Quarterly report pursuant to Section 13 or 15(d)

Acquisition of Rental Property

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Acquisition of Rental Property
 9 Months Ended
Sep. 30, 2013
Business Combinations [Abstract]  
Acquisition of Rental Property
Acquisition of Rental Property

In August 2013, Deer Park completed a refinancing of its existing debt and then immediately restructured the ownership whereby we acquired an additional ownership interest in the property from one of the partners which gave us a controlling interest. With the acquisition of this additional interest, we have consolidated the property for financial reporting purposes since the acquisition date, and remeasured our previously held interest that was accounted for as an equity method investment.

Prior to the acquisition, Deer Park successfully negotiated new financing of the debt obligations for the previous mortgage and mezzanine loans totaling approximately $238.5 million, with a $150.0 million mortgage loan. The new five year mortgage loan bears interest at a 150 basis point spread over LIBOR. The previous mortgage and mezzanine loans were in default, and as part of the refinancing, all default interest associated with the loans was waived. Utilizing funding from our existing unsecured lines of credit, we loaned approximately $89.5 million at a rate of LIBOR plus 3.25% and due on August 30, 2020 to the Deer Park joint venture representing the remaining amount necessary to repay the previous mortgage and mezzanine loans. As a result of the refinancing, Deer Park recorded a gain on early extinguishment of debt of approximately $13.8 million. Our share of this gain and the income from the settlement of a lawsuit with a third party was approximately $7.8 million and has been included in equity in earnings (losses) of unconsolidated joint ventures in the consolidated statement of operations for the three and nine months ended September 30, 2013.

Subsequent to the debt extinguishment, we acquired an additional one-third interest in the Deer Park property from one of the partners, bringing our total ownership to a two-thirds interest, for total consideration of approximately $27.9 million, including $13.9 million in cash and 450,576 in common limited partnership units of Tanger Properties Limited Partnership, which are exchangeable for an equivalent number of the Company's common shares. This transaction was accounted for as a business combination resulting in the assets acquired and liabilities assumed being recorded at fair value as a result of the step acquisition. Prior to the acquisition, the joint venture was considered a variable interest entity and was accounted for under the equity method of accounting since we did not have the ability to direct the significant activities that affect the economic performance of the venture as a one-third owner. Upon acquiring an additional one-third interest, we determined, based on the acquisition agreement and other transaction documents which amended our rights with respect to the property and our obligations with respect to the additional one-third interest, that we control the property assets and direct the property’s significant activities and therefore, consolidate the property’s assets and liabilities.
 
The following table illustrates the fair value of the total consideration transferred and the amounts of the identifiable assets acquired and liabilities assumed at the acquisition date (in thousands):

Cash transferred
$
13,939

Common limited partnership units issued
13,981

Fair value of total consideration transferred to acquire one-third interest
27,920

Fair value of our previously held one-third interest
27,920

Fair value of one-third interest owned by the remaining partner
27,920

Fair value of net assets acquired
$
83,760






The aggregate purchase price of the property has been allocated as follows:

 
 
Fair Value
 (in thousands)
 
Weighted-Average Amortization Period (in years)
Land
 
$
82,413

 
 
Buildings, improvements and fixtures
 
172,694

 
 
Deferred lease costs and other intangibles
 
 
 
 
Above market lease value
 
18,807

 
11.9
Below market lease value
 
(12,658
)
 
18.5
Lease in place value
 
28,846

 
7.6
Tenant relationships
 
27,594

 
19.0
Lease and legal costs
 
1,724

 
8.9
Total deferred lease costs and other intangibles, net
 
64,313

 
 
Other identifiable assets and liabilities assumed, net
 
2,265

 
 
Debt
 
(237,925
)
 
 
Total fair value of net assets acquired
 
$
83,760

 
 


There was no contingent consideration associated with this acquisition. We incurred approximately $772,000 in third-party acquisition costs which were expensed as incurred. As a part of the acquisition accounting, we recorded a gain of $26.0 million which represented the difference between the carrying book value and the fair value of our previously held equity method investment in Deer Park.

Although we do not anticipate any changes in the fair value measurements of the acquisitions, the measurements may be subject to change within 12 months of the business combination date if new facts or circumstances are brought to our attention that were previously unknown but existed as of the business combination date.

Following the acquisition, we and the remaining one-third owner of the Deer Park property restructured certain aspects of our ownership of the property, whereby we receive substantially all of the economics generated by the property and would have substantial control over the property's financial activities. We and the remaining one-third owner of the Deer Park property entered into a triple net lease agreement with a different wholly-owned subsidiary of ours which operates the property as lessee. Under the new structure, we will serve as property manager and control the management, leasing, marketing and other operations of the property. We and the remaining one-third property owner will receive, in proportion to our respective ownership interests, fixed annual lease payments of approximately $2.5 million, plus an amount necessary to pay the interest expense on debt related to the property. In addition, we and the remaining property owner have entered into an agreement whereby they may require us to acquire their ownership interest in the property on the second anniversary of the acquisition date for a price of $28.4 million, and we have the option to acquire their ownership interest on the fourth anniversary of the acquisition date at the same price. Due to the other partner's ability to require us to purchase their interest, we have recorded an obligation to redeem their interest at the redemption price as a deferred financing obligation in the other liabilities section of the balance sheet.

The results of operations from the property are included in the consolidated statements of operations beginning on the acquisition date. The aggregate revenues and net loss from the property from the acquisition date through September 30, 2013, were $3.2 million and $337,000, respectively. The following unaudited condensed pro forma financial information for the three and nine months ended September 30, 2013 is presented as if the acquisition had been consummated as of January 1, 2012, the beginning of the previous reporting period (in thousands, except per share data):
 
 
(Pro forma)
 
(Pro forma)
 
 
Three months ended
 
Nine months ended
 
 
September 30,
 
September 30,
 
 
2013

2012
 
2013

2012
Total Revenue
 
$
104,326

 
$
98,905

 
$
300,931

 
$
286,452

Income from continuing operations
 
29,417

 
15,041

 
61,700

 
60,333

Net income attributable to Tanger Factory Outlet Centers, Inc.
 
27,861

 
14,257

 
58,466

 
58,102

Basic earnings per common share
 
0.30

 
0.15

 
0.62

 
0.63

Diluted earnings per common share
 
0.29

 
0.15

 
0.61

 
0.62