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, 2000
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
7,876,835 Common Shares, $.01 par value,
outstanding as of August 1, 2000
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, 2000 and 1999 3
Consolidated Balance Sheets
As of June 30, 2000 and December 31, 1999 4
Consolidated Statements of Cash Flows
For the six months ended June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II. Other Information
Item 1. Legal proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 16
2
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
REVENUES
Base rentals $ 17,962 $ 17,092 $ 35,420 $ 34,163
Percentage rentals 551 478 1,004 886
Expense reimbursements 7,384 6,851 14,347 13,209
Other income 1,393 718 2,336 1,044
- --------------------------------------------------------------------------------------------------------------------------
Total revenues 27,290 25,139 53,107 49,302
- --------------------------------------------------------------------------------------------------------------------------
EXPENSES
Property operating 8,268 7,339 15,707 14,228
General and administrative 1,866 1,855 3,627 3,529
Interest 6,937 6,042 13,599 12,011
Depreciation and amortization 6,537 6,146 12,975 12,325
- --------------------------------------------------------------------------------------------------------------------------
Total expenses 23,608 21,382 45,908 42,093
- --------------------------------------------------------------------------------------------------------------------------
Income before loss on sale of real estate,
minority interest and extraordinary item 3,682 3,757 7,199 7,209
Loss on sale of real estate (5,935) --- (5,935) ---
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest and extraordinary item (2,253) 3,757 1,264 7,209
Minority interest 756 (913) (92) (1,739)
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item (1,497) 2,844 1,172 5,470
Extraordinary item - Loss on early extinguishment of debt,
net of minority interest of $96 --- --- --- (249)
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) (1,497) 2,844 1,172 5,221
Less applicable preferred share dividends (467) (481) (933) (960)
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to common shareholders $ (1,964) $ 2,363 $ 239 $ 4,261
==========================================================================================================================
Basic earnings per common share:
Income (loss) before extraordinary item $ (.25) $ .30 $ .03 $ .57
Extraordinary item --- --- --- (.03)
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (.25) $ .30 $ .03 $ .54
==========================================================================================================================
Diluted earnings per common share:
Income (loss) before extraordinary item $ (.25) $ .30 $ .03 $ .57
Extraordinary item --- --- --- (.03)
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (.25) $ .30 $ .03 $ .54
==========================================================================================================================
Dividends paid per common share $ .61 $ .61 $ 1.21 $ 1.21
==========================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
3
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, December 31,
2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
Rental Property
Land $ 60,397 $ 63,045
Buildings, improvements and fixtures 495,760 484,277
Developments under construction 11,608 18,894
- --------------------------------------------------------------------------------------------------------------------------------
567,765 566,216
Accumulated depreciation (111,307) (104,511)
- --------------------------------------------------------------------------------------------------------------------------------
Rental property, net 456,458 461,705
Cash and cash equivalents 185 503
Deferred charges, net 8,425 8,176
Other assets 15,040 19,685
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $ 480,108 $ 490,069
===============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilites
Long-term debt
Senior, unsecured notes $ 150,000 $ 150,000
Mortgages payable 89,962 90,652
Unsecured term note 20,000 ---
Unsecured lines of credit 67,722 88,995
- --------------------------------------------------------------------------------------------------------------------------------
327,684 329,647
Construction trade payables 12,720 6,287
Accounts payable and accrued expenses 11,546 13,081
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 351,950 349,015
- --------------------------------------------------------------------------------------------------------------------------------
Commitments
Minority interest 29,704 33,290
- --------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Preferred shares, $.01 par value, 1,000,000 shares authorized,
85,270 shares issued and outstanding at June 30, 2000
and December 31, 1999 1 1
Common shares, $.01 par value, 50,000,000 shares authorized,
7,876,835 shares issued and outstanding at June 30, 2000
and December 31, 1999 79 79
Paid in capital 136,571 136,571
Distributions in excess of net income (38,197) (28,887)
- --------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 98,454 107,764
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 480,108 $ 490,069
===============================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
4
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
June 30,
2000 1999
- ---------------------------------------------------------------------------------------------------------------------
(Unaudited)
OPERATING ACTIVITIES
Net income $ 1,172 $ 5,221
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 12,975 12,325
Amortization of deferred financing costs 603 519
Minority interest 92 1,643
Loss on early extinguishment of debt --- 345
Loss on sale of real estate 5,935 ---
Gain on sale of outparcels of land (427) ---
Straight-line base rent adjustment 101 (194)
Increase (decrease) due to changes in:
Other assets 520 2,047
Accounts payable and accrued expenses (1,535) 2,661
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activites 19,436 24,567
- ---------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to rental properties (13,062) (18,853)
Additions to deferred lease costs (1,378) (1,253)
Net proceeds from sale of real estate 7,848 ---
Insurance proceeds from casualty losses 4,046 500
Advances to officer (571) (1,418)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,117) (21,024)
- ---------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Repurchase of common shares --- (958)
Cash dividends paid (10,482) (10,446)
Distributions to minority interest (3,678) (3,655)
Proceeds from mortgages payable --- 66,500
Repayments on mortgages payable (690) (47,829)
Proceeds from unsecured bank term note 20,000 ---
Proceeds from revolving lines of credit 40,332 46,303
Repayments on revolving lines of credit (61,605) (58,700)
Additions to deferred financing costs (514) (900)
Proceeds from exercise of unit options --- 12
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (16,637) (9,673)
- ---------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (318) (6,130)
Cash and cash equivalents, beginning of period 503 6,330
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 185 $ 200
=====================================================================================================================
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, 2000 and 1999 amounted to $12,720 and $6,459, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(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, 1999. 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 and Disposition of Rental Properties
In June 2000, the Company sold its centers in Lawrence, KS and McMinnville,
OR. Net proceeds received from the sale totaled $7.1 million. As a result
of the sale, the Company recognized a loss on sale of real estate of $5.9
million. The combined net operating income of these two centers represented
approximately 1% of the total portfolio's operating income. The Company
also sold land outparcels at two centers for net proceeds of $715,000 and
has included in other income a gain on sale of $427,000.
During the first six months of 2000, the Company added 60,100 square feet
to the portfolio in Commerce, GA and Sevierville, TN. In addition, the
Company has approximately 225,000 square feet of expansion space under
construction in four centers located in Riverhead, NY; Lancaster, PA;.
Sevierville, TN; and San Marcos, TX.
Commitments to complete construction of the expansions to the existing
properties and other capital expenditure requirements amounted to
approximately $9.8 million at June 30, 2000. 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, 2000 and
1999 amounted to $121,000 and $264,000, respectively, and for the six
months ended June 30, 2000 and 1999 amounted to $359,000 and $610,000,
respectively.
3. Other Assets
In May 2000, the demand notes receivable totaling $3.4 million from Stanley
K. Tanger, the Company's Chairman of the Board and Chief Executive Officer,
were converted into two separate term notes of which $2.5 million is due
from Mr. Tanger and $845,000 is due from Steven B. Tanger, the Company's
President and Chief Operating Officer. The notes amortize evenly over five
years with principal and interest at a rate of 8% per annum due quarterly.
4. Long-Term Debt
In January 2000, the Company entered into a $20.0 million two year
unsecured term loan with interest payable at LIBOR plus 2.25%. The proceeds
were used to reduce amounts outstanding under the existing lines of credit.
Also in January 2000, the Company entered into interest rate swap
agreements on notional
6
amounts totaling $20.0 million at a cost of $162,000. The agreements mature
in January 2002. The swap agreements have the effect of fixing the interest
rate on the new $20.0 million loan at 8.75%.
At June 30, 2000, the Company had revolving lines of credit with an
unsecured borrowing capacity of $100 million, of which $32.3 million was
available for additional borrowings.
On July 28, 2000, the Company entered into a five year secured term loan
with Wells Fargo Bank for $29.5 million with interest payable at LIBOR plus
1.75%. The proceeds were used to reduce amounts outstanding under the
existing lines of credit.
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 Six Months Ended
June 30, June 30,
2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------
Numerator:
Income (loss) before extraordinary item $(1,497) $ 2,844 $ 1,172 $ 5,470
Less applicable preferred share dividends (467) (481) (933) (960)
- ------------------------------------------------------------------------------------------------------
Income (loss) available to common shareholders -
numerator for basic and diluted earnings per share $(1,964) $ 2,363 $ 239 $ 4,510
- ------------------------------------------------------------------------------------------------------
Basic weighted average common shares 7,877 7,850 7,877 7,867
Effect of outstanding share and unit options -- 71 20 3
- ------------------------------------------------------------------------------------------------------
Diluted weighted average common shares 7,877 7,921 7,897 7,870
- ------------------------------------------------------------------------------------------------------
Basic earnings per share before extraordinary item $ (.25) $ .30 $ .03 $ .57
- ------------------------------------------------------------------------------------------------------
Diluted earnings per share before extaordinary item $ (.25) $ .30 $ .03 $ .57
- ------------------------------------------------------------------------------------------------------
The computation of diluted earnings per share excludes options to purchase
common shares when the exercise price is greater than the average market
price of the common units for the period. Options excluded totaled
1,521,000 and 379,000 for the three months ended June 30, 2000 and 1999,
respectively, and 1,281,000 and 1,068,000 for the six months ended June 30,
2000 and 1999, respectively. The assumed conversion of preferred shares to
common shares as of the beginning of the year would have been
anti-dilutive. The assumed conversion of the partnership units held by the
minority interest limited partner as of the beginning of the year, which
would result in the elimination of earnings allocated to the minority
interest, would have no impact on earnings per share since the allocation
of earnings to a partnership unit is equivalent to earnings allocated to a
common share.
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 that might appear, are not necessarily indicative of future
operations.
The discussion of our results of operations reported in the consolidated
statements of operations compares the three and six months ended June 30, 2000
with the three and six months ended June 30, 1999. 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 that may occur subsequent to the original opening
date.
7
Cautionary Statements
Certain statements made below are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. We intend for such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Reform Act of 1995 and included
this statement for purposes of complying with these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "believe", "expect", "intend", "anticipate", "estimate", "project",
or similar expressions. You should not rely on forward-looking statements since
they involve known and unknown risks, uncertainties and other factors which are,
in some cases, beyond our control and which could materially affect our actual
results, performance or achievements. Factors which may cause actual results to
differ materially from current expectations include, but are not limited to, the
following:
- - general economic and local real estate conditions could change (for
example, our tenant's business may change if the economy changes, which
might effect (1) the amount of rent they pay us or their ability to pay
rent to us, (2) their demand for new space, or (3) our ability to renew or
re-lease a significant amount of available space on favorable terms);
- - the laws and regulations that apply to us could change (for instance, a
change in the tax laws that apply to REITs could result in unfavorable tax
treatment for us);
- - availability and cost of capital (for instance, financing opportunities may
not be available to us, or may not be available to us on favorable terms);
- - 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 June 30, 2000, we owned 29 centers in 20 states totaling 5.0 million square
feet of GLA compared to 31 centers in 23 states totaling 5.1 million square feet
of GLA at June 30, 1999. Since June 30, 1999, we have acquired one center and
expanded 4 centers, increasing GLA by approximately 290,000 square feet. In
addition, we sold two centers totaling 186,000 square feet in June 2000 and on
May 3, 1999, a tornado destroyed our center in Stroud, Oklahoma, which had a GLA
of 198,000 square feet and which was fully covered under our insurance
policies.
During the first six months of 2000, we added 60,100 square feet to the
portfolio in Commerce, GA and Sevierville, TN. In addition, we have
approximately 225,000 square feet of expansion space under construction in four
centers located in Riverhead, NY; Lancaster, PA; Sevierville, TN; and San
Marcos, TX. In June 2000, we sold our centers in Lawrence, KS and McMinnville,
OR. Net proceeds received from the sale totaled $7.1 million. As a result of the
two sales, we recognized a loss on sale of real estate of $5.9 million. The
combined net operating income of these two centers represented approximately 1%
of the total portfolio's operating income. We also sold land outparcels at two
centers for net proceeds of $715,000 and included in other income a gain on sale
of $427,000.
8
A summary of the operating results for the three and six months ended June 30,
2000 and 1999 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,
2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
GLA open at end of period (000's) 5,021 5,115 5,021 5,115
Weighted average GLA (000's) (1) 5,176 4,963 5,171 5,000
Outlet centers in operation 29 31 29 31
New centers acquired --- --- --- ---
Centers sold 2 --- 2 ---
Centers expanded --- 1 --- 2
States operated in at end of period 20 23 20 23
Occupancy percentage at end of period 95 95 95 95
Per square foot
Revenues
Base rentals $ 3.47 $ 3.44 $ 6.85 $ 6.83
Percentage rentals .11 .10 .19 .18
Expense reimbursements 1.43 1.38 2.77 2.64
Other income .27 .14 .45 .21
- ------------------------------------------------------------------------------------------------------------------------
Total revenues 5.28 5.06 10.26 9.86
- ------------------------------------------------------------------------------------------------------------------------
Expenses
Property operating 1.60 1.48 3.04 2.85
General and administrative .36 .37 .70 .71
Interest 1.34 1.22 2.63 2.40
Depreciation and amortization 1.26 1.24 2.51 2.46
- ------------------------------------------------------------------------------------------------------------------------
Total expenses 4.56 4.31 8.88 8.42
- ------------------------------------------------------------------------------------------------------------------------
Income before loss on sale of real estate,
minority interest and extraordinary item $ .72 $ .75 $ 1.38 $ 1.44
========================================================================================================================
(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 June 30, 2000 to the three months ended
June 30, 1999
Base rentals increased $870,000, or 5%, in the 2000 period when compared to the
same period in 1999. The increase is primarily due to the effect of the
expansions and the acquisition completed since June 30, 1999, as mentioned in
the Overview above, offset by the loss of rent from the center in Stroud,
Oklahoma. The sale of the two centers in June of 2000 had a minimal effect on
base rent since each occurred late in the quarter. Base rent per weighted
average GLA increased by $.03 per square foot from $3.44 per square foot in the
three months ended June 30, 1999 to $3.47 per square foot in the three months
ended June 30, 2000. The increase is the result of the expansions and due to the
loss of the center in Stroud, Oklahoma which had a lower average base rent per
square foot compared to the portfolio average.
Percentage rentals, which represent revenues based on a percentage of tenants'
sales volume above predetermined levels (the "breakpoint"), increased $73,000,
and on a weighted average GLA basis, increased $.01 per square foot in 2000
compared to 1999.
9
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 93% in 1999 to 89% in 2000 primarily as a result of higher
operating costs and other non-reimbursable expenses during the 2000 period
compared to the 1999 period.
Other income increased $675,000 in 2000 compared to 1999 primarily due to the
recognition of gains on sale of land outparcels totaling $427,000 and business
interruption insurance proceeds relating to the Stroud center.
Property operating expenses increased by $929,000, or 13%, in the 2000 period as
compared to the 1999 period and, on a weighted average GLA basis, increased $.12
per square foot from $1.48 to $1.60. The increases are the result of certain
increases in real estate tax assessments and higher common area maintenance
expenses.
General and administrative expenses increased slightly by $11,000, or 1%, in the
2000 period as compared to the 1999 period and, as a percentage of total
revenues, were approximately 7% of total revenues in both the 2000 and 1999
periods.
Interest expense increased $895,000 during the 2000 period as compared to the
1999 period due to the incremental financing needed to fund the expansions since
June 1999 and the November 1999 acquisition in Fort Lauderdale, FL and due to
higher interest rates on our variable rate debt. Depreciation and amortization
per weighted average GLA increased slightly from $1.24 per square foot in the
1999 period to $1.26 per square foot in the 2000 period.
Comparison of the six months ended June 30, 2000 to the six months ended June
30, 1999
Base rentals increased $1.3 million, or 4%, in the 2000 period when compared to
the same period in 1999. The increase is primarily due to the effect of the
expansions and the acquisition completed since June 30, 1999, as mentioned in
the Overview above, offset by the loss of rent from the center in Stroud,
Oklahoma. The sale of the two centers in June 2000 had a minimal effect on base
rent since each occurred late in the quarter. Base rent per weighted average GLA
increased by $.02 per square foot from $6.83 per square foot in the six months
ended June 30, 1999 to $6.85 per square foot in the six months ended June 30,
2000. The increase is the result of the expansions and due to the loss of the
center in Stroud, Oklahoma which had a lower average base rent per square foot
compared to the portfolio average.
Percentage rentals, which represent revenues based on a percentage of tenants'
sales volume above predetermined levels (the "breakpoint"), increased $118,000,
and on a weighted average GLA basis, increased $.01 per square foot in 2000
compared to 1999. For the first six months of 2000, reported same-store sales,
defined as the weighted average sales per square foot reported by tenants for
stores open since January 1, 1999, increased by 1% when compared to the first
six months of 1999. Reported same-space sales for the rolling twelve months
ended June 30, 2000, defined as the weighted average sales per square foot
reported in space open for the full duration of each comparison period,
increased 7% to $278, reflecting the continued success of the our strategy to
re-merchandise selected centers by replacing low volume tenants with high volume
tenants.
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 93% in 1999 to 91% in 2000 primarily as a result of higher
operating costs and other non-reimbursable expenses during the 2000 period
compared to the 1999 period.
10
Other income increased $1.3 million in 2000 compared to 1999 primarily due to
the recognition of gains on sale of land outparcels totaling $427,000 and
incremental business interruption insurance proceeds relating to the Stroud
center totaling $779,000.
Property operating expenses increased by $1.5 million, or 10%, in the 2000
period as compared to the 1999 period and, on a weighted average GLA basis,
increased $.19 per square foot from $2.85 to $3.04. The increases are the result
of certain increases in real estate tax assessments and higher common area
maintenance expenses.
General and administrative expenses increased $98,000, or 3%, in the 2000 period
as compared to the 1999 period and, as a percentage of total revenues, general
and administrative expenses were approximately 7% of total revenues in both the
2000 and 1999 periods.
Interest expense increased $1.6 million during the 2000 period as compared to
the 1999 period due to the incremental financing needed to fund the expansions
since June 1999 and the November 1999 acquisition in Fort Lauderdale, FL and due
to higher interest rates on our variable rate debt. Depreciation and
amortization per weighted average GLA increased 2% from $2.46 per square foot in
the 1999 period to $2.51 per square foot in the 2000 period due to a higher mix
of tenant finishing allowances included in buildings and improvements which are
depreciated over shorter lives than other construction costs.
The extraordinary loss recognized in the 1999 period represents the write-off of
unamortized deferred financing costs related to debt that was extinguished
during the period prior to its scheduled maturity.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $19.4 million and $24.6 million
for the six months ended June 30, 2000 and 1999, respectively. The decrease in
cash provided by operating activities is due primarily to a decrease in payables
and an increase in receivables during 2000 when compared to 1999 offset
partially by an increase in operating income. Net cash used in investing
activities was $3.1 million and $21.0 million during 2000 and 1999,
respectively. Net cash used was lower in 2000 primarily due to the decrease in
cash paid for expansion activities, $4.0 million received in insurance proceeds
relating to the Stroud, Oklahoma center, and $7.8 million received in net
proceeds for the sale of the Company's centers in Lawrence and McMinnville. Net
cash used in financing activities increased to $16.6 million during the first
six months of 2000 from $9.7 million in 1999 due to the reduction of amounts
outstanding under the lines of credit from the proceeds from insurance and
property sales.
During the first six months of 2000, we added 60,100 square feet to our
portfolio in Commerce, GA and Sevierville, TN. In addition, we have
approximately 225,000 square feet of expansion space under construction in four
centers located in Riverhead, NY; Lancaster, PA;. Sevierville, TN; and San
Marcos, TX. Commitments to complete construction of the expansions to the
existing properties and other capital expenditure requirements amounted to
approximately $9.8 million at June 30, 2000. Commitments for construction
represent only those costs contractually required to be paid by us.
We are also in the process of developing plans for additional expansions and new
centers for completion in 2000 and beyond. Currently, we are in the preleasing
stage of a second phase of the Fort Lauderdale development that will include
130,000 square feet of GLA to be developed on the 12-acre parcel adjacent to the
existing Bass Pro Outdoor World store. The local and state planning authorities
are currently reviewing the project and they anticipate final approvals by
fourth quarter of this year. We anticipate stores in this phase to begin opening
in the second half of 2001. We also have an option to purchase the retail
portion of a site at the Bourne Bridge Rotary in Cape Cod, MA. Based on tenant
demand, we plan to develop a new 250,000 square foot outlet center. The entire
site will contain more than 750,000 square feet of mixed-use entertainment,
retail, office and residential community built in the style of a Cape Cod
Village. The local and state planning authorities are currently reviewing the
project and they anticipate final approvals by next year. Due to the extensive
amount of site work and road construction, stores are not expected to be open
until mid 2003.
11
The developments or expansions that we have planned or anticipated may not be
started or completed as scheduled, or may not result in accretive funds from
operations. In addition, we regularly evaluate acquisition or disposition
proposals and engage from time to time in negotiations for acquisitions or
dispositions of properties. We may also enter into letters of intent for the
purchase or sale of properties. Any prospective acquisition or disposition that
is being evaluated or which is subject to a letter of intent may not be
consummated, or if consummated, may not result in accretive funds from
operations.
During the first six months of the year, we have taken a number of steps to
insure that we have the capital necessary to complete our development pipeline
and to put us in a position to handle the debt maturities that will be occurring
over the next twelve months. These steps include the following:
Lender Loan Amount Status Interest Rate
Fleet National Bank/
Bank of America 2 yr unsecured $20.0 million Closed 01/00 8.75% fixed
Wells Fargo Bank 5 yr secured $29.5 million Closed 07/00 Libor+1.75%
New York Life 5 yr secured (renewal) $ 9.2 million Commitment 9.125% fixed
Woodman of the World
Life Ins. Society 10 yr secured $16.6 million Commitment 8.86% fixed
The loan commitments are scheduled to have documentation completed and loans
closed during the third quarter of 2000. In addition, we have received
commitments from Bank of America, Southtrust Bank, Fleet National Bank and Bank
One to extend the maturities on the lines of credit until at least June 30,
2002. This additional long-term financing, the proceeds from the property sales,
and internally generated cash flow will be used to fund approximately 462,000
square feet of profitable expansions to many of our successful, high volume
centers over the next twelve months.
The financing transactions and the approximate 150 basis point increase in LIBOR
rates over the last twelve months have effectively increased the average
interest rate (including amortization of loan costs) on our outstanding debt
from 8.1% in 1999 to an estimated 8.9% in 2000. Because of the long-term nature
of the leases with tenants, we cannot immediately pass through the higher
interest expense caused by this increase in market rates, which has begun to
have an impact on earnings. At June 30, 2000, our total outstanding debt was
$327.7 million, approximately 73% of the outstanding long-term debt represented
unsecured borrowings and approximately 79% of our real estate portfolio was
unencumbered.
We maintain revolving lines of credit with Bank of America, Southtrust Bank,
Fleet National Bank and Bank One that provide for unsecured borrowings up to
$100 million, of which $32.3 million was available for additional borrowings at
June 30, 2000. The closing of the term loan with Wells Fargo on July 28, 2000
increased the amount available by $29.5 million. As a general matter, we plan to
utilize our 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 we determine 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, we may not, in the short term, be able to access these markets on
favorable terms. We believe the decline is temporary and we may utilize these
funds as the markets improve to continue our external growth. In the interim, we
may consider other strategies to generate additional capital to reinvest in
attractive opportunities. These strategies may include the use of operational
and developmental joint ventures, selling certain properties that do not meet
our long-term investment criteria, selling land outparcels at existing
properties and other related strategies. Based on cash provided by operations,
existing credit facilities, ongoing negotiations with certain financial
institutions and funds available under the shelf registration, we believe that
we have access to the necessary financing to fund the planned capital
expenditures during 2001.
We anticipate that adequate cash will be available to fund our operating and
administrative expenses, regular debt service obligations, and the payment of
dividends in accordance with REIT requirements in both the short and long term.
Although we receive most of our rental payments on a monthly basis,
distributions to shareholders are made quarterly and interest payments on the
senior, unsecured notes are made semi-annually. Amounts
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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 our 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.
In May 2000, the demand notes receivable totaling $3.4 million from Stanley K.
Tanger, the Company's Chairman of the Board and Chief Executive Officer, were
converted into two separate term notes of which $2.5 million is due from Mr.
Tanger and $845,000 is due from Steven B. Tanger, the Company's President and
Chief Operating Officer. The notes amortize evenly over five years with
principal and interest at a rate of 8% per annum due quarterly.
On July 13, 2000, our Board of Directors declared a $.6075 cash dividend per
common share payable on August 15, 2000 to each shareholder of record on July
31, 2000, and caused a $.6075 per Operating Partnership unit cash distribution
to be paid to the minority interests. The Board of Directors also declared a
cash dividend of $.5474 per preferred depositary share payable on August 15,
2000 to each shareholder of record on July 31, 2000.
Market Risk
We are exposed to various market risks, including changes in interest rates.
Market risk is the potential loss arising from adverse changes in market rates
and prices, such as interest rates. We do not enter into derivatives or other
financial instruments for trading or speculative purposes.
We negotiate long-term fixed rate debt instruments and enter into interest rate
swap agreements to manage our exposure to interest rate changes. The swaps
involve the exchange of fixed and variable interest rate payments based on a
contractual principal amount and time period. Payments or receipts on the
agreements are recorded as adjustments to interest expense. At June 30, 2000, we
had interest rate swap agreements effective through January 2002 with a notional
amount of $20 million. Under this agreement, we receive a floating interest rate
based on the 30 day LIBOR index and pay a fixed interest rate of 6.5%. These
swaps effectively change our payment of interest on $20 million of variable rate
debt for the contract period to a fixed rate of 8.75%.
The fair value of the interest rate swap agreements represents the estimated
receipts or payments that would be made to terminate the agreements. At June 30,
2000, we would have received $138,000 to terminate the agreements. A 1% decrease
in the 30 day LIBOR index would decrease this amount received by approximately
$282,000. 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 our total long-term debt at June 30, 2000 was $322.4 million and the
recorded value was $327.7 million. A 1% increase from prevailing interest rates
at June 30, 2000 would result in a decrease in fair value of total long-term
debt by approximately $4.5 million. Fair values were determined from quoted
market prices, where available, using current interest rates considering credit
ratings and the remaining terms to maturity.
New Accounting Pronouncements
During 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires entities to recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at their fair value. In June 1999, the
FASB issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133-an amendment
of the FASB Statement No. 133" that revises SFAS No. 133 to become effective in
the first quarter of 2001. We anticipate that, due to our limited use of
derivative instruments, the adoption of SFAS No. 133 will not have a significant
effect on our results of operations or our financial position.
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Funds from Operations
We believe 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 depreciable operating
properties, plus depreciation and amortization uniquely significant to real
estate. We caution that the calculation of FFO may vary from entity to entity
and as such our presentation of FFO may not be comparable to other similarly
titled measures of other reporting companies. FFO does not represent net income
or cash flow from operations as defined by generally accepted accounting
principles and should not be considered an alternative to net income as an
indication of operating performance or to cash from operations as a measure of
liquidity. FFO is not necessarily indicative of cash flows available to fund
dividends to shareholders and other cash needs.
In October 1999, the National Association of Real Estate Investment Trusts
("NAREIT") issued interpretive guidance regarding the calculation of FFO.
NAREIT's leadership determined that FFO should include both recurring and
non-recurring operating results, except those results defined as extraordinary
items under generally accepted accounting principles and gains and losses from
sales of depreciable operating property. All REITS are encouraged to implement
the recommendations of this guidance effective for fiscal periods beginning in
2000 for all periods presented in financial statements or tables. We adopted the
new NAREIT clarification as of January 1, 2000 which had no impact on amounts
previously reported as funds from operations.
Below is a calculation of FFO for the three and six months ended June 30, 2000
and 1999 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,
2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
Funds from Operations:
Net income (loss) $ (1,497) $ 2,844 $ 1,172 $ 5,221
Adjusted for:
Extraordinary item - loss on early extinguishment of debt --- --- --- 249
Minority interest (756) 913 92 1,739
Depreciation and amortization uniquely significant to real estate 6,475 6,093 12,853 12,214
Loss on sale of real estate 5,935 --- 5,935 ---
- -----------------------------------------------------------------------------------------------------------------------------
Funds from operations before minority interest (1) $ 10,157 $ 9,850 $ 20,052 $ 19,423
=============================================================================================================================
Weighted average shares outstanding (2) 11,722 11,749 11,699 11,698
=============================================================================================================================
Cash flows provided by (used in):
Operating activities $ 19,436 $ 24,567
Investing activities (3,117) (21,024)
Financing activities (16,637) (9,673)
__________________
(1) For the three and six months ended June 30, 2000, includes $427 in gains on sales of outparcels of land.
(2) 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.
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Economic Conditions and Outlook
The majority of our leases contain provisions designed to mitigate the impact of
inflation. Such provisions include clauses for the escalation of base rent and
clauses enabling us to receive percentage rentals based on tenants' gross sales
(above predetermined levels, which we believe often are lower than traditional
retail industry standards) that generally increase as prices rise. Most of the
leases require the tenant to pay their share of property operating expenses,
including common area maintenance, real estate taxes, insurance and advertising
and promotion, thereby reducing exposure to increases in costs and operating
expenses resulting from inflation.
While factory outlet stores continue to be a profitable and fundamental
distribution channel for brand name manufacturers, some retail formats are more
successful than others. As typical in the retail industry, certain tenants have
closed, or will close, certain stores by terminating their lease prior to its
natural expiration or as a result of filing for protection under bankruptcy
laws.
As part of our strategy of aggressively managing our assets, we are
strengthening the tenant base in several of our centers by adding strong new
anchor tenants, such as Polo, 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.
As of June 30, 2000, our centers were 95% occupied.
Approximately 25% of our lease portfolio is scheduled to expire during the next
two years. Approximately 697,000 square feet of space is up for renewal during
2000 and approximately 580,000 square feet will come up for renewal in 2001. If
we are unable to successfully renew or release a significant amount of this
space on favorable economic terms, the loss in rent could have a material
adverse effect on our results of operations.
Existing tenants' sales have remained stable and renewals by existing tenants
have remained strong. Approximately 415,000, or 60%, of the square feet
scheduled to expire in 2000 have already been renewed by the existing tenants at
an average base rental rate approximately 5% higher than the expiring rate. In
addition, we continue to attract and retain additional tenants. Our factory
outlet centers typically include well known, national, brand name companies. By
maintaining a broad base of creditworthy tenants and a geographically diverse
portfolio of properties located across the United States, we reduce our
operating and leasing risks. No one tenant (including affiliates) accounts for
more than 7% of our combined base and percentage rental revenues. Accordingly,
we currently do not expect any material adverse impact on our results of
operations and financial condition as a result of leases to be renewed or stores
to be released.
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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 4. Submission of Matters to a Vote of Security Holders
On May 16, 2000, we held our Annual Meeting of Shareholders. The matter on which
common shareholders voted was the election of five directors to serve until the
next Annual Meeting of Shareholders. The results of the voting are shown below:
Nominees ......... Votes For Votes Against
------------------ --------- ---------
Stanley K. Tanger 6,567,406 766,736
Steven B. Tanger . 7,226,303 107,839
Jack Africk ...... 7,183,435 150,707
William G. Benton 7,261,865 72,277
Thomas E. Robinson 7,262,415 71,272
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(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.
Senior Vice President, Chief Financial Officer
DATE: August 11, 2000
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