Annual report pursuant to Section 13 and 15(d)

Equity-Based Compensation

v3.6.0.2
Equity-Based Compensation
12 Months Ended
Dec. 31, 2016
Tanger Factory Outlet Centers, Inc [Member]  
Equity-Based Compensation
Equity-Based Compensation

When a common share is issued by the Company, the Operating Partnership issues one corresponding unit of partnership interest to the Company's wholly owned subsidiaries. Therefore, when the Company grants an equity based award, the Operating Partnership treats each award as having been granted by the Operating Partnership. In the discussion below, the term "we" refers to the Company and the Operating Partnership together and the term "shares" is meant to also include corresponding units of the Operating Partnership.

We may issue up to 15.4 million common shares under the Plan. Through December 31, 2016, we had granted 7,543,760 options, net of options forfeited; 5,014,072 restricted common share awards, net of restricted common shares forfeited or withheld for employees' tax obligations; and notional units which may result in the issuance of a maximum of 759,176 common shares. Shares remaining available for future issuance totaled 2,082,992 common shares. The amount and terms of the awards granted under the Plan were determined by the Board of Directors (or the Compensation Committee of the Board of Directors).

We recorded equity-based compensation expense in general and administrative expenses in the consolidated statements of operations for the years ended December 31, 2016, 2015 and 2014, respectively, as follows (in thousands):
 
 
2016
 
2015
 
2014
Restricted common shares
 
$
10,976

 
$
11,220

 
$
9,978

Notional unit performance awards
 
3,967

 
3,030

 
4,313

Options
 
376

 
462

 
459

Total equity-based compensation
 
$
15,319

 
$
14,712

 
$
14,750



Equity-based compensation expense capitalized as a part of rental property and deferred lease costs were as follows (in thousands):
 
 
2016
 
2015
 
2014
Equity-based compensation expense capitalized
 
$
985

 
$
837

 
$
709



As of December 31, 2016, there was $25.1 million of total unrecognized compensation cost related to unvested common equity-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 2.0 years.

Restricted Common Share Awards

During 2016, 2015 and 2014, the Company granted 286,524, 357,844 and 373,960 restricted common shares, respectively, to the independent directors and the senior executive officers. The independent directors' restricted common shares vest ratably over a three year period and the senior executive officers' restricted common shares vest ratably over a four or five year period. For the restricted shares issued to our chief executive officer during 2016, 2015 and 2014, the restricted share agreements require him to hold the shares for a minimum of three years following each applicable vesting date thereof. Compensation expense related to the amortization of the deferred compensation is being recognized in accordance with the vesting schedule of the restricted shares. For all of the restricted common share awards described above, the grant date fair value of the award was determined based upon the closing market price of the Company's common shares on the day prior to the grant date and the associated compensation expense is being recognized in accordance with the vesting schedule of each grant.

The following table summarizes information related to unvested restricted common shares outstanding for the years ended December 31, 2016, 2015, and 2014:
Unvested Restricted Common Shares
 
Number of shares
 
Weighted average grant date fair value
Outstanding at December 31, 2013
 
1,057,966

 
$
26.91

Granted(1)
 
1,307,729

 
26.50

Vested
 
(1,266,245
)
 
24.67

Forfeited
 

 

Outstanding at December 31, 2014
 
1,099,450

 
$
29.01

Granted
 
357,844

 
36.69

Vested
 
(371,299
)
 
28.12

Forfeited
 

 

Outstanding at December 31, 2015
 
1,085,995

 
$
31.84

Granted
 
286,524

 
29.64

Vested
 
(388,851
)
 
31.30

Forfeited
 
(104,400
)
 
34.13

Outstanding at December 31, 2016
 
879,268

 
$
31.09


(1)
Includes 933,769 shares granted under the 2010 Multi Year Performance Plan.

The total value of restricted common shares vested during the years ended 2016, 2015 and 2014 was $12.7 million, $13.1 million and $46.6 million, respectively. During 2016, 2015 and 2014, we withheld shares with value equivalent to the employees' minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total number of shares withheld were 66,760, 31,863 and 412,239 for 2016, 2015 and 2014, respectively, and were based on the value of the restricted common shares on the vesting date as determined by our closing share price on the day prior to the vesting date. Total amounts paid for the employees' tax obligation to taxing authorities were $2.2 million, $1.1 million and $15.5 million for 2016, 2015 and 2014, respectively, which is reflected as a financing activity within the consolidated statements of cash flows.

Notional Unit Performance Awards

Outperformance Plan

Every year since 2013, the Compensation Committee of Tanger Factory Outlet Centers, Inc. approved the terms of the Tanger Factory Outlet Centers, Inc. Outperformance Plan (the “OPP"). The OPP is a long-term incentive long-term performance based incentive compensation plan. Recipients may earn units which may convert, subject to the achievement of the goals described below, into restricted common shares of the Company based on the Company’s absolute share price appreciation (or total shareholder return) and its share price appreciation relative to its peer group over a three-year measurement period. Any shares earned at the end of the three-year measurement period are subject to a time based vesting schedule, with 50% of the shares vesting immediately following the measurement period, and the remaining 50% vesting one year thereafter, contingent upon continued employment with the Company through the vesting dates (unless terminated prior thereto (a) by the Company without cause, (b) by participant for good reason or (c) due to death or disability.

The following table sets forth OPP performance targets and other relevant information about each plan:
 
 
2016 OPP
 
2015 OPP
 
2014 OPP(1)
 
2013 OPP (2)
Performance targets (3)
 
 
 
 
 
 
 
 
Absolute portion of award:
 
 
 
 
 
 
 
 
Percent of total award
 
50%
 
60%
 
70%
 
70%
Absolute share price appreciation range
 
18% - 35%
 
25% - 35%
 
25% - 35%
 
25% - 35%
Percentage of units to be earned
 
20%-100%
 
33%-100%
 
33%-100%
 
33%-100%
 
 
 
 
 
 
 
 
 
Relative portion of award:
 
 
 
 
 
 
 
 
Percent of total award
 
50%
 
40%
 
30%
 
30%
Percentile rank of peer group range(4)
 
40th - 70th
 
50th - 70th
 
50th - 70th
 
50th - 70th
Percentage of units to be earned
 
20%-100%
 
33%-100%
 
33%-100%
 
33%-100%
 
 
 
 
 
 
 
 
 
Maximum number of restricted common shares that may be earned
 
321,900

 
306,600

 
329,700

 
315,150

Grant date fair value per share
 
$
15.10

 
$
15.85

 
$
14.71

 
$
13.99

(1)
On December 31, 2016, the measurement period for the 2014 OPP expired. Based on the Company’s absolute share price appreciation (or total shareholder return) over the three year measurement period, we issued 184,455 restricted common shares in January 2017, with 94,663 vesting immediately and the remaining 89,792 vesting in January one year thereafter, contingent upon continued employment with the Company through the vesting date (unless terminated prior thereto (a) by the Company without cause, (b) by participant for good reason or (c) due to death or disability). Our relative total shareholder return for the 2014 OPP did not meet the minimum share price appreciation and no shares were earned under this component of the 2014 OPP.
(2)
On December 31, 2015, the measurement period for the 2013 OPP expired and neither of the Company’s absolute nor relative total shareholder returns were sufficient for employees to earn, and therefore become eligible to vest in, any restricted shares under the plan. Accordingly, all 2013 OPP performance awards were automatically forfeited.
(3)
The performance shares for the OPP will convert on a pro-rata basis by linear interpolation between share price appreciation thresholds, both for absolute share price appreciation and for relative share price appreciation amongst the Company's peer group. The share price targets will be reduced on a dollar-for-dollar basis with respect to any dividend payments made during the measurement period.
(4)
The peer group is based on companies included in the SNL Equity REIT index.

The fair values of the OPP awards granted during the years ended December 31, 2016, 2015, and 2014 were determined at the grant dates using a Monte Carlo simulation pricing model and the following assumptions:
 
 
2016
 
2015
 
2014
Risk free interest rate (1)
 
1.05
%
 
0.86
%
 
0.67
%
Expected dividend yield (2)
 
3.1
%
 
2.7
%
 
2.8
%
Expected volatility (3)
 
21
%
 
20
%
 
27
%
(1)
Represents the interest rate as of the grant date on US treasury bonds having the same life as the estimated life of the restricted unit grants.
(2)
The dividend yield is calculated utilizing the dividends paid for the previous five-year period.
(3)
Based on a mix of historical and implied volatility for our common shares and the common shares of our peer index companies over the measurement period.

The following table sets forth OPP activity for the years ended December 31, 2016, 2015, and 2014:
Unvested OPP Awards (1)
 
Number of units
 
Weighted average grant date fair value
Outstanding as of December 31, 2013
 
315,150

 
$
13.99

Awarded
 
329,700

 
14.71

Forfeited
 

 

Outstanding as of December 31, 2014
 
644,850

 
$
14.36

Awarded
 
306,600

 
15.85

Forfeited
 
(407,150
)
 
14.28

Outstanding as of December 31, 2015
 
544,300

 
$
15.26

Awarded
 
321,900

 
15.10

Forfeited
 
(107,024
)
 
14.77

Outstanding as of December 31, 2016
 
759,176

 
$
15.36

(1)
Excludes the 2010 Multi Year Performance Plan that had a four year measurement period.

2010 Multi Year Performance Plan

During the first quarter of 2010, the Company's Compensation Committee approved the general terms of the Tanger Factory Outlet Centers, Inc. 2010 Multi-Year Performance Plan, (the "2010 Multi Year Performance Plan"). Under the 2010 Multi-Year Performance Plan, we granted 392,000 notional units, net of notional units forfeited, to award recipients as a group, which would convert into restricted common shares on a one-for one basis, one-for two basis, or one-for-three basis depending upon the amount by which the Company's common shares appreciated above a minimum level over a four year performance period ending December 31, 2013, not to exceed a total value of approximately $32.2 million. Based on the Company's performance over the four year measurement period, we issued 933,769 restricted common shares in January 2014 which vested on December 31, 2014 contingent on continued employment through the vesting date. The fair value of the awards were calculated using a Monte Carlo simulation pricing model.

Option Awards

In February 2014, the Company granted 282,500 options to non-executive employees of the Company. The exercise price of the options granted during the first quarter of 2014 was $32.02 which equaled the closing market price of the Company's common shares on the day prior to the grant date. The options expire 10 years from the date of grant and 20% of the options become exercisable in each of the first five years commencing one year from the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: expected dividend yield 2.8%; expected life of 7 years; expected volatility of 32%; a risk-free rate of 2.46%; and forfeiture rates of 3.0% to 13.5% dependent upon the employee's position within the Company.

Options outstanding at December 31, 2016 had the following weighted average exercise prices and weighted average remaining contractual lives:
 
 
Options Outstanding
 
Options Exercisable
Exercise prices
 
Options
 
Weighted average exercise price
 
Weighted remaining contractual life in years
 
Options
 
Weighted average exercise price
$
26.06

 
63,200

 
$
26.06

 
4.15
 
63,200

 
$
26.06

32.02

 
179,000

 
32.02

 
7.00
 
52,400

 
32.02

 
 
242,200

 
$
30.46

 
6.26
 
115,600

 
$
28.76



A summary of option activity under the Plan for the years ended December 31, 2016, 2015, and 2014 (aggregate intrinsic value amount in thousands):
Options
 
Shares
 
Weighted-average exercise price
 
Weighted-average remaining contractual life in years
 
Aggregate intrinsic value
Outstanding as of December 31, 2013
 
166,300

 
24.13

 
 
 
 
Granted
 
282,500

 
32.02

 
 
 
 
Exercised
 
(47,000
)
 
19.22

 
 
 
 
Forfeited
 
(31,300
)
 
31.11

 
 
 
 
Outstanding as of December 31, 2014
 
370,500

 
$
30.20

 
8.12
 
$
2,759

Granted
 

 

 
 
 
 
Exercised
 
(28,400
)
 
27.76

 
 
 
 
Forfeited
 
(23,700
)
 
$
31.58

 
 
 
 
Outstanding as of December 31, 2015
 
318,400

 
$
30.32

 
7.19
 
$
924

Granted
 

 

 
 
 
 
Exercised
 
(59,700
)
 
29.31

 
 
 
 
Forfeited
 
(16,500
)
 
31.86

 
 
 
 
Outstanding as of December 31, 2016
 
242,200

 
$
30.46

 
6.26
 
$
1,287

 
 
 
 
 
 
 
 
 
Vested and Expected to Vest as of
 
 
 
 
 
 
 
 
December 31, 2016
 
231,064

 
$
30.39

 
6.22
 
$
1,245

 
 
 
 
 
 
 
 
 
Exercisable as of December 31, 2016
 
115,600

 
$
28.76

 
5.44
 
$
811



The total intrinsic value of options exercised during the years ended December 31, 2016, 2015 and 2014 was $469,000, $200,000 and $724,000, respectively.

401(k) Retirement Savings Plan

We have a 401(k) Retirement Savings Plan covering substantially all employees who meet certain age and employment criteria. An employee may invest pretax earnings in the 401(k) plan up to the maximum legal limits (as defined by Federal regulations). This plan allows participants to defer a portion of their compensation and to receive matching contributions for a portion of the deferred amounts. During the years ended December 31, 2016, 2015 and 2014, we contributed approximately $828,000, $742,000 and $703,000, respectively, to the 401(k) Retirement Savings Plan.