightly from $1.18 per square foot in the 1997
period to $1.17 per square foot in the 1998 period.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1998 TO THE SIX MONTHS
ENDED JUNE 30, 1997
Base rentals increased $5.2 million, or 19%, in the 1998 period when compared to
the same period in 1997 primarily as a result of a 20% increase in weighted
average GLA. The increase in weighted average GLA is due to the acquisitions in
February 1997 (approximately 123,000 square feet), October 1997 (180,000 square
feet) and March 1998 (173,000 square feet), as well as expansions completed in
the fourth quarter of 1997 and first quarter 1998. The decrease in base rentals
per weighted average GLA of $.04 in the first six months of 1998 compared to the
same period in 1997 reflects the impact of these acquisitions, which
collectively have a lower average base rental rate per square foot. Base rentals
per weighted average GLA, excluding these acquisitions, during the 1998 period
remained level with the 1997 period at $7.00 per square foot.
Percentage rentals increased $172,000, or 24%, due to the acquisitions and
expansions completed in 1997. On a weighted average GLA basis, percentage
rentals increased slightly from $.18 to $.19 per square foot. For the six months
ended June 30, 1998, reported same-store sales, defined as the weighted average
sales per square foot reported by tenants for stores open since January 1,1997,
were level with that of the previous year. Total tenant sales for all centers
increased approximately 21% for the first six months in 1998 to $422 million
compared to $348 million for the same period in 1997.
11
Expense reimbursements, which represent the contractual recovery from tenants of
certain common area maintenance, insurance, property tax, promotional,
advertising and management expenses generally fluctuates consistently with the
reimbursable property operating expenses to which it relates. Expense
reimbursements, expressed as a percentage of property operating expenses,
remained level at 96% in each of the 1998 and 1997 periods.
Property operating expenses increased by $1.9 million, or 16%, in the 1998
period as compared to the 1997 period but, on a weighted average GLA basis,
decreased $.12 per square foot to $3.04 from $3.16. The decrease is primarily
due to improved operating efficiencies and lower other non-reimbursable
operating costs per square foot.
General and administrative expenses increased $311,000, or 10%, in the 1998
quarter as compared to the 1997 quarter. As a percentage of revenues, general
and administrative expenses decreased from approximately 7.6% of revenues in the
1997 period to 7.1% in the 1998 period and, on a weighted average GLA basis,
decreased $.07 per square foot to $.72 in 1998.
Interest expense increased $2.4 million during the 1998 period as compared to
the 1997 period due to higher average borrowings outstanding during the period
and due to less interest capitalized during the 1998 period as a result of a
decrease in ongoing construction activity relative to the 1997 period. Average
borrowings have increased principally to finance the acquisitions and expansions
to existing centers (see "Overview" above). Depreciation and amortization per
weighted average GLA remained level in the 1998 period when compared with the
1997 period at $2.31 per square foot.
The gain on sale of real estate for the six months ended June 30, 1998
represents the sale of an 8,000 square foot, single tenant property in
Manchester, VT for $1.85 million and the sale of two outparcels at other centers
for sales prices aggregating $690,000.
The extraordinary loss for the six months ended June 30, 1998 represents a
write-off of the unamortized deferred financing costs due to the termination of
a $50 million secured line of credit.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $16.7 and $16.5 million for the
six months ended June 30, 1998 and 1997, respectively. Net cash used in
investing activities amounted to $32.2 and $42.0 million during the first six
months of 1998 and 1997, respectively, reflecting lower levels of construction
activity in the 1998 period compared to the 1997 period. The net decrease in the
1998 period is also attributable to the proceeds received from the sale of one
factory outlet center and two outparcels located at other existing centers. Net
cash from financing activities amounted to $14.8 and $25.5 million during the
first six months of 1998 and 1997, respectively, and has decreased consistently
with the capital needs of the current acquisition and expansion activity. The
net decrease of $10.7 million in the 1998 period compared with the 1997 period
also reflects additional dividends paid as a result of additional Common Shares
outstanding and a $.08 per share increase in the quarterly dividend
distributions.
During the first six months, the Company placed in service the related assets of
the expansions which were significantly underway at December 31, 1997 totaling
approximately 297,000 square feet. As a result, the balance sheet caption
Developments under Construction decreased from $26.8 million as of December 31,
1997 to $3.5 million at June 30, 1998. In addition, the Company has begun
construction on additional expansions to the properties in Branson, MO (25,000
square feet) and Sevierville, TN (96,000 square feet). Commitments to complete
construction of the expansions to the existing properties and other capital
12
expenditure requirements amounted to approximately $800,000 at June 30, 1998.
Commitments for construction represent only those costs contractually required
to be paid by the Company.
The Company also is in the process of developing plans for additional expansions
and new centers for completion in 1999 and beyond and will consider other
acquisitions that are suitable for its portfolio. The Company is continuing the
preleasing of two planned 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 has an
active shelf registration with the SEC providing for the issuance of up to $100
million in additional equity securities and $100 million in additional debt
securities. In addition, the Company maintains revolving lines of credit which
provide for unsecured borrowings of up to $100 million, of which $66.6 million
was available for additional borrowings as of June 30, 1998. Subsequent to June
30, 1998, the Company used a portion of these available borrowings to finance
the acquisition of Sanibel Factory Stores, which was acquired for a purchase
price of $27.65 million. Based on existing credit facilities, ongoing
negotiations with certain financial institutions and funds available under the
shelf registration, management believes that the Company has access to the
necessary financing to fund the planned remaining capital expenditures during
1998.
Management is continuing its strategy of unencumbering the Company's real estate
assets to improve its access to capital with more favorable interest rates.
During the first six months of 1998, the Company terminated a $50 million
secured line of credit and increased the unsecured lines of credit by $25
million. At June 30, 1998, approximately 71% of the outstanding long-term debt
represented unsecured borrowings and approximately 78% of the Company's real
estate portfolio was unencumbered. The weighted average interest rate on debt
outstanding on June 30, 1998 was 8.4%.
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 will be used to reduce the outstanding borrowings under the
existing lines of credit or invested in short-term money market or other
suitable instruments. Certain of the Company's debt agreements or instruments
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 July 9, 1998, the Board of Directors of the Company declared a $.60 cash
dividend per common share payable on August 14, 1998 to each shareholder of
record on July 30, 1998, and caused a $.60 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 $.5406 per preferred depositary share
payable on August 14, 1998 to each shareholder of record on July 30, 1998.
13
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, " Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 requires public business enterprises to adopt its provisions for
fiscal years beginning after December 15, 1997, and to report certain
information about operating segments in complete sets of financial statements of
the enterprise issued to shareholders. Segment disclosures will also be required
in interim financial statements beginning in the second year of application. The
Company is evaluating the provisions of SFAS No. 131, and has determined the
impact, if any, will not be significant to the financial statements.
In May 1998, the Emerging Issues Task Force of the FASB reached a consensus on
Issue 98-9, "Accounting for Contingent Rent in Interim Financial Periods". The
consensus states that a lessor should defer recognition of contingent rental
income until specified targets that trigger the contingent rent are met. Since
the Company is currently, and has historically followed this practice when
recognizing percentage rental income, the adoption of this consensus is expected
to have no impact on the Company's current accounting practices.
On June 15, 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities (FAS
133). FAS 133 is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. FAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. Management of the
Company anticipates that, due to its limited use of derivative instruments, the
adoption of FAS 133 will not have a significant effect on the Company's results
of operations or its financial position.
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. 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 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.
14
Below is a computation of FFO for the three and six months ended June 30, 1998
and 1997 as well as actual cash flow and other data for those respective
periods:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------------------------------------------
1998 1997 1998 1997
----------- ------------------------------------------------------
(In thousands)
Income before gain on sale or real estate, minority
interest and extraordinary item $4,335 $3,857 $8,864 $7,822
Adjusted for depreciation and amortization uniquely
significant to real estate 5,503 4,574 10,589 8,811
------------------------------------------------------------------
Funds from operations before minority interest $9,838 $8,431 $19,453 $16,633
==================================================================
Diluted weighted average shares outstanding(1) 11,915 10,667 11,900 10,663
==================================================================
Cash flows provided by (used in):
Operating activities $ 16,729 $ 16,539
Investing activities $(32,200) $(42,025)
Financing activities $ 14,820 $ 25,504
(1) ASSUMES THE OPERATING PARTNERSHIP UNITS HELD BY THE MINORITY INTEREST,
PREFERRED SHARES OF THE COMPANY AND STOCK AND UNIT OPTIONS ARE CONVERTED TO
COMMON SHARES OF THE COMPANY.
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, advertising and promotion, thereby
reducing exposure to increases in costs and operating expenses resulting from
inflation.
Approximately 168,000 square feet of space is up for renewal during the
remaining part of 1998 and approximately 733,000 square feet will come up for
renewal in 1999. 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. 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, certain tenants have requested, or may
request, and management may grant, from time to time, a reduction in rent to
remain in operation.
The Company's portfolio is currently 97% 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.
15
The Company has evaluated its computer systems and applications for potential
software failures as a result of recognizing the year 2000 and beyond. Most of
the systems are compliant with the year 2000, or will be with normal upgrades
currently available to the Company. Therefore, the Company believes the costs to
bring the remaining systems and applications in compliance will be
insignificant. While the Company believes its planning efforts are adequate to
address its Year 2000 concerns, there can be no guarantee that the systems of
other companies on which the Company's systems and operations rely will be
converted on a timely basis and will not have a material effect on the Company's
results of operations or financial condition.
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 30, 1998, the Company's Board of Directors declared a distribution of
one Preferred Share Purchase Right (a "Right") for each then outstanding Common
Share of the Company. The Rights and the redemption price are payable to
shareholders of record on August 27, 1998.
Each Right will entitle shareholders to buy one one-hundredth of a share of a
new series of Junior Participating Preferred Shares of the Company at an
exercise price of $120. The Rights will expire on August 26, 2008.
Under certain circumstances, if an acquiring person or group acquires 15% or
more of the Company's outstanding Common Shares, an exercisable Right will
entitle its holder (other than the acquirer) to buy, at the Right's then-current
exercise price, Common Shares of the Company having a market value of two times
the exercise price of one Right. If an acquirer acquires at least 15%, but less
than 50%, of the Company's Common Shares, the Board may exchange each Right
(other than those of the acquirer) for one Common Share (or one one-hundredth of
a Class B Preferred Share) per Right. In addition, under certain circumstances,
if the Company is involved in a merger or other business combination where it is
not the surviving corporation, an exercisable Right will entitle its holder to
buy, at the Right's then-current exercise price, Common Shares of the acquiring
company having a market value of two times the exercise price of one Right. The
Company may redeem the Rights at $.01 per Right at any time prior to a person or
group acquiring a 15% position.
The Rights were not adopted in response to any specific takeover threat.
16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 8, 1998, the Company held its Annual Meeting of Shareholders. The matters
on which common shareholders voted were the election of five directors to serve
until the next Annual Meeting of Shareholders; to ratify the amendment and
restatement of the Share Option Plan and the Unit Option Plan (the "Plans") in
order to (i) reflect amendments previously approved by shareholders, (ii)
conform the Plans to changes to Rule 16b-3 of the Exchange Act with respect to
Options granted to officers and directors of the Company, (iii) permit the grant
of Options intended to qualify as "performance-based compensation" under Section
162(m) of the Internal Revenue Code, (iv) permit discretionary Option grants to
Independent Directors and (v) amend the Plans in certain other respects; and the
ratification of an amendment to the 1993 Share Option Plan and the 1993 Unit
Option Plan to increase from 1,500,000 to 1,750,000 the number of Common Shares
and Units which may be issued under the Share Option Plan and the Unit Option
Plan. The results of the voting are shown below:
ELECTION OF DIRECTORS
Nominees Votes For Votes Withheld
-------- --------- --------------
Stanley K. Tanger 7,336,119 40,807
Steven B. Tanger 7,336,565 40,361
Jack Africk 7,328,640 48,286
William G. Benton 7,331,842 45,084
Thomas E. Robinson 7,330,642 46,284
AMENDMENT AND RESTATEMENT TO SHARE AND UNIT OPTION PLANS
Votes cast for amendment 6,186,628
Votes cast against amendment 1,143,239
Votes abstained 47,058
AMENDMENT TO PLANS TO INCREASE NUMBER OF AVAILABLE SHARES AND UNITS
Votes cast for amendment 5,296,486
Votes cast against amendment 2,033,446
Votes abstained 46,994
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
17
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
DATED: August 10, 1998
18