FORM 10-Q UNITED STATES 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, 2004 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 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities and Exchange Act of 1934). Yes X No 13,686,408 shares of Common Stock, $.01 par value, outstanding as of July 30, 2004 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 six months ended June 30, 2004 and 2003 3 Consolidated Balance Sheets As of June 30, 2004 and December 31, 2003 4 Consolidated Statements of Cash Flows For the six months ended June 30, 2004 and 2003 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures about Market Risk 25 Item 4. Controls and Procedures 26 Part II. Other Information Item 1. Legal proceedings 27 Item 4. Submissions of Matters to a Vote of Security Holders 27 Item 6. Exhibits and Reports on Form 8-K 28 Signatures 28 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, 2004 2003 2004 2003 - ------------------------------------------------------------------------------------------------------------------------------- (unaudited) (unaudited) REVENUES Base rentals $ 32,440 $ 19,306 $ 64,277 $ 38,361 Percentage rentals 957 549 1,670 944 Expense reimbursements 13,173 8,226 25,189 16,435 Other income 2,395 791 3,253 1,450 - ------------------------------------------------------------------------------------------------------------------------------- Total revenues 48,965 28,872 94,389 57,190 - ------------------------------------------------------------------------------------------------------------------------------- EXPENSES Property operating 14,926 9,749 28,514 19,314 General and administrative 3,254 2,451 6,413 4,881 Depreciation and amortization 13,117 6,880 25,429 13,936 - ------------------------------------------------------------------------------------------------------------------------------- Total expenses 31,297 19,080 60,356 38,131 - ------------------------------------------------------------------------------------------------------------------------------- Operating income 17,668 9,792 34,033 19,059 Interest expense 8,900 6,556 17,764 13,279 - ------------------------------------------------------------------------------------------------------------------------------- Income before equity in earnings of unconsolidated joint ventures, minority interests and discontinued operations 8,768 3,236 16,269 5,780 Equity in earnings of unconsolidated joint ventures 275 279 440 372 Minority interests Consolidated joint venture (6,619) --- (13,212) --- Operating partnership (445) (757) (644) (1,306) - ------------------------------------------------------------------------------------------------------------------------------- Income from continuing operations 1,979 2,758 2,853 4,846 Discontinued operations 1,766 (451) 1,904 (348) - ------------------------------------------------------------------------------------------------------------------------------- Net income 3,745 2,307 4,757 4,498 Less applicable preferred share dividends --- (363) --- (806) - ------------------------------------------------------------------------------------------------------------------------------- Net income available to common shareholders $ 3,745 $ 1,944 $ 4,757 $ 3,692 - ------------------------------------------------------------------------------------------------------------------------------- Basic earnings per common share: Income from continuing operations $ .15 $ .25 $ .21 $ .43 Net income $ .28 $ .20 $ .35 $ .39 - ------------------------------------------------------------------------------------------------------------------------------- Diluted earnings per common share: Income from continuing operations $ .15 $ .24 $ .21 $ .42 Net income $ .28 $ .20 $ .35 $ .38 - ------------------------------------------------------------------------------------------------------------------------------- Dividends paid per common share $ .6250 $ .6150 $ 1.2400 $ 1.2275 - ------------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
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TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data) June 30, December 31, 2004 2003 - ---------------------------------------------------------------------------------------------------------------------------- (unaudited) ASSETS Rental Property Land $ 115,541 $ 119,833 Buildings, improvements and fixtures 965,394 958,720 - ---------------------------------------------------------------------------------------------------------------------------- 1,080,935 1,078,553 Accumulated depreciation (209,359) (192,698) - ---------------------------------------------------------------------------------------------------------------------------- Rental property, net 871,576 885,855 Cash and cash equivalents 8,694 9,836 Deferred charges, net 64,747 68,568 Other assets 26,963 23,178 - ---------------------------------------------------------------------------------------------------------------------------- Total assets $ 971,980 $ 987,437 - ---------------------------------------------------------------------------------------------------------------------------- LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS' EQUITY Liabilities Debt Senior, unsecured notes $ 147,509 $ 147,509 Mortgages payable (including a debt premium of $10,608 and $11,852, respectively) 366,065 370,160 Lines of credit --- 22,650 - ---------------------------------------------------------------------------------------------------------------------------- 513,574 540,319 Construction trade payables 6,300 4,345 Accounts payable and accrued expenses 18,579 18,025 - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities 538,453 562,689 - ---------------------------------------------------------------------------------------------------------------------------- Commitments Minority interests Consolidated joint venture 220,225 218,148 Operating partnership 38,731 39,182 - ---------------------------------------------------------------------------------------------------------------------------- Total minority interests 258,956 257,330 Shareholders' equity Common shares, $.01 par value, 50,000,000 shares authorized, 13,671,770 and 12,960,643 shares issued and outstanding at June 30, 2004 and December 31, 2003 137 130 Paid in capital 272,459 250,070 Distributions in excess of net income (94,603) (82,737) Deferred compensation (3,406) --- Accumulated other comprehensive loss (16) (45) - ---------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 174,571 167,418 - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities, minority interests and shareholders' equity $ 971,980 $ 987,437 - ---------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
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TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Six Months Ended June 30, 2004 2003 - ------------------------------------------------------------------------------------------------------------------ (unaudited) OPERATING ACTIVITIES Net income $ 4,757 $ 4,498 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization (including discontinued operations) 25,559 14,468 Amortization of deferred financing costs 727 623 Equity in earnings of unconsolidated joint ventures (440) (372) Consolidated joint venture minority interest 13,212 --- Operating partnership minority interest (including discontinued operations) 1,071 1,193 Compensation expense related to restricted shares and share options granted 1,003 51 Amortization of premium on assumed indebtedness (1,245) --- (Gain) loss on sale of real estate (included in discontinued operations) (2,084) 735 (Gain) on sale of outparcels of land (1,219) --- Net accretion of market rent rate adjustment (370) --- Straight-line base rent adjustment (218) 112 Increase (decrease) due to changes in: Other assets (975) 1,828 Accounts payable and accrued expenses 616 (1,667) - ------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activites 40,394 21,469 - ------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Additions to rental property (6,907) (5,036) Acquisition of rental property --- (4,700) Additions to investments in unconsolidated joint ventures --- (952) Additions to deferred lease costs (924) (836) Net proceeds from sale of real estate 8,945 2,076 (Increase) decrease in escrow from rental property purchase (6,565) 4,006 Distributions received from unconsolidated joint ventures 750 650 - ------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (4,701) (4,792) - ------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Cash dividends paid (16,623) (12,237) Distributions to consolidated joint venture minority interest (11,135) --- Distributions to operating partnership minority interest (3,763) (3,723) Net proceeds from sale of common shares 13,173 --- Payments for redemption of preferred shares --- (372) Proceeds from issuance of debt 40,350 48,815 Repayments of debt (65,850) (61,233) Additions to deferred financing costs (9) (80) Proceeds from exercise of share and unit options 7,022 11,284 - ------------------------------------------------------------------------------------------------------------------ Net cash used in financing activities (36,835) (17,546) - ------------------------------------------------------------------------------------------------------------------ Net decrease in cash and cash equivalents (1,142) (869) Cash and cash equivalents, beginning of period 9,836 1,072 - ------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents, end of period $ 8,694 $ 203 - ------------------------------------------------------------------------------------------------------------------ Supplemental schedule of non-cash 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, 2004 and 2003 amounted to $6,300 and $8,010, respectively. We recognized charges to deferred compensation related to the issuance of restricted common shares and share options in the 2004 period of $4,381. The accompanying notes are an integral part of these consolidated financial statements. 5
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 (Unaudited) 1. Business Tanger Factory Outlet Centers, Inc., a fully-integrated, self-administered, self-managed real estate investment trust ("REIT"), develops, owns, operates and manages factory outlet centers. At June 30, 2004, we had ownership interests in or management responsibilities for 38 centers in 23 states totaling 9.3 million square feet of gross leasable area ("GLA"). We provide all development, leasing and management services for our centers. The factory outlet centers and other assets of the Company's business are held by, and all of its operations are conducted by, Tanger Properties Limited Partnership. Unless the context indicates otherwise, the term the "Company" refers to Tanger Factory Outlet Centers, Inc. and subsidiaries and the term "Operating Partnership" refers to Tanger Properties Limited Partnership and subsidiaries. The terms "we", "our" and "us" refer to the Company or the Company and the Operating Partnership together, as the context requires. 2. Basis of Presentation Our unaudited consolidated financial statements have been prepared pursuant to accounting principles generally accepted in the United States of America and should be read in conjunction with the consolidated financial statements and notes thereto of our Annual Report on Form 10-K for the year ended December 31, 2003. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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 unaudited consolidated financial statements include our accounts, our wholly-owned subsidiaries, as well as the Operating Partnership and its subsidiaries and reflect, in the opinion of management, all adjustments necessary for a fair presentation of the interim consolidated financial statements. All such adjustments are of a normal and recurring nature. Intercompany balances and transactions have been eliminated in consolidation. Investments in real estate joint ventures that represent non-controlling ownership interests are accounted for using the equity method of accounting. These investments are recorded initially at cost and subsequently adjusted for our net equity in the venture's income (loss) and cash contributions and distributions. Our investments are included in other assets in our consolidated balance sheets. In January 2003, the Financial Accounting Standards Board ("FASB") issued Financial Interpretation No. 46 "Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51" ("FIN 46") (Revised December 2003) which clarified the application of existing accounting pronouncements to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of FIN 46 were effective immediately for all variable interests in variable interest entities created after January 31, 2003. COROC Holdings, LLC ("COROC"), a joint venture entered into by us in December 2003, was evaluated under the provisions of FIN 46 and it was determined that we are considered the primary beneficiary of the joint venture and therefore the results of operations and financial position of COROC are included in our consolidated financial statements. We have evaluated Deer Park Enterprise, LLC ("Deer Park"), which was created after January 31, 2003 (Note 3) and have determined that under the current facts and circumstances we are not required to consolidate this entity under the provisions of FIN 46. 6 For variable interests in variable interest entities existing as of January 31, 2003, the provisions of FIN 46 are applicable as of March 31, 2004 and thereafter. We evaluated TWMB Associates, LLC ("TWMB"), a joint venture in which we have a 50% ownership interest which existed prior to January 31, 2003, and determined that under the provisions of FIN 46 the entity is not a variable interest entity. Therefore, TWMB will continue to be accounted for using the equity method of accounting. Certain amounts in the 2003 consolidated financial statements have been reclassified to conform to the 2004 presentation. See Footnote 4. 3. Investments in Unconsolidated Real Estate Joint Ventures Our investment in unconsolidated real estate joint ventures as of June 30, 2004 and December 31, 2003 was $7.3 million and $7.5 million, respectively. These investments include our 50% ownership investment in TWMB and our one-third ownership interest in Deer Park on Long Island, New York. Our investment in real estate joint ventures are reduced by 50% of the profits earned for leasing and development services we provided to TWMB. The following management, leasing and development fees were recorded in other income from services provided to TWMB during the three and six months ended June 30, 2004 and 2003 (in thousands): Three Months Ended Six Months Ended June 30, June 30, 2004 2003 2004 2003 ----------------------- ----------- ------------ ------------ -------------- Fee: Management $ 69 $ 34 $ 137 $ 68 Leasing 78 76 139 133 Development 17 (4) 22 9 ----------------------- ----------- ------------ ------------ -------------- Total Fees $ 164 $ 106 $ 298 $ 210 ----------------------- ----------- ------------ ------------ -------------- Our carrying value of investments in unconsolidated joint ventures differs from our share of the assets reported in the "Summary Balance Sheets - Unconsolidated Joint Ventures" shown below due to adjustments to the book basis, including intercompany profits on sales of services that are capitalized by the unconsolidated joint ventures. The differences in basis are amortized over the various useful lives of the related assets. During the second quarter, TWMB completed the construction of a 79,000 square foot third-phase expansion of the Myrtle Beach center at an approximate cost of $9.7 million. As of June 30, 2004, 50,000 square feet were open with the remainder of the stores scheduled to open during July and August 2004. The completion of this expansion brings the total gross leasable area of TWMB's Myrtle Beach center to approximately 403,000 square feet. In conjunction with the construction of the center, TWMB maintains a construction loan in the amount of $36.2 million with Bank of America, NA (Agent) and SouthTrust Bank due in September 2005. As of June 30, 2004, the construction loan had a balance of $32.0 million. 7
Summary unaudited financial information of joint ventures accounted for using the equity method is as follows (in thousands): As of As of Summary Balance Sheets June 30, December 31, - Unconsolidated Joint Ventures: 2004 2003 - -------------------------------------------- -------------- -------------- Assets: Operating real estate at cost, net $42,847 $36,096 Other real estate investment (1) 27,108 27,803 - -------------------------------------------- -------------- -------------- Total real estate 69,955 63,899 Cash and cash equivalents 1,381 4,145 Deferred charges, net 1,535 1,652 Other assets 3,879 3,277 - -------------------------------------------- -------------- -------------- Total assets $76,750 $72,973 - -------------------------------------------- -------------- -------------- Liabilities and Owners' Equity: Mortgages payable $57,156 $54,683 Construction trade payables 3,090 1,164 Accounts payable and other liabilities 508 564 - -------------------------------------------- -------------- -------------- Total liabilities 60,754 56,411 Owners' equity 15,996 16,562 - -------------------------------------------- -------------- -------------- Total liabilities and owners' equity $76,750 $72,973 - -------------------------------------------- -------------- -------------- (1) Other real estate investment represents a development property that generates net income considered incidental to its intended future operation as an outlet center. As such, the net income generated from this property is recorded as a reduction to the carrying value of the property.
Three Months Six Months Ended Ended Consolidated Statements of Operations - June 30, June 30, Unconsolidated Joint Ventures 2004 2003 2004 2003 - ------------------------------------------- ------------ -------------- -------------- ------------- Revenues $ 2,507 $ 2,158 $4,582 $ 3,885 - ------------------------------------------- ------------ -------------- -------------- ------------- Expenses: Property operating 946 782 1,721 1,486 General and administrative 12 3 13 20 Depreciation and amortization 631 552 1,254 1,080 - ------------------------------------------- ------------ -------------- -------------- ------------- Total expenses 1,589 1,337 2,988 2,586 - ------------------------------------------- ------------ -------------- -------------- ------------- Operating income 918 821 1,594 1,299 Interest expense 405 294 785 619 - ------------------------------------------- ------------ -------------- -------------- ------------- Net income $ 513 $ 527 $ 809 $ 680 - ------------------------------------------- ------------ -------------- -------------- ------------- Tanger's share of: - ------------------------------------------- ------------ -------------- -------------- ------------- Net income $ 275 $ 279 $ 440 $ 372 Depreciation (real estate related) 304 266 604 520 - ------------------------------------------- ------------ -------------- -------------- -------------
8 4. Disposition of Properties In accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"), results of operations and gain/(loss) on sales of real estate for properties with identifiable cash flows sold are reflected in the consolidated statements of operations as discontinued operations for all periods presented. In June 2004, we completed the sale of two non-core properties located in North Conway, New Hampshire. Net proceeds received from the sales of these properties were approximately $6.5 million. We recorded a gain on sale of real estate of approximately $2.1 million which is included in discontinued operations for the three and six months ended June 30, 2004. In May and October 2003, we completed the sale of properties located in Martinsburg, West Virginia and Casa Grande, Arizona, respectively. Net proceeds received from the sales of these properties were approximately $8.7 million. We recorded a loss on sale of real estate related to the Martinsburg sale of approximately $735,000 which is included in discontinued operations for the three and six months ended June 30, 2003. Below is a summary of the results of operations of these properties (in thousands):
Three Months Ended Six Months Ended June 30, June 30, 2004 2003 2004 2003 - ----------------------------------------------------- ----------- ------------ ------------ -------------- Base rentals $ 174 $ 531 $ 397 $ 1,136 Percentage rentals -- 6 -- 6 Expense reimbursements 82 240 213 481 Other income 2 15 3 26 - ----------------------------------------------------- ----------- ------------ ------------ -------------- Total revenues 258 792 613 1,649 Property operating expenses 111 389 233 841 General and administrative 3 1 3 2 Depreciation and amortization 66 260 130 532 - ----------------------------------------------------- ----------- ------------ ------------ -------------- Total expenses 180 650 366 1,375 - ----------------------------------------------------- ----------- ------------ ------------ -------------- Income before gain (loss) on sale of real estate 78 142 247 274 Gain (loss) on sale of real estate 2,084 (735) 2,084 (735) - ----------------------------------------------------- ----------- ------------ ------------ -------------- Discontinued operations before minority interest 2,162 (593) 2,331 (461) Minority interest 396 (142) 427 (113) - ----------------------------------------------------- ----------- ------------ ------------ -------------- Discontinued operations $ 1,766 $ (451) $1,904 $ (348) - ----------------------------------------------------- ----------- ------------ ------------ --------------
During the second quarter of 2004 we sold three outparcels of undeveloped land at our Branson, Missouri; Westbrook, Connecticut; and Gonzales, Louisiana centers respectively. Net proceeds received were approximately $2.5 million and a gain of approximately $1.2 million was recorded in other income in the second quarter of 2004. 5. Other Comprehensive Income - Derivative Financial Instruments During the first quarter of 2003 our interest rate swap, which had been designated as a cash flow hedge, expired and therefore the fair value of the swap became zero resulting in a change in fair value of $98,000. TWMB's interest rate swap agreement has been designated as a cash flow hedge and is carried on TWMB's balance sheet at fair value. At June 30, 2004, our portion of the fair value of TWMB's hedge is recorded as a reduction to investment in joint ventures of $20,000. For the three and six months ended June 30, 2004, the change in the fair value of the derivative instrument is recorded as $8,000 and $29,000, respectively, of other comprehensive income, net of minority interest of $27,000 and $33,000, respectively. 9
Three Months Ended Six Months Ended June 30, June 30, 2004 2003 2004 2003 - ----------------------------------------------------- ----------- ------------ ------------ -------------- Net income $ 3,745 $ 2,307 $ 4,757 $ 4,498 - ----------------------------------------------------- ----------- ------------ ------------ -------------- Other comprehensive income: Change in fair value of our portion of TWMB cash flow hedge, net of minority interest of $27 and $1 and $33 and ($2) 8 3 29 (8) Change in fair value of cash flow hedge, net of minority interest of $24 --- --- --- 74 - ----------------------------------------------------- ----------- ------------ ------------ -------------- Other comprehensive income 8 3 29 66 - ----------------------------------------------------- ----------- ------------ ------------ -------------- Total comprehensive income $ 3,753 $ 2,310 $ 4,786 $ 4,564 - ----------------------------------------------------- ----------- ------------ ------------ --------------
6. Earnings Per Share The following table sets forth a reconciliation of the numerators and denominators in computing earnings per share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (in thousands, except per share amounts):
Three Months Ended Six Months Ended June 30, June 30, 2004 2003 2004 2003 - ------------------------------------------------------- ------------ ----------- ------------ ------------- Numerator: Income from continuing operations $ 1,979 $ 2,758 $ 2,853 $ 4,846 Less applicable preferred share dividends --- (363) --- (806) - ------------------------------------------------------- ------------ ----------- ------------ ------------- Income from continuing operations available to common shareholders - basic and diluted 1,979 2,395 2,853 4,040 Discontinued operations 1,766 (451) 1,904 (348) - ------------------------------------------------------- ------------ ----------- ------------ ------------- Net income available to common shareholders - basic and diluted $ 3,745 $ 1,944 $4,757 $3,692 ------------------------------------------------------- ------------ ----------- ------------ ------------- Denominator: Basic weighted average common shares 13,504 9,590 13,420 9,387 Effect of outstanding share and unit options 84 219 116 228 Effect of unvested restricted share awards 6 --- 5 --- - ------------------------------------------------------- ------------ ----------- ------------ ------------- Diluted weighted average common shares 13,594 9,809 13,541 9,615 Basic earnings per common share: Income from continuing operations $ .15 $ .25 $ .21 $ .43 Discontinued operations .13 (.05) .14 (.04) - ------------------------------------------------------- ------------ ----------- ------------ ------------- Net income $ .28 $ .20 $ .35 $ .39 Diluted earnings per common share: Income from continuing operations $ .15 $ .24 $ .21 $ .42 Discontinued operations .13 (.04) .14 (.04) - ------------------------------------------------------- ------------ ----------- ------------ ------------- Net income $ .28 $ .20 $ .35 $ .38 - ------------------------------------------------------- ------------ ----------- ------------ -------------
10 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 214,000 for the three months ended June 30, 2004 and 107,000 and 6,000 for the six months ended June 30, 2004 and 2003, respectively. There were no options excluded from the computation for the three months ended June 30, 2003. 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 Operating Partnership's minority interest limited partner as of the beginning of the year, which would result in the elimination of earnings allocated to the minority interest in the Operating Partnership, 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. Shareholders' Equity In December 2003, we completed a public offering of 2,300,000 common shares at a price of $40.50 per share, receiving net proceeds of approximately $88.0 million. The net proceeds were used together with other available funds to finance our portion of the equity required to purchase the COROC portfolio of outlet shopping centers as mentioned in Note 2 above and for general corporate purposes. In addition in January 2004, the underwriters of the December 2003 offering exercised in full their over-allotment option to purchase an additional 345,000 common shares at the offering price of $40.50 per share. We received net proceeds of approximately $13.2 million from the exercise of the over-allotment. 8. Employee Benefit Plans During the second quarter of 2004, the Board of Directors approved amendments to the Company's Share Option Plan to add restricted shares and other share-based grants to the Plan, to merge the Operating Partnership's Unit Option Plan into the Share Option Plan and to rename the Plan as the Amended and Restated Incentive Award Plan (the "Incentive Award Plan"). The Incentive Award Plan was approved by a vote of shareholders at our Annual Shareholders' Meeting. The Board of Directors approved the grant of 106,125 restricted common shares to the independent directors and certain executive officers in April 2004. As a result of the granting of the restricted common shares, we recorded a charge to deferred compensation of $4.1 million in the shareholders' equity section of the consolidated balance sheet. During the second quarter, we recognized expense related to the amortization of the deferred compensation of approximately $932,000 in accordance with the vesting schedule of the restricted shares. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion should be read in conjunction with the unaudited consolidated financial statements appearing elsewhere in this report. Historical results and percentage relationships set forth in the unaudited consolidated statements of operations, including trends which might appear, are not necessarily indicative of future operations. Unless the context indicates otherwise, the term "Company" refers to Tanger Factory Outlet Centers, Inc. and subsidiaries and the term "Operating Partnership" refers to Tanger Properties Limited Partnership and subsidiaries. The terms "we", "our" and "us" refer to the Company or the Company and the Operating Partnership together, as the text requires. The discussion of our results of operations reported in the unaudited consolidated statements of operations compares the three and six months ended June 30, 2004 with the three and six months ended June 30, 2003. Certain comparisons between the periods are made on a percentage basis as well as on a weighted average gross leasable area ("GLA") basis, a technique which adjusts for certain increases or decreases in the number of centers and corresponding square feet related to the development, acquisition, expansion or disposition of rental properties. The computation of weighted average GLA, however, does not adjust for fluctuations in occupancy which may occur subsequent to the original opening date. Cautionary Statements Certain statements made below are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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: - - national and local general economic and market conditions; - - demographic changes; our ability to sustain, manage or forecast our growth; existing government regulations and changes in, or the failure to comply with, government regulations; - - adverse publicity; liability and other claims asserted against us; - - competition; - - the risk that we may not be able to finance our planned development activities; - - risks related to the retail real estate industry in which we compete, including the potential adverse impact of external factors such as inflation, tenant demand for space, consumer confidence, unemployment rates and consumer tastes and preferences; - - risks associated with our development activities, such as the potential for cost overruns, delays and lack of predictability with respect to the financial returns associated with these development activities; 12 - - risks associated with real estate ownership, such as the potential adverse impact of changes in the local economic climate on the revenues and the value of our properties; - - risks that a significant number of tenants may become unable to meet their lease obligations or that we may be unable to renew or re-lease a significant amount of available space on economically favorable terms; - - fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; - - business disruptions; - - the ability to attract and retain qualified personnel; - - the ability to realize planned costs savings in acquisitions; and - - retention of earnings. 13 General Overview In December 2003 we completed the acquisition of the Charter Oak Partners' portfolio of nine factory outlet centers totaling approximately 3.3 million square feet. We and an affiliate of Blackstone Real Estate Advisors ("Blackstone") acquired the portfolio through a joint venture in the form of a limited liability company, COROC Holdings, LLC ("COROC"). We own one-third and Blackstone owns two-thirds of the joint venture. We provide operating, management, leasing and marketing services to the properties for a fee. COROC is consolidated for financial reporting purposes under the provisions of Financial Accounting Standard Board Interpretation No. 46 ("FIN 46"). The purchase price for this transaction was $491.0 million, including the assumption of approximately $186.4 million of cross-collateralized debt which has a stated, fixed interest rate of 6.59% and matures in July 2008. We recorded the debt at its fair value of $198.3 million, with an effective interest rate of 4.97%. Accordingly, a debt premium of $11.9 million was recorded and is being amortized using the effective interest method over the life of the debt. We financed the majority of our equity in the joint venture with proceeds from the issuance of 2.3 million common shares at $40.50 per share. The successful equity financing allows us to maintain a strong balance sheet and our current financial flexibility. At June 30, 2004, we had ownership interests in or management responsibilities for 38 centers in 23 states totaling 9.3 million square feet compared to 33 centers in 20 states totaling 6.2 million square feet at June 30, 2003. The activity in our portfolio of properties since June 30, 2003 is summarized below:
No. of GLA Centers (000's) States - ---------------------------------------------------------------- ------------ ------------ ----------- As of June 30, 2003 33 6,215 20 Acquisitions/Expansions: Sevierville, Tennessee (wholly-owned) --- 35 --- Myrtle Beach Hwy 17, South Carolina - --- 65 --- (unconsolidated joint venture) Charter Oak portfolio (consolidated joint venture) Rehoboth, Delaware 1 569 1 Foley, Alabama 1 536 --- Myrtle Beach Hwy 501, South Carolina 1 427 --- Hilton Head, South Carolina 1 393 --- Park City, Utah 1 301 1 Westbrook, Connecticut 1 291 1 Lincoln City, Oregon 1 270 1 Tuscola, Illinois 1 258 1 Tilton, New Hampshire 1 228 --- Dispositions: Bourne, Massachusetts (managed) (1) (23) (1) Casa Grande, Arizona (wholly-owned) (1) (185) (1) Clover, New Hampshire (wholly-owned) (1) (11) --- LLBean, New Hampshire (wholly-owned) (1) (51) --- Other --- 3 --- - ---------------------------------------------------------------- ------------ ------------ ----------- As of June 30, 2004 38 9,321 23 - ---------------------------------------------------------------- ------------ ------------ -----------
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A summary of the operating results for the three and six months ended June 30, 2004 and 2003 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, 2004 2003 2004 2003 - -------------------------------------------------------------------- ------------ ------------ ------------ ------------- GLA at end of period (000's) Wholly owned 5,240 5,449 5,240 5,449 Partially-owned (consolidated) (1) 3,273 --- 3,273 --- Partially owned (unconsolidated) (2) 374 309 374 309 Managed 434 457 434 457 - -------------------------------------------------------------------- ------------ ------------ ------------ ------------- Total GLA at end of period (000's) 9,321 6,215 9,321 6,215 - -------------------------------------------------------------------- ------------ ------------ ------------ ------------- Weighted average GLA (000's) (3) 8,513 5,201 8,513 5,199 Occupancy percentage at end of period (1) (2) 95% 96% 95% 96% Per square foot for wholly owned properties Revenues Base rentals $3.81 $3.71 $7.55 $7.38 Percentage rentals .11 .11 .20 .18 Expense reimbursements 1.55 1.58 2.96 3.16 Other income .28 .15 .38 .28 - -------------------------------------------------------------------- ------------ ------------ ------------ ------------- Total revenues 5.75 5.55 11.09 11.00 - -------------------------------------------------------------------- ------------ ------------ ------------ ------------- Expenses Property operating 1.75 1.88 3.35 3.71 General and administrative .38 .47 .75 .94 Depreciation and amortization 1.54 1.32 2.99 2.68 - -------------------------------------------------------------------- ------------ ------------ ------------ ------------- Total expenses 3.67 3.67 7.09 7.33 - -------------------------------------------------------------------- ------------ ------------ ------------ ------------- Operating income 2.08 1.88 4.00 3.67 - -------------------------------------------------------------------- ------------ ------------ ------------ ------------- Interest expense 1.05 1.26 2.09 2.56 - -------------------------------------------------------------------- ------------ ------------ ------------ ------------- Income before equity in earnings of unconsolidated joint ventures, minority interest and discontinued operations $1.03 $.62 $1.91 $1.11 - -------------------------------------------------------------------- ------------ ------------ ------------ ------------- (1) Includes the nine centers from the Charter Oak portfolio acquired on December 19, 2003 of which Tanger owns a one-third interest through a joint venture arrangement. (2) Includes Myrtle Beach, South Carolina Hwy 17 property which we operate through a 50% ownership joint venture. (3) Represents GLA of wholly-owned and partially owned consolidated operating properties weighted by months of operation. GLA is not adjusted for fluctuations in occupancy that may occur subsequent to the original opening date. Excludes GLA of properties for which their results are included in discontinued operations.
15 The table set forth below summarizes certain information with respect to our existing centers in which we have an ownership interest as of June 30, 2004. Mortgage Debt Outstanding GLA % (000's) as of Location (sq. ft.) Occupied June 30, 2004 - ----------------------------------- ----------- ----------- ------------------ Riverhead, NY (1) 729,238 99 $ --- Rehoboth, DE (1) (3) 568,787 99 39,568 Foley, AL (3) 535,675 99 32,357 San Marcos, TX 442,486 96 36,957 Myrtle Beach Hwy 501, SC (3) 427,388 97 22,973 Sevierville, TN (1) 419,023 100 --- Hilton Head, SC (3) 393,094 89 18,558 Commerce II, GA 342,556 97 29,500 Howell, MI 325,231 100 --- Myrtle Beach Hwy 17, SC (1) (2) 374,399 100 --- Park City, UT (3) 300,602 97 12,642 Westbrook, CT (3) 291,051 90 15,023 Branson, MO 277,883 100 24,000 Williamsburg, IA 277,230 96 18,870 Lincoln City, OR (3) 270,280 93 10,447 Tuscola, IL (3) 258,114 77 20,274 Lancaster, PA 255,152 96 13,997 Locust Grove, GA 247,454 99 --- Gonzales, LA 245,199 93 --- Tilton, NH (3) 227,966 98 13,054 Fort Meyers, FL 198,789 82 --- Commerce I, GA 185,750 68 7,558 Terrell, TX 177,490 97 --- Dalton, GA 173,430 79 10,812 Seymour, IN 141,051 82 --- North Branch, MN 134,480 99 --- West Branch, MI 112,420 100 6,864 Barstow, CA 108,950 95 --- Blowing Rock, NC 105,448 100 9,443 Pigeon Forge, TN (1) 94,558 93 --- Nags Head, NC 82,178 100 6,408 Boaz, AL 79,575 97 --- Kittery I, ME 59,694 100 6,152 Kittery II, ME 24,619 100 --- - ---------------------------------- ------------ -------- ----------------- 8,887,240 95 355,457 Debt premium 10,608 - -------------------------------------------------------------------------- $366,065 ========================================================================== (1) These properties or a portion thereof are subject to a ground lease. (2) Represents property that is currently held through an unconsolidated joint venture in which we own a 50% interest. The joint venture had $32.0 million of construction loan debt as of June 30, 2004. (3) Represents properties that are currently held through a consolidated joint venture in which we own a one-third interest. 16 RESULTS OF OPERATIONS Comparison of the three months ended June 30, 2004 to the three months ended June 30, 2003 Base rentals increased $13.1 million, or 68%, in the 2004 period when compared to the same period in 2003. The increase is primarily due to the December 2003 acquisition of the COROC portfolio of nine outlet center properties. Base rent per weighted average GLA increased by $.10 per square foot from $3.71 per square foot in the 2003 period to $3.81 per square foot in the 2004 period. The increase is primarily the result of the COROC portfolio acquisition which had a higher average base rent per square foot compared to the pre-acquisition portfolio average. In addition, base rent is impacted by the amortization of above/below market rate lease values associated with the required purchase price allocation associated with the acquisition of the COROC portfolio. The values of the above and below market leases are amortized and recorded as either an increase (in the case of below market leases) or a decrease (in the case of above market leases) to rental income over the remaining term of the associated lease. If a tenant vacates its space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balance of the related above/below market lease value will be written off and could materially impact our net income and funds from operations positively or negatively. The overall portfolio occupancy at June 30, 2004 decreased 1% from 96% to 95% compared to June 30, 2003 due to the addition of the COROC portfolio which had a lower average occupancy rate, 94% compared to the remaining properties that had an average occupancy rate of 96%. One center experienced a negative occupancy trend of at least 10% from June 30, 2003 to June 30, 2004 offset by two centers which experienced a positive occupancy gain of at least 10%. Percentage rentals, which represent revenues based on a percentage of tenants' sales volume above predetermined levels (the "breakpoint"), increased $408,000 or 74%, and on a weighted average GLA basis, remained at $.11 per square foot in the 2004 and 2003 periods. The dollar increase was partially the result of the COROC portfolio acquisition as well as an increase in tenant sales during the last twelve months. Reported same-space sales per square foot for the rolling twelve months ended June 30, 2004 were $309 per square foot. This represents a 5% increase compared to the same period in 2003. Same-space sales is defined as the weighted average sales per square foot reported in space open for the full duration of each comparison period. 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, were 88% and 84% in the 2004 and 2003 periods, respectively. The increase is due to higher reimbursement rates at the COROC portfolio. Other income increased $1.6 million, or 203%, in the 2004 period compared to the 2003 period and on a weighted average GLA basis, increased $.13 per square foot from $.15 to $.28. Other income in the 2004 period includes gains from the sales of three outparcels of land of $1.2 million. In the 2003 period there were no sales of outparcels of land. The remaining increase is primarily attributable to increases in vending income and management fees. Property operating expenses increased by $5.2 million, or 53%, in the 2004 period as compared to the 2003 period and, on a weighted average GLA basis, decreased $.13 per square foot from $1.88 to $1.75. The dollar increase is the result of the additional operating costs of the COROC portfolio in the 2004 period. The decrease on a weighted average GLA basis is due to expenses at the COROC portfolio per square foot being lower than the portfolio average for the second quarter. 17 General and administrative expenses increased $803,000, or 33%, in the 2004 period as compared to the 2003 period. The increase is primarily due to the additional employees hired as a result of the acquisition of the COROC portfolio. However, as a percentage of total revenues, general and administrative expenses decreased from 8.5% in the 2003 period to 6.6% in the 2004 period and, on a weighted average GLA basis, decreased from $.47 per square foot in the 2003 period to $.38 per square foot in the 2004 period. Depreciation and amortization per weighted average GLA increased from $1.32 per square foot in the 2003 period to $1.54 per square foot in the 2004 period due to a higher mix of tenant finishing allowances included in buildings and improvements which are depreciated over shorter lives (i.e. over lives generally ranging from 3 to 10 years as opposed to other construction costs which are depreciated over lives ranging from 15 to 33 years). Also, certain assets in the acquisition of the COROC portfolio in December 2003 accounted for under SFAS 141 "Business Combinations" ("FAS 141") were allocated to lease costs which are amortized over shorter lives than building costs. Interest expense increased $2.3 million, or 36%, during the 2004 period as compared to the 2003 period due primarily to the assumption of $186.4 million of cross-collateralized debt in the fourth quarter of 2003 related to the acquisition of the COROC portfolio. Consolidated joint venture minority interest increased $6.6 million due to the allocation of earnings to our joint venture partner with whom we own the COROC portfolio. The COROC portfolio was acquired in late December 2003. The allocation of earnings to our joint venture partner is based on a preferred return on investment as opposed to their ownership percentage and accordingly has a significant impact on our earnings. Discontinued operations increased $2.2 million due to the sale of the Clover and LLBean, New Hampshire properties in the 2004 period resulting in a gain on sale of real estate of approximately $2.1 million. Also, included in the 2003 period is the sale of the Martinsburg, West Virginia center which was sold at a loss of approximately $735,000. Comparison of the six months ended June 30, 2004 to the six months ended June 30, 2003 Base rentals increased $25.9 million, or 68%, in the 2004 period when compared to the same period in 2003. The increase is primarily due to the acquisition of the COROC portfolio of outlet center properties. Base rent per weighted average GLA increased by $.17 per square foot from $7.38 per square foot in the 2003 period to $7.55 per square foot in the 2004 period. The increase is primarily the result of the COROC portfolio acquisition which had a higher average base rent per square foot compared to the pre-acquisition portfolio average. In addition, base rent is impacted by the amortization of above/below market rate lease values associated with the required purchase price allocation associated with the acquisition of the COROC portfolio. The values of the above and below market leases are amortized and recorded as either an increase (in the case of below market leases) or a decrease (in the case of above market leases) to rental income over the remaining term of the associated lease. If a tenant vacates its space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balance of the related above/below market lease value will be written off and could materially impact our net income and funds from operations positively or negatively. The overall portfolio occupancy at June 30, 2004 decreased 1% from 96% to 95% compared to June 30, 2003 due to the addition of the COROC portfolio which had a lower average occupancy rate, 94% compared to the remaining properties that had an average occupancy rate of 96%. One center experienced a negative occupancy trend of at least 10% from June 30, 2003 to June 30, 2004 offset by two centers which experienced a positive occupancy gain of at least 10%. 18 Percentage rentals, which represent revenues based on a percentage of tenants' sales volume above predetermined levels (the "breakpoint"), increased $726,000 or 77%, and on a weighted average GLA basis, increased $.02 per square foot in the 2004 period compared to the 2003 period. The increase was partially the result of the COROC portfolio acquisition as well as an increase in tenant sales during the last twelve months. Reported same-space sales per square foot for the rolling twelve months ended June 30, 2004 were $309 per square foot. This represents a 5% increase compared to the same period in 2003. Same-space sales is defined as the weighted average sales per square foot reported in space open for the full duration of each comparison period. 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, were 88% and 85% in the 2004 and 2003 periods, respectively. The increase is due to higher reimbursement rates at the COROC properties. Other income increased $1.8 million, or 124%, in the 2004 period compared to the 2003 period and on a weighted average GLA basis, increased $.10 per square foot from $.28 to $.38. Other income in the 2004 period includes gains from the sales of three outparcels of land of $1.2 million. In the 2003 period there were no sales of outparcels of land. The remaining increase is primarily attributable to increases in vending income and management fees. Property operating expenses increased by $9.2 million, or 48%, in the 2004 period as compared to the 2003 period and, on a weighted average GLA basis, decreased $.36 per square foot from $3.71 to $3.35. The dollar increase is the result of the additional operating costs of the COROC portfolio in the 2004 period. The decrease on a weighted average GLA basis is due to expenses at the COROC portfolio per square foot being lower than the portfolio average for the first six months of 2004. General and administrative expenses increased $1.5 million, or 31%, in the 2004 period as compared to the 2003 period. The increase is primarily due to the additional employees hired as a result of the acquisition of the COROC portfolio. However, as a percentage of total revenues, general and administrative expenses decreased from 8.5% in the 2003 period to 6.8% in the 2004 period and, on a weighted average GLA basis, decreased from $.94 per square foot in the 2003 period to $.75 per square foot in the 2004 period. Depreciation and amortization per weighted average GLA increased from $2.68 per square foot in the 2003 period to $2.99 per square foot in the 2004 period due to a higher mix of tenant finishing allowances included in buildings and improvements which are depreciated over shorter lives (i.e. over lives generally ranging from 3 to 10 years as opposed to other construction costs which are depreciated over lives ranging from 15 to 33 years). Also, certain assets in the acquisition of the COROC portfolio in December 2003 accounted for under SFAS 141 "Business Combinations" ("FAS 141") were allocated to lease costs which are amortized over shorter lives than building costs. Interest expense increased $4.5 million, or 34%, during the 2004 period as compared to the 2003 period due primarily to the assumption of $186.4 million of cross-collateralized debt in the fourth quarter of 2003 related to the acquisition of the COROC portfolio. Equity in earnings from unconsolidated joint ventures increased $68,000, or 18%, in the 2004 period compared to the 2003 period due to the TWMB Associates, LLC ("TWMB"), outlet center in Myrtle Beach, South Carolina having 65,000 more square feet of GLA open in the 2004 period versus the 2003 period. TWMB is an unconsolidated joint venture in which we have a 50% ownership interest. 19 Consolidated joint venture minority interest increased $13.2 million due to the allocation of earnings to our joint venture partner with whom we own the COROC portfolio. The COROC portfolio was acquired in late December 2003. The allocation of earnings to our joint venture partner is based on a preferred return on investment as opposed to their ownership percentage and accordingly has a significant impact on our earnings. Discontinued operations increased $2.3 million due to the sale of the Clover and LLBean, New Hampshire properties in the 2004 period resulting in a gain on sale of real estate of approximately $2.1 million. Also, included in the 2003 period is the sale of the Martinsburg, West Virginia center which was sold at a loss of approximately $735,000. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $40.4 million and $21.5 million for the six months ended June 30, 2004 and 2003, respectively. The increase in cash provided by operating activities is due primarily to the incremental income from the COROC acquisition in December 2003. Net cash used in investing activities was $4.7 and $4.8 million during the first six months of 2004 and 2003, respectively. Net cash used in financing activities was $36.8 million and $17.5 million during the first six months of 2004 and 2003, respectively. Cash used was higher in 2004 due primarily to increased dividends in 2004 compared to 2003, debt repayments and distributions paid to the minority interest partner in our consolidated joint venture offset by proceeds from the sale of common shares. Our consolidated cash balance increased $8.5 million from June 30, 2003 to June 30, 2004 due primarily to cash held in reserve at our consolidated joint venture, COROC. Development and Dispositions Pittsburgh, Pennsylvania We have an option to purchase land and have begun the early development and leasing of a site located near Pittsburgh, Pennsylvania. We currently expect the center to be approximately 420,000 square feet upon total build out with the initial phase scheduled to open in early 2006. Charleston, South Carolina We have an option to purchase land and have begun the early development and leasing of a site located near Charleston, South Carolina. We currently expect the center to be approximately 370,000 square feet upon total build out with the initial phase scheduled to open in 2006. Wisconsin Dells, Wisconsin We have begun the early development and leasing of a site located near Wisconsin Dells, Wisconsin. We currently expect the center to be approximately 300,000 square feet upon total build out with the initial phase scheduled to open in 2006. 20 Outparcels During the second quarter of 2004 we sold three outparcels of undeveloped land at our Branson, Missouri; Westbrook, Connecticut; and Gonzales, Louisiana centers respectively. Net proceeds received were approximately $2.5 million and a gain of approximately $1.2 million was recorded in other income in the second quarter of 2004. Joint Ventures TWMB Associates, LLC During the second quarter, TWMB completed the construction of a 79,000 square foot third-phase expansion of the Myrtle Beach center at an approximate cost of $9.7 million. As of June 30, 2004, 50,000 square feet were open with the remainder of the stores scheduled to open during July and August 2004. We and our partner each made capital contributions during the fourth quarter of 2003 of $1.7 million for the third phase. The completion of this expansion brings the total gross leasable area of TWMB's Myrtle Beach center to approximately 403,000 square feet. In conjunction with the construction of the center, TWMB maintains a construction loan in the amount of $36.2 million with Bank of America, NA (Agent) and SouthTrust Bank due in September 2005. As of June 30, 2004 the construction loan had a balance of $32.0 million. In August of 2002, TWMB entered into an interest rate swap agreement with Bank of America, NA effective through August 2004 with a notional amount of $19 million. Under this agreement, TWMB receives a floating interest rate based on the 30 day LIBOR index and pays a fixed interest rate of 2.49%. This swap effectively changes the payment of interest on $19 million of variable rate debt to fixed rate debt for the contract period at a rate of 4.49%. All debt incurred by this unconsolidated joint venture is collateralized by its property as well as joint and several guarantees by both partners. Either partner in TWMB has the right to initiate the sale or purchase of the other party's interest at certain times. If such action is initiated, one member would determine the fair market value purchase price of the venture and the other would determine whether they would take the role of seller or purchaser. The members' roles in this transaction would be determined by the tossing of a coin, commonly known as a Russian roulette provision. If either partner enacts this provision and depending on our role in the transaction as either seller or purchaser, we could potentially incur a cash outflow for the purchase of our partner's interest. However, we do not expect this event to occur in the near future based on the positive results and expectations of developing and operating an outlet center in the Myrtle Beach, South Carolina area. Deer Park Enterprise, LLC Deer Park Enterprise, LLC ("Deer Park") is a joint venture agreement in which we have a one-third ownership interest entered into by us in September 2003 with two other members for the purpose of, but not limited to, developing a site located in Deer Park, New York. We currently expect the center to be approximately 790,000 square feet upon total buildout. We expect the site will contain both outlet and big box retail tenants with the initial phase scheduled for delivery in late 2006 or early 2007. Any developments or expansions that we, or a joint venture that we are involved in, have planned or anticipated may not be started or completed as scheduled, or may not result in accretive net income or funds from operations. In addition, we regularly evaluate acquisition or disposition proposals and engage from time to time in negotiations for acquisitions or disposals 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 an increase in net income or funds from operations. 21 Financing Arrangements At June 30, 2004, approximately 29% of our outstanding long-term debt represented unsecured borrowings and approximately 34% of the gross book value of our real estate portfolio was unencumbered. The average interest rate, including loan cost amortization, on average debt outstanding for the three months ended June 30, 2004 was 7.54%. In December 2003, we completed a public offering of 2,300,000 common shares at a price of $40.50 per share, receiving net proceeds of approximately $88.0 million. The net proceeds were used together with other available funds to finance our portion of the equity required to purchase the COROC portfolio of outlet shopping centers as mentioned in General Overview above and for general corporate purposes. In addition, in January 2004, the underwriters of the December 2003 offering exercised in full their over-allotment option to purchase an additional 345,000 common shares at the offering price of $40.50 per share. We received net proceeds of approximately $13.2 million from the exercise of the over-allotment. We intend to retain the ability to raise additional capital, including public debt or equity, to pursue attractive investment opportunities that may arise and to otherwise act in a manner that we believe to be in our shareholders' best interests. Prior to the common share offerings in 2002, 2003 and 2004, we had established a shelf registration to allow us to issue up to $400 million in either all debt or all equity or any combination thereof. We intend to restock this shelf up to its $400 million level during 2004. To generate capital to reinvest into other attractive investment opportunities, we may also consider the use of additional operational and developmental joint ventures, selling certain properties that do not meet our long-term investment criteria as well as outparcels on existing properties. We maintain unsecured, revolving lines of credit that provided for unsecured borrowings of up to $100 million at June 30, 2004. Subsequent to June 30, 2004, we were successful in obtaining a commitment for an additional $25 million unsecured line of credit from Citicorp North America, Inc., a subsidiary of Citigroup, bringing the total committed unsecured lines of credit to $125 million. In addition, we have obtained commitments to extend the maturity dates on all of our lines of credit until June of 2007. Based on cash provided by operations, existing credit facilities, ongoing negotiations with certain financial institutions and our ability to sell debt or equity subject to market conditions, we believe that we have access to the necessary financing to fund the planned capital expenditures during 2004. 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 Real Estate Investment Trust ("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. On July 15, 2004, our Board of Directors declared a $.6250 cash dividend per common share payable on August 16, 2004 to each shareholder of record on July 30, 2004, and caused a $.6250 per Operating Partnership unit cash distribution to be paid to the Operating Partnership's minority interest. Critical Accounting Policies and Estimates Refer to our 2003 Annual Report on Form 10-K for a discussion of our critical accounting policies which include principles of consolidation, acquisition of real estate, cost capitalization, impairment of long-lived assets and revenue recognition. There have been no material changes to these policies in 2004. 22 Funds from Operations ("FFO") Funds from Operations ("FFO"), represents income before extraordinary items and gains (losses) on sale or disposal of depreciable operating properties, plus depreciation and amortization uniquely significant to real estate and after adjustments for unconsolidated partnerships and joint ventures. FFO is intended to exclude GAAP historical cost depreciation of real estate, which assumes that the value of real estate assets diminish ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO excludes depreciation and amortization unique to real estate, gains and losses from property dispositions and extraordinary items, it provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities and interest costs, providing perspective not immediately apparent from net income. We present FFO because we consider it an important supplemental measure of our operating performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, any of which present FFO when reporting their results. FFO is widely used by us and others in our industry to evaluate and price potential acquisition candidates. The National Association of Real Estate Investment Trusts, Inc., of which we are a member, has encouraged its member companies to report their FFO as a supplemental, industry-wide standard measure of REIT operating performance. In addition, our employment agreements with certain members of management base a portion of their bonus compensation on our FFO performance. FFO has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for, analysis of our results as reported under GAAP. Some of these limitations are: - - FFO does not reflect our cash expenditures, or future requirements for, capital expenditures or contractual commitments; - - FFO does not reflect changes in, or cash requirements for, our working capital needs; - - Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and FFO does not reflect any cash requirements for such replacements; - - FFO may reflect the impact of earnings or charges resulting from matters which may not be indicative of our ongoing operations; and - - Other companies in our industry may calculate FFO differently than we do, limiting its usefulness as a comparative measure. Because of these limitations, FFO should not be considered as a measure of discretionary cash available to us to invest in the growth of our business or our dividend paying capacity. We compensate for these limitations by relying primarily on our GAAP results and using FFO only supplementally. See the statements of cash flow included in our consolidated financial statements. 23
Below is a calculation of FFO for the three and six months ended June 30, 2004 and 2003 and other data for those respective periods (in thousands): Three Months Ended Six Months Ended June 30, June 30, 2004 2003 2004 2003 ---------------------------------------------------------------------- ------------ ------------ ------------ ------------- Funds from Operations: Net income $ 3,745 $ 2,307 $ 4,757 $ 4,498 Adjusted for Minority interest in operating partnership 445 757 644 1,306 Minority interest adjustment - consolidated joint venture (329) --- (296) --- Minority interest, depreciation and amortization attributable to discontinued operations 463 118 558 418 Depreciation and amortization uniquely significant to real estate - wholly owned 13,062 6,806 25,316 13,790 Depreciation and amortization uniquely significant to real estate - unconsolidated joint venture 304 266 604 520 (Gain)/loss on sale of real estate (2,084) 735 (2,084) 735 ---------------------------------------------------------------------- ------------ ------------ ------------ ------------- Funds from operations $ 15,606 $ 10,989 $ 29,499 $ 21,267 ---------------------------------------------------------------------- ------------ ------------ ------------ ------------- Weighted average shares outstanding (1) 16,627 13,432 16,574 13,304 ---------------------------------------------------------------------- ------------ ------------ ------------ ------------- (1) Assumes the partnership units of the Operating Partnership held by the minority interest in the Operating Partnership and share and unit options and unvested restricted share awards are converted to common shares of the Company.
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. During 2004, we have approximately 1,790,000 square feet, or 19% of our portfolio, coming up for renewal. If we were unable to successfully renew or re-lease 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. 24 As of June 30, 2004, we have renewed approximately 1,041,000 square feet, or 58% of the square feet scheduled to expire in 2004. The existing tenants have renewed at an average base rental rate approximately 8% higher than the expiring rate. We also re-tenanted approximately 282,000 square feet of vacant space during the first six months of 2004 at a 2% increase in the average base rental rate from that which was previously charged. 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) accounted for more than 5.8% of our combined base and percentage rental revenues for the three months ended June 30, 2004. Accordingly, we 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 re-leased. As of June 30, 2004 and 2003, our centers were 95% and 96% occupied, respectively. Consistent with our long-term strategy of re-merchandising 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 rates in the near term. Item 3. Quantitative and Qualitative Disclosures about 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, 2004, TWMB had an interest rate swap agreement effective through August 2004 with a notional amount of $19 million. Under this agreement, TWMB receives a floating interest rate based on the 30 day LIBOR index and pays a fixed interest rate of 2.49%. This swap effectively changes the payment of interest on $19 million of variable rate construction debt to fixed rate debt for the contract period at a rate of 4.49%. The fair value of the interest rate swap agreement represents the estimated receipts or payments that would be made to terminate the agreement. At June 30, 2004, TWMB would have paid approximately $40,000 to terminate the agreement. A 1% decrease in the 30 day LIBOR index would increase the amount paid by TWMB by $32,000 to approximately $72,000. The fair value is based on dealer quotes, considering current interest rates and the remaining term to maturity. TWMB does not intend to terminate the interest rate swap agreement prior to its maturity. The fair value of this derivative is currently recorded as a liability in TWMB's balance sheet; however, if held to maturity, the value of the swap will be zero at that time. 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, 2004 was $536.6 million and its recorded value was $513.6 million. A 1% increase from prevailing interest rates at June 30, 2004 would result in a decrease in fair value of total long-term debt by approximately $8.7 million. Fair values were determined from quoted market prices, where available, using current interest rates considering credit ratings and the remaining terms to maturity. 25 Item 4. Controls and Procedures The Chief Executive Officer, Stanley K. Tanger, and Chief Financial Officer, Frank C. Marchisello, Jr., evaluated the effectiveness of the registrant's disclosure controls and procedures on June 30, 2004 (Evaluation Date), and concluded that, as of the Evaluation Date, the registrant's disclosure controls and procedures were effective to ensure that information the registrant is required to disclose in its filings with the Securities and Exchange Commission under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms, and to ensure that information required to be disclosed by the registrant in the reports that it files under the Exchange Act is accumulated and communicated to the registrant's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. There were no significant changes in the registrant's internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date. 26 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 liability insurance. Item 4. Submission of Matters to a Vote of Security Holders On May 14, 2004, we held our Annual Meeting of Shareholders. The common shareholders voted on three matters. The first 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 as shown below: Nominees Votes For Votes Withheld ------------------ ---------- -------------- Stanley K. Tanger 11,471,471 136,970 Steven B. Tanger 11,441,152 167,289 Jack Africk 11,428,147 180,294 William G. Benton 11,458,363 150,078 Thomas E. Robinson 11,467,886 140,555 The second matter on which common shareholders voted was the ratification of the Amended and Restated Incentive Award Plan in order to add restricted shares and other share-based grants to the Plan, to reflect the merger of the Unit Option Plan of the Operating Partnership into the Plan and to amend the Plan in certain other respects. The results of the voting are as shown below: Votes For Votes Against Abstain No Vote --------- ------------- ------- --------- 7,982,132 708,883 86,954 2,830,472 The third matter on which common shareholders voted was the ratification of an increase, from 2,250,000 to 3,000,000 in the aggregate number of common shares which may be issued under the Incentive Award Plan. The results of the voting are as shown below: Votes For Votes Against Abstain No Vote --------- ------------- ------- --------- 4,911,609 3,787,053 79,307 2,830,472 27 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Amended and Restated Employment Agreement for Stanley K. Tanger as of January 1, 2004. 10.2 Amended and Restated Employment Agreement for Steven B. Tanger as of January 1, 2004. 10.3 Amended and Restated Employment Agreement for Frank C. Marchisello, Jr. as of January 1, 2004. 31.1 Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. 31.2 Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. 32.1 Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. 32.2 Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. (b) Reports on Form 8-K We filed the following reports on Form 8-K during the three months ended June 30, 2004: Current Report on Form 8-K dated April 27, 2004 to furnish the March 31, 2004 Supplemental Operating and Financial Data 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. Executive Vice President, Chief Financial Officer DATE: August 6, 2004 28 Exhibit Index Exhibit No. Description - -------------------------------------------------------------------------------- 10.1 Amended and Restated Employment Agreement of Stanley K. Tanger as of January 1, 2004. 10.2 Amended and Restated Employment Agreement of Steven B. Tanger as of January 1, 2004. 10.3 Amended and Restated Employment Agreement of Frank C. Marchisello, Jr. as of January 1, 2004. 31.1 Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. 31.2 Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. 32.1 Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. 32.2 Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. 29