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, 2002
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
8,029,905 shares of Common Stock,
$.01 par value, outstanding as of August 1, 2002
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, 2002 and 2001 3
Consolidated Balance Sheets
As of June 30, 2002 and December 31, 2001 4
Consolidated Statements of Cash Flows
For the six months ended June 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. Other Information
Item 1. Legal proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
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,
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
REVENUES
Base rentals $ 18,540 $ 18,164 $ 36,729 $ 36,042
Percentage rentals 581 499 1,178 850
Expense reimbursements 7,333 7,587 14,635 15,045
Other income 508 557 1,081 1,077
- -------------------------------------------------------------------------------------------------------------------------------
Total revenues 26,962 26,807 53,623 53,014
- -------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Property operating 8,677 8,844 17,334 17,427
General and administrative 2,092 2,016 4,367 4,085
Interest 7,118 7,658 14,247 15,291
Depreciation and amortization 7,116 6,836 14,199 13,958
- -------------------------------------------------------------------------------------------------------------------------------
Total expenses 25,003 25,354 50,147 50,761
- -------------------------------------------------------------------------------------------------------------------------------
Income before minority interest, discontinued operations,
and extraordinary item 1,959 1,453 3,476 2,253
Minority interest (416) (280) (712) (379)
- -------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 1,543 1,173 2,764 1,874
Discontinued operations (including gain on sale of $460 in 2002),
net of minority interest 551 225 775 449
- -------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 2,094 1,398 3,539 2,323
Extraordinary item - Loss on early extinguishment of debt,
net of minority interest of $50 --- --- --- (130)
- -------------------------------------------------------------------------------------------------------------------------------
Net income 2,094 1,398 3,539 2,193
Less applicable preferred share dividends (442) (443) (886) (885)
- -------------------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 1,652 $ 955 $ 2,653 $ 1,308
===============================================================================================================================
Basic earnings per common share:
Income from continuing operations $ .14 $ .09 $ .23 $ .12
Net income $ .21 $ .12 $ .33 $ .16
===============================================================================================================================
Diluted earnings per common share:
Income from continuing operations $ .13 $ .09 $ .23 $ .12
Net income $ .20 $ .12 $ .33 $ .16
===============================================================================================================================
Dividends paid per common share $ .61 $ .61 $ 1.22 $ 1.21
===============================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
3
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, December 31,
2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
Rental Property
Land $ 50,176 $60,158
Buildings, improvements and fixtures 535,438 539,108
- ----------------------------------------------------------------------------------------------------------------------------
585,614 599,266
Accumulated depreciation (161,612) (148,950)
- ----------------------------------------------------------------------------------------------------------------------------
Rental property, net 424,002 450,316
Cash and cash equivalents 204 515
Deferred charges, net 10,465 11,413
Other assets 30,783 14,028
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $ 465,454 $ 476,272
============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Debt
Senior, unsecured notes $ 155,609 $160,509
Mortgages payable 175,603 176,736
Lines of credit 26,625 20,950
- ----------------------------------------------------------------------------------------------------------------------------
357,837 358,195
Construction trade payables 4,141 3,722
Accounts payable and accrued expenses 12,943 16,478
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 374,921 378,395
- ----------------------------------------------------------------------------------------------------------------------------
Commitments
Minority interest 19,326 21,506
- ----------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Preferred shares, $.01 par value, 1,000,000 shares authorized,
80,190 and 80,600 shares issued and outstanding
at June 30, 2002 and December 31, 2001 1 1
Common shares, $.01 par value, 50,000,000 shares authorized,
8,029,905 and 7,929,711 shares issued and outstanding
at June 30, 2002 and December 31, 2001 80 79
Paid in capital 138,177 136,529
Distributions in excess of net income (66,619) (59,534)
Accumulated other comprehensive loss (432) (704)
- ----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 71,207 76,371
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 465,454 $ 476,272
============================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
4
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
June 30,
2002 2001
- ---------------------------------------------------------------------------------------------------------------------
(unaudited)
OPERATING ACTIVITIES
Net income $ 3,539 $ 2,193
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization (including discontinued operations) 14,371 14,137
Amortization of deferred financing costs 628 973
Minority interest 1,007 500
Loss on early extinguishment of debt --- 180
Gain on sale of real estate (included in discontinued operations) (460) ---
Gain on sale of outparcel of land (31) ---
Straight-line base rent adjustment 101 172
Increase (decrease) due to changes in:
Other assets (446) (497)
Accounts payable and accrued expenses (3,158) (957)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activites 15,551 16,701
- ---------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to rental properties (2,944) (12,256)
Additions to investments in joint ventures (80) ---
Additions to deferred lease costs (753) (1,064)
Net proceeds from sale of real estate 17,291 723
Increase in escrow from rental property sale (16,826) ---
Collections from officers 86 645
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,226) (11,952)
- ---------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Cash dividends paid (10,624) (10,526)
Distributions to minority interest (3,708) (3,693)
Proceeds from issuance of debt 50,651 221,817
Repayments of debt (51,009) (208,424)
Additions to deferred financing costs (11) (4,533)
Proceeds from exercise of unit option 2,065 192
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (12,636) (5,167)
- ---------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (311) (418)
Cash and cash equivalents, beginning of period 515 634
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 204 $ 216
=====================================================================================================================
Supplemental schedule of non-cash investing activities:
The Company purchases capital equipment and incurs costs relating to
construction of new facilities, including tenant finishing allowances.
Expenditures included in construction trade payables as of June 30, 2002 and
2001 amounted to $4,141 and $6,251, respectively.
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, 2002
(Unaudited)
1. Business
Tanger Factory Outlet Centers, Inc., a fully-integrated, self-administered,
self-managed real estate investment trust ("REIT"), develops, owns and operates
factory outlet 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 the
term "Operating Partnership" refers to Tanger Properties Limited Partnership.
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,
2001. 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 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.
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 and our equity in the venture's income (loss) is included in
other income in our Consolidated Statements of Operations.
Certain amounts in the 2001 Consolidated Financial Statements have been
reclassified to conform to the 2002 presentation. See Footnote 5.
3. Development of Rental Properties
During the second quarter of 2002, through our unconsolidated 50% ownership
joint venture, TWMB Associates, LLC ("TWMB") with Rosen-Warren Myrtle Beach LLC
("Rosen-Warren"), we opened the first phase of our new 400,000 square foot
Tanger Outlet Center in Myrtle Beach, South Carolina on June 28, 2002. The first
phase consists of approximately 260,000 square feet and features 60 brand name
and designer outlet stores.
Interest costs capitalized during the three months ended June 30, 2002 and 2001
amounted to $80,000 and $52,000, respectively, and for the six months ended June
30, 2002 and 2001 amounted to $159,000 and $423,000, respectively. The interest
capitalized in 2002 relates to the on going construction of TWMB's Myrtle Beach,
SC center.
6
4. Investments in Real Estate Joint Ventures
Effective August 7, 2000, we announced the formation of a joint venture with C.
Randy Warren Jr., former Senior Vice President of Leasing of the Company. The
new entity, Tanger-Warren Development, LLC ("Tanger-Warren"), was formed to
identify, acquire and develop sites exclusively for us. We agreed to be
co-managers of Tanger-Warren, each with 50% ownership interest in the joint
venture and any entities formed with respect to a specific project. As of June
30, 2002, our investment in Tanger-Warren amounted to approximately $6,500 and
the impact of this joint venture on our results of operations has been
insignificant.
In September 2001, we established a joint venture, TWMB, with respect to our
Myrtle Beach, South Carolina project with Rosen-Warren. Rosen-Warren and we each
own 50% of TWMB. Also, in September 2001 TWMB began construction on the first
phase of a new 400,000 square foot Tanger Outlet Center in Myrtle Beach, SC. The
first phase, which opened on June 28, 2002, totals approximately 260,000 square
feet and features 60 brand name and designer outlet tenants. In conjunction with
the beginning of construction, TWMB closed on a construction loan in the amount
of $36.2 million with Bank of America, NA (Agent) and SouthTrust Bank, the
proceeds of which will be used to develop the Tanger Outlet Center in Myrtle
Beach, SC. As of June 30, 2002, the construction loan had an $18.1 million
balance. All debt incurred by this unconsolidated joint venture is
collateralized by its property as well as joint and several guarantees by us and
by Rosen-Warren.
We receive fees from TWMB for our respective development, leasing, management
and other services. Since this project was under construction during the
majority of the quarter, the impact of this joint venture to our consolidated
results of operations was insignificant.
At June 30, 2002, our investment in unconsolidated real estate joint ventures
was $4.2 million. 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
and equity in the venture's income (loss) is included in other income. Our
investment in real estate joint ventures is reduced by 50% of the profits earned
for services we provided to the joint ventures.
Summary unaudited financial information of joint ventures accounted for using
the equity method as of June 30, 2002 and December 31, 2001 is as follows (in
thousands):
2002 2001
- ----------------------------------------------- -------------- --------------
Assets:
Investment properties at cost, net $28,968 $7,348
Cash and cash equivalents 226 136
Other assets 2,975 2,199
- ----------------------------------------------- -------------- --------------
Total assets $32,169 $9,683
=============================================== ============== ==============
Liabilities and Owners' Equity
Debt $18,058 $ 10
Accounts payable and other liabilities 5,457 1,030
- ----------------------------------------------- -------------- --------------
Total liabilities 23,515 1,040
Owners' equity 8,654 8,643
- ----------------------------------------------- -------------- --------------
Total liabilities and owners' equity $32,169 $9,683
=============================================== ============== ==============
7
5. Disposition of Rental Properties
On June 27, 2002 we completed the sale of our non-core, single tenant property
located in Ft. Lauderdale, Florida. Net proceeds from the sale were
approximately $16.8 million. We recorded a gain on sale of real estate of
approximately $460,000.
In accordance with SFAS 144 "Accounting for the Impairment or Disposal of Long
Lived Assets," effective for financial statements issued for fiscal years
beginning after December 15, 2001, results of operations and gain/(loss) on
sales of real estate for properties sold subsequent to December 31, 2001 are
reflected in the Consolidated Statements of Operations as discontinued
operations for all periods presented. Below is a summary of the result of
operations of this property through its respective disposition date (in
thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
- --------------------------------------------- ----------- ------------ ------------ -------------
Base rentals $ 382 $ 400 $ 782 $ 800
Expense reimbursements 97 114 244 227
- --------------------------------------------- ----------- ------------ ------------ -------------
Total revenues 479 514 1,026 1,027
Property operating expenses 97 114 244 228
Depreciation and amortization 82 90 172 179
- --------------------------------------------- ----------- ------------ ------------ -------------
Total expenses 179 204 416 407
- --------------------------------------------- ----------- ------------ ------------ -------------
Income before gain on sale of real estate 300 310 610 620
Gain on sale of real estate 460 --- 460 ---
- --------------------------------------------- ----------- ------------ ------------ -------------
Income before minority interest $ 760 $ 310 $1,070 $ 620
- --------------------------------------------- ----------- ------------ ------------ -------------
6. Other Comprehensive Income - Derivative Financial Instruments
Effective January 1, 2001, we adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by FAS 137 and FAS 138 (collectively, "FAS 133"). In
accordance with the provisions of FAS 133, our interest rate swap agreement has
been designated as a cash flow hedge and is carried on the balance sheet at fair
value. At June 30, 2002, the fair value of the hedge is recorded as a liability
of $596,000. For the three and six months ended June 30, 2002, the change in the
fair value of the derivative instrument was recorded as a $63,000 and $272,000
gain, net of minority interest of $23,000 and $105,000, respectively, to
accumulated other comprehensive income.
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
- ----------------------------------------------------- -------------- ------------ ------------ -------------
Net income $ 2,094 $1,398 $3,539 $2,193
Other comprehensive income (loss):
Cumulative effect adjustment of FAS 133
adoption, net of minority interest
of $83 --- --- --- (217)
Reclassification to earnings on
termination of cash flow hedge,
net of minority interest of $41 --- --- --- 106
Change in fair value of cash flow hedge,
net of minority interest of $23 and $4
and $105 and $125, respectively 63 (10) 272 (324)
- ----------------------------------------------------- -------------- ------------ ------------ -------------
Other comprehensive income (loss) 63 (10) 272 (435)
- ----------------------------------------------------- -------------- ------------ ------------ -------------
Total comprehensive income $ 2,157 $ 1,388 $3,811 $ 1,758
- ----------------------------------------------------- -------------- ------------ ------------ -------------
8
7. 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,
2002 2001 2002 2001
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Numerator:
Income from continuing operations $1,543 $1,173 $2,764 $1,874
Less applicable preferred share dividends (442) (443) (886) (885)
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Income from continuing operations available to
common shareholders - basic and diluted 1,101 730 1,878 989
Discontinued operations 551 225 775 449
Extraordinary item - early extinguishment of debt --- --- --- (130)
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Net income available to common shareholders -
basic and diluted $1,652 $ 955 $2,653 $1,308
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Denominator:
Basic weighted average common shares 8,015 7,923 7,982 7,921
Effect of outstanding share and unit options 214 25 153 25
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Diluted weighted average common shares 8,229 7,948 8,135 7,946
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Basic earnings per common share:
Income from continuing operations $ .14 $.09 $.23 $.12
Discontinued operations .07 .03 .10 .06
Extraordinary item - early extinguishment of debt --- --- --- (.02)
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Net income $ .21 $.12 $.33 $.16
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Diluted earnings per common share:
Income from continuing operations $ .13 $.09 $.23 $.12
Discontinued operations .07 .03 .10 .06
Extraordinary item - early extinguishment of debt --- --- --- (.02)
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Net income $ .20 $.12 $.33 $.16
- ------------------------------------------------------- ------------ ----------- ------------ -------------
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 235,000 and
1,245,000 for the three months ended June 30, 2002 and 2001, respectively, and
345,000 and 1,245,000 for the six months ended June 30, 2002 and 2001,
respectively. The assumed conversion of preferred shares to common shares as of
the beginning of the year would have been anti-dilutive. The assumed conversion
of the partnership units held by the minority interest limited partner as of the
beginning of the year, which would result in the elimination of earnings
allocated to the minority interest, would have no impact on earnings per share
since the allocation of earnings to a partnership unit is equivalent to earnings
allocated to a common share.
9
8. New Accounting Pronouncements
In 2001, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("FAS 144"), which replaces FAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("FAS 121"). FAS 144 retains the requirements of FAS 121 to
recognized an impairment loss only if the carrying amount of a long-lived asset
is not recoverable from its undiscounted cash flows and to measure an impairment
loss as the difference between the carrying amount and fair value of the asset.
The provisions of FAS 144 are effective for financial statements issued for
fiscal years beginning after December 15, 2001. We implemented the provisions of
FAS 144 on January 1, 2002. FAS 144 did not have an effect on our results of
operations or our financial position.
Under both FAS No. 121 and 144, real estate assets designated as held for sale
are stated at their fair value less costs to sell. We classify real estate as
held for sale when our Board of Directors approves the sale of the assets and we
have commenced an active program to sell the assets. Subsequent to this
classification, no further depreciation is recorded on the assets. Under FAS No.
121, the operating results of real estate assets held for sale are included in
continuing operations. Upon implementation of FAS No. 144 in 2002, the operating
results of newly designated real estate assets held for sale will be included in
discontinued operations in our results of operations. We currently do not have
any assets that are held for sale.
In April 2002, the FASB issued FAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
In rescinding FAS No. 4, "Reporting Gains and Losses from Extinguishment of
Debt", and FAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements", FAS 145 eliminates the requirement that gains and losses from the
extinguishment of debt be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect. FAS 145 is effective
for us for transactions occurring after January 1, 2003. Management is currently
evaluating the effects of this statement.
In June 2002 the FASB issued FAS No. 146, Accounting for Exit or Disposal
Activities. FAS 146 addresses significant issues regarding the recognition,
measurement, and reporting of costs that are associated with exit and disposal
activities, including restructuring activities that are currently accounted for
pursuant to the guidance that the Emerging Issues Task Force (EITF) has set
forth in EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). FAS 146 will be effective for exit or
disposal activities that are initiated after December 31, 2002. Management is
currently evaluating the effects of this statement.
During 2000, the American Institute of Certified Public Accountants' Accounting
Standards Executive Committee issued an exposure draft Statement of Position
("SOP") regarding the capitalization of costs associated with property, plant
and equipment. Under the proposed SOP, all property plant and equipment related
costs would be expensed unless the costs are directly identifiable with specific
projects and the proposal would limit the amount of overhead costs companies
capitalize to certain payroll or payroll related costs. If this proposal is
adopted, the amount of costs we capitalize will be less than would have been
capitalized before the adoption of this proposal. The effective date of the
final SOP is expected in 2003.
10
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.
The discussion of our results of operations reported in the unaudited
consolidated statements of operations compares the three and six months ended
June 30, 2002 with the three and six months ended June 30, 2001. 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:
- - general economic and local real estate conditions could change (for
example, our tenant's business may change if the economy changes, which
might effect (1) the amount of rent they pay us or their ability to pay
rent to us, (2) their demand for new space, or (3) our ability to renew or
re-lease a significant amount of available space on favorable terms);
- - the laws and regulations that apply to us could change (for instance, a
change in the tax laws that apply to REITs could result in unfavorable tax
treatment for us);
- - availability and cost of capital (for instance, financing opportunities may
not be available to us, or may not be available to us on favorable terms);
- - the level and volatility of interest rates may fluctuate in an unfavorable
manner;
- - our operating costs may increase or our costs to construct or acquire new
properties or expand our existing properties may increase or exceed our
original expectations.
General Overview
At June 30, 2002, we owned 28 centers in 20 states totaling 5.17 million square
feet compared to 29 centers in 20 states totaling 5.33 million square feet at
June 30, 2002. The decrease is due to the sale of our 165,000 square foot
property in Ft. Lauderdale, Florida on June 27, 2002.
11
Also at June 30, 2002, we operated one center in Myrtle Beach, South Carolina
which we built through a 50% ownership joint venture, TWMB Associates, LLC
("TWMB"), with Rosen-Warren Myrtle Beach LLC ("Rosen-Warren") The first phase of
the center, opened on June 28, 2002, consists of approximately 260,000 square
feet and includes 60 brand name and designer outlet tenants. A second phase is
planned and will contain approximately 140,000 square feet.
A summary of the operating results for the three and six months ended June 30,
2002 and 2001 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,
2002 2001 2002 2001
- ---------------------------------------------------------------------- ------------ ------------ ------------ -------------
GLA open at end of period (100% owned centers) (000's) 5,167 5,141 5,167 5,141
GLA open at end of period (50% ownership joint venture) (000's) (1) 260 --- 260 ---
- ---------------------------------------------------------------------- ------------ ------------ ------------ -------------
GLA open at end of period (000's) (1) 5,427 5,141 5,427 5,141
Weighted average GLA (000's) (2) 5,167 5,129 5,167 5,109
Outlet centers in operation (1) 29 28 29 28
Centers opened (1) 1 --- 1 ---
Centers sold 1 --- 1 ---
Centers expanded --- 1 --- 1
States operated in at end of period (1) 21 20 21 20
Occupancy percentage at end of period (1) 96% 94% 96% 94%
Per square foot
Revenues
Base rentals $ 3.59 $ 3.54 $ 7.11 $ 7.05
Percentage rentals .11 .10 .23 .17
Expense reimbursements 1.42 1.48 2.83 2.94
Other income .10 .11 .21 .21
- ---------------------------------------------------------------------- ------------ ------------ ------------ -------------
Total revenues 5.22 5.23 10.38 10.37
- ---------------------------------------------------------------------- ------------ ------------ ------------ -------------
Expenses
Property operating 1.68 1.72 3.35 3.41
General and administrative .40 .40 .85 .80
Interest 1.38 1.49 2.76 2.99
Depreciation and amortization 1.38 1.33 2.75 2.73
- ---------------------------------------------------------------------- ------------ ------------ ------------ -------------
Total expenses 4.84 4.94 9.71 9.93
- ---------------------------------------------------------------------- ------------ ------------ ------------ -------------
Income before gain on sale of real estate, minority
interest, discontinued operations and extraordinary item $ .38 $ .29 $ .67 $ .44
====================================================================== ============ ============ ============ =============
(1) Includes Myrtle Beach, SC property which we operate and have a 50% ownership
in through a joint venture.
(2) GLA of 100% owned properties weighted by months of operations. GLA is not
adjusted for fluctuations in occupancy that may occur subsequent to the original
opening date.
(3) In accordance with SFAS No. 144 "Accounting for the Impairment or Disposal
of Long Lived Assets," the results of operations for the Ft. Lauderdale property
disposed of during 2002 have been reported as discontinued operations for both
the current and prior periods presented and removed from GLA open at both period
ends.
12
The table set forth below summarizes certain information with respect to our
existing centers as of June 30, 2002.
GLA %
Date Opened Location (sq. ft.) Occupied
- ---- ------------- ------------------------------------------ ----------- ------------
Jun. 1986 Kittery I, ME 59,694 100
Mar. 1987 Clover, North Conway, NH 11,000 100
Nov. 1987 Martinsburg, WV 49,252 57
Apr. 1988 LL Bean, North Conway, NH 50,745 100
Jul. 1988 Pigeon Forge, TN 94,558 100
Aug. 1988 Boaz, AL 80,730 93
Jun. 1988 Kittery II, ME 24,703 94
Jul. 1989 Commerce, GA 185,750 90
Oct. 1989 Bourne, MA 23,417 100
Feb. 1991 West Branch, MI 112,420 98
May 1991 Williamsburg, IA 277,230 98
Feb. 1992 Casa Grande, AZ 184,768 89
Dec. 1992 North Branch, MN 134,480 100
Feb. 1993 Gonzales, LA 245,199 96
May 1993 San Marcos, TX 441,432 98
Aug. 1994 Riverhead, NY 729,238 99
Aug. 1994 Terrell, TX 177,490 95
Sep. 1994 Seymour, IN 141,051 76
Oct. 1994 (1) Lancaster, PA 255,059 96
Nov. 1994 Branson, MO 277,494 98
Nov. 1994 Locust Grove, GA 248,854 98
Jan. 1995 Barstow, CA 105,950 57
Dec. 1995 Commerce II, GA 342,556 97
Feb. 1997 (1) Sevierville, TN 353,977 100
Sept. 1997 (1) Blowing Rock, NC 105,448 100
Sep. 1997 (1) Nags Head, NC 82,254 100
Mar. 1998 (1) Dalton, GA 173,430 96
Jul. 1998 (1) Fort Meyers, FL 198,789 93
Jun. 2002 (2) Myrtle Beach, SC 259,929 100
- ------------------ ----------------------------------------- ------------ ------------
Total 5,426,897 96
================== ========================================= ============ ============
(1) Represents date acquired by us.
(2) Represents center operated by us through a 50% ownership joint venture.
RESULTS OF OPERATIONS
Comparison of the three months ended June 30, 2002 to the three months ended
June 30, 2001
Base rentals increased $376,000, or 2%, in the 2002 period when compared to the
same period in 2001. The increase is primarily due to the effect of the
completed expansion at our San Marcos, TX center during 2001. Base rent per
weighted average GLA increased by $.05 per square foot from $3.54 per square
foot in the 2001 period compared to $3.59 per square foot in the 2002 period.
The slight increase is the result of the addition of the San Marcos expansion to
the portfolio which had a higher average base rent per square foot compared to
the portfolio average. While the overall portfolio occupancy at June 30, 2002
increased 2% from 94% to 96% compared with the prior year quarter, three centers
experienced negative occupancy trends which were offset by positive occupancy
gains in other centers.
13
Percentage rentals, which represent revenues based on a percentage of tenants'
sales volume above predetermined levels (the "breakpoint"), increased $82,000,
and on a weighted average GLA basis, increased $.01 per square foot in 2002
compared to 2001. For the three months ended June 30, 2002, same-space sales
increased 1% compared to the same period in 2001. Same-space sales are defined
as the weighted average sales per square foot reported in space open for the
full duration of each comparison period. Reported same-space sales per square
foot for the rolling twelve months ended June 30, 2002 were $297 per square
foot, representing a 6% increase compared to the same period in 2001. The
increases are attributable to our continued ability to attract high volume
tenants to our centers which improves the average sales per square foot
throughout our portfolio.
Expense reimbursements, which represent the contractual recovery from tenants of
certain common area maintenance, insurance, property tax, promotional,
advertising and management expenses generally fluctuates consistently with the
reimbursable property operating expenses to which it relates. Expense
reimbursements, expressed as a percentage of property operating expenses,
decreased to 85% in 2002 from 86% in 2001 primarily as a result of higher real
estate taxes due to revaluations, increases in property insurance premiums and
increases in other non-reimbursable expenses.
Other income decreased $49,000 in 2002 compared to 2001 primarily due to
increases in vending income and the recognition of development and lease fee
revenue from our TWMB joint venture offset by decreases in interest income from
2001 which related to cash proceeds from the February 2001 bond offering.
Property operating expenses decreased by $167,000, or 2%, in the 2002 period as
compared to the 2001 period and, on a weighted average GLA basis, decreased $.04
per square foot from $1.72 to $1.68. The decrease is the result of a
company-wide effort to improve operating efficiencies and reduce costs in common
area maintenance and marketing partially offset by increases in real estate
taxes, property insurance and other non-reimbursable expenses.
General and administrative expenses increased $76,000, or 4%, in the 2002 period
as compared to the 2001 period. Also, as a percentage of total revenues, general
and administrative expenses were 8% in both the 2002 and 2001 periods and, on a
weighted average GLA basis remained constant at $.40 per square foot.
Interest expense decreased $540,000 during 2002 as compared to 2001 due
primarily to lower average interest rates during 2002. Beginning in the fourth
quarter of 2001 and continuing through the first quarter of 2002, we purchased
at par or below, approximately $19.4 million of our outstanding 7.875% senior,
unsecured public notes that mature in October 2004. The purchases were funded by
amounts available under our unsecured lines of credit. The replacement of the
2004 bonds with funding through lines of credit provided us with a significant
interest expense reduction as the lines of credit have a lower interest rate.
Depreciation and amortization per weighted average GLA increased from $1.33 per
square foot in the 2001 period to $1.38 per square foot in the 2002 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).
In accordance with SFAS 144 "Accounting for the Impairment or Disposal of Long
Lived Assets," effective for financial statements issued for fiscal years
beginning after December 15, 2001, results of operations and gain/ (loss) on
sales of real estate for properties sold subsequent to December 31, 2001 are
reflected in the Consolidated Statements of Operations as discontinued
operations" for both periods presented. The increase in discontinued operations
is due to the gain on the sale of the Ft. Lauderdale property sold in 2002.
14
Comparison of the six months ended June 30, 2002 to the six months ended June
30, 2001
Base rentals increased $687,000, or 2%, in the 2002 period when compared to the
same period in 2001. The increase is primarily due to the completed expansion at
our San Marcos, TX center during the first six months of 2001. The full effect
of this expansion was recognized in 2002. Base rent per weighted average GLA
increased by $.06 per square foot from $7.05 per square foot in the 2001 period
compared to $7.11 per square foot in the 2002 period. The increase is the result
of the addition of the San Marcos expansion to the portfolio which had a higher
average base rent per square foot compared to the portfolio average. While the
overall portfolio occupancy at June 30, 2002 increased 2% from 94% to 96%
compared with the prior year quarter, three centers experienced negative
occupancy trends which were offset by positive occupancy gains in other centers.
Percentage rentals, which represent revenues based on a percentage of tenants'
sales volume above predetermined levels (the "breakpoint"), increased $328,000
or 39%, and on a weighted average GLA basis, increased $.06 per square foot in
2002 compared to 2001. Reported same-space sales per square foot for the rolling
twelve months ended June 30, 2002 were $297 per square foot, representing a 6%
increase compared to the same period in 2001. The increase is attributable to
our continued ability to attract high volume tenants to our centers which
improves the average sales per square foot throughout our portfolio. Reported
same-store sales for the six months ended June 30, 2002, defined as the weighted
average sales per square foot reported by tenants for stores open since January
1, 2001, increased 2% compared to the same period in the prior year.
Expense reimbursements, which represent the contractual recovery from tenants of
certain common area maintenance, insurance, property tax, promotional,
advertising and management expenses generally fluctuates consistently with the
reimbursable property operating expenses to which it relates. Expense
reimbursements, expressed as a percentage of property operating expenses,
decreased to 84% in 2002 from 86% in 2001 primarily as a result of higher real
estate taxes due to revaluations, increases in property insurance premiums and
increases in other non-reimbursable expenses.
Property operating expenses decreased by $93,000, or 1%, in the 2002 period as
compared to the 2001 period and, on a weighted average GLA basis, decreased $.06
per square foot from $3.41 to $3.35. The decrease is the result of a
company-wide effort to improve operating efficiencies and reduce costs in common
area maintenance and marketing partially offset by increases in real estate
taxes, property insurance and other non-reimbursable expenses.
General and administrative expenses increased $282,000, or 7%, in the 2002
period as compared to the 2001 period. Also, as a percentage of total revenues,
general and administrative expenses were 8% in both the 2002 and 2001 periods
and, on a weighted average GLA basis increased from $.80 in 2001 to $.85 in
2002.
Interest expense decreased $1.0 million during 2002 as compared to 2001 due
primarily to lower average interest rates during 2002. Beginning in the fourth
quarter of 2001 and continuing through the first quarter of 2002, we purchased
at par or below, approximately $19.4 million of our outstanding 7.875% senior,
unsecured public notes that mature in October 2004. The purchases were funded by
amounts available under our unsecured lines of credit. The replacement of the
2004 bonds with funding through lines of credit provided us with a significant
interest expense reduction as the lines of credit have a lower interest rate.
Also, the 2001 results included $295,200 paid to terminate certain interest rate
swap agreements during that period. Depreciation and amortization per weighted
average GLA increased from $2.73 per square foot in the 2001 period to $2.75 per
square foot in the 2002 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).
15
In accordance with SFAS 144 "Accounting for the Impairment or Disposal of Long
Lived Assets," effective for financial statements issued for fiscal years
beginning after December 15, 2001, results of operations and gain/ (loss) on
sales of real estate for properties sold subsequent to December 31, 2001 are
reflected in the Consolidated Statements of Operations as discontinued
operations for both periods presented. The increase in discontinued operations
is due to the gain on the sale of the Ft. Lauderdale property sold in 2002.
The 2001 extraordinary loss relates to debt that was extinguished with a portion
of the February 2001 bond offering proceeds prior to its scheduled maturity.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $15.6 million and $16.7 million
for the six months ended June 30, 2002 and 2001, respectively. The decrease in
cash provided by operating activities is due primarily to a decrease in accounts
payable in 2002 when compared to 2001 offset by an increase in operating income.
Net cash used in investing activities was $3.2 and $12.0 million during the
first six months of 2002 and 2001, respectively. Cash used was higher in 2001
primarily due to the increase in cash paid for expansion activities at our San
Marcos, TX center. Net cash used in financing activities amounted to $12.6
million and $5.2 million during the first six months of 2002 and 2001,
respectively. Cash used was lower in 2001 due to the debt proceeds raised during
the first six months of 2001.
Joint Ventures
Effective August 7, 2000, we announced the formation of a joint venture with C.
Randy Warren Jr., former Senior Vice President of Leasing of the Company. The
new entity, Tanger-Warren Development, LLC ("Tanger-Warren"), was formed to
identify, acquire and develop sites exclusively for us. We agreed to be
co-managers of Tanger-Warren, each with 50% ownership interest in the joint
venture and any entities formed with respect to a specific project. As of June
30, 2002, our investment in Tanger-Warren amounted to approximately $6,500 and
the impact of this joint venture on our results of operations has been
insignificant.
In September 2001, we established a joint venture, TWMB, with respect to our
Myrtle Beach, South Carolina project with Rosen-Warren. We and Rosen-Warren,
each as 50% owners, contributed $4.3 million in cash for a total initial equity
in TWMB of $8.6 million. In September 2001, TWMB began construction on the first
phase of a new 400,000 square foot Tanger Outlet Center in Myrtle Beach, SC. The
first phase is projected to cost $34.6 million and consists of approximately
260,000 square feet which opened on June 28, 2002 with 60 brand name outlet
tenants. We currently anticipate construction of a 140,000 square foot second,
and final phase to cost approximately $13.7 million. Prior to beginning
construction on the second phase, Rosen-Warren and we each will be required to
contribute an additional $1.75 million in cash for a total equity contribution
in phase two of TWMB of $3.5 million. Beginning in July 2002, we will receive
on-going asset management fees for our services as property manager of the
Myrtle Beach center.
In conjunction with the beginning of construction, TWMB closed on a construction
loan in the amount of $36.2 million with Bank of America, NA (Agent) and
SouthTrust Bank, the proceeds of which will be used to develop the Tanger Outlet
Center in Myrtle Beach, SC. As of June 30, 2002, the construction loan had an
$18.1 million balance. All debt incurred by this unconsolidated joint venture is
secured by its property as well as joint and several guarantees by Rosen-Warren
and us. We do not expect events to occur that would trigger the provisions of
the guarantee because our properties have historically produced sufficient cash
flow to meet the related debt service requirements.
16
Either owner in TWMB has the right to initiate the sale or purchase of the other
party's interest no sooner than October 25, 2002. If such action is initiated,
one owner would determine the fair market value purchase price of the joint
venture and the other would determine whether they would take the role of seller
or purchaser. The owner who is to designate the fair market value purchase price
would be determined by the toss of a coin. If either Rosen-Warren or we enacted
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
Rosen-Warren's interest. However, we do not expect this event to occur in the
near future based on the positive expectations of developing and operating an
outlet center in the Myrtle Beach area.
Other Developments
On July 1, 2002, our option to purchase the retail portion of a site at the
Bourne Bridge Rotary in Cape Cod, Massachusetts was terminated due to the
seller's inability to obtain the proper approvals for the Bourne project from
the local authorities by such date. As a result of the termination, the net
carrying amount of assets remaining on this project includes $100,000 in earnest
money that is refundable to us immediately and a $150,000 note receivable at 5%
annual interest that becomes due from the seller and is payable with accrued
interest on July 1, 2003. At this time we believe that this note receivable is
fully collectable.
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 funds from operations. In addition, we regularly
evaluate acquisition or disposition proposals and engage from time to time in
negotiations for acquisitions or dispositions of properties. We may also enter
into letters of intent for the purchase or sale of properties. Any prospective
acquisition or disposition that is being evaluated or which is subject to a
letter of intent may not be consummated, or if consummated, may not result in
accretive funds from operations.
Financing Arrangements
During the first quarter of 2002, we purchased at par or below, $4.9 million of
our outstanding 7.875% senior, unsecured public notes that mature in October
2004. The purchases were funded by amounts available under our unsecured lines
of credit. These purchases were in addition to $14.5 million of the October 2004
notes that were purchased in the fourth quarter of 2001 at par.
At June 30, 2002, approximately 51% of our outstanding long-term debt
represented unsecured borrowings and approximately 58% of our real estate
portfolio was unencumbered. The average interest rate, including loan cost
amortization, on average debt outstanding for the six months ended June 30, 2002
was 7.96%.
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 best interest and our
shareholders' interests. During the second quarter of 2001, we amended our shelf
registration for the ability to issue up to $400 million, ($200 million in debt
and $200 million in equity securities). In July 2002, we again amended the shelf
registration to allow us to issue the $400 million in either all debt or all
equity or any combination thereof up to $400 million. We may also consider the
use of operational and developmental joint ventures, selling certain properties
that do not meet our long-term investment criteria as well as outparcels on
existing properties to generate capital to reinvest into other attractive
investment opportunities.
We maintain unsecured, revolving lines of credit that provide for unsecured
borrowings up to $75 million at June 30, 2002. During 2002, we extended the
maturity of one $25 million line of credit to June 30, 2004. The other two $25
million lines of credit mature on June 30, 2003 and we are currently in
negotiation with the respective financial institutions to extend them beyond
that date. 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 2002.
17
We anticipate that adequate cash will be available to fund our operating and
administrative expenses, regular debt service obligations, and the payment of
dividends in accordance with REIT requirements in both the short and long term.
Although we receive most of our rental payments on a monthly basis,
distributions to shareholders are made quarterly and interest payments on the
senior, unsecured notes are made semi-annually. Amounts accumulated for such
payments will be used in the interim to reduce the outstanding borrowings under
the existing lines of credit or invested in short-term money market or other
suitable instruments.
On July 11, 2002, our Board of Directors declared a $.6125 cash dividend per
common share payable on August 15, 2002 to each shareholder of record on July
31, 2002, and caused a $.6125 per Operating Partnership unit cash distribution
to be paid to the minority interests. The Board of Directors also declared a
cash dividend of $.5518 per preferred depositary share payable on August 15,
2002 to each shareholder of record on July 31, 2002.
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, 2002, we
had an interest rate swap agreement effective through January 2003 with a
notional amount of $25 million. Under this agreement, we receive a floating
interest rate based on the 30 day LIBOR index and pay a fixed interest rate of
5.97%. This swap effectively changes our payment of interest on $25 million of
variable rate debt to fixed rate debt for the contract period at a rate of
7.72%.
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,
2002, we would have paid approximately $596,000 to terminate the agreement. A 1%
decrease in the 30 day LIBOR index would increase the amount paid by us by
$126,000 to approximately $722,000. The fair value is based on dealer quotes,
considering current interest rates and remaining term to maturity. We do not
intend to terminate our interest rate swap agreement prior to its maturity. This
derivative is currently recorded as a liability; 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, 2002 was $353.8 million and its
recorded value was $357.8 million. A 1% increase from prevailing interest rates
at June 30, 2002 would result in a decrease in fair value of total long-term
debt by approximately $11.2 million. Fair values were determined from quoted
market prices, where available, using current interest rates considering credit
ratings and the remaining terms to maturity.
18
New Accounting Pronouncements
In 2001, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("FAS 144"), which replaces FAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("FAS 121"). FAS 144 retains the requirements of FAS 121 to
recognized an impairment loss only if the carrying amount of a long-lived asset
is not recoverable from its undiscounted cash flows and to measure an impairment
loss as the difference between the carrying amount and fair value of the asset.
The provisions of FAS 144 are effective for financial statements issued for
fiscal years beginning after December 15, 2001. We implemented the provisions of
FAS 144 on January 1, 2002. FAS 144 did not have an effect on our results of
operations or our financial position.
Under both FAS No. 121 and 144, real estate assets designated as held for sale
are stated at their fair value less costs to sell. We classify real estate as
held for sale when our Board of Directors approves the sale of the assets and we
have commenced an active program to sell the assets. Subsequent to this
classification, no further depreciation is recorded on the assets. Under FAS No.
121, the operating results of real estate assets held for sale are included in
continuing operations. Upon implementation of FAS No. 144 in 2002, the operating
results of newly designated real estate assets held for sale will be included in
discontinued operations in our results of operations. We currently do not have
any assets that are held for sale.
In April 2002, the FASB issued FAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
In rescinding FAS No. 4, "Reporting Gains and Losses from Extinguishment of
Debt", and FAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements", FAS 145 eliminates the requirement that gains and losses from the
extinguishment of debt be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect. FAS 145 is effective
for us for transactions occurring after January 1, 2003. Management is currently
evaluating the effects of this statement.
In June 2002 the FASB issued FAS No. 146, Accounting for Exit or Disposal
Activities. FAS 146 addresses significant issues regarding the recognition,
measurement, and reporting of costs that are associated with exit and disposal
activities, including restructuring activities that are currently accounted for
pursuant to the guidance that the Emerging Issues Task Force (EITF) has set
forth in EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). FAS 146 will be effective for exit or
disposal activities that are initiated after December 31, 2002. Management is
currently evaluating the effects of this statement.
During 2000, the American Institute of Certified Public Accountants' Accounting
Standards Executive Committee issued an exposure draft Statement of Position
("SOP") regarding the capitalization of costs associated with property, plant
and equipment. Under the proposed SOP, all property plant and equipment related
costs would be expensed unless the costs are directly identifiable with specific
projects and the proposal would limit the amount of overhead costs companies
capitalize to certain payroll or payroll related costs. If this proposal is
adopted, the amount of costs we capitalize will be less than would have been
capitalized before the adoption of this proposal. The effective date of the
final SOP is expected in 2003.
19
Funds from Operations
We believe that for a clear understanding of our consolidated historical
operating results, FFO should be considered along with net income as presented
in the unaudited consolidated financial statements included elsewhere in this
report. FFO is presented because it is a widely accepted financial indicator
used by certain investors and analysts to analyze and compare one equity real
estate investment trust ("REIT") with another on the basis of operating
performance. FFO is generally defined as net income (loss), computed in
accordance with generally accepted accounting principles, before extraordinary
items and gains (losses) on sale or disposal of depreciable operating
properties, plus depreciation and amortization uniquely significant to real
estate and after adjustments for unconsolidated partnerships and joint ventures.
We caution that the calculation of FFO may vary from entity to entity and as
such our presentation of FFO may not be comparable to other similarly titled
measures of other reporting companies. FFO does not represent net income or cash
flow from operations as defined by generally accepted accounting principles and
should not be considered an alternative to net income as an indication of
operating performance or to cash from operations as a measure of liquidity. FFO
is not necessarily indicative of cash flows available to fund dividends to
shareholders and other cash needs.
Below is a calculation of funds from operations for the three and six months
ended June 30, 2002 and 2001 as well as actual cash flow and other data for
those respective periods (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
- ----------------------------------------------------------------------- ------------ ------------ ------------ -------------
Funds from Operations:
Net income $2,094 $1,398 $ 3,539 $2,193
Adjusted for:
Extraordinary item - loss on early extinguishment of debt --- --- --- 130
Minority interest 416 280 712 379
Minority interest, depreciation and amortization
attributable to discontinued operations 291 175 467 351
Depreciation and amortization uniquely significant to real estate 7,042 6,770 14,052 13,802
Gain on sale of real estate (460) --- (460) ---
- ----------------------------------------------------------------------- ------------ ------------ ------------ -------------
Funds from operations before minority interest $9,383 $8,623 $18,310 $16,855
- ----------------------------------------------------------------------- ------------ ------------ ------------ -------------
Weighted average shares outstanding (1) 11,984 11,707 11,982 11,705
- ----------------------------------------------------------------------- ------------ ------------ ------------ -------------
Cash flow provided by (used in):
Operating activities $ 15,551 $ 16,701
Investing activities (3,226) (11,952)
Financing activities (12,636) (5,167)
(1) Assumes the partnership units of the Operating Partnership held by the
minority interest, preferred shares of the Company and stock and unit options
are converted to common shares of the Company.
20
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.
Approximately 33% of our lease portfolio is scheduled to expire during 2002 and
2003. Approximately, 935,000 square feet of space is up for renewal during 2002,
20% of which is located in our dominant center in Riverhead, NY, and
approximately 848,000 square feet will come up for renewal in 2003. If we were
unable to successfully renew or release a significant amount of this space on
favorable economic terms, the loss in rent could have a material, adverse effect
on our results of operations.
As of June 30, 2002, we have renewed approximately 533,000 square feet, or 57%
of the square feet scheduled to expire in 2002. The existing tenants have
renewed at an average base rental rate approximately 5% higher than the expiring
rate. We also re-tenanted 132,000 square feet of vacant space during the first
six months of 2002 at a 6% 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) accounts for more than 6% of our combined base
and percentage rental revenues. Accordingly, we do not expect any material
adverse impact on our results of operation and financial condition as a result
of leases to be renewed or stores to be released.
As of June 30, 2002, our centers were 96% occupied. Consistent with our
long-term strategy of remerchandising centers, we will continue to hold space
off the market until an appropriate tenant is identified. While we believe this
strategy will add value to our centers in the long-term, it may reduce our
average occupancy rate in the near term.
21
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 17, 2002, we held our Annual Meeting of Shareholders. The matter on which
common shareholders voted was the election of five directors to serve until the
next Annual Meeting of Shareholders. The results of the voting are as shown
below:
Nominees Votes For Votes Against
- -------- --------- -------------
Stanley K. Tanger 7,066,372 165,907
Steven B. Tanger 7,083,634 148,645
Jack Africk 7,173,017 59,262
William G. Benton 7,183,716 48,563
Thomas E. Robinson 7,183,416 48,863
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None.
(b) Reports on Form 8-K
We filed the following report on Form 8-K during the three months ended
June 30, 2002:
Current Report on Form 8-K dated April 30, 2002 to file the March 31, 2002
Supplemental Operating and Financial Data
22
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
TANGER FACTORY OUTLET CENTERS, INC.
By: /s/ Frank C. Marchisello Jr.
----------------------------
Frank C. Marchisello, Jr.
Senior Vice President, Chief Financial Officer
DATE: August 12, 2002
23