FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
7,918,911 Common Shares, $.01 par value,
outstanding as of November 1, 2000
1
TANGER FACTORY OUTLET CENTERS, INC.
Index
Part I. Financial Information
Page Number
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations
For the three and nine months ended September 30, 2000 and 1999 3
Consolidated Balance Sheets
As of September 30, 2000 and December 31, 1999 4
Consolidated Statements of Cash Flows
For the nine months ended September 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 8
Part II. Other Information
Item 1. Legal proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 17
2
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
REVENUES
Base rentals $ 17,492 $ 17,151 $ 52,912 $ 51,314
Percentage rentals 898 888 1,902 1,774
Expense reimbursements 7,791 7,107 22,138 20,316
Other income 1,165 1,759 3,501 2,803
- --------------------------------------------------------------------------------------------------------------------------
Total revenues 27,346 26,905 80,453 76,207
- --------------------------------------------------------------------------------------------------------------------------
EXPENSES
Property operating 8,751 7,993 24,458 22,221
General and administrative 1,862 1,880 5,489 5,409
Interest 6,852 5,957 20,451 17,968
Depreciation and amortization 6,537 6,200 19,512 18,525
- --------------------------------------------------------------------------------------------------------------------------
Total expenses 24,002 22,030 69,910 64,123
- --------------------------------------------------------------------------------------------------------------------------
Income before gain or loss on sale of real estate,
minority interest and extraordinary item 3,344 4,875 10,543 12,084
Gain (loss) on sale of real estate --- 1,313 (5,935) 1,313
- --------------------------------------------------------------------------------------------------------------------------
Income before minority interest and extraordinary item 3,344 6,188 4,608 13,397
Minority interest (803) (1,591) (895) (3,330)
- --------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 2,541 4,597 3,713 10,067
Extraordinary item - Loss on early extinguishment of debt,
net of minority interest of $96 --- --- --- (249)
- --------------------------------------------------------------------------------------------------------------------------
Net income 2,541 4,597 3,713 9,818
Less applicable preferred share dividends (449) (481) (1,382) (1,441)
- --------------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 2,092 $ 4,116 $ 2,331 $ 8,377
==========================================================================================================================
Basic earnings per common share:
Income before extraordinary item $ .26 $ .52 $ .30 $ 1.10
Extraordinary item --- --- --- (.03)
- --------------------------------------------------------------------------------------------------------------------------
Net income $ .26 $ .52 $ .30 $ 1.07
==========================================================================================================================
Diluted earnings per common share:
Income before extraordinary item $ .26 $ .52 $ .29 $ 1.09
Extraordinary item --- --- --- (.03)
- --------------------------------------------------------------------------------------------------------------------------
Net income $ .26 $ .52 $ .29 $ 1.06
==========================================================================================================================
Dividends paid per common share $ .61 $ .61 $ 1.82 $ 1.81
==========================================================================================================================
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)
September 30, December 31,
2000 1999
- -------------------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
Rental Property
Land $ 60,303 $ 63,045
Buildings, improvements and fixtures 498,830 484,277
Developments under construction 21,778 18,894
- -------------------------------------------------------------------------------------------------------------------------------
580,911 566,216
Accumulated depreciation (117,367) (104,511)
- -------------------------------------------------------------------------------------------------------------------------------
Rental property, net 463,544 461,705
Cash and cash equivalents 202 503
Deferred charges, net 8,872 8,176
Other assets 15,578 19,685
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $ 488,196 $ 490,069
===============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilites
Long-term debt
Senior, unsecured notes $ 150,000 $ 150,000
Mortgages payable 135,759 90,652
Unsecured term note 20,000 ---
Unsecured lines of credit 31,289 88,995
- -------------------------------------------------------------------------------------------------------------------------------
337,048 329,647
Construction trade payables 13,110 6,287
Accounts payable and accrued expenses 13,630 13,081
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities 363,788 349,015
- -------------------------------------------------------------------------------------------------------------------------------
Commitments
Minority interest 28,879 33,290
- -------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Preferred shares, $.01 par value, 1,000,000 shares authorized,
80,600 and 85,270 shares issued and outstanding
at September 30, 2000 and December 31, 1999 1 1
Common shares, $.01 par value, 50,000,000 shares authorized,
7,918,911 and 7,876,835 shares issued and outstanding
at September 30, 2000 and December 31, 1999 79 79
Paid in capital 136,357 136,571
Distributions in excess of net income (40,908) (28,887)
- -------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 95,529 107,764
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 488,196 $ 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)
Nine Months Ended
September 30,
2000 1999
- ---------------------------------------------------------------------------------------------------------------------
(Unaudited)
OPERATING ACTIVITIES
Net income $ 3,713 $ 9,818
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 19,512 18,525
Amortization of deferred financing costs 928 758
Minority interest 895 3,234
Loss on early extinguishment of debt --- 345
Gain (loss) on disposal or sale of real estate 5,935 (1,313)
Gain on sale of outparcels of land (908) (687)
Straight-line base rent adjustment 170 (211)
Increase (decrease) due to changes in:
Other assets (554) (102)
Accounts payable and accrued expenses 549 3,440
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activites 30,240 33,807
- ---------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to rental properties (25,896) (26,613)
Additions to deferred lease costs (1,894) (1,709)
Net proceeds from sale of real estate 8,598 1,987
Insurance proceeds from casualty losses 4,046 7,853
Advances to officer, net of repayments (358) (2,436)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (15,504) (20,918)
- ---------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Repurchase of common shares --- (958)
Cash dividends paid (15,734) (15,674)
Distributions to minority interest (5,520) (5,490)
Proceeds from mortgages payable 46,160 66,500
Repayments on mortgages payable (1,053) (48,192)
Proceeds from revolving lines of credit 93,924 74,448
Repayments on revolving lines of credit (131,630) (88,650)
Additions to deferred financing costs (1,184) (1,015)
Proceeds from exercise of unit options --- 12
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (15,037) (19,019)
- ---------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (301) (6,130)
Cash and cash equivalents, beginning of period 503 6,330
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 202 $ 200
=====================================================================================================================
Supplemental schedule of non-cash investing activities:
The Company purchases capital equipment and incurs costs relating to contruction of new facilities,
including tenant finishing allowances. Expenditures included in construction trade payables as of
September 30, 2000 and 1999 amounted to $13,110 and $6,692, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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
During the first nine months of 2000, the Company added 70,100 square feet to
the portfolio in Commerce, GA, Sevierville, TN and San Marcos, TX. In addition,
the Company has approximately 244,300 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, 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. During the third quarter, the Company
also sold two land outparcels at its San Marcos center for net proceeds of
$752,000 and has included in other income a gain on sale of $482,000. During the
first nine months of 2000, the Company in total has sold four land outparcels
for net proceeds of $1.5 million and has included in other income a gain on sale
of $908,000.
Commitments to complete construction of the expansions to the existing
properties and other capital expenditure requirements amounted to approximately
$5.7 million at September 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 September 30, 2000 and
1999 amounted to $328,000 and $293,000, respectively, and for the nine months
ended September 30, 2000 and 1999 amounted to $687,000 and $903,000,
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. The balances of
these notes at September 30, 2000 were $2.4 million and $810,000, respectively.
6
4. Long-Term Debt
On September 8, 2000, the Company refinanced its five year $9.2 million secured
loan with New York Life Insurance Company at a fixed interest rate of 9.125%.
On August 29, 2000, the Company entered into a ten year secured term loan with
Woodmen of the World Life Insurance Society for $16.7 million with interest
payable at a fixed rate of 8.86%. The proceeds were used to reduce amounts
outstanding under the existing lines of credit.
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.
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 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 September 30, 2000, the Company had revolving lines of credit with an
unsecured borrowing capacity of $100 million, of which $68.7 million was
available for additional borrowings.
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 Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Numerator:
Income before extraordinary item $ 2,541 $ 4,597 $ 3,713 $ 10,067
Less applicable preferred share dividends (449) (481) (1,382) (1,441)
- ------------------------------------------------------------------------------------------------------------------------------------
Income available to common shareholders -
numerator for basic and diluted earnings per share $ 2,092 $ 4,116 $ 2,331 $ 8,626
- ------------------------------------------------------------------------------------------------------------------------------------
Denominator:
Basic weighted average common shares 7,905 7,850 7,886 7,861
Effect of outstanding share and unit options 52 70 27 22
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted weighted average common shares 7,957 7,920 7,913 7,883
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share before extraordinary item $ .26 $ .52 $ .30 $ 1.10
====================================================================================================================================
Diluted earnings per share before extaordinary item $ .26 $ .52 $ .29 $ 1.09
====================================================================================================================================
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 shares for the period. Options excluded totaled 663,000 and
370,000 for the three months ended September 30, 2000 and 1999, respectively,
and 1,276,000 and 684,000 for the nine months ended September 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.
7
6. Subsequent Events
On November 9, 2000, the Company terminated its contract to purchase twelve
acres of land in Dania Beach/Ft. Lauderdale, Florida from Bass Pro Outdoor
World, L.P. ("Bass Pro"). Conditions that were required to have been satisfied
prior to consummation of the Company's purchase of the property, including the
ability to obtain a building permit and the satisfaction by the seller of
various title and other matters, had not been satisfied by the scheduled closing
date of November 3, 2000. In accordance with, and as a result of the termination
of the purchase contract, Bass Pro has thirty business days in which to exercise
an option to reacquire the existing Outdoor World building owned by the Company
at the site. The Company is in the process of determining the final cost
associated with the termination of the contract, which will be written off in
the fourth quarter, or should Bass Pro exercise its option to repurchase, at the
time of close.
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 nine months ended September 30,
2000 with the three and nine months ended September 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.
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.
8
General Overview
At September 30, 2000, we owned 29 centers in 20 states totaling 5.0 million
square feet of GLA compared to 30 centers in 22 states totaling 4.9 million
square feet of GLA at September 30, 1999. Since September 30, 1999, we have
acquired one center and expanded four existing centers, increasing GLA by a net
of approximately 244,000 square feet. In addition, we sold two centers totaling
186,000 square feet in June 2000.
During the first nine months of 2000, we added 70,100 square feet to the
portfolio in Commerce, GA, San Marcos, TX and Sevierville, TN. In addition, we
have approximately 244,300 square feet of expansion space under construction in
four centers located in Lancaster, PA, Riverhead, NY, San Marcos, TX and
Sevierville, TN. 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. During the first
nine months of 2000, we also sold four land outparcels for net proceeds of $1.5
million and have included in other income a gain on sale of $908,000.
A summary of the operating results for the three and nine months ended September
30, 2000 and 1999 is presented in the following table, expressed in amounts
calculated on a weighted average GLA basis.
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
GLA open at end of period (000's) 5,004 4,946 5,004 4,946
Weighted average GLA (000's) (1) 5,010 4,939 5,117 4,976
Outlet centers in operation 29 30 29 30
New centers acquired --- --- --- ---
Centers sold --- 1 2 1
Centers expanded --- 2 --- 4
States operated in at end of period 20 22 20 22
Occupancy percentage at end of period 95 95 95 95
Per square foot
Revenues
Base rentals $ 3.49 $ 3.47 $ 10.34 $ 10.31
Percentage rentals .18 .18 .37 .36
Expense reimbursements 1.56 1.44 4.33 4.08
Other income .23 .36 .68 .56
- ------------------------------------------------------------------------------------------------------------------------
Total revenues 5.46 5.45 15.72 15.31
- ------------------------------------------------------------------------------------------------------------------------
Expenses
Property operating 1.75 1.62 4.78 4.47
General and administrative .37 .38 1.07 1.09
Interest 1.37 1.21 4.00 3.61
Depreciation and amortization 1.30 1.26 3.81 3.72
- ------------------------------------------------------------------------------------------------------------------------
Total expenses 4.79 4.47 13.66 12.89
- ------------------------------------------------------------------------------------------------------------------------
Income before gain or loss on sale of real estate,
minority interest and extraordinary item $ .67 $ .98 $ 2.06 $ 2.42
========================================================================================================================
(1) GLA weighted by months of operations. GLA is not adjusted for fluctuations
in occupancy which may occur subsequent to the original opening date.
9
RESULTS OF OPERATIONS
Comparison of the three months ended September 30, 2000 to the three months
ended September 30, 1999
Base rentals increased $341,000, or 2%, in the 2000 period when compared to the
same period in 1999. The increase is primarily due to the effect of the
expansions during the fourth quarter of 1999 and the first nine months of 2000,
as mentioned in the General Overview above, offset by the loss of rent from the
sales of the centers in Lawrence, Kansas and McMinnville, Oregon. Base rent per
weighted average GLA increased by $.02 per square foot from $3.47 per square
foot in the three months ended September 30, 1999 to $3.49 per square foot in
the three months ended September 30, 2000. The increase is mainly attributable
to the expansions.
Percentage rentals, which represent revenues based on a percentage of tenants'
sales volume above predetermined levels (the "breakpoint"), increased $10,000,
and on a weighted average GLA basis, remained flat in comparison to the prior
year.
Expense reimbursements, which represent the contractual recovery from tenants of
certain common area maintenance, insurance, property tax, promotional,
advertising and management expenses generally fluctuates consistently with the
reimbursable property operating expenses to which it relates. Expense
reimbursements, expressed as a percentage of property operating expenses,
remained constant at 89% in 2000 compared to the same period in 1999.
Other income decreased $594,000 due to the recognition of $318,000 in 1999 from
the Stroud insurance reimbursement and higher gain on sale from outparcel sales
in 1999 of $687,000 versus $482,000 in 2000. We received approximately $1.9
million in business interruption insurance proceeds when our outlet center in
Stroud, Oklahoma was destroyed by a tornado in May 1999. The proceeds were
amortized into income over a fourteen month period from May 1999 to June 2000.
Property operating expenses increased by $758,000, or 9%, in the 2000 period as
compared to the 1999 period and, on a weighted average GLA basis, increased $.13
per square foot from $1.62 to $1.75. The increases are the result of certain
increases in real estate tax assessments and higher common area maintenance
expenses.
General and administrative expenses decreased slightly by $18,000, 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
described in the General Overview section above and higher interest rates on our
variable rate and new fixed rate debt obtained during the quarter. Depreciation
and amortization per weighted average GLA increased from $1.26 per square foot
in the 1999 period to $1.30 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.
Comparison of the nine months ended September 30, 2000 to the nine months ended
September 30, 1999
Base rentals increased $1.6 million, or 3%, 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 September 30, 1999, as mentioned
in the General Overview above, offset by the loss of rent from the sales of the
centers in Lawrence, KS and McMinnville, OR. Base rent per weighted average GLA
increased by $.03 per square foot from $10.31 per square foot in the nine months
ended September 30, 1999 to $10.34 per square foot in the nine months ended
September 30, 2000. The increase is the result of the expansions and acquisition
since September 30, 1999.
10
Percentage rentals increased $128,000, and on a weighted average GLA basis,
increased $.01 per square foot in 2000 compared to 1999. For the first nine
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 nine months of 1999. Reported
same-space sales for the rolling twelve months ended September 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 91% in 1999 to 90% 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 $698,000 in 2000 compared to 1999 primarily due to the
increased gains on sale of land outparcels totaling $221,000 in the 2000 period
compared to the 1999 period. Also, business interruption insurance proceeds
relating to the Stroud center totaling $1.0 million were recognized in 2000
compared to $524,000 in 1999.
Property operating expenses increased by $2.2 million, or 10%, in the 2000
period as compared to the 1999 period and, on a weighted average GLA basis,
increased $.31 per square foot from $4.47 to $4.78. The increases are the result
of certain increases in real estate tax assessments and higher common area
maintenance expenses.
General and administrative expenses increased $80,000, or 1%, 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 $2.5 million during the 2000 period as compared to
the 1999 period due to the incremental financing needed to fund the expansions
since September 1999 and the November 1999 acquisition in Fort Lauderdale, FL
and higher interest rates on our variable rate debt. Depreciation and
amortization per weighted average GLA increased 2% from $3.72 per square foot in
the 1999 period to $3.81 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 $30.2 million and $33.8 million
for the nine months ended September 30, 2000 and 1999, respectively. The
decrease in cash provided by operating activities is due primarily to a decrease
in accounts payable and accrued expenses. Net cash used in investing activities
was $15.5 million and $20.9 million during 2000 and 1999, respectively. Net cash
used in investing was lower in 2000 primarily due to the increase in cash
received from the sale of real estate, a decrease in insurance proceeds received
from casualty losses and a decrease in advances to officers. Net cash used in
financing activities decreased to $15.0 million during the first nine months of
2000 from $19.0 million in 1999 due to the reduction of amounts outstanding
under the lines of credit from the proceeds from insurance and property sales.
11
During the first nine months of 2000, we added 70,100 square feet to our
portfolio in Commerce, GA, San Marcos, TX and Sevierville, TN. In addition, we
have approximately 244,300 square feet of expansion space under construction in
four centers located in Lancaster, PA, Riverhead, NY, San Marcos, TX and
Sevierville, TN. Commitments to complete construction of the expansions to the
existing properties and other capital expenditure requirements amounted to
approximately $5.7 million at September 30, 2000. Commitments for construction
represent only those costs contractually required to be paid by us.
We 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.
On November 9, 2000, the Company terminated its contract to purchase twelve
acres of land in Dania Beach/Ft. Lauderdale, Florida from Bass Pro Outdoor
World, L.P. ("Bass Pro"). Conditions that were required to have been satisfied
prior to consummation of the Company's purchase of the property, including the
ability to obtain a building permit and the satisfaction by the seller of
various title and other matters, had not been satisfied by the scheduled closing
date of November 3, 2000. In accordance with, and as a result of the termination
of the purchase contract, Bass Pro has thirty business days in which to exercise
an option to reacquire the existing Outdoor World building owned by the Company
at the site. The Company is in the process of determining the final cost
associated with the termination of the contract, which will be written off in
the fourth quarter, or should Bass Pro exercise its option to repurchase, at the
time of close.
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 nine months of the year, 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, we have taken the following steps:
Interest
Lender Loan Amount Status 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%
Woodmen of the World Life Ins. Society 10 yr secured $16.7 million Closed 08/00 8.86% fixed
New York Life Insurance Company 5 yr secured (renewal) $ 9.2 million Closed 09/00 9.125% fixed
We have extended the maturities for our four lines of credit with Bank of
America, Bank One, Fleet National Bank and SouthTrust Bank 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 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 8.2% in 1999 to an estimated 8.7% 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 September 30, 2000, our total outstanding debt
was $337.0 million, approximately 60% of the outstanding long-term debt
represented unsecured borrowings and approximately 70% of our real estate
portfolio was unencumbered.
12
We maintain revolving lines of credit with Bank of America, Bank One, Fleet
National Bank and SouthTrust Bank that provide for unsecured borrowings up to
$100 million, of which $68.7 million was available for additional borrowings at
September 30, 2000. 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 as well as 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 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 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. The balances of
these notes at September 30, 2000 were $2.4 million and $810,000, respectively.
On October 12, 2000, our Board of Directors declared a $.6075 cash dividend per
common share payable on November 15, 2000 to each shareholder of record on
October 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
November 15, 2000 to each shareholder of record on October 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 September 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%.
13
The fair value of the interest rate swap agreements represents the estimated
receipts or payments that would be made to terminate the agreements. At
September 30, 2000, we would have received $12,000 to terminate the agreements.
A 1% decrease in the 30-day LIBOR index would decrease this amount received by
approximately $238,000. 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 September 30, 2000 was $332.0 million and
the recorded value was $337.0 million. A 1% increase from prevailing interest
rates at September 30, 2000 would result in a decrease in fair value of total
long-term debt by approximately $5.2 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.
14
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 nine months ended September 30,
2000 and 1999 as well as actual cash flow and other data for those respective
periods (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
Funds from Operations:
Net income $ 2,541 $ 4,597 $ 3,713 $ 9,818
Adjusted for:
Extraordinary item - loss on early extinguishment of debt --- --- --- 249
Minority interest 803 1,591 895 3,330
Depreciation and amortization uniquely significant to real es 6,470 6,149 19,323 18,363
(Gain) loss on sale of real estate --- (1,313) 5,935 (1,313)
- ----------------------------------------------------------------------------------------------------------------------------
Funds from operations before minority interest (1) $ 9,814 $ 11,024 $ 29,866 $ 30,447
============================================================================================================================
Weighted average shares outstanding (2) 11,730 11,748 11,705 11,711
============================================================================================================================
Cash flows provided by (used in):
Operating activities $ 30,240 $ 33,807
Investing activities (15,504) (20,918)
Financing activities (15,037) (19,019)
__________________
(1) Includes gain on sales of outparcels of land of $482 and $687 for the three months ended, and $908 and $687 for the nine
months ended September 30, 2000 and 1999.
(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.
15
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, Tommy Hilfiger 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 September 30, 2000, our centers were 95% occupied.
As of September 30, 2000, we have renewed approximately 498,000 square feet, or
71% of the square feet scheduled to expire in 2000. The existing tenants have
renewed at an average base rental rate approximately 5% higher than the expiring
rate. An additional 27,400 feet, or 4%, is currently in renewal negotiation or
will be negotiated during the fourth quarter with existing tenants. We are in
the process of releasing approximately 175,000 square feet of space that was not
renewed this year by the existing tenants. In addition, approximately 12% of our
lease portfolio is scheduled to expire during 2001. Consistent with our
long-term strategy of remerchandising centers, we will continue to hold space
off the market until an appropriate tenant is identified. While we believe this
strategy will add value to our centers in the long-term, it may reduce our
average occupancy rate by one to two percent over the next twelve to eighteen
months. 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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor the Operating Partnership is presently involved in any
material litigation nor, to their knowledge, is any material litigation
threatened against the Company or the Operating Partnership or its properties,
other than routine litigation arising in the ordinary course of business and
which is expected to be covered by the liability insurance.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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: November 13, 2000
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