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 MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_______ to_______
COMMISSION FILE NO. 1-11986
TANGER FACTORY OUTLET CENTERS, INC.
(Exact name of Registrant as specified in its Charter)
NORTH CAROLINA 56-1815473
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3200 NORTHLINE AVENUE, SUITE 360, GREENSBORO, NORTH CAROLINA 27408
(Address of principal executive offices)
(Zip code)
(336) 292-3010
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
7,849,306 shares of Common Stock,
$.01 par value, outstanding as of April 26, 1999
- --------------------------------------------------------------------------------
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, 1999 and 1998 3
Consolidated Balance Sheets
As of March 31, 1999 and December 31, 1998 4
Consolidated Statements of Cash Flows
For the three months ended March 31, 1999 and 1998 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 6. Exhibits and Reports on Form 8-K 16
Signatures 16
2
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
THREE MONTHS ENDED
MARCH 31,
1999 1998
- ---------------------------------------------------------------------- --------- -------------
(Unaudited)
REVENUES
Base rentals $17,071 $15,655
Percentage rentals 408 494
Expense reimbursements 6,358 6,360
Other income 326 297
- ---------------------------------------------------------------------- --------- -------------
Total revenues 24,163 22,806
- ---------------------------------------------------------------------- --------- -------------
EXPENSES
Property operating 6,889 6,652
General and administrative 1,674 1,699
Interest 5,969 4,792
Depreciation and amortization 6,179 5,134
- ---------------------------------------------------------------------- --------- -------------
Total expenses 20,711 18,277
- ---------------------------------------------------------------------- --------- -------------
INCOME BEFORE GAIN ON SALE OF REAL ESTATE, MINORITY INTEREST
AND EXTRAORDINARY ITEM 3,452 4,529
Gain on sale of real estate --- 994
- ---------------------------------------------------------------------- --------- -------------
INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY ITEM 3,452 5,523
Minority interest (826) (1,408)
- ---------------------------------------------------------------------- --------- -------------
INCOME BEFORE EXTRAORDINARY ITEM 2,626 4,115
Extraordinary item - Loss on early extinguishment of debt,
net of minority interest of $96 and $128 (249) (332)
- ---------------------------------------------------------------------- --------- -------------
NET INCOME 2,377 3,783
Less preferred share dividends (479) (468)
- ---------------------------------------------------------------------- --------- -------------
Net income available to common shareholders $1,898 $3,315
- ---------------------------------------------------------------------- --------- -------------
BASIC EARNINGS PER COMMON SHARE:
Income before extraordinary item $.27 $.46
Extraordinary item (.03) (.04)
- ---------------------------------------------------------------------- --------- -------------
Net income $.24 $.42
- ---------------------------------------------------------------------- --------- -------------
DILUTED EARNINGS PER COMMON SHARE:
Income before extraordinary item $.27 $ .45
Extraordinary item (.03) (.04)
- ---------------------------------------------------------------------- --------- -------------
Net income $.24 $.41
- ---------------------------------------------------------------------- --------- -------------
DIVIDENDS PAID PER COMMON SHARE $.60 $.55
- ---------------------------------------------------------------------- --------- -------------
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)
MARCH 31, DECEMBER 31,
1999 1998
- -------------------------------------------------------------------- ----------- --------------
(Unaudited)
ASSETS
Rental property
Land $53,869 $53,869
Buildings, improvements and fixtures 470,534 458,546
Developments under construction 13,347 16,832
- -------------------------------------------------------------------- ----------- --------------
537,750 529,247
Accumulated depreciation (90,468) (84,685)
- -------------------------------------------------------------------- ----------- --------------
Rental property, net 447,282 444,562
Cash and cash equivalents 200 6,330
Deferred charges, net 8,588 8,218
Other assets 10,864 12,685
- -------------------------------------------------------------------- ----------- --------------
TOTAL ASSETS $466,934 $471,795
- -------------------------------------------------------------------- ----------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Long-term debt
Senior, unsecured notes $150,000 $150,000
Mortgages payable 91,746 72,790
Lines of credit 63,455 79,695
- ---------------------------------------------------------------------- --------- -------------
305,201 302,485
Construction trade payables 6,468 9,224
Accounts payable and accrued expenses 10,498 10,723
- -------------------------------------------------------------------- ----------- --------------
TOTAL LIABILITIES 322,167 322,432
- -------------------------------------------------------------------- ----------- --------------
Commitments
Minority interest 34,153 35,324
- -------------------------------------------------------------------- ----------- --------------
SHAREHOLDERS' EQUITY
Preferred shares, $.01 par value, 1,000,000 shares authorized,
88,270 shares issued and outstanding at March 31, 1999
and December 31, 1998 1 1
Common shares, $.01 par value, 50,000,000 shares authorized,
7,864,306 and 7,897,606 shares issued and outstanding
at March 31, 1999 and December 31, 1998 79 79
Paid in capital 136,944 137,530
Distributions in excess of net income (26,410) (23,571)
- -------------------------------------------------------------------- ----------- --------------
TOTAL SHAREHOLDERS' EQUITY 110,614 114,039
- -------------------------------------------------------------------- ----------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $466,934 $471,795
- -------------------------------------------------------------------- ----------- --------------
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)
THREE MONTHS ENDED
MARCH 31,
1999 1998
- --------------------------------------------------------------------- --------- ---------------
(Unaudited)
OPERATING ACTIVITIES
Net income $2,377 $3,783
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 6,179 5,134
Amortization of deferred financing costs 274 258
Minority interest 730 1,280
Loss on early extinguishment of debt 345 460
Gain on sale of real of estate --- (994)
Straight-line base rent adjustment (150) (84)
Compensation under Unit Option Plan --- 84
Increase (decrease) due to changes in:
Other assets 1,899 606
Accounts payable and accrued expenses (225) (2,005)
- --------------------------------------------------------------------- --------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,429 8,522
- --------------------------------------------------------------------- --------- ---------------
INVESTING ACTIVITIES
Acquisition of rental properties --- (17,000)
Additions to rental properties (11,237) (9,714)
Additions to deferred lease costs (549) (483)
Net proceeds from sale of real estate --- 2,411
- --------------------------------------------------------------------- --------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (11,786) (24,786)
- --------------------------------------------------------------------- --------- ---------------
FINANCING ACTIVITIES
Repurchase of common shares (667) ---
Cash dividends paid (5,216) (4,769)
Distributions to minority interest (1,820) (1,668)
Proceeds from mortgages payable 66,500 ---
Repayments on mortgages payable (47,544) (304)
Proceeds from revolving lines of credit 26,110 35,765
Repayments on revolving lines of credit (42,350) (11,100)
Additions to deferred financing costs (786) (134)
Proceeds from exercise of unit options --- 48
- --------------------------------------------------------------------- --------- ---------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (5,773) 17,838
- --------------------------------------------------------------------- --------- ---------------
Net increase (decrease) in cash and cash equivalents (6,130) 1,574
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,330 3,607
- --------------------------------------------------------------------- --------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $200 $5,181
- --------------------------------------------------------------------- --------- ---------------
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 March 31, 1999 and
1998 amounted to $6,468 and $8,375, 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
March 31, 1999
(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 Consolidated Financial Statements and Notes
thereto of the Company's Annual Report on Form 10-K for the year ended
December 31, 1998. 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. DEVELOPMENT OF RENTAL PROPERTIES
During the first quarter of 1999, the Company substantially completed a
94,982 square foot expansion of its center in Sevierville, Tennessee which
began opening in fourth quarter 1998, opening an additional 48,279 square
feet. Additionally, approximately 143,000 square feet of expansions in five
of the Company's centers are currently under construction and are scheduled
to open in the second half of 1999.
Commitments to complete construction of the expansions to the existing
properties and other capital expenditure requirements amounted to
approximately $5.3 million at March 31, 1999. Commitments for construction
represent only those costs contractually required to be paid by the Company.
Interest costs capitalized during the three months ended March 31, 1999 and
1998 amounted to $346,000 and $336,000, respectively.
3. LONG-TERM DEBT
On March 18, 1999, the Company obtained a $66.5 million non-recourse 10 year
loan with John Hancock Mutual Life Insurance at a fixed interest rate of
7.875%. The new loan refinances a prior loan, also with John Hancock, which
had a balance of approximately $47.3 million, an interest rate of 8.92% and a
scheduled maturity of January 1, 2002. The additional proceeds were used to
reduce amounts outstanding under the revolving lines of credit. The
unamortized deferred financing costs associated with the prior loan were
expensed during the quarter and are reflected as an extraordinary item, net
of minority interest, in the accompanying statements of operations.
At March 31, 1999, the Company had revolving lines of credit with an
unsecured borrowing capacity of $100 million, of which $36.5 million was
available for additional borrowings.
6
4. STOCK REPURCHASES
During the quarter, the Board of Directors increased the amount
authorized to repurchase the Company's common shares from $5 million to
$6 million. During the quarter ended March 31, 1999, the Company
repurchased and retired an additional 33,300 shares for approximately
$667,000, leaving a balance of $5.2 million authorized for future
repurchases.
5. EARNINGS PER SHARE
The following table sets forth a reconciliation of the numerators and
denominators in computing earnings per share in accordance with Statement
of Financial Accounting Standards No. 128, EARNINGS PER SHARE (in
thousands, except per share amounts):
THREE MONTHS ENDED
MARCH 31,
1999 1998
------------------------------------------------------------- ----------- -----------
NUMERATOR:
Income before extraordinary item $2,626 $4,115
Less preferred share dividends (479) (468)
------------------------------------------------------------- ----------- -----------
Income available to common shareholders -
numerator for basic and diluted earnings per share $2,147 $3,647
------------------------------------------------------------- ----------- -----------
DENOMINATOR:
Basic weighted average common shares 7,884 7,858
Effect of outstanding share and unit options --- 180
------------------------------------------------------------- ----------- -----------
Diluted weighted average common shares 7,884 8,038
------------------------------------------------------------- ----------- -----------
Basic earnings per share before extraordinary item $.27 $.46
------------------------------------------------------------- ----------- -----------
Diluted earnings per share before extraordinary item $.27 $.45
------------------------------------------------------------- ----------- -----------
Options to purchase common shares which were excluded from the
computation of diluted earnings per share for the three months ended
March 31, 1999 and 1998 because the exercise price was greater than the
average market price of the common shares totaled 1,314,342 and 26,000,
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.
6. SUBSEQUENT EVENTS
On May 3, 1999, a tornado severely damaged the Company's outlet center in
Stroud, Oklahoma. There were no reported injuries at the center, but the
extensive damage has made the center non-operational. At March 31, 1999,
the Stroud center's total assets were less than 2% of the Company's total
assets and its revenues in 1998 were less than 3% of the Company's total
revenues in 1998. Based on the Company's existing insurance coverage for
both replacement cost and business interruption losses applicable to this
property, the Company believes that the impact of this event will not
have a material effect on the Company's financial condition, results of
operations or cash flows.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the consolidated
financial statements appearing elsewhere in this report. 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 months ended March 31,
1999 with the three months ended March 31, 1998. 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. The Company intends 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);
- - capital availability (for instance, financing opportunities may not be
available to us, or may not be available to us on favorable terms);
- - our operating costs may increase or our costs to construct or acquire new
properties or expand our existing properties may increase or exceed our
original expectations.
GENERAL OVERVIEW
At March 31, 1999, the Company owned 31 centers in 23 states totaling 5.1
million square feet compared to 30 centers in 22 states totaling 4.7 million
square feet at March 31, 1998. Since March 31, 1998, the Company has acquired
one center, expanded two centers and sold one center, increasing GLA by
approximately 362,000 square feet.
During the first quarter of 1999, the Company substantially completed a 94,982
square foot expansion of its center in Sevierville, Tennessee which began
opening in fourth quarter 1998, opening an additional 48,279 square feet.
Additionally, approximately 143,000 square feet of expansions in five of the
Company's centers are currently under construction and are
8
scheduled to open in the second half of 1999.
On May 3, 1999, a tornado severely damaged the Company's outlet center in
Stroud, Oklahoma. There were no reported injuries at the center, but the
extensive damage has made the center non-operational. At March 31, 1999, the
Stroud center's total assets were less than 2% of the Company's total assets and
its revenues in 1998 were less than 3% of the Company's total revenues in 1998.
Based on the Company's existing insurance coverage for both replacement cost and
business interruption losses applicable to this property, the Company believes
that the impact of this event will not have a material effect on the Company's
financial condition, results of operations or cash flows.
A summary of the operating results for the three months ended March 31, 1999 and
1998 is presented in the following table, expressed in amounts calculated on a
weighted average GLA basis.
1999 1998
- ---------------------------------------------------------------------- --------- -------------
GLA open at end of period (000's) 5,062 4,700
Weighted average GLA (000's) (1) 5,039 4,499
Outlet centers in operation 31 30
New centers acquired -- 1
Centers sold -- 1
Centers expanded 1 --
States operated in at end of period 23 22
Occupancy percentage at end of period 94% 97%
PER SQUARE FOOT
Revenues
Base rentals $3.39 $3.48
Percentage rentals .08 .11
Expense reimbursements 1.26 1.41
Other income .06 .07
- --------------------------------------------------------- ------------ ----------- ------------
Total revenues 4.79 5.07
- --------------------------------------------------------- ------------ ----------- ------------
Expenses
Property operating 1.37 1.48
General and administrative .33 .38
Interest 1.18 1.07
Depreciation and amortization 1.23 1.14
- ---------------------------------------------------------------------- --------- -------------
Total expenses 4.11 4.07
- --------------------------------------------------------- ------------ ----------- ------------
Income before gain on sale of real estate, minority
interest and extraordinary item $.68 $1.00
--------------------------------------------------------- ------------ ----------- ------------
(1) GLA WEIGHTED BY MONTHS OF OPERATIONS. GLA IS NOT ADJUSTED FOR FLUCTUATIONS
IN OCCUPANCY WHICH MAY OCCUR SUBSEQUENT TO THE ORIGINAL OPENING DATE.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1999 TO THE THREE MONTHS ENDED
MARCH 31, 1998
Base rentals increased $1.4 million, or 9%, in the 1999 period when compared to
the same period in 1998 primarily as a result of a 12% increase in weighted
average GLA. The increase in weighted average GLA is due to the acquisitions in
March 1998 (173,000 square feet) and July 1998 (186,000 square feet) and
expansions at three of the Company's centers totaling approximately 125,642
square feet. Base rent per weighted average GLA decreased $.09 per foot due to
the portfolio of properties having a lower overall average occupancy rate in the
first three months of 1999 compared to the same period in 1998.
9
Percentage rentals, which represent revenues based on a percentage of tenants'
sales volume above predetermined levels (the "breakpoint"), decreased $86,000,
and on a weighted average GLA basis, decreased $.03 per square foot in the first
three months of 1999 compared to the first three months of 1998. The decrease
reflects lower sales for the tenants whose lease years ended in the first
quarter of 1999. For the three months ended March 31, 1999, reported same-store
sales, defined as the weighted average sales per square foot reported by tenants
for stores open since January 1, 1998, were even with that of the previous 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 from 96% in the 1998 three month period to 92% in the 1999 three month
period primarily as a result of a lower average occupancy rate in the 1999
period compared to the 1998 period.
Property operating expenses increased by $237,000, or 4%, in the 1999 period as
compared to the 1998 period due to a higher average GLA in 1999 versus 1998.
However, on a weighted average GLA basis, property operating expenses decreased
$.11 per square foot from $1.48 to $1.37. Slightly higher real estate taxes per
square foot were offset by considerable decreases in advertising and promotion
and common area maintenance expenses per square foot.
General and administrative expenses decreased $25,000, or 1%, in the 1999
quarter as compared to the 1998 quarter. As a percentage of revenues, general
and administrative expenses were approximately 7% of revenues in both the 1999
and 1998 periods and, on a weighted average GLA basis, decreased $.05 per square
foot from $.38 in 1998 to $.33 in 1999 reflecting the absorption of the
acquisitions and expansions in 1998 without corresponding increases in general
and administrative expenses.
Interest expense increased $1.2 million during the 1999 period as compared to
the 1998 period due to financing the 1998 acquisitions and expansions.
Depreciation and amortization per weighted average GLA increased from $1.14 per
square foot in the 1998 period to $1.23 per square foot in the 1999 period due
to a higher mix of tenant finishing allowances included in buildings and
improvements which are depreciated over shorter lives (i.e., over lives
generally ranging from 3 to 10 years as opposed to other construction costs
which are depreciated over lives ranging from 15 to 33 years.)
The gain on sale of real estate for the three months ended March 31, 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 losses recognized in each three month period represent the
write-off of unamortized deferred financing costs related to debt that was
extinguished during each period prior to its scheduled maturity.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $11.4 million and $8.5 million for
the three months ended March 31, 1999 and 1998, respectively. The increase in
cash provided by operating activities is due primarily to an increase in
receivables and a lesser decrease in accounts payable during 1999 when compared
to the same period in 1998. Net cash used in investing activities was $11.8 and
$24.8 million during the first three months of 1999 and 1998, respectively. Cash
used was higher in 1998 primarily due to the acquisition of a factory outlet
center in Dalton, Georgia in 1998. Likewise, net cash from financing activities
amounted to $(5.8) and $17.8 million during the first three months of 1999 and
1998, respectively, decreasing consistently with the capital needs of the
current acquisition and expansion activity. Also attributing to the decrease in
cash from financing activities in the
10
first three months of 1999 compared to the same period in 1998 was an increase
in dividends paid of $599,000 and the repurchase and retirement of some of the
Company's common shares totaling $667,000 in 1999.
During the first quarter of 1999, the Company substantially completed a 94,982
square foot expansion of its center in Sevierville, Tennessee which began
opening in fourth quarter 1998, opening an additional 48,279 square feet.
Additionally, approximately 143,000 square feet of expansions in five of the
Company's centers is currently under construction and is scheduled to open in
the second half of 1999. Commitments to complete construction of the expansions
to the existing properties and other capital expenditure requirements amounted
to approximately $5.3 million at March 31, 1999. 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 2000 and beyond. Currently, the Company is in
the preleasing stages for a future center in Bourne, Massachusetts and for
further expansions of five existing Centers. However, these anticipated or
planned developments or expansions may not be started or completed as scheduled,
or may not result in accretive funds from operations. In addition, the Company
regularly evaluates acquisition or disposition proposals, engages from time to
time in negotiations for acquisitions or dispositions and may from time to time
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 also may not be consummated, or if consummated,
may not result in accretive funds from operations.
The Company maintains revolving lines of credit which provide for unsecured
borrowings up to $100 million, of which $36.5 million was available for
additional borrowings at March 31, 1999. As a general matter, the Company
anticipates utilizing its lines of credit as an interim source of funds to
acquire, develop and expand factory outlet centers and to repay the credit lines
with longer-term debt or equity when management determines that market
conditions are favorable. Under joint shelf registration, the Company and the
Operating Partnership could issue up to $100 million in additional equity
securities and $100 million in additional debt securities. With the decline in
the real estate debt and equity markets, the Company may not, in the short term,
be able to access these markets on favorable terms. Management believes the
decline is temporary and may utilize these funds as the markets improve to
continue its external growth. In the interim, the Company may consider the use
of operational and developmental joint ventures and other related strategies to
generate additional capital. Based on cash provided by operations, 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 capital
expenditures during 1999.
On March 18, 1999, the Company refinanced its 8.92% notes which had a carrying
amount of $47.3 million. The refinancing reduced the interest rate to 7.875%,
increased the loan amount to $66.5 million and extended the maturity date to
April 2009. The additional proceeds were used to reduce amounts outstanding
under the revolving lines of credit. As a result of this refinancing, management
expects to realize a savings in interest cost of approximately $300,000 over the
next twelve months. In addition, the Company extended the maturity of one of its
revolving lines of credit from June 2000 to June 2001.
At March 31, 1999, approximately 70% of the outstanding long-term debt
represented unsecured borrowings and approximately 79% of the Company's real
estate portfolio was unencumbered. The weighted average interest rate on debt
outstanding on March 31, 1999 was 7.9%.
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 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
11
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, for the prior fiscal year on an annual basis or 95%
of FFO on a cumulative basis from the date of the agreement.
On April 8, 1999, the Board of Directors of the Company declared a $.605 cash
dividend per common share payable on May 14, 1999 to each shareholder of record
on April 30, 1999, and caused a $.605 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 $.5451 per preferred depositary share
payable on May 14, 1999 to each shareholder of record on April 30, 1999. Both
dividends represent a 1% increase from the quarterly distributions previously
paid to holders of shares and Operating Partnership units.
MARKET RISK
The Company is 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. The Company does not enter into
derivatives or other financial instruments for trading or speculative purposes.
The Company enters into interest rate swap agreements to manage its 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, 1999, the Company had an interest rate swap agreement
effective through October 2001 with a notional amount of $20 million. Under this
agreement, the Company receives a floating interest rate based on the 30 day
LIBOR index and pays a fixed interest rate of 5.47%. These swaps effectively
change the Company's payment of interest on $20 million of variable rate debt to
fixed rate debt for the contract period.
The fair value of the interest rate swap agreement represents the estimated
receipts or payments that would be made to terminate the agreements. At March
31, 1999, the Company would have paid $42,000 to terminate the agreements. A 1%
decrease in the 30 day LIBOR index would increase the amount paid by
approximately $501,000. The fair value is based on dealer quotes, considering
current interest rates.
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 the Company's total long-term debt at March 31, 1999 was $282.5
million. A 1% increase from prevailing interest rates at March 31, 1999 would
result in a decrease in fair value of total long-term debt by approximately $6.1
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
On June 15, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES ("SFAS 133"). SFAS 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. SFAS 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 SFAS 133 will not have a
significant effect on the Company's results of operations or its financial
position.
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FUNDS FROM OPERATIONS
Management believes that for a clear understanding of the consolidated
historical operating results of the Company, FFO should be considered along with
net income as presented in the unaudited consolidated financial statements
included elsewhere in this report. FFO is presented because it is a widely
accepted financial indicator used by certain investors and analysts to analyze
and compare one equity real estate investment trust ("REIT") with another on the
basis of operating performance. FFO is generally defined as net income (loss),
computed in accordance with generally accepted accounting principles, before
extraordinary items and gains (losses) on sale of real estate, 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 calculation of funds from operations for the three months ended March
31, 1999 and 1998 as well as actual cash flow and other data for those
respective periods (in thousands):
1999 1998
- ------------------------------------------------- ------------- ------------ -------------
FUNDS FROM OPERATIONS:
Income before gain on sale of real estate, minority interest $3,452 $4,529
and extraordinary item
Adjusted for depreciation and amortization uniquely 6,121 5,086
significant to real estate
- ------------------------------------------------- ------------- ------------ -------------
Funds from operations before minority interest $9,573 $9,615
- ------------------------------------------------- ------------- ------------ -------------
CASH FLOWS PROVIDED BY (USED IN):
Operating activities $11,429 $8,522
Investing activities (11,786) (24,786)
Financing activities (5,773) 17,838
WEIGHTED AVERAGE SHARES OUTSTANDING (1) 11,713 11,885
- ------------------------------------------------- ------------- ------------ -------------
- --------------------------------
(1) ASSUMES THE PARTNERSHIP UNITS OF THE OPERATING PARTNERSHIP HELD BY THE
MINORITY INTEREST, PREFERRED SHARES OF THE COMPANY AND SHARE AND UNIT OPTIONS
ARE ALL CONVERTED TO COMMON SHARES OF THE COMPANY.
ECONOMIC CONDITIONS AND OUTLOOK
The majority 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 advertising and promotion, thereby reducing exposure
to increases in costs and operating expenses resulting from inflation.
While factory outlet stores continue to be a profitable and fundamental
distribution channel for brand name manufacturers, some retail formats are more
successful than others. As typical in the retail industry, certain tenants have
closed, or will close, certain stores by terminating their lease prior to its
natural expiration or as a result of filing for protection under bankruptcy
laws.
As part of its strategy of aggressively managing its assets, the Company is
strengthening the tenant base in several of its centers by adding strong new
anchor tenants, such as Nike, GAP and Nautica. To accomplish this goal, stores
may remain vacant for a longer period of time in order to recapture enough space
to meet the size
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requirement of these upscale, high volume tenants. Consequently, the Company
anticipates that its average occupancy level will remain strong, but may be more
in line with the industry average.
Approximately 311,000 square feet of space is up for renewal during the
remainder of 1999 and approximately 690,000 square feet will come up for renewal
in 2000. If the Company 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 its results of operations. However,
existing tenants' sales have remained stable and renewals by existing tenants
have remained strong. Approximately 409,000 square feet scheduled to expire in
1999 has already been renewed. In addition, the Company continues 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 creditworthy 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 8% 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.
YEAR 2000 COMPLIANCE
The year 2000 ("Y2K") issue refers generally to computer applications using only
the last two digits to refer to a year rather than all four digits. As a result,
these applications could fail or create erroneous results if they recognize "00"
as the year 1900 rather than the year 2000. The Company has taken Y2K
initiatives in three general areas which represent the areas that could have an
impact on the company - Information technology systems, non-information
technology systems and third-party issues. The following is a summary of these
initiatives:
INFORMATION TECHNOLOGY SYSTEMS. The Company has focused its efforts on the
high-risk areas of the corporate office computer hardware, operating systems and
software applications. The Company's assessment and testing of existing
equipment and software revealed that certain older desktop personal computers,
the network operating system and the DOS-based accounting system were not Y2K
compliant. The non-compliant personal computers have since been replaced. The
Company is currently in the process of installing and testing current upgrades
for the DOS-based accounting and the network operating systems which will make
these systems compliant with Y2K and expects to complete this process by June
30, 1999.
NON-INFORMATION TECHNOLOGY SYSTEMS. Non-information technology consists mainly
of facilities management systems such as telephone, utility and security systems
for the corporate office and the outlet centers. The Company has reviewed the
corporate facility management systems and made inquiry of the building
owner/manager and concluded that the corporate office building systems including
telephone, utilities, fire and security systems are Y2K compliant. The Company
is in the process of identifying date sensitive systems and equipment including
HVAC units, telephones, security systems and alarms, fire warning systems and
general office systems at its 31 outlet centers. Assessment and testing of these
systems is expected to be completed by June 30, 1999. Critical non-compliant
systems will be replaced by mid-1999. Based on preliminary assessment, the cost
of replacement is not expected to be significant.
THIRD PARTIES. The Company has third-party relationships with approximately 260
tenants and over 8,000 suppliers and contractors. Many of these third parties
are publicly-traded corporations and subject to disclosure requirements. The
Company has begun assessment of major third parties' Y2K readiness including
tenants, key suppliers of outsourced services including stock transfer, debt
servicing, banking collection and disbursement, payroll and benefits, while
simultaneously responding to their inquiries regarding the Company's readiness.
The majority of the Company's vendors are small suppliers that the Company
believes can manually execute their business and are readily replaceable.
Management also believes there is no material risk of being unable to procure
necessary supplies and services from third parties who have not already
indicated that they are currently Y2K compliant. The Company is diligently
working to substantially complete its third party assessment. The
14
Company has received responses to approximately 66% of the surveys sent to
tenants, banks and key suppliers of which 99% have indicated they are presently,
or will be by December 31, 1999, Y2K compliant. The Company also intends to
monitor Y2K disclosures in SEC filings of publicly-owned third parties
commencing with the current quarter filings.
COSTS. The accounting software and network operating system upgrades are being
executed under existing maintenance and support agreements with software
vendors, and thus the Company does not expect to incur additional costs to bring
those systems in compliance. Approximately $220,000 has been spent to upgrade
or replace equipment or systems specifically to bring them in compliance with
Y2K. The total cost of Y2K compliance activities, expected to be less than
$400,000, has not been, and is not expected to be material to the operating
results or financial position of the Company.
The identification and remediation of systems at the outlet centers is being
accomplished by in-house business systems personnel and outlet center general
managers whose costs are recorded as normal operating expenses. The assessment
of third-party readiness is also being conducted by in-house personnel whose
costs are recorded as normal operating expenses. The Company is not yet in a
position to estimate the cost of third-party compliance issues, but has no
reason to believe, based upon its evaluations to date, that such costs will
exceed $100,000.
RISKS. The principal risks to the Company relating to the completion of its
accounting software conversion is failure to correctly bill tenants by December
31, 1999 and to pay invoices when due. Management believes it has adequate
resources, or could obtain the needed resources, to manually bill tenants and
pay bills until the systems became operational.
The principal risks to the Company relating to non-information systems at the
outlet centers are failure to identify time-sensitive systems and inability to
find a suitable replacement system. The Company believes that adequate
replacement components or new systems are available at reasonable prices and are
in good supply. The Company also believes that adequate time and resources are
available to remediate these areas as needed.
The principal risks to the Company in its relationships with third parties are
the failure of third-party systems used to conduct business such as tenants
being unable to stock stores with merchandise, use cash registers and pay
invoices; banks being unable to process receipts and disbursements; vendors
being unable to supply needed materials and services to the centers; and
processing of outsourced employee payroll. Based on Y2K compliance work done to
date, the Company has no reason to believe that key tenants, banks and suppliers
will not be Y2K compliant in all material respects or can not be replaced within
an acceptable time frame. The Company will attempt to obtain compliance
certification from suppliers of key services as soon as such certifications are
available.
CONTINGENCY PLANS. The Company intends to deal with contingency planning during
the first half of 1999 after the results of the above assessments are known. The
Company description of its Y2K compliance issues are based upon information
obtained by management through evaluations of internal business systems and from
tenant and vendor compliance efforts. No assurance can be given that the Company
will be able to address the Y2K issues for all its systems in a timely manner or
that it will not encounter unexpected difficulties or significant expenses
relating to adequately addressing the Y2K issue. If the Company or the major
tenants or vendors with whom the Company does business fail to address their
major Y2K issues, the Company's operating results or financial position could be
materially adversely affected.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor the Operating Partnership is presently involved in any
material litigation nor, to their knowledge, is any material litigation
threatened against the Company or the Operating Partnership or its properties,
other than routine litigation arising in the ordinary course of business and
which is expected to be covered by the liability insurance.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Promissory Notes by and between Tanger Properties Limited
Partnership and John Hancock Mutual Life Insurance Company
aggregating $66,500,000.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
TANGER FACTORY OUTLET CENTERS, INC.
By: /s/ FRANK C. MARCHISELLO, JR.
Frank C. Marchisello, Jr.
Vice President, Chief Financial Officer
DATE: May 12, 1999
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