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, 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
7,850,256 Common Shares, $.01 par value,
outstanding as of July 28, 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 and six months ended June 30, 1999 and 1998 3
Consolidated Balance Sheets
As of June 30, 1999 and December 31, 1998 4
Consolidated Statements of Cash Flows
For the six months ended June 30, 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 17
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
[OBJECT OMITTED]
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,
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------
(unaudited) (unaudited)
REVENUES
Base rentals $17,092 $16,469 $34,163 $32,124
Percentage rentals 478 381 886 875
Expense reimbursements 6,851 7,125 13,209 13,485
Other income 718 375 1,044 672
- -------------------------------------------------------------------------------------------
Total revenues 25,139 24,350 49,302 47,156
- -------------------------------------------------------------------------------------------
EXPENSES
Property operating 7,339 7,397 14,228 14,049
General and administrative 1,855 1,640 3,529 3,339
Interest 6,042 5,433 12,011 10,225
Depreciation and amortization 6,146 5,545 12,325 10,679
- -------------------------------------------------------------------------------------------
Total expenses 21,382 20,015 42,093 38,292
- -------------------------------------------------------------------------------------------
INCOME BEFORE GAIN ON SALE OF REAL
ESTATE, MINORITY INTEREST AND
EXTRAORDINARY ITEM 3,757 4,335 7,209 8,864
Gain on sale of real estate -- -- -- 994
- -------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST AND
EXTRAORDINARY ITEM 3,757 4,335 7,209 9,858
Minority interest (913) (1,070) (1,739) (2,478)
- -------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM 2,844 3,265 5,470 7,380
Extraordinary item - Loss early
estinguishment of debt, net of
minority interest of $96 and $128 -- -- (249) (332)
- -------------------------------------------------------------------------------------------
NET INCOME 2,844 3,265 5,221 7,048
Less preferred share dividends (481) (484) (960) (952)
- -------------------------------------------------------------------------------------------
Net income available to common
shareholders $ 2,363 $ 2,781 $4,261 $6,096
- -------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE:
Income before extraordinary item $.30 $.35 $.57 $.82
Extraordinary item -- -- (.03) (.05)
- -------------------------------------------------------------------------------------------
Net income $.30 $.35 $.54 $.77
- -------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE:
Income before extraordinary item $.30 $.34 $.57 $.80
Extraordinary item -- -- (.03) (.04)
- -------------------------------------------------------------------------------------------
Net income $.30 $.34 $.54 $.76
- -------------------------------------------------------------------------------------------
Dividends paid per common share $.61 $.60 $1.21 $1.15
- -------------------------------------------------------------------------------------------
3
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, December 31,
1999 1998
- ---------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
Rental Property
Land $53,869 $53,869
Buildings, improvements and fixtures 476,456 458,546
Developments under construction 15,036 16,832
- ---------------------------------------------------------------------------------------------------
545,361 529,247
Accumulated depreciation (96,203) (84,685)
- ---------------------------------------------------------------------------------------------------
Rental property, net 449,158 444,562
Cash and cash equivalents 200 6,330
Deferred charges, net 8,810 8,218
Other assets 12,114 12,685
- ---------------------------------------------------------------------------------------------------
Total assets $470,282 $471,795
- ---------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Long-term debt
Senior, unsecured notes $150,000 $150,000
Mortgages payable 91,461 72,790
Lines of credit 67,298 79,695
- ---------------------------------------------------------------------------------------------------
308,759 302,485
Construction trade payables 6,459 9,224
Accounts payable and accrued expenses 13,884 10,723
- ---------------------------------------------------------------------------------------------------
Total liabilities 329,102 322,432
- ---------------------------------------------------------------------------------------------------
Commitments
Minority interest 33,201 35,324
- ---------------------------------------------------------------------------------------------------
Shareholders' equity
Preferred shares, $.01 par value, 1,000,000 shares authorized,
88,220 and 88,270 shares issued and outstanding
at June 30, 1999 and December 31, 1998 1 1
Common shares, $.01 par value, 50,000,000 shares authorized,
7,850,256 and 7,897,606 shares issued and outstanding
at June 30, 1999 and December 31, 1998 78 79
Paid in capital 136,696 137,530
Distributions in excess of net income (28,796) (23,571)
- ---------------------------------------------------------------------------------------------------
Total shareholders' equity 107,979 114,039
- ---------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $470,282 $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)
Six Months Ended
June 30,
1999 1998
- ----------------------------------------------------------------------------------------------------
(Unaudited)
OPERATING ACTIVITIES
Net income $5,221 $7,048
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 12,325 10,679
Amortization of deferred financing costs 519 542
Minority interest 1,643 2,350
Loss on early extinguishment of debt 345 460
Gain on sale of real estate -- (994)
Straight-line base rent adjustment (194) (470)
Compensation under Unit Option Plan -- 168
Increase (decrease) due to changes in:
Other assets 2,047 (793)
Accounts payable and accrued expenses 2,661 (2,261)
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 24,567 16,729
- ---------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisition of rental properties -- (17,000)
Additions to rental properties (18,853) (16,298)
Additions to deferred lease costs (1,253) (1,313)
Net proceeds from sale of real estate -- 2,411
Advances to officer (1,418) --
Insurance proceeds from casualty losses 500 --
- ---------------------------------------------------------------------------------------------------
Net cash used in investing activities (21,024) (32,200)
- ---------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Repurchase of common shares (958) --
Cash dividends paid (10,446) (9,973)
Distributions to minority interest (3,655) (3,488)
Proceeds from mortgages payable 66,500 --
Repayments on mortgages payable (47,829) (616)
Proceeds from revolving lines of credit 46,303 56,190
Repayments on revolving lines of credit (58,700) (27,790)
Additions to deferred financing costs (900) (257)
Proceeds from exercise of unit options 12 754
- ---------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (9,673) 14,820
- ---------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (6,130) (651)
Cash and cash equivalents, beginning of period 6,330 3,607
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $200 $2,956
- ---------------------------------------------------------------------------------------------------
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, 1999 and
1998 amounted to $6,459 and $6,924, respectively.
5
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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. Rental Properties
During the first six months of 1999, the Company completed expansions at two
of its centers, opening an additional 66,500 square feet in Sevierville,
Tennessee and 16,900 square feet in Riverhead, New York. Additionally,
approximately 204,000 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.
On May 3, 1999, a tornado destroyed the Company's outlet center in Stroud,
Oklahoma, making the center non-operational. The Stroud center's total assets
are less than 2% of the Company's total assets and its revenues are less than
3% of the Company's total revenues. The Company is currently in the process
of filing claims with its insurance carrier. 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. Business interruption insurance is being
recognized on a straight-line basis over the expected period of business
interruption. A portion of these proceeds has been recognized as Other Income
for the second quarter.
Commitments to complete construction of the expansions to the existing
centers and other capital expenditure requirements amounted to approximately
$4.3 million at June 30, 1999. 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, 1999 and
1998 amounted to $264,000 and $63,000, respectively, and during the six
months ended June 30, 1999 and 1998 amounted to $610,000 and $399,000,
respectively.
3. Other Assets
Other assets include a note receivable totaling $1.4 million from Stanley K.
Tanger, the Company's Chairman of the Board and Chief Executive Officer.
During the second quarter, Mr. Tanger and the Company entered into a demand
note agreement whereby he may borrow up to $2 million through various
advances from the Company for an investment in a separate E-commerce
business. The note bears interest at a rate of 8% per annum and is secured by
Mr. Tanger's limited partnership interest in Tanger Investments Limited
Partnership. Mr. Tanger intends to fully repay the loan.
6
4. Long-Term Debt
On March 18, 1999, the Company obtained a $66.5 million non-recourse loan due
April 1, 2009 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 first quarter and are reflected as an extraordinary item,
net of minority interest, in the accompanying statements of operations.
The Company has revolving lines of credit with an unsecured borrowing
capacity of $100 million, of which $32.7 million was available for additional
borrowings at June 30, 1999. During the first six months of 1999, the Company
has extended the maturities of all of its lines of credit by one year. The
lines of credit now have maturity dates in the years 2001 and 2002.
In June 1999, the Company terminated its interest rate swap agreement with a
notional amount of $20 million and, based on its fair value at that time,
received cash proceeds of $146,000. The agreement was scheduled to expire in
October 2001. The proceeds have been recorded as deferred income and are
being amortized as a reduction to interest expense over the remaining life of
the original contract term.
5. Stock Repurchases
The Board of Directors has authorized the Company to repurchase up to $6.0
million of its outstanding common shares. During the six months ended June
30, 1999, the Company repurchased and retired an additional 48,300 shares at
an average price $19.83 per share for approximately $958,000, leaving a
balance of $4.8 million authorized for future repurchases.
6. Earnings Per Share
The following table sets forth a reconciliation of the numerators and
denominators in computing earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share (in thousands,
except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------
Numerator:
Income before extraordinary item $2,844 $3,265 $5,470 $7,380
Less preferred share dividends (481) (484) (960) (952)
- ---------------------------------------------------------------------------------------------------
Income available to common shareholderes-
numerator for basic and diluted earnings per share 2,363 2,781 4,510 6,428
- ---------------------------------------------------------------------------------------------------
Denominator:
Basic weighted average common shares 7,850 7,883 7,867 7,871
Effect of outstanding share and unit options 71 193 3 186
- ---------------------------------------------------------------------------------------------------
Diluted weighted average common shares 7,921 8,076 7,870 8,057
- ---------------------------------------------------------------------------------------------------
Basic earnings per share before extraordinary item $.30 $.35 $.57 $.82
- ---------------------------------------------------------------------------------------------------
Diluted earnings per share before extraordinary item $.30 $.34 $.57 $.80
- ---------------------------------------------------------------------------------------------------
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 379,000 and 6,000 for the
three months ended June 30, 1999 and 1998, respectively, and 1,068,000 and
129,000 for the six months ended June 30, 1999 and 1998, 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
7
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.
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 and six months ended
June 30, 1999 with the three and six months ended June 30, 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 tenants' 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.
8
GENERAL OVERVIEW
At June 30, 1999, the Company owned 31 centers in 23 states totaling 5.1 million
square feet of GLA compared to 30 centers in 22 states totaling 4.7 million
square feet of GLA at June 30, 1998. GLA has increased 381,000 square feet as
the Company has acquired one center and expanded three centers since June 30,
1998.
During the first six months of 1999, the Company completed expansions at two of
its centers, opening an additional 66,500 square feet in Sevierville, Tennessee
and 16,900 square feet in Riverhead, New York. Additionally, approximately
204,000 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.
On May 3, 1999, a tornado destroyed the Company's outlet center in Stroud,
Oklahoma, making the center non-operational. The Stroud center's total assets
are less than 2% of the Company's total assets and its revenues are less than 3%
of the Company's total revenues. The Company is currently in the process of
filing claims with its insurance carrier. 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. Business interruption insurance is being recognized on
a straight-line basis over the expected period of business interruption. A
portion of these proceeds has been recognized as Other Income for the second
quarter.
A summary of the operating results for the three and six months ended June 30,
1999 and 1998 is presented in the following table, expressed in amounts
calculated on a weighted average GLA basis.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------
GLA open at end of period (000's)(2) 5,115 4,734 5,115 4,734
Weighted average GLA (000's)(1) 4,963 4,729 5,000 4,615
Outlet centers in operation (2) 31 30 31 30
New centers acquired -- -- -- 1
Centers sold -- -- -- 1
Centers expanded 1 -- 2 --
States operated in at end of period (2) 23 22 23 22
Occupancy percentage at end of period 95 97 95 97
Per square foot
Revenues
Base rentals $3.44 $3.48 $6.83 $6.96
Percentage rentals .10 .08 .18 .19
Expense reimbursements 1.38 1.51 2.64 2.92
Other income .14 .08 .21 .15
- --------------------------------------------------------------------------------------------------
Total revenues 5.06 5.15 9.86 10.22
- --------------------------------------------------------------------------------------------------
Expenses
Property operating 1.48 1.56 2.85 3.04
General and administrative .37 .35 .71 .72
Interest 1.22 1.15 2.40 2.22
Depreciation and amortization 1.24 1.17 2.46 2.31
- --------------------------------------------------------------------------------------------------
Total expenses 4.31 4.23 8.42 8.29
- --------------------------------------------------------------------------------------------------
Income before gain on sale of real estate,
minority interest and extraordinary item $.75 $.92 $1.44 $1.93
- --------------------------------------------------------------------------------------------------
(1) GLA weighted by months of operations. GLA is not adjusted for fluctuations
in occupancy which may occur subsequent to the original opening date.
(2) Currently includes the center in Stroud, Oklahoma which was destroyed by a
tornado on May 3, 1999.
9
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1999 TO THE THREE MONTHS ENDED
JUNE 30, 1998
Base rentals increased $623,000, or 4%, in the 1999 period when compared to the
same period in 1998. The increase is primarily due to the acquisition and
expansions as mentioned in the Overview, offset by the loss of rent from the
destruction of the outlet center in Stroud, Oklahoma by a tornado on May 3,
1999. Base rent per weighted average GLA decreased $.04 per foot due to the
portfolio of properties having a lower overall average occupancy rate in the
three months ended June 30, 1999 compared to the same period in 1998.
Percentage rentals, which represent revenues based on a percentage of tenants'
sales volume above predetermined levels (the "breakpoint"), increased $97,000,
and on a weighted average GLA basis, increased $.02 per square foot in the 1999
period compared to the same period in 1998. The increase reflects higher sales
for certain tenants who normally achieve sales over their breakpoints in the
second quarter as well as some sales for certain other tenants shifting more to
second quarter from first quarter.
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 93% 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.
Other income has increased $343,000 in the 1999 period as compared to the 1998
period. The increase is primarily due to the recognition of a portion of the
business interruption insurance proceeds relating to the Stroud, Oklahoma
center.
Property operating expenses decreased by $58,000, or 1%, in the 1999 period as
compared to the 1998 period. However, on a weighted average GLA basis, property
operating expenses decreased $.08 per square foot from $1.56 to $1.48. 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 increased $215,000, or 13%, 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, increased $.02 per square
foot from $.35 in 1998 to $.37 in 1999. The increase in general and
administrative expenses is primarily due to rental and related expenses for the
new corporate office space to which the Company relocated its corporate
headquarters in April 1999.
Interest expense increased $609,000 during the 1999 period as compared to the
1998 period due to financing the 1998 acquisitions and the 1998 and 1999
expansions. Depreciation and amortization per weighted average GLA increased
from $1.17 per square foot in the 1998 period to $1.24 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.)
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 TO THE SIX MONTHS ENDED JUNE
30, 1998
Base rentals increased $2.0 million, or 6%, in the 1999 period when compared to
the same period in 1998. The increase is primarily due to the acquisition and
expansions as mentioned in the Overview, offset by the loss of rent from the
destruction of the outlet center in Stroud, Oklahoma by a tornado on May 3,
1999. Base rent per weighted average GLA decreased $.13 per foot due to the
portfolio of properties having a lower overall average occupancy rate in the
first six months of 1999 compared to the same period in 1998.
10
Percentage rentals, which represent revenues based on a percentage of tenants'
sales volume above predetermined levels (the "breakpoint"), increased slightly
by $11,000, and on a weighted average GLA basis, decreased $.01 per square foot
in the 1999 period compared to the same period in 1998. For the six months ended
June 30, 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
approximately 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 six month period to 93% in the 1999 six month
period primarily as a result of a lower average occupancy rate in the 1999
period compared to the 1998 period.
Other income has increased $372,000 in the 1999 period as compared to the 1998
period. The increase is primarily due to the recognition of a portion of the
business interruption insurance proceeds relating to the Stroud, Oklahoma
center.
Property operating expenses increased by $179,000, or 1%, in the 1999 period as
compared to the 1998. However, on a weighted average GLA basis, property
operating expenses decreased $.19 per square foot from $3.04 to $2.85. 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 increased $190,000, or 6%, 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 $.01 per square
foot from $.72 in 1998 to $.71 in 1999. The decrease in general and
administrative expenses per square foot reflects the absorption of the 1998
acquisitions and the 1998 and 1999 expansions without corresponding increases in
general and administrative expenses offset by rental and related expenses for
the new corporate office space to which the Company relocated its corporate
headquarters in April 1999.
Interest expense increased $1.8 million during the 1999 period as compared to
the 1998 period due to financing the 1998 acquisitions and the 1998 and 1999
expansions. Depreciation and amortization per weighted average GLA increased
from $2.31 per square foot in the 1998 period to $2.46 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 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 losses recognized in each six 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 $24.6 million and $16.7 million
for the six months ended June 30, 1999 and 1998, respectively. The increase in
cash provided by operating activities is due primarily to a decrease in
receivables and an increase in accounts payable during 1999 when compared to the
same period in 1998. Net cash used in investing activities was $21.0 million and
$32.2 million during the first six 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 $(9.7) and $14.8 million during the
11
first six 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 first six
months of 1999 compared to the same period in 1998 was an increase in dividends
paid of $640,000 and the repurchase and retirement of some of the Company's
common shares totaling $958,000 in 1999.
During the first six months of 1999, the Company completed expansions at two of
its centers, opening an additional 66,500 square feet in Sevierville, Tennessee
and 16,900 square feet in Riverhead, New York. Additionally, approximately
204,000 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 centers
and other capital expenditure requirements amounted to approximately $4.3
million at June 30, 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 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.
Other assets include a receivable totaling $1.4 million from Stanley K. Tanger,
the Company's Chairman of the Board and Chief Executive Officer. During the
second quarter, Mr. Tanger and the Company entered into a demand note agreement
whereby he may borrow up to $2 million through various advances from the Company
for an investment in a separate E-commerce business. The note bears interest at
a rate of 8% per annum and is secured by Mr. Tanger's limited partnership
interest in Tanger Investments Limited Partnership. Mr. Tanger intends to fully
repay the loan.
The Company maintains revolving lines of credit which provide for unsecured
borrowings up to $100 million, of which $32.7 million was available for
additional borrowings at June 30, 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 has extended the maturities of all
of its revolving lines of credit by one year. The lines of credit now have
maturity dates in the years 2001 and 2002.
12
At June 30, 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 June 30, 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 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 July 8, 1999, the Board of Directors of the Company declared a $.605 cash
dividend per common share payable on August 16, 1999 to each shareholder of
record on July 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 August 16, 1999 to each shareholder of record on July 30, 1999.
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. In June 1999, the Company terminated its only interest rate swap
agreement effective through October 2001 with a notional amount of $20 million.
Under this agreement, the Company received a floating interest rate based on the
30 day LIBOR index and paid a fixed interest rate of 5.47%. Upon termination of
the agreement, the Company received $146,000 in cash proceeds. The proceeds have
been recorded as deferred income and are being amortized as a reduction to
interest expense over the remaining life of the original contract term.
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 June 30, 1999 was $308.6 million.
A 1% increase from prevailing interest rates at June 30, 1999 would result in a
decrease in fair value of total long-term debt by approximately $5.7 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, as amended by SFAS 137, is
effective for the first quarter of fiscal 2001. 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.
13
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 and six months
ended June 30, 1999 and 1998 as well as actual cash flow and other data for
those respective periods (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------
FUNDS FROM OPERATIONS:
Income before gain on sale of real estate,
minority interest and extraordinary item $3,757 $4,335 $7,209 $8,864
Adjusted for depreciation and amortization
uniquely significant to real estate 6,093 5,503 12,214 10,589
- --------------------------------------------------------------------------------------------------
Funds from operations before minority interest $9,850 $9,838 $19,423 $19,453
- --------------------------------------------------------------------------------------------------
Weighted average shares outstanding(1) 11,749 11,915 11,698 11,900
- --------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY (USED IN):
Operating activities $24,567 $16,729
Investing activities (21,024) (32,200)
Financing activities (9,673) 14,820
- -----------------
(1) Assumes the partnership units of the Operating Partnership held by the
minority interest, preferred shares of the Company and stock and unit
options are converted to common shares of the Company.
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.
14
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 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.
As of June 30, 1999, the Company has renewed approximately 508,000 square feet,
or 70% of the square feet scheduled to expire in 1999. Approximately 633,000
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. 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 computer hardware and operating systems and software
applications at the corporate office. 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 Company has replaced all critical non-compliant equipment
and also has installed current upgrades for the DOS-based accounting software
and the network operating systems which has made these systems compliant with
Y2K.
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
has also identified date sensitive systems and equipment including HVAC units,
telephones, security systems and alarms, fire warning systems and general office
systems at each of its outlet centers. The Company has replaced, or will have
replaced by the end of 1999, all critical non-compliant systems. Based on our
current 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 party
tenants 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
15
assessment. The Company has received responses to approximately 69% of the
surveys sent to tenants, banks and key suppliers and intends to contact the
remaining companies for a response. 99% of the companies who responded 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 were
executed under existing maintenance and support agreements with software
vendors, and thus the Company did not incur incremental 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. Contingency plans generally involve the development and
testing of manual procedures or the use of alternate systems. Viable contingency
plans are difficult to develop for potential third party Y2K failures. The
Company has not yet adopted a formal Y2K contingency plan to date, but continues
to explore and research alternate systems or uses which may be necessary in the
event that a critical third party is not Y2K compliant by December 31, 1999
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. The most likely worst case scenario would be that
certain tenants would not be able to pay their rent and that certain accounting
functions would have to be processed manually.
16
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 4. Submission of Matters to a Vote of Security Holders
On May 7, 1999, 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 and to vote on a proposal by the
Directors to amend the Company's Articles of Incorporation to preserve the right
to exchange Operating Partnership Units for the Company's common shares if an
entity all of whose equity interest is owned by the Company is the general
partner of the Operating Partnership. The results of the voting are shown below:
ELECTION OF DIRECTORS
Nominees Votes For Votes Withheld
-------- --------- --------------
Stanley K. Tanger 7,129,628 34,043
Steven B. Tanger 7,134,129 29,542
Jack Africk 7,131,389 32,282
William G. Benton 7,133,540 30,131
Thomas E. Robinson 7,133,346 30,328
AMENDMENT TO ARTICLES OF INCORPORATION
Votes cast for amendment 4,551,776
Votes cast against amendment 82,673
Votes abstained 64,916
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1Promissory Notes by and between Tanger Properties Limited
Partnership and John Hancock Mutual Life Insurance Company
aggregating $66,500,000 incorporated herein by reference to the
Company's exhibits to the Quarterly Report of Form 10-Q for the
period ended March 31, 1999.
(b) 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.
Senior Vice President, Chief Financial
Officer
DATE: August 10, 1999