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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 September 30, 2003
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 Numbers:
33-99736-01
333-3526-01
333-39365-01
333-61394-01
TANGER PROPERTIES LIMITED PARTNERHSIP
(Exact name of Registrant as specified in its Charter)
NORTH CAROLINA 56-1822494
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3200 Northline Avenue, Suite 360, Greensboro, North Carolina 27408
(Address of principal executive offices)
(Zip code)
(336) 292-3010
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities and Exchange Act of 1934). Yes X No -
1
TANGER PROPERTIES LIMITED PARTNERSHIP
Index
Part I. Financial Information
Page Number
Item 1. Financial Statements (Unaudited)
Statements of Operations
For the three and nine months ended
September 30, 2003 and 2002 3
Balance Sheets
As of September 30, 2003 and December 31, 2002 4
Statements of Cash Flows
For the nine months ended September 30, 2003 and 2002 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
Item 4. Controls and Procedures 29
Part II. Other Information
Item 1. Legal proceedings 30
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 30
2
TANGER PROPERTIES LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
(In thousands, except per unit data)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
REVENUES
Base rentals $ 20,070 $ 18,673 $ 59,498 $ 55,058
Percentage rentals 793 778 1,743 1,956
Expense reimbursements 8,419 7,361 25,305 21,876
Other income 1,073 1,044 2,547 2,358
- --------------------------------------------------------------------------------------------------------------------------------
Total revenues 30,355 27,856 89,093 81,248
- --------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Property operating 10,073 8,582 30,135 25,729
General and administrative 2,492 2,623 7,375 6,989
Interest 6,427 7,171 19,707 21,418
Depreciation and amortization 7,084 7,133 21,463 21,365
- --------------------------------------------------------------------------------------------------------------------------------
Total expenses 26,076 25,509 78,680 75,501
- --------------------------------------------------------------------------------------------------------------------------------
Income before equity in earnings of unconsolidated joint
ventures and discontinued operations 4,279 2,347 10,413 5,747
Equity in earnings of unconsolidated joint ventures 267 317 639 250
- --------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 4,546 2,664 11,052 5,997
Discontinued operations --- 328 (815) 1,541
- --------------------------------------------------------------------------------------------------------------------------------
Net income 4,546 2,992 10,237 7,538
Less applicable preferred unit distributions --- (443) (806) (1,329)
- --------------------------------------------------------------------------------------------------------------------------------
Income available to common unitholders 4,546 2,549 9,431 6,209
Income allocated to limited partners 4,495 2,515 9,321 6,125
- --------------------------------------------------------------------------------------------------------------------------------
Income allocated to general partner $ 51 $ 34 $ 110 $ 84
- --------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common unit:
Income from continuing operations $ .34 $ .20 $ .80 $ .42
Net income $ .34 $ .22 $ .74 $ .56
- --------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common unit:
Income from continuing operations $ .33 $ .19 $ .79 $ .41
Net income $ .33 $ .22 $ .73 $ .55
- --------------------------------------------------------------------------------------------------------------------------------
Distributions paid per common unit $ .62 $ .61 $ 1.84 $ 1.84
- --------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
3
TANGER PROPERTIES LIMITED PARTNERSHIP
BALANCE SHEETS
(In thousands)
September 30, December 31,
2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
Rental Property
Land $ 50,474 $ 51,274
Buildings, improvements and fixtures 583,269 571,125
- ----------------------------------------------------------------------------------------------------------------------------
633,743 622,399
Accumulated depreciation (191,628) (174,199)
- ----------------------------------------------------------------------------------------------------------------------------
Rental property, net 442,115 448,200
Cash and cash equivalents 200 1,068
Deferred charges, net 9,398 10,104
Other assets 13,510 18,008
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $ 465,223 $ 477,380
- ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND PARTNERS' EQUITY
Liabilities
Debt
Senior, unsecured notes $ 147,509 $ 150,109
Mortgages payable 172,552 174,421
Lines of credit 7,272 20,475
- ----------------------------------------------------------------------------------------------------------------------------
327,333 345,005
Construction trade payables 7,188 3,310
Accounts payable and accrued expenses 13,784 14,800
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 348,305 363,115
- ----------------------------------------------------------------------------------------------------------------------------
Commitments
Partners' equity
General partner 974 1,141
Limited partners 116,062 113,361
Accumulated other comprehensive loss (118) (237)
- ----------------------------------------------------------------------------------------------------------------------------
Total partners' equity 116,918 114,265
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and partners' equity $ 465,223 $ 477,380
- ----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
4
TANGER PROPERTIES LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
September 30,
2003 2002
- ----------------------------------------------------------------------------------------------------------------------
(unaudited)
OPERATING ACTIVITIES
Net income $ 10,237 $ 7,538
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization (including discontinued operations) 21,552 21,572
Amortization of deferred financing costs 955 898
Equity in earnings of unconsolidated joint ventures (639) (250)
Compensation under Unit Option Plan 76 ---
Loss/(gain) on sale of real estate (included in discontinued operations) 735 (460)
Gain on sale of outparcels of land --- (274)
Straight-line base rent adjustment 147 193
Increase (decrease) due to changes in:
Other assets 529 (85)
Accounts payable and accrued expenses (885) (1,529)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activites 32,707 27,603
- ----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to rental property (7,970) (4,182)
Acquisition of rental property (4,700) (37,500)
Additions to investments in unconsolidated joint ventures (952) (30)
Additions to deferred lease costs (1,188) (1,200)
Net proceeds from sale of real estate 2,076 17,737
Decrease in escrow from rental property sale 4,006 ---
Distributions received from unconsolidated joint ventures 1,125 150
Collections from officers --- 331
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (7,603) (24,694)
- ----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Cash distributions paid (24,184) (21,551)
Contribution from sole shareholder of general partner --- 27,960
Payments for redemption of preferred units (372) ---
Proceeds from issuance of debt 73,657 95,064
Repayments of debt (91,329) (106,363)
Additions to deferred financing costs (521) (389)
Proceeds from exercise of options 16,777 2,067
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (25,972) (3,212)
- ----------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (868) (303)
Cash and cash equivalents, beginning of period 1,068 503
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 200 $ 200
- ----------------------------------------------------------------------------------------------------------------------
Supplemental schedule of non-cash investing activities:
We purchase capital equipment and incurs costs relating to construction of
new facilities, including tenant finishing allowances. Expenditures included in
construction trade payables as of September 30, 2003 and 2002 amounted to $7,188
and $4,041, respectively.
The accompanying notes are an integral part of these financial statements.
5
TANGER PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
1. Business
Tanger Properties Limited Partnership, a North Carolina limited partnership,
develops, owns, operates and manages factory outlet centers. At September 30,
2003, we operated 33 centers in 20 states totaling 6.3 million square feet. We
are controlled by Tanger Factory Outlet Centers, Inc., a fully-integrated,
self-administered, self-managed real estate investment trust ("REIT"), as sole
shareholder of our general partner, Tanger GP Trust. Unless the context
indicates otherwise, the term "Operating Partnership" refers to Tanger
Properties Limited Partnership and the term "Company" refers to Tanger Factory
Outlet Centers, Inc. and Subsidiaries. The terms "we", "our" and "us" refer to
the Operating Partnership or the Operating Partnership and the Company together,
as the context requires.
2. Basis of Presentation
Our unaudited 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 financial statements and notes thereto of our Annual
Report on Form 10-K for the year ended December 31, 2002. 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 financial statements reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the interim
financial statements. All such adjustments are of a normal and recurring nature.
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 Balance
Sheets.
Certain amounts in the 2002 financial statements have been reclassified to
conform to the 2003 presentation. See Footnote 5.
6
3. Changes in Significant Accounting Policy
The Company has a non-qualified and incentive share option plan (the "Share
Option Plan") and the Operating Partnership has a non-qualified Unit option plan
(the "Unit Option Plan"). Prior to 2003, these plans were accounted for under
the recognition and measurement provisions of APB Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. No unit-based
employee compensation cost was reflected in 2002 net income, as all options
granted under those plans had an exercise price equal to the market value of the
underlying common share on the date of grant. Effective January 1, 2003, we
adopted the fair value recognition provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123"). Under the modified prospective method of adoption selected by us under
the provisions of Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure - An
Amendment of FAS 123", compensation cost recognized in 2003 is the same as that
which would have been recognized had the recognition provisions of FAS 123 been
applied from its original effective date. In accordance with FAS 148, results
for prior periods have not been restated. The following table illustrates the
effect on net income and earnings per unit if the fair value based method had
been applied to all outstanding awards in each period (in thousands except per
unit data):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
- -------------------------------------------------------------- -------------- ------------ ------------ -------------
Net income $ 4,546 $2,992 $10,237 $7,538
Add: Stock-based employee compensation expense
included in net income 20 --- 71 ---
Less: Total stock based employee compensation expense
determined under fair value based method for all
awards (20) (42) (71) (119)
- -------------------------------------------------------------- -------------- ------------ ------------ ------------
Pro forma net income $4,546 $2,950 $10,237 $7,419
- -------------------------------------------------------------- -------------- ------------ ------------ -------------
Earnings per unit:
Basic - as reported $.34 $.22 $.74 $.56
Basic - pro forma .34 .22 .74 .55
Diluted - as reported $.33 $.22 $.73 $.55
Diluted - pro forma .33 .22 .73 .54
- -------------------------------------------------------------- -------------- ------------ ------------ -------------
4. Acquisition and Development of Owned Rental Properties
In January 2003, we acquired a 29,000 square foot, 100% leased expansion located
contiguous with our existing factory outlet center in Sevierville, Tennessee for
$4.7 million. Construction of an additional 35,000 square foot expansion of the
center was completed during the third quarter of 2003.
Commitments to complete construction of the expansions to the existing
properties and other capital expenditure requirements amounted to approximately
$1.1 million at September 30, 2003. Commitments for construction represent only
those costs contractually required to be paid by us.
7
Interest costs capitalized during the three months ended September 30, 2003 and
2002 amounted to $36,000 and $9,000, respectively, and for the nine months ended
September 30, 2003 and 2002 amounted to $57,000 and $168,000, respectively.
5. Disposition of Owned Rental Properties
In May 2003, we completed the sale of our square foot property located in
Martinsburg, West Virginia. Net proceeds received from the sale of this property
were approximately $2.1 million. As a result of the sale, we recognized a loss
on sale of real estate of approximately $735,000.
In June and November 2002, respectively, we completed the sale of two of our
non-core properties located in Ft. Lauderdale, Florida and Bourne,
Massachusetts. Net proceeds received from the sales of these properties were
approximately $19.9 million. We retained management responsibility for the
Bourne center after the completion of the sale, however these responsibilities
are not considered a significant interest in the property. Management fees
received were immaterial.
In August and December 2002, respectively, we sold two outparcels of land which
had related land leases with identifiable cash flows, at two properties in our
portfolio. These sales totaled $700,000 in net proceeds.
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"),
results of operations and gain/(loss) on sales of real estate for properties
with identifiable cash flows sold subsequent to December 31, 2001 are reflected
in the Statements of Operations as discontinued operations for all periods
presented. Below is a summary of the results of operations of these properties
(in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
- ----------------------------------------------------- ----------- ------------ ------------ --------------
Base rentals $ --- $ 174 $ 70 $ 1,300
Expense reimbursements --- 47 30 406
Other income --- 4 2 12
- ----------------------------------------------------- ----------- ------------ ------------ --------------
Total revenues --- 225 102 1,718
Property operating expenses --- 72 93 505
Depreciation and amortization --- 68 89 375
- ----------------------------------------------------- ----------- ------------ ------------ --------------
Total expenses --- 140 182 880
- ----------------------------------------------------- ----------- ------------ ------------ --------------
Income before gain/(loss) on sale of real estate --- 85 (80) 838
Gain on sale of leased land outparcel --- 243 --- 243
(Loss)/gain on sale of real estate --- --- (735) 460
- ----------------------------------------------------- ----------- ------------ ------------ --------------
Discontinued operations $ --- $ 328 $(815) $ 1,541
- ----------------------------------------------------- ----------- ------------ ------------ --------------
8
6. Investments in Real Estate Joint Ventures
TWMB Associates, LLC
In September 2001, we established TWMB Associates, LLC ("TWMB"), a joint venture
in which we have a 50% ownership interest with Rosen-Warren Myrtle Beach LLC
("Rosen-Warren") as our venture partner, to construct and operate the Tanger
Outlet center in Myrtle Beach, South Carolina. Each member contributed $4.3
million in cash for a total initial equity in TWMB of $8.6 million. In June 2002
the first phase opened 100% leased at a cost of approximately $35.4 million with
approximately 260,000 square feet and 60 brand name outlet tenants.
In May, June and July 2003, 58,000 square feet of stores opened in our 64,000
square foot second phase. The entire second phase cost approximately $6.0
million. The remaining 6,000 square feet is expected to open in the fourth
quarter of 2003. Each member contributed approximately $1.1 million each toward
the second phase which contains 22 additional brand name outlet tenants.
In addition, TWMB is currently underway with a 79,000 square foot third phase
expansion of the Myrtle Beach center with an estimated cost of the expansion of
$9.7 million. TWMB expects to complete the expansion with stores commencing
operations during the summer of 2004. Each member is expected to make capital
contributions for the third phase of approximately $1.7 million each during the
fourth quarter of 2003. Upon completion of this third phase in 2004, the Myrtle
Beach center will total 403,000 square feet.
In conjunction with the construction of the center, TWMB closed on a
construction loan in September 2001 in the amount of $36.2 million with Bank of
America, NA (Agent) and SouthTrust Bank due in September 2005. As of September
30, 2003, the construction loan had a $29.2 million balance. In August 2002,
TWMB entered into an interest rate swap agreement with Bank of America, NA
effective through August 2004 with a notional amount of $19 million. Under this
agreement, TWMB receives a floating interest rate based on the 30 day LIBOR
index and pays a fixed interest rate of 2.49%. This swap effectively changes the
payment of interest on $19 million of variable rate debt to fixed rate debt for
the contract period at a rate of 4.49%. TWMB pays interest on the balance of the
outstanding loan at a floating interest rate equal to LIBOR plus 2.00%. All debt
incurred by this unconsolidated joint venture is collateralized by its property
as well as joint and several guarantees by Rosen-Warren and us.
Deer Park Enterprise, LLC
During the third quarter of 2003, we established a wholly owned subsidiary,
Tanger Deer Park, LLC ("Tanger Deer Park"). In September 2003, Tanger Deer Park
entered into a joint venture agreement with two other members to create Deer
Park Enterprise, LLC ("Deer Park"). All members in the joint venture have an
equal ownership interest of 33.33%. Deer Park was formed for the purpose of, but
not limited to, developing a site located in Deer Park, New York with
approximately 790,000 square feet planned at total buildout. We expect the site
will contain both outlet and big box retail tenants. During the third quarter,
all three members made equal equity contributions of $433,000 each into Deer
Park.
On October 10, 2003, Deer Park entered into a sale-leaseback transaction for the
above mentioned real estate located in Deer Park, New York. The agreement
consists of the sale of the property to Deer Park for $29 million which is being
leased back to the seller under a 24 month operating lease agreement. Each
member made an additional equity contribution of $1.2 million at the time of
purchase. In conjunction with the real estate purchase, Deer Park closed on a
loan in the amount of $19 million with Fleet Bank due in October 2005 and a
purchase money mortgage in the amount of $7 million. Deer Park's Fleet loan
incurs interest at a floating interest rate equal to LIBOR plus 2.00%. The debt
incurred by Deer Park is collateralized by the property as well as joint and
several guarantees by all three parties.
9
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, "Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"),
which addresses the disclosure to be made by a guarantor in its interim and
annual financial statements about its obligations under guarantees. FIN 45
applies to all guarantees entered in to or modified after December 31, 2002. FIN
45 also requires the recognition of a liability by a guarantor at the inception
of certain guarantees. FIN 45 requires the guarantor to recognize a liability
for the non-contingent component of the guarantee; this is the obligation to
stand ready to perform in the event that specified triggering events or
conditions occur. The initial measurement of this liability is the fair value of
the guarantee at inception. The recognition of the liability is required even if
it is not probable that payments will be required under the guarantee or if the
guarantee was issued with a premium payment or as part of a transaction with
multiple elements. The guarantee made by us of the Deer Park debt as mentioned
in the above paragraph is the only guarantee that we have entered into or
modified either individually or through a joint venture agreement since December
31, 2002. We will adopt the disclosure requirements of FIN 45 during the fourth
quarter of 2003 and will apply the recognition and measurement provisions.
Our investment in unconsolidated real estate joint ventures as of September 30,
2003 and December 31, 2002 was $4.9 million and $3.9 million, respectively.
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 investment in real estate joint ventures are included in
other assets and are also reduced by 50% of the profits earned for leasing and
development services we provided to the joint ventures. The following
management, leasing and development fees were recognized from services provided
to TWMB during the three and nine months ended September 30, 2003 and 2002 (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
- ---------------------- ------------ ------------ ------------ ------------
Fee:
Management $ 37 $ --- $ 105 $ ---
Leasing 40 64 173 126
Development (6) (23) 4 79
- ---------------------- ------------ ------------ ------------ ------------
Total Fees $ 71 $ 41 $ 282 $ 205
- ---------------------- ------------ ------------ ------------ ------------
Our carrying value of investments in unconsolidated joint ventures differs from
our share of the assets reported in the "Summary Balance Sheets - Unconsolidated
Joint Ventures" shown below due to the cost of our investment in excess of the
historical net book values of the unconsolidated joint ventures and other
adjustments to the book basis, including intercompany profits on sales of
services that are capitalized by the unconsolidated joint ventures. The
differences in basis are amortized over the various useful lives of the related
assets.
10
Summary unaudited financial information of joint ventures accounted for using
the equity method is as follows (in thousands):
September 30, December 31,
Summary Balance Sheets - Unconsolidated Joint Ventures: 2003 2002
- ----------------------------------------------------------------- --------------- --------------
Assets:
Rental property at cost, net $35,200 $32,153
Cash and cash equivalents 1,377 514
Deferred charges, net 1,767 1,751
Other assets 2,900 1,491
- ----------------------------------------------------------------- --------------- --------------
Total assets $41,244 $35,909
- ----------------------------------------------------------------- --------------- --------------
Liabilities and Owners' Equity
Mortgage payable $29,248 $25,513
Construction trade payables 751 1,644
Accounts payable and other liabilities 743 522
- ----------------------------------------------------------------- --------------- --------------
Total liabilities 30,742 27,679
Owners' equity 10,502 8,230
- ----------------------------------------------------------------- --------------- --------------
Total liabilities and owners' equity $41,244 $35,909
- ----------------------------------------------------------------- --------------- --------------
Three Months Ended Nine Months Ended
Summary Statements of Operations- September 30, September 30,
Unconsolidated Joint Ventures 2003 2002 2003 2002
- ----------------------------------------------------- ----------- ------------ ------------ ------------
Revenues $ 2,195 $ 2,178 $ 6,080 $ 2,434
- ----------------------------------------------------- ----------- ------------ ------------ ------------
Expenses:
Property operating expenses 725 963 2,211 1,345
General and administrative 1 1 21 9
Interest 372 256 991 256
Depreciation and amortization 599 347 1,679 347
- ----------------------------------------------------- ----------- ------------ ------------ ------------
Total expenses 1,697 1,567 4,902 1,957
- ----------------------------------------------------- ----------- ------------ ------------ ------------
Net income 498 611 1,178 477
- ----------------------------------------------------- ----------- ------------ ------------ ------------
Tanger Properties Limited Partnership share of:
- ----------------------------------------------------- ----------- ------------ ------------ ------------
Net income $ 267 $ 317 $ 639 $ 250
Depreciation (real estate related) $ 287 $ 168 $ 807 $ 168
- ----------------------------------------------------- ----------- ------------ ------------ ------------
7. Preferred Unit Redemption
On June 20, 2003, the Company redeemed all of our outstanding Series A
Cumulative Convertible Redeemable Preferred Shares (the "Preferred Shares") held
by the Preferred Stock Depositary in the form of Depositary Shares, each
representing 1/10th of a Preferred Share. Since preferred units held by the
Company's majority owned subsidiary, Tanger LP Trust, are to be redeemed by the
Operating Partnership to the extent any Preferred Shares of the Company are
redeemed, proceeds required to redeem the Company's preferred shares were funded
by the Operating Partnership in exchange for the preferred units held by the
Company. Likewise, preferred units are automatically converted into limited
partnership units to the extent of any conversion of the Company's preferred
shares into Common Shares. The redemption price was $250 per Preferred Share
($25 per Depositary Share), plus accrued and unpaid dividends, if any, to, but
not including, the redemption date.
11
In lieu of receiving the cash redemption price, holders of the Depositary
Shares, at their option, could exercise their right to convert each Depositary
Share into .901 common shares by following the instructions for, and completing
the Notice of Conversion located on the back of their Depositary Share
certificates. Those Depositary Shares, and the corresponding Preferred Shares,
that were converted to common shares did not receive accrued and unpaid
dividends, if any, but were entitled to receive common dividends declared after
the date on which the Depositary Shares were converted to common shares.
On or after the redemption date, the Depositary Shares, and the corresponding
Preferred Shares, were no longer deemed to be outstanding, dividends on the
Depositary Shares, and the corresponding Preferred Shares, ceased to accrue, and
all rights of the holders of the Depositary Shares, and the corresponding
Preferred Shares, ceased, except for the right to receive the redemption price
and accrued and unpaid dividends, without interest thereon, upon surrender of
certificates representing the Depositary Shares, and the corresponding Preferred
Shares.
In total, 787,008 of the Depositary Shares were converted into 709,078 common
shares and the Company redeemed the remaining 14,889 Depositary Shares for $25
per share, plus accrued and unpaid dividends. Likewise, 787,008 preferred units
were converted into 709,078 limited partnership units and the Operating
Partnership redeemed the remaining 14,889 preferred units. The Operating
Partnership funded the redemption, totaling approximately $375,000, from cash
flow from operations.
8. Earnings Per Unit
The following table sets forth a reconciliation of the numerators and
denominators in computing earnings per unit in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share (in thousands, except
per unit amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Numerator:
Income from continuing operations $4,546 $ 2,664 $11,052 $5,997
Less applicable preferred unit distributions --- (443) (806) (1,329)
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Income from continuing operations available to
common unitholders - basic and diluted 4,546 2,221 10,246 4,668
Discontinued operations --- 328 (815) 1,541
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Net income available to common unitholders -
basic and diluted $4,546 $ 2,549 $ 9,431 $ 6,209
Denominator:
Basic weighted average common units 13,437 11,302 12,763 11,112
Effect of outstanding unit options 178 210 212 168
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Diluted weighted average common units 13,615 11,512 12,975 11,280
Basic earnings per common unit:
Income from continuing operations $ .34 $ .20 $ .80 $ .42
Discontinued operations --- .02 (.06) .14
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Net income $ .34 $ .22 $ .74 $ .56
Diluted earnings per common unit:
Income from continuing operations $ .33 $ .19 $ .79 $ .41
Discontinued operations --- .03 (.06) .14
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Net income $ .33 $ .22 $ .73 $ .55
- ------------------------------------------------------- ------------ ----------- ------------ -------------
12
The computation of diluted earnings per unit excludes options to purchase common
units when the exercise price is greater than the average market price of the
common units for the period. The market price of the common units is considered
to be equivalent to the market price of the common shares of Tanger Factory
Outlet Centers, Inc., sole owner of the Operating Partnership's general partner.
Options excluded from the computations totaled 210,000 for the three months
ended September 30, 2002 and 316,000 for the nine months ended September 30,
2002. There were no options excluded from the computation for the three and nine
months ended September 30, 2003. The assumed conversion of preferred units to
common units as of the beginning of the year would have been anti-dilutive.
At September 30, 2003 and December 31, 2002, the ownership interests of the
Operating Partnership consisted of the following:
2003 2002
- -------------------------- -------------- --------------
Preferred units --- 80,190
- -------------------------- -------------- --------------
Common units:
General partner 150,000 150,000
Limited partners 13,384,948 11,944,330
- -------------------------- -------------- --------------
Total 13,534,948 12,094,330
- -------------------------- -------------- --------------
9. Other Comprehensive Income - Derivative Financial Instruments
During the first quarter of 2003, our interest rate swap that had been
designated as a cash flow hedge expired. The fair value of the swap became zero
resulting in a change in fair value of $98,000. TWMB's interest rate swap
agreement has been designated as a cash flow hedge and is carried on TWMB's
balance sheet at fair value. At September 30, 2003, our portion of the fair
value of TWMB's hedge is recorded as a $118,000 reduction to investment in joint
ventures. Total comprehensive income for the three and nine months ended
September 30, 2003 and 2002 is as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
- ----------------------------------------------------- ----------- ------------ ------------ --------------
Net income $4,546 $ 2,992 $10,237 $ 7,538
- ----------------------------------------------------- ----------- ------------ ------------ --------------
Other comprehensive income:
Change in fair value of our portion of
TWMB cash flow hedge, net of minority 31 (94) 21 (94)
Change in fair value of cash flow hedge --- 236 98 613
- ----------------------------------------------------- ----------- ------------ ------------ --------------
Other comprehensive income 31 142 119 519
- ----------------------------------------------------- ----------- ------------ ------------ --------------
Total comprehensive income $4,577 $ 3,134 $10,356 $ 8,057
- ----------------------------------------------------- ----------- ------------ ------------ --------------
10. New Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board (FASB or the "Board")
issued Statement of Financial Accounting Standards No. 145 (FAS 145),
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections". In rescinding FASB Statement No. 4 (FAS 4),
"Reporting Gains and Losses from Extinguishment of Debt", and FASB Statement No.
64 (FAS 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. Generally, FAS 145 is effective for transactions occurring
after December 31, 2002. We adopted this statement effective January 1, 2003,
and it had no significant impact on our results of operations for the 2003 or
2002 periods.
13
In January of 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of
existing accounting pronouncements to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The provisions of
FIN 46 are effective immediately for all variable interests in variable interest
entities created after January 31, 2003, and we will need to apply its
provisions to any existing variable interests in variable interest entities
beginning in the first fiscal year or interim period ending after December 15,
2003. Certain of the disclosure requirements apply to all financial statements
issued after January 31, 2003, regardless of when the variable interest entity
was established. We have evaluated Deer Park, which was created after January
31, 2003 (Note 6) and have determined that under the current facts and
circumstances that we will not be required to consolidate under the provisions
of FIN 46. We are in the process of evaluating TWMB, which was created prior to
January 31, 2003 (Note 6) in order to determine whether the entity is a variable
interest entity and whether we are considered to be the primary beneficiary or
whether we hold a significant variable interest. TWMB is a joint venture
arrangement where it is possible that we may be required to consolidate or
disclose additional information about our 50% interest in TWMB in the future.
Our maximum exposure to loss as a result of our involvement in this joint
venture is equal to our investment in the joint venture and our obligation under
our joint and several guarantee of TWMB's debt, all as disclosed in Note 6.
In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", effective at
the beginning of the first interim period beginning after June 15, 2003. The
Board initiated its liabilities and equity project in response to concerns
regarding the current balance sheet classifications of certain financial
instruments. The standard specifies that instruments within its scope, which
include mandatorily redeemable financial instruments, obligations to repurchase
the issuer's equity shares by transferring assets, and certain obligations to
issue a variable number of shares, represent obligations of the issuer and,
therefore, the issuer must classify them as liabilities. We adopted this
statement effective July 1, 2003, and it had no significant impact on our
results of operations or financial position.
11. Subsequent Events
On October 31, 2003, we completed the sale of our property located in Casa
Grande, Arizona. Net proceeds received from the sale of this property were
approximately $6.6 million. As a result of the sale, we expect to recognize a
gain in the fourth quarter of 2003 on sale of real estate of approximately
$668,000.
On October 6, 2003 we announced the execution of a definitive agreement for the
acquisition of the Charter Oak Partners' portfolio of nine factory outlet
centers totaling approximately 3.3 million square feet. We and an affiliate of
Blackstone Real Estate Advisors ("Blackstone") have formed a limited liability
company to acquire the portfolio as a joint venture. We will own one- third and
Blackstone will own two-thirds of the joint venture. We will provide operating,
management, leasing and marketing services to the properties for a fee.
The purchase price for this transaction is $491 million, including the
assumption of approximately $187 million of cross-collateralized debt with a
6.59% interest rate with GMAC Commercial Mortgage Corporation that matures in
July 2008. In October 2003, we made a $3.3 million deposit and Blackstone a $6.7
million deposit into an escrow account in accordance with the property purchase
agreement. The deposits, which are refundable except under certain limited
circumstances, are to be applied to the purchase price upon closing. Closing is
expected to take place during the fourth quarter of 2003. The factory outlets
being acquired are located in: Rehoboth, Delaware; Foley, Alabama; Myrtle Beach,
South Carolina; Park City, Utah; Hilton Head, South Carolina; Tilton, New
Hampshire; Lincoln City, Oregon; Westbrook, Connecticut and Tuscola, Illinois.
We are currently evaluating the above mentioned joint venture for accounting
treatment under FIN 46.
14
In October 2003, we received a commitment from Wells Fargo Bank to increase our
existing line of credit with them from $10 million to $25 million. This increase
will bring our committed unsecured, revolving lines of credit up to $100
million. All of our lines of credit have maturity dates of June 30, 2005.
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
financial statements appearing elsewhere in this report. Historical results and
percentage relationships set forth in the unaudited Statements of Operations,
including trends which might appear, are not necessarily indicative of future
operations. Unless the context indicates otherwise, the term "Operating
Partnership" refers to Tanger Properties Limited Partnership and the term
"Company" refers to Tanger Factory Outlet Centers, Inc. and Subsidiaries. The
terms "we", "our" and "us" refer to the Operating Partnership or the Operating
Partnership and the Company together, as the context requires.
The discussion of our results of operations reported in the unaudited Statements
of Operations compares the three and nine months ended September 30, 2003 with
the three and nine months ended September 30, 2002. 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 and does not include joint venture or managed properties.
Cautionary Statements
Certain statements made below are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. We intend for such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Reform Act of 1995 and included
this statement for purposes of complying with these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "believe", "expect", "intend", "anticipate", "estimate", "project",
or similar expressions. You should not rely on forward-looking statements since
they involve known and unknown risks, uncertainties and other factors which are,
in some cases, beyond our control and which could materially affect our actual
results, performance or achievements. Factors which may cause actual results to
differ materially from current expectations include, but are not limited to, the
following:
- - national and local general economic and market conditions;
- - demographic changes; our ability to sustain, manage or forecast our growth;
existing government regulations and changes in, or the failure to comply
with, government regulations;
- - adverse publicity; liability and other claims asserted against us;
- - competition;
- - the risk that we may not be able to finance our planned development
activities;
15
- - risks related to the retail real estate industry in which we compete,
including the potential adverse impact of external factors such as
inflation, tenant demand for space, consumer confidence, unemployment rates
and consumer tastes and preferences;
- - risks associated with our development activities, such as the potential for
cost overruns, delays and lack of predictability with respect to the
financial returns associated with these development activities;
- - risks associated with real estate ownership, such as the potential adverse
impact of changes in the local economic climate on the revenues and the
value of our properties;
- - risks that a significant number of tenants may become unable to meet their
lease obligations or that we may be unable to renew or re-lease a
significant amount of available space on economically favorable terms;
- - fluctuations and difficulty in forecasting operating results; changes in
business strategy or development plans;
- - business disruptions;
- - the ability to attract and retain qualified personnel;
- - the ability to realized planned costs savings in acquisitions; and
- - retention of earnings.
16
General Overview
At September 30, 2003, we had ownership interests in or management
responsibilities for 33 centers in 20 states totaling 6.3 million square feet
compared to 34 centers in 21 states totaling 6.2 million square feet at
September 30, 2002. The activity in our portfolio of properties since September
30, 2002 is summarized below:
No.
of GLA
Centers (000's) States
- --------------------------------------------------------------------- ------------ ------------ -----------
As of September 30, 2002 34 6,187 21
- --------------------------------------------------------------------- ------------ ------------ -----------
New development expansion:
Myrtle Beach, South Carolina (joint venture) --- 58 ---
Acquisitions/Expansions:
Bourne, Massachusetts (managed) 1 23 1
Sevierville, Tennessee (wholly-owned) --- 65 ---
Dispositions:
Bourne, Massachusetts (wholly-owned) (1) (23) (1)
Martinsburg, West Virginia (wholly-owned) (1) (49) (1)
Other --- (3) ---
- --------------------------------------------------------------------- ------------ ------------ -----------
As of September 30, 2003 33 6,258 20
- --------------------------------------------------------------------- ------------ ------------ -----------
A summary of the operating results for the three and nine months ended September
30, 2003 and 2002 is presented in the following table, expressed in amounts
calculated on a weighted average GLA basis.
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
- ---------------------------------------------------------------------- ------------ ------------ ------------ -------------
GLA at end of period (000's)
Wholly owned 5,483 5,493 5,483 5,493
Partially owned (1) 318 260 318 260
Managed 457 434 457 434
- ---------------------------------------------------------------------- ------------ ------------ ------------ -------------
Total GLA at end of period (000's) 6,258 6,187 6,258 6,187
- ---------------------------------------------------------------------- ------------ ------------ ------------ -------------
Weighted average GLA (000's) (2) 5,471 5,173 5,454 5,121
Occupancy percentage at end of period (1) 95% 96% 95% 96%
Per square foot for wholly owned properties
Revenues
Base rentals $3.67 $3.61 $10.91 $10.75
Percentage rentals .14 .15 .32 .38
Expense reimbursements 1.54 1.42 4.64 4.27
Other income .20 .20 .47 .46
- ---------------------------------------------------------------------- ------------ ------------ ------------ -------------
Total revenues 5.55 5.38 16.34 15.86
- ---------------------------------------------------------------------- ------------ ------------ ------------ -------------
Expenses
Property operating 1.84 1.66 5.53 5.02
General and administrative .46 .51 1.35 1.36
Interest 1.17 1.38 3.61 4.18
Depreciation and amortization 1.30 1.38 3.94 4.17
- ---------------------------------------------------------------------- ------------ ------------ ------------ -------------
Total expenses 4.77 4.93 14.43 14.73
- ---------------------------------------------------------------------- ------------ ------------ ------------ -------------
In Income before equity in earnings of unconsolidated joint
ventures
Inc and discontinued operations $.78 $.45 $1.91 $1.13
- ---------------------------------------------------------------------- ------------ ------------ ------------ -------------
(1) Includes Myrtle Beach, SC property which we operate and have a 50%
ownership in through a joint venture.
(2) GLA weighted by months of operations. GLA is not adjusted for fluctuations
in occupancy that may occur subsequent to the original opening date and
does not include joint venture or managed properties.
17
The table set forth below summarizes certain information with respect to our
existing centers in which we have an ownership interest.
% %
Mortgage Debt Occupied Occupied
GLA as of Outstanding (000's) as of as of
September as of September September September
Date Opened Location 30, 2003 30, 2003 30, 2003 30, 2002
- -------------------- ------------------------------- ---------------- ------------------------ ------------- -----------------
Aug. 1994 Riverhead, NY 729,238 --- 99 99
May 1993 San Marcos, TX 442,486 $37,466 98 98
Feb. 1997 (1) Sevierville, TN 419,023 --- 99 100
Dec. 1995 Commerce II, GA 342,556 29,500 94 96
Sept. 2002 (1) Howell, MI 325,231 --- 99 100
Nov. 1994 Branson, MO 277,407 24,000 100 100
May 1991 Williamsburg, IA 277,230 19,158 96 99
Jun. 2002 (2) Myrtle Beach, SC 318,133 --- 100 100
Oct. 1994 (1) Lancaster, PA 255,059 14,266 98 96
Nov. 1994 Locust Grove, GA 247,454 --- 100 100
Feb. 1993 Gonzales, LA 245,199 --- 95 98
Jul. 1998 (1) Fort Meyers, FL 198,789 --- 86 97
Jul. 1989 Commerce, GA 185,750 7,935 74 87
Feb. 1992 Casa Grande, AZ 184,768 --- 79 90
Aug. 1994 Terrell, TX 177,490 --- 97 100
Mar. 1998 (1) Dalton, GA 173,430 10,977 82 98
Sept. 1994 Seymour, IN 141,051 --- 75 80
Dec. 1992 North Branch, MN 134,480 --- 100 100
Feb. 1991 West Branch, MI 112,420 6,968 100 100
Jan. 1995 Barstow, CA 105,950 --- 87 57
Sept. 1997 (1) Blowing Rock, NC 105,448 9,553 100 100
Jul. 1988 Pigeon Forge, TN 94,558 --- 97 94
Sept. 1997 (1) Nags Head, NC 82,254 6,483 100 100
Jul. 1988 Boaz, AL 79,575 --- 97 91
Jun. 1986 Kittery I, ME 59,694 6,246 100 100
Apr. 1988 LL Bean, North Conway, NH 50,745 --- 91 100
Jun. 1988 Kittery II, ME 24,619 --- 100 94
Mar. 1987 Clover, North Conway, NH 11,000 --- 100 100
- -------------------- ------------------------------- ---------------- ------------------------ --------- -------------
Total 5,801,037 $172,552 95% 96%
==================== =============================== ================ ======================== ========= =============
(1) Represents date acquired by us.
(2) Represents center operated by us through a 50% ownership joint venture.
Mortgage debt of the joint venture outstanding as of September 30, 2003 on
this property is $29.2 million.
18
RESULTS OF OPERATIONS
Comparison of the three months ended September 30, 2003 to the three months
ended September 30, 2002
Base rentals increased $1.4 million, or 7%, in the 2003 period when compared to
the same period in 2002. The increase is primarily due to the acquisition of the
Howell, Michigan center during the third quarter of 2002 and the additional GLA,
both acquired and constructed, at our Sevierville, Tennessee center during 2003.
Base rent per weighted average GLA increased by $.06 per square foot from $3.61
per square foot in the 2002 period compared to $3.67 per square foot in the 2003
period. The increase is primarily the result of the addition of the Howell,
Michigan acquisition which had a higher average base rent per square foot
compared to the portfolio average. While the overall portfolio occupancy at
September 30, 2003 was 95%, a decrease of only 1% from 96% at September 30,
2002, four centers experienced negative occupancy trends of at least 10% from
September 30, 2002 to September 30, 2003, which were offset by positive
occupancy gains in other centers.
Percentage rentals, which increased $15,000 or 2% during the 2003 period
compared to the 2002 period, represent revenues based on a percentage of
tenants' sales volume above predetermined levels (the "breakpoint"). On a
weighted average GLA basis, percentage rentals decreased $.01 per square foot in
2003 compared to 2002 from $.15 to $.14 per square foot. Reported same-space
sales per square foot for the rolling twelve months ended September 30, 2003
were $303 per square foot. This represents a 3.6% increase compared to the same
period in 2002. Same-space sales is defined as the weighted average sales per
square foot reported in space open for the full duration of each comparison
period. Same-space sales for the three months ended September 30, 2003 increased
6.3% compared to the same period of 2002.
Expense reimbursements, which represent the contractual recovery from tenants of
certain common area maintenance, insurance, property tax, promotional,
advertising and management expenses generally fluctuates consistently with the
reimbursable property operating expenses to which it relates. Expense
reimbursements, expressed as a percentage of property operating expenses, were
84% and 86%, respectively, in the 2003 and 2002 periods.
Other income increased $29,000, or 3%, in 2003 compared to 2002 and on a
weighted average GLA basis, remained constant at $.20 per square foot for both
periods.
Property operating expenses increased by $1.5 million, or 17%, in the 2003
period as compared to the 2002 period and, on a weighted average GLA basis,
increased $.18 per square foot from $1.66 to $1.84. The increase is the result
of the additional operating costs of the Howell, Michigan center that we
acquired in late September 2002 and the acquisition and expansion in our
Sevierville, Tennessee center during 2003 as well as portfolio wide increases in
advertising, common area maintenance and property taxes.
General and administrative expenses decreased $131,000, or 5%, in the 2003
period as compared to the 2002 period. Also, as a percentage of total revenues,
general and administrative expenses were 8% and 9% respectively in the 2003 and
2002 periods and, on a weighted average GLA basis decreased $.05 per square foot
from $.51in the 2002 period to $.46 in the 2003 period.
Interest expense decreased $744,000, or 10%, during 2003 as compared to 2002 due
primarily to lower outstanding debt and lower average interest rates during
2003. Since the 2002 period, we have reduced our outstanding borrowings through
operating cash flows, proceeds from the exercise of employee options, property
sales and a common share offering. Also, since September 30, 2002, we have
purchased, $8.1 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 additional interest expense
reduction as the lines of credit currently have a lower interest rate.
19
Depreciation and amortization per weighted average GLA decreased from $1.38 per
square foot in the 2002 period to $1.30 per square foot in the 2003 period due
to a lower 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).
Equity in earnings from unconsolidated joint ventures decreased $50,000 in the
2003 period compared to the 2002 due to higher interest expense and depreciation
at our joint venture, TWMB Associates, LLC, in the 2003 period from expansion at
our Myrtle Beach, South Carolina property.
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 unaudited Statements of Operations as discontinued operations
in the 2002 period. No real estate sales occurred in the 2003 period. The 2002
period includes discontinued operations from the Ft. Lauderdale, Florida;
Martinsburg, West Virginia; and Bourne, Massachusetts properties and
discontinued operations from two outparcels of land which had related land
leases with identifiable cash flows.
Comparison of the nine months ended September 30, 2003 to the nine months ended
September 30, 2002
Base rentals increased $4.4 million, or 8%, in the 2003 period when compared to
the same period in 2002. The increase is primarily due to the acquisition of the
Howell, Michigan center during the third quarter of 2002 and the additional GLA
acquired at our Sevierville, Tennessee center early during the first quarter of
2003. Base rent per weighted average GLA increased by $.16 per square foot from
$10.75 per square foot in the 2002 period compared to $10.91 per square foot in
the 2003 period. The increase per square foot is primarily the result of the
addition of the Howell, Michigan and Sevierville, Tennessee acquisitions which
had a higher average base rent per square foot compared to the portfolio
average. In addition, we had an increase in termination revenue, a component of
base rentals, of $141,000 during the 2003 period compared to 2002. While the
overall portfolio occupancy at September 30, 2003 was 95%, a decrease of only 1%
from 96% at September 30, 2002, four centers experienced negative occupancy
trends of at least 10% from September 30, 2002 to September 30, 2003, 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"), decreased $213,000
or 11%, and on a weighted average GLA basis, decreased $.06 per square foot in
2003 compared to 2002 from $.38 to $.32. The decrease is due to the dilutive
effect on percentage rentals of the additional square footage added from the
Howell, Michigan and Sevierville, Tennessee centers.
Expense reimbursements, which represent the contractual recovery from tenants of
certain common area maintenance, insurance, property tax, promotional,
advertising and management expenses generally fluctuates consistently with the
reimbursable property operating expenses to which it relates. Expense
reimbursements, expressed as a percentage of property operating expenses, were
84% and 85%, respectively, in the 2003 and 2002 periods.
Other income increased $189,000, or 8%, in 2003 compared to 2002 and on a
weighted average GLA basis, increased $.01 per square foot from $.46 to $.47.
The increase is due primarily to increases in vending income and income from
property management services.
Property operating expenses increased by $4.4 million, or 17%, in the 2003
period as compared to the 2002 period and, on a weighted average GLA basis,
increased $.51 per square foot to $5.53 from $5.02. The increase is the result
of the additional operating costs of the Howell, Michigan center that we
acquired in September 2002 as well as increases in snow removal, property taxes
and property insurance costs.
20
General and administrative expenses increased $386,000, or 6%, in the 2003
period as compared to the 2002 period. The increase is primarily due to
increases in employee compensation from headcount increases and increased travel
expenses. Also, as a percentage of total revenues, general and administrative
expenses were 8% and 9% respectively in the 2003 and 2002 periods and, on a
weighted average GLA basis, decreased $.01 per square foot in the 2002 period
compared to the 2003 period from $1.36 to $1.35.
Interest expense decreased $1.7 million, or 8%, during 2003 as compared to 2002
due primarily to lower outstanding debt and lower average interest rates during
2003. Since the 2002 period, we have reduced our outstanding borrowings through
operating cash flows, proceeds from the exercise of employee options, property
sales and a common share offering. Also, since September 30, 2002, we have
purchased, $8.1 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 additional interest expense
reduction as the lines of credit currently have a lower interest rate.
Depreciation and amortization per weighted average GLA decreased from $4.17 per
square foot in the 2002 period to $3.94 per square foot in the 2003 period due
to a lower 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).
Equity in earnings from unconsolidated joint ventures increased $389,000 in the
2003 period compared to the 2002 period due to TWMB's Myrtle Beach, South
Carolina center being open for nine months in 2003 period versus three months in
the 2002 period.
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 unaudited Statements of Operations as discontinued operations
for both periods presented. The decrease in discontinued operations is due to
the 2003 period reflecting the discontinued operations and loss on sale of the
Martinsburg, West Virginia center only. The 2002 period includes Martinsburg
results as well as discontinued operations from the Ft. Lauderdale, Florida and
Bourne, Massachusetts properties, a gain on the sale of the Ft. Lauderdale
property and discontinued operations from two outparcels of land which had
related land leases with identifiable cash flows.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $32.7 million and $27.6 million
for the nine months ended September 30, 2003 and 2002, respectively. The
increase in cash provided by operating activities is due primarily to the
increases in income after adjustments for non-cash items of approximately $3.8
million when comparing 2003 and 2002 and by changes in accounts payable, accrued
expenses and other assets in 2003 compared to 2002. Net cash used in investing
activities was $7.6 and $24.7 million during the first nine months of 2003 and
2002, respectively. Cash used was higher in 2002 primarily due to the cash
needed to pay for the acquisition of the Howell, Michigan center offset by the
proceeds from the sale of the Ft. Lauderdale, Florida center. Net cash used in
financing activities was $26.0 million and $3.2 million during the nine months
of 2003 and 2002, respectively. Cash used was higher in 2003 due to the
Company's common share offering in 2002 and an increase in distributions paid in
2003 due to the higher number of units outstanding.
21
Acquisitions, Developments and Dispositions
In January 2003, we acquired a 29,000 square foot, 100% leased expansion located
contiguous with our existing factory outlet center in Sevierville, Tennessee at
a purchase price of $4.7 million. Construction of an additional 35,000 square
foot expansion of the center was completed during the third quarter and opened
100% occupied. The cost of the expansion was approximately $4 million. The
Sevierville center now totals approximately 419,000 square feet.
In May 2003, we completed the sale of our 49,000 square foot property located in
Martinsburg, West Virginia. Net proceeds received from the sale of this property
were approximately $2.1 million. As a result of the sale, we recognized a loss
on sale of real estate of approximately $735,000, which is included in
discontinued operations.
In October 2003, we completed the sale of our 185,000 square foot property
located in Casa Grande, Arizona. Net proceeds received from the sale of this
property were approximately $6.6 million. As a result of the sale, we expect to
recognize a gain in the fourth quarter of 2003 on sale of real estate of
approximately $668,000.
We have an option to purchase land and have begun the early development and
leasing of a site located near Pittsburgh, Pennsylvania. We currently expect the
center to be approximately 420,000 square feet upon total build out with the
initial phase scheduled to open in early 2005.
Joint Ventures
TWMB Associates, LLC
In September 2001, we established TWMB Associates, LLC ("TWMB"), a joint venture
in which we have a 50% ownership interest with Rosen-Warren Myrtle Beach LLC
("Rosen-Warren") as our venture partner, to construct and operate the Tanger
Outlet center in Myrtle Beach, South Carolina. Each member contributed $4.3
million in cash for a total initial equity in TWMB of $8.6 million. In June 2002
the first phase opened 100% leased at a cost of approximately $35.4 million with
approximately 260,000 square feet and 60 brand name outlet tenants.
In May, June and July 2003, 58,000 square feet of stores opened in our 64,000
square foot second phase. The entire second phase cost approximately $6.0
million. The remaining 6,000 square feet is expected to open in the fourth
quarter of 2003. Each member contributed approximately $1.1 million each toward
the second phase which will contain 22 additional brand name outlet tenants.
In addition, TWMB is currently underway with a 79,000 square foot third phase
expansion of the Myrtle Beach center with an estimated cost of the expansion of
$9.7 million. TWMB expects to complete the expansion with stores commencing
operations during the summer of 2004. Each member is expected to make capital
contributions for the third phase of approximately $1.7 million each during the
fourth quarter of 2003. Upon completion of this third phase in 2004, the Myrtle
Beach center will total 403,000 square feet.
22
In conjunction with the construction of the center, TWMB closed on a
construction loan in September 2001 in the amount of $36.2 million with Bank of
America, NA (Agent) and SouthTrust Bank due in September 2005. As of September
30, 2003, the construction loan had a $29.2 million balance. In August 2002,
TWMB entered into an interest rate swap agreement with Bank of America, NA
effective through August 2004 with a notional amount of $19 million. Under this
agreement, TWMB receives a floating interest rate based on the 30 day LIBOR
index and pays a fixed interest rate of 2.49%. This swap effectively changes the
payment of interest on $19 million of variable rate debt to fixed rate debt for
the contract period at a rate of 4.49%. TWMB pays interest on the balance of the
outstanding loan at a floating interest rate equal to LIBOR plus 2.00%. All debt
incurred by this unconsolidated joint venture is collateralized 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 the
Myrtle Beach property has produced sufficient cash flow to meet the related debt
service requirements.
Either partner in TWMB has the right to initiate the sale or purchase of the
other party's interest. If such action is initiated, one member would determine
the fair market value purchase price of the venture and the other would
determine whether they would take the role of seller or purchaser. The members'
roles in this transaction would be determined by the tossing of a coin, commonly
known as a Russian roulette provision. If either Rosen-Warren or we enact 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 results and expectations of developing and
operating an outlet center in the Myrtle Beach area.
Deer Park Enterprise, LLC
During the third quarter of 2003, we established a wholly owned subsidiary,
Tanger Deer Park, LLC ("Tanger Deer Park"). In September 2003, Tanger Deer Park
entered into a joint venture agreement with two other members to create Deer
Park Enterprise, LLC ("Deer Park"). All members in the joint venture have an
equal ownership interest of 33.33%. Deer Park was formed for the purpose of, but
not limited to, developing a site located in Deer Park, New York with
approximately 790,000 square feet planned at total buildout. We expect the site
will contain both outlet and big box retail tenants. During the third quarter,
all three members made equal equity contributions of $433,000 each into Deer
Park.
On October 10, 2003, Deer Park entered into a sale-leaseback transaction for the
above mentioned real estate located in Deer Park, New York. The agreement
consists of the sale of the property to Deer Park for $29 million which is being
leased back to the seller under a 24 month operating lease agreement. Each
member made an additional equity contribution of $1.2 million at the time of
purchase. In conjunction with the real estate purchase, Deer Park closed on a
loan in the amount of $19 million with Fleet Bank due in October 2005 and a
purchase money mortgage in the amount of $7 million. Deer Park's Fleet loan
incurs interest at a floating interest rate equal to LIBOR plus 2.00%. The debt
incurred by Deer Park is collateralized by the property as well as joint and
several guarantees by all three parties.
23
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, "Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"),
which addresses the disclosure to be made by a guarantor in its interim and
annual financial statements about its obligations under guarantees. FIN 45
applies to all guarantees entered in to or modified after December 31, 2002. FIN
45 also requires the recognition of a liability by a guarantor at the inception
of certain guarantees. FIN 45 requires the guarantor to recognize a liability
for the non-contingent component of the guarantee; this is the obligation to
stand ready to perform in the event that specified triggering events or
conditions occur. The initial measurement of this liability is the fair value of
the guarantee at inception. The recognition of the liability is required even if
it is not probable that payments will be required under the guarantee or if the
guarantee was issued with a premium payment or as part of a transaction with
multiple elements. The guarantee made by us of the Deer Park debt as mentioned
in the above paragraph is the only guarantee that we have entered into or
modified either individually or through a joint venture agreement since December
31, 2002. We will adopt the disclosure requirements and the recognition and
measurement provisions of FIN 45 during the fourth quarter of 2003.
Charter Oak
On October 6, 2003 we announced the execution of a definitive agreement for the
acquisition of the Charter Oak Partners' portfolio of nine factory outlet
centers totaling approximately 3.3 million square feet. Tanger and an affiliate
of Blackstone Real Estate Advisors have formed a limited liability company to
acquire the portfolio as a joint venture. We will own one-third and Blackstone
will own two-thirds of the joint venture. We will provide operating, management,
leasing and marketing services for the properties for a fee.
The purchase price for this transaction is $491 million, including the
assumption of approximately $187 million of cross-collateralized debt with a
6.59% interest rate with GMAC Commercial Mortgage Corporation that matures in
July 2008. In October 2003, we made a $3.3 million deposit and Blackstone a $6.7
million deposit into an escrow account in accordance with the property purchase
agreement. The deposits, which are refundable except under certain limited
circumstances, are to be applied to the purchase price upon closing. Closing is
expected to take place during the fourth quarter of 2003. We expect that the
transaction will be accretive to our operating results. The factory outlets
being acquired are located in: Rehoboth, Delaware; Foley, Alabama; Myrtle Beach,
South Carolina; Park City, Utah; Hilton Head, South Carolina; Tilton, New
Hampshire; Lincoln City, Oregon; Westbrook, Connecticut and Tuscola, Illinois.
Any developments or expansions that we, or a joint venture that we are involved
in, have planned or anticipated may not be started or completed as scheduled, or
may not result in accretive net income and 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 an increase in net income or funds from operations (see "Funds from
Operations").
Preferred Unit Redemption
On June 20, 2003, the Company redeemed all of our outstanding Series A
Cumulative Convertible Redeemable Preferred Shares (the "Preferred Shares") held
by the Preferred Stock Depositary in the form of Depositary Shares, each
representing 1/10th of a Preferred Share. Since preferred units held by the
Company's majority owned subsidiary, Tanger LP Trust, are to be redeemed by the
Operating Partnership to the extent any Preferred Shares of the Company are
redeemed, proceeds required to redeem the Company's preferred shares were funded
by the Operating Partnership in exchange for the preferred units held by the
Company. Likewise, preferred units are automatically converted into limited
partnership units to the extent of any conversion of the Company's preferred
shares into Common Shares. The redemption price was $250 per Preferred Share
($25 per Depositary Share), plus accrued and unpaid dividends, if any, to, but
not including, the redemption date.
24
In lieu of receiving the cash redemption price, holders of the Depositary
Shares, at their option, could exercise their right to convert each Depositary
Share into .901 common shares by following the instructions for, and completing
the Notice of Conversion located on the back of their Depositary Share
certificates. Those Depositary Shares, and the corresponding Preferred Shares,
that were converted to common shares did not receive accrued and unpaid
dividends, if any, but were entitled to receive common dividends declared after
the date on which the Depositary Shares were converted to common shares.
On or after the redemption date, the Depositary Shares, and the corresponding
Preferred Shares, were no longer deemed to be outstanding, dividends on the
Depositary Shares, and the corresponding Preferred Shares, ceased to accrue, and
all rights of the holders of the Depositary Shares, and the corresponding
Preferred Shares, ceased, except for the right to receive the redemption price
and accrued and unpaid dividends, without interest thereon, upon surrender of
certificates representing the Depositary Shares, and the corresponding Preferred
Shares.
In total, 787,008 of the Depositary Shares were converted into 709,078 common
shares and the Company redeemed the remaining 14,889 Depositary Shares for $25
per share, plus accrued and unpaid dividends. Likewise, 787,008 preferred units
were converted into 709,078 limited partnership units and the Operating
Partnership redeemed the remaining 14,889 preferred units. The Operating
Partnership funded the redemption, totaling approximately $375,000, from cash
flow from operations.
Financing Arrangements
During the nine months of 2003, we purchased at a 2% premium, $2.6 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 $24.9 million of the notes that
were purchased in 2001 and 2002.
At September 30, 2003, approximately 47% of our outstanding long-term debt
represented unsecured borrowings and approximately 61% of the gross book value
of our real estate portfolio was unencumbered. The average interest rate,
including loan cost amortization, on average debt outstanding for the three
months ended September 30, 2003 was 7.82%.
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
unitholders' interests. To generate capital to reinvest into other attractive
investment opportunities, we may also consider the use of operational and
developmental joint ventures, selling certain properties that do not meet our
long-term investment criteria or selling outparcels on existing properties.
We maintain unsecured, revolving lines of credit that provided for unsecured
borrowings up to $85 million at September 30, 2003. In October 2003, we received
a commitment from Wells Fargo Bank to increase our existing line of credit with
them from $10 million to $25 million. This increase will bring our committed
unsecured, revolving lines of credit up to $100 million. All of our lines of
credit have maturity dates of June 30, 2005. We, together with the Company, also
have the ability through our shelf registration to issue up to $400 million in
either all debt or all equity or any combination thereof up to $400 million.
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 2003 and
2004.
25
We anticipate that adequate cash will be available to fund our operating and
administrative expenses, regular debt service obligations, and the payment of
distributions 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 unitholders 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 October 9, 2003, our Board of Trustees declared a $.6150 cash distribution
per common unit payable on November 14, 2003 to each unitholder of record on
October 31, 2003.
New Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board (FASB or the "Board")
issued Statement of Financial Accounting Standards No. 145 (FAS 145),
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections". In rescinding FASB Statement No. 4 (FAS 4),
"Reporting Gains and Losses from Extinguishment of Debt", and FASB Statement No.
64 (FAS 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. Generally, FAS 145 is effective for transactions occurring
after December 31, 2002. We adopted this statement effective January 1, 2003,
and it had no significant impact on our results of operations for the 2003 or
2002 periods.
In January of 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of
existing accounting pronouncements to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The provisions of
FIN 46 are effective immediately for all variable interests in variable interest
entities created after January 31, 2003, and we will need to apply its
provisions to any existing variable interests in variable interest entities
beginning in the first fiscal year or interim period ending after December 15,
2003. Certain of the disclosure requirements apply to all financial statements
issued after January 31, 2003, regardless of when the variable interest entity
was established. We have evaluated Deer Park, which was created after January
31, 2003 (Note 6) and have determined that under the current facts and
circumstances that we will not be required to consolidate under the provisions
of FIN 46. We are in the process of evaluating TWMB, which was created prior to
January 31, 2003 (Note 6) in order to determine whether the entity is a variable
interest entity and whether we are considered to be the primary beneficiary or
whether we hold a significant variable interest. TWMB is a joint venture
arrangement where it is possible that we may be required to consolidate or
disclose additional information about our 50% interest in TWMB in the future.
Our maximum exposure to loss as a result of our involvement in this joint
venture is equal to our investment in the joint venture and our obligation under
our joint and several guarantee of TWMB's debt, all as disclosed in Note 6.
Also, we are currently evaluating the joint venture related to the Charter Oak
portfolio (Note 11) for accounting treatment under FIN 46.
In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", effective at
the beginning of the first interim period beginning after June 15, 2003. The
Board initiated its liabilities and equity project in response to concerns
regarding the current balance sheet classifications of certain financial
instruments. The standard specifies that instruments within its scope, which
include mandatorily redeemable financial instruments, obligations to repurchase
the issuer's equity shares by transferring assets, and certain obligations to
issue a variable number of shares, represent obligations of the issuer and,
therefore, the issuer must classify them as liabilities. We adopted this
statement effective July 1, 2003, and it had no significant impact on our
results of operations or financial position.
26
Funds from Operations ("FFO")
We believe that for a clear understanding of our historical operating results,
FFO should be considered along with net income as presented in the unaudited
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 distributions to unitholders and other cash needs.
Below is a calculation of funds from operations for the three and nine months
ended September 30, 2003 and 2002 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---------------------------------------------------------------------- ------------ ------------ ------------ -------------
Funds from Operations:
Net income $4,546 $2,992 $ 10,237 $7,538
Adjusted for:
Depreciation and amortization
attributable to discontinued operations --- 68 89 375
Depreciation and amortization uniquely significant to real estate-
wholly owned 7,021 7,056 21,252 20,973
Depreciation and amortization uniquely significant to real estate-
joint ventures 287 168 808 168
Loss/(gain) on sale of real estate --- --- 735 (460)
---------------------------------------------------------------------- ------------ ------------ ------------ -------------
Funds from operations $11,854 $10,284 $33,121 $28,594
---------------------------------------------------------------------- ------------ ------------ ------------ -------------
Weighted average units outstanding (1) 13,615 12,235 13,410 12,003
---------------------------------------------------------------------- ------------ ------------ ------------ -------------
(1) Assumes our preferred units and unit options are all converted to common
units.
27
Economic Conditions and Outlook
The majority of our leases contain provisions designed to mitigate the impact of
inflation. Such provisions include clauses for the escalation of base rent and
clauses enabling us to receive percentage rentals based on tenants' gross sales
(above predetermined levels, which we believe often are lower than traditional
retail industry standards) that generally increase as prices rise. Most of the
leases require the tenant to pay their share of property operating expenses,
including common area maintenance, real estate taxes, insurance and advertising
and promotion, thereby reducing exposure to increases in costs and operating
expenses resulting from inflation.
While factory outlet stores continue to be a profitable and fundamental
distribution channel for brand name manufacturers, some retail formats are more
successful than others. As typical in the retail industry, certain tenants have
closed, or will close, certain stores by terminating their lease prior to its
natural expiration or as a result of filing for protection under bankruptcy
laws.
During 2003 and 2004, we have approximately 2,377,000 square feet of our
portfolio coming up for renewal. If we are unable to successfully renew or
re-lease a significant amount of this space on favorable economic terms, the
loss in rent could have a material adverse effect on our results of operations.
As of September 30, 2003, we have renewed approximately 831,000 square feet, 78%
of the 1,070,000 total square feet scheduled to expire in 2003. The existing
tenants have renewed at an average base rental rate approximately equal to the
expiring rate. We also re-tenanted 251,000 square feet of vacant space during
the first nine months of 2003 at a 4% increase in the average base rental rate
from that which was previously charged. Our factory outlet centers typically
include well-known, national, brand name companies. By maintaining a broad base
of creditworthy tenants and a geographically diverse portfolio of properties
located across the United States, we reduce our operating and leasing risks. No
one tenant (including affiliates) accounted for more than 6.3% of our combined
base and percentage rental revenues for the nine months ended September 30,
2003. Accordingly, we do not expect any material adverse impact on our results
of operations and financial condition as a result of leases to be renewed or
stores to be released.
As of September 30, 2003 and 2002, our centers were 95% and 96% occupied,
respectively. Consistent with our long-term strategy of re-merchandising
centers, we will continue to hold space off the market until an appropriate
tenant is identified. While we believe this strategy will add value to our
centers in the long-term, it may reduce our average occupancy rates in the near
term.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to various market risks, including changes in interest rates.
Market risk is the potential loss arising from adverse changes in market rates
and prices, such as interest rates. We do not enter into derivatives or other
financial instruments for trading or speculative purposes.
To manage our exposure to interest rate changes, we negotiate long-term fixed
rate debt instruments and from time to time enter into interest rate swap
agreements. The swaps involve the exchange of fixed and variable interest rate
payments based on a contractual principal amount and time period. Payments or
receipts on the agreements are recorded as adjustments to interest expense. At
September 30, 2003, TWMB had an interest rate swap agreement effective through
August 2004 with a notional amount of $19 million. Under this agreement, TWMB
receives a floating interest rate based on the 30 day LIBOR index and pays a
fixed interest rate of 2.49%. This swap effectively changes the payment of
interest on $19 million of variable rate construction debt to fixed rate debt
for the contract period at a rate of 4.49%.
28
The fair value of the interest rate swap agreement represents the estimated
receipts or payments that would be made to terminate the agreement. At September
30, 2003, TWMB would have paid approximately $236,000 to terminate the
agreement. A 1% decrease in the 30 day LIBOR index would increase the amount
paid by TWMB by $175,000 to approximately $411,000. The fair value is based on
dealer quotes, considering current interest rates and remaining term to
maturity. TWMB does not intend to terminate the interest rate swap agreement
prior to its maturity. The fair value of this derivative is currently recorded
as a liability in TWMB's unaudited Consolidated Balance Sheets; 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 September 30, 2003 was $355.3 million and
its recorded value was $327.3 million. A 1% increase from prevailing interest
rates at September 30, 2003 would result in a decrease in fair value of total
long-term debt by approximately $11.0 million. Fair values were determined from
quoted market prices, where available, using current interest rates considering
credit ratings and the remaining terms to maturity.
Item 4. Controls and Procedures
The Chief Executive Officer, Stanley K. Tanger, and Treasurer and Assistant
Secretary, Frank C. Marchisello, Jr., of Tanger GP Trust, sole general partner
of the registrant, evaluated the effectiveness of the registrant's disclosure
controls and procedures as of the report period ended September 30, 2003
(Evaluation Date), and concluded that, as of the Evaluation Date, the
registrant's disclosure controls and procedures were effective to ensure that
information the registrant is required to disclose in its filings with the
Securities and Exchange Commission under the Securities and Exchange Act of 1934
is recorded, processed, summarized and reported, within the time periods
specified in the Commission's rules and forms, and to ensure that information
required to be disclosed by the registrant in the reports that it files under
the Exchange Act is accumulated and communicated to the registrant's management,
including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
There were no significant changes in the registrant's internal controls or in
other factors that could significantly affect these controls subsequent to the
Evaluation Date.
29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Operating Partnership nor the Company is presently involved in any
material litigation nor, to their knowledge, is any material litigation
threatened against the Operating Partnership or the Company 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amended and Restated Employment Agreement of Frank C.
Marchisello Jr., as of July 1, 2003., incorporated by
reference to the Tanger Factory Outlet Centers, Inc. From
10-Q for the quarter ended September 30, 2003.
31.1 Principal Executive Officer Certification Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 302 of
the Sarbanes - Oxley Act of 2002.
31.2 Principal Financial Officer Certification Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 302 of
the Sarbanes - Oxley Act of 2002.
32.1 Principal Executive Officer Certification Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes - Oxley Act of 2002.
32.2 Principal Financial Officer Certification Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes - Oxley Act of 2002.
(b) Reports on Form 8-K - None.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
TANGER PROPERTIES LIMITED PARTNERSHIP
By: Tanger GP Trust, its general partner
By: /s/ Frank C. Marchisello Jr.
----------------------------
Frank C. Marchisello, Jr.
Treasurer and Assistant Secretary
DATE: November 12, 2003
30
Exhibit Index
Exhibit No. Description
- ---------- -----------------------------------------------------------------
10.1 Amended and Restated Employment Agreement for Frank C.
Marchisello Jr., as of July 1, 2003., incorporated by reference
to the Tanger Factory Outlet Centers, Inc. Form 10-Q for the
quarter ended September 30, 2003.
31.1 Principal Executive Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes - Oxley Act of 2002.
31.2 Principal Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes - Oxley Act of 2002.
32.1 Principal Executive Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes - Oxley Act of 2002.
32.2 Principal Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes - Oxley Act of 2002.
31