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 March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to
Commission File No. 1-11986
TANGER FACTORY OUTLET CENTERS, INC.
(Exact name of Registrant as specified in its Charter)
NORTH CAROLINA 56-1815473
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3200 Northline Avenue, Suite 360, Greensboro, North Carolina 27408
(Address of principal executive offices)
(Zip code)
(336) 292-3010 (Registrant's
telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities and Exchange Act of 1934). Yes X No
13,596,028 shares of Common Stock,
$.01 par value, outstanding as of April 30, 2004
1
TANGER FACTORY OUTLET CENTERS, INC.
Index
Part I. Financial Information
Page Number
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations
For the three months ended March 31, 2004 and 2003 3
Consolidated Balance Sheets
As of March 31, 2004 and December 31, 2003 4
Consolidated Statements of Cash Flows
For the three months ended March 31, 2004 and 2003 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Item 4. Controls and Procedures 23
Part II. Other Information
Item 1. Legal proceedings 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 24
2
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended
March 31,
2004 2003
- ---------------------------------------------------------------------------------------------------------------
(unaudited)
REVENUES
Base rentals $ 32,060 $ 19,285
Percentage rentals 713 395
Expense reimbursements 12,147 8,313
Other income 859 662
- ---------------------------------------------------------------------------------------------------------------
Total revenues 45,779 28,655
- ---------------------------------------------------------------------------------------------------------------
EXPENSES
Property operating 13,710 9,702
General and administrative 3,159 2,428
Depreciation and amortization 12,376 7,128
- ---------------------------------------------------------------------------------------------------------------
Total expenses 29,245 19,258
- ---------------------------------------------------------------------------------------------------------------
Operating income 16,534 9,397
Interest expense 8,864 6,724
- ---------------------------------------------------------------------------------------------------------------
Income before equity in earnings of unconsolidated joint ventures,
minority interest and discontinued operations 7,670 2,673
Equity in earnings of unconsolidated joint ventures 165 92
Minority interest
Consolidated joint venture (6,593) ---
Operating partnership (230) (578)
- ---------------------------------------------------------------------------------------------------------------
Income from continuing operations 1,012 2,187
Discontinued operations --- 4
- ---------------------------------------------------------------------------------------------------------------
Net income 1,012 2,191
Less applicable preferred share dividends --- (443)
- ---------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 1,012 $ 1,748
- ---------------------------------------------------------------------------------------------------------------
Basic earnings per common share:
Income from continuing operations $ .08 $ .19
Net income $ .08 $ .19
- ---------------------------------------------------------------------------------------------------------------
Diluted earnings per common share:
Income from continuing operations $ .08 $ .19
Net income $ .08 $ .19
- ---------------------------------------------------------------------------------------------------------------
Dividends paid per common share $ .6150 $ .6125
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
3
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, December 31,
2004 2003
- ----------------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
Rental Property
Land $ 118,933 $ 119,833
Buildings, improvements and fixtures 965,948 958,720
- ----------------------------------------------------------------------------------------------------------------------------
1,084,881 1,078,553
Accumulated depreciation (202,454) (192,698)
- ----------------------------------------------------------------------------------------------------------------------------
Rental property, net 882,427 885,855
Cash and cash equivalents 10,781 9,836
Deferred charges, net 67,114 68,568
Other assets 19,565 23,178
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $ 979,887 $ 987,437
- ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY
Liabilities
Long-term debt
Senior, unsecured notes $ 147,509 $ 147,509
Mortgages payable (including a debt premium of $11,242 and $11,852, respectively) 368,087 370,160
Lines of credit 4,825 22,650
- ----------------------------------------------------------------------------------------------------------------------------
520,421 540,319
Construction trade payables 5,816 4,345
Accounts payable and accrued expenses 18,507 18,025
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 544,744 562,689
- ----------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Minority interest
Consolidated joint venture 220,337 218,148
Operating partnership 39,524 39,182
- ----------------------------------------------------------------------------------------------------------------------------
Total minority interest 259,861 257,330
- ----------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Common shares, $.01 par value, 50,000,000 shares authorized,
13,452,203 and 12,960,643 shares issued and outstanding
at March 31, 2004 and December 31, 2003 135 130
Paid in capital 265,087 250,070
Distributions in excess of net income (89,916) (82,737)
Accumulated other comprehensive loss (24) (45)
- ----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 175,282 167,418
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities, minority interest and shareholders' equity $ 979,887 $ 987,437
- ----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
4
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
March 31,
2004 2003
- ---------------------------------------------------------------------------------------------------------------------
(unaudited)
OPERATING ACTIVITIES
Net income $ 1,012 $ 2,191
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 12,376 7,329
Amortization of deferred financing costs 363 314
Equity in earnings of unconsolidated joint ventures (165) (92)
Consolidated joint venture minority interest 6,593 ---
Operating partnership minority interest 230 578
Compensation under Unit Option Plan 14 26
Amortization of premium on assumed indebtedness (610) ---
Market rent rate adjustment (60) ---
Straight-line base rent adjustment (84) 57
Increase (decrease) due to changes in
Other assets (80) 1,470
Accounts payable and accrued expenses 508 (2,931)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activites 20,097 8,942
- ---------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to rental property (2,517) (1,690)
Acquisition of rental property --- (4,700)
Additions to investments in unconsolidated joint ventures --- (952)
Additions to deferred lease costs (239) (297)
Decrease in escrow from rental property purchase --- 4,008
Distributions received from unconsolidated joint ventures 375 300
Other --- (2)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,381) (3,333)
- ---------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Cash dividends paid (8,191) (6,030)
Distributions to operating partnership minority interest (1,866) (1,858)
Distributions to consolidated joint venture minority interest (4,404) ---
Net proceeds from sale of common shares 13,173 ---
Proceeds from issuance of debt 26,075 23,119
Repayments of debt (45,363) (26,985)
Additions to deferred financing costs (3) (18)
Proceeds from exercise of share and unit options 3,808 5,300
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (16,771) (6,472)
- ---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 945 (863)
Cash and cash equivalents, beginning of period 9,836 1,072
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 10,781 $ 209
- ---------------------------------------------------------------------------------------------------------------------
Supplemental schedule of non-cash investing activities:
We purchase capital equipment and incur costs relating to construction of
new facilities, including tenant finishing allowances. Expenditures included in
construction trade payables as of March 31, 2004 and 2003 amounted to $5,816 and
$7,560, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
5
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
1. Business
Tanger Factory Outlet Centers, Inc., a fully-integrated, self-administered,
self-managed real estate investment trust ("REIT"), develops, owns, operates and
manages factory outlet centers. At March 31, 2004, we had ownership interests in
or management responsibilities for 40 centers in 23 states totaling 9.3 million
square feet of gross leasable area ("GLA"). We provide all development, leasing
and management services for our centers. The factory outlet centers and other
assets of the Company's business are held by, and all of its operations are
conducted by, Tanger Properties Limited Partnership. Unless the context
indicates otherwise, the term the "Company" refers to Tanger Factory Outlet
Centers, Inc. and subsidiaries and the term "Operating Partnership" refers to
Tanger Properties Limited Partnership and subsidiaries. The terms "we", "our"
and "us" refer to the Company or the Company and the Operating Partnership
together, as the context requires.
2. Basis of Presentation
Our unaudited consolidated financial statements have been prepared pursuant to
accounting principles generally accepted in the United States of America and
should be read in conjunction with the consolidated financial statements and
notes thereto of our Annual Report on Form 10-K for the year ended December 31,
2003. Certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
Securities and Exchange Commission's ("SEC") rules and regulations, although
management believes that the disclosures are adequate to make the information
presented not misleading.
The accompanying unaudited consolidated financial statements include our
accounts, our wholly-owned subsidiaries, as well as the Operating Partnership
and its subsidiaries and reflect, in the opinion of management, all adjustments
necessary for a fair presentation of the interim consolidated financial
statements. All such adjustments are of a normal and recurring nature.
Intercompany balances and transactions have been eliminated in consolidation.
Investments in real estate joint ventures that represent non-controlling
ownership interests are accounted for using the equity method of accounting.
These investments are recorded initially at cost and subsequently adjusted for
our net equity in the venture's income (loss) and cash contributions and
distributions. Our investments are included in other assets in our consolidated
balance sheets.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Financial Interpretation No. 46 "Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51" ("FIN 46") (Revised
December 2003) which clarified the application of existing accounting
pronouncements to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The provisions of FIN 46 were
effective immediately for all variable interests in variable interest entities
created after January 31, 2003. COROC Holdings, LLC ("COROC"), a joint venture
entered into by us in December 2003, was evaluated under the provisions of FIN
46 and it was determined that we are considered the primary beneficiary of the
joint venture and therefore the results of operations and financial position of
COROC are included in our consolidated financial statements.
6
For variable interests in variable interest entities existing as of January 31,
2003, the provisions of FIN 46 are applicable as of March 31, 2004 and
thereafter. We evaluated TWMB Associates, LLC ("TWMB"), a joint venture in which
we have a 50% ownership interest which existed prior to January 31, 2003, and
determined that under the provisions of FIN 46 the entity is not a variable
interest entity. Therefore, TWMB will continue to be accounted for using the
equity method of accounting.
Certain amounts in the 2003 consolidated financial statements have been
reclassified to conform to the 2004 presentation. See Footnote 4.
3. Investments in Unconsolidated Real Estate Joint Ventures
Our investment in unconsolidated real estate joint ventures as of March 31, 2004
and December 31, 2003 was $7.3 million and $7.5 million, respectively. These
investments include our 50% ownership investment in TWMB and our one-third
ownership interest in Deer Park Enterprise, LLC ("Deer Park") on Long Island,
New York.
Our investment in real estate joint ventures are reduced by 50% of the profits
earned for leasing and development services we provided to TWMB. The following
management, leasing and development fees were recorded in other income from
services provided to TWMB during the quarter ended March 31, 2004 and 2003 (in
thousands):
Three months ended
March 31,
2004 2003
-----------------------------------------------------------------------
Fee:
Management $ 68 $ 34
Leasing 61 58
Development 5 13
-----------------------------------------------------------------------
Total Fees $ 134 $ 105
-----------------------------------------------------------------------
Our carrying value of investments in unconsolidated joint ventures differs from
our share of the assets reported in the "Summary Balance Sheets - Unconsolidated
Joint Ventures" shown below due to adjustments to the book basis, including
intercompany profits on sales of services that are capitalized by the
unconsolidated joint ventures. The differences in basis are amortized over the
various useful lives of the related assets.
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. We and our partner each made capital contributions during
the fourth quarter of 2003 of $1.7 million for the third phase. Upon completion
of this third phase in 2004, TWMB's Myrtle Beach center will total 403,000
square feet. At March 31, 2004, commitments for construction of the third phase
expansion amounted to $2.2 million. Commitments for construction represent only
those costs contractually required to be paid by TWMB.
7
In conjunction with the construction of the center, TWMB maintains a
construction loan in the amount of $36.2 million with Bank of America, NA
(Agent) and SouthTrust Bank due in September 2005. As of March 31, 2004 the
construction loan had a balance of $29.7 million. In August of 2002, TWMB
entered into an interest rate swap agreement with Bank of America, NA effective
through August 2004 with a notional amount of $19 million. Under this agreement,
TWMB receives a floating interest rate based on the 30 day LIBOR index and pays
a fixed interest rate of 2.49%. This swap effectively changes the payment of
interest on $19 million of variable rate debt to fixed rate debt for the
contract period at a rate of 4.49%. All debt incurred by this unconsolidated
joint venture is collateralized by its property as well as joint and several
guarantees by both partners.
Summary unaudited financial information of joint ventures accounted for using
the equity method is as follows (in thousands):
As of As of Tanger's Tanger's
Summary Balance Sheets March 31, December 31, Portion Portion
- - Unconsolidated Joint Ventures: 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------
Assets:
Investment properties at cost, net $67,051 $63,899 $28,944 $27,316
Cash and cash equivalents 2,078 4,145 921 1,983
Deferred charges, net 1,596 1,652 798 826
Other assets 3,334 3,277 1,354 1,339
- ---------------------------------------------------------------------------------------------
Total assets $74,059 $72,973 $32,017 $31,464
- ---------------------------------------------------------------------------------------------
Liabilities and Owners' Equity:
Mortgage payable $54,811 $54,683 $23,213 $23,137
Construction trade payables 2,501 1,164 1,251 582
Accounts payable and other liabilities 603 564 297 280
- ---------------------------------------------------------------------------------------------
Total liabilities 57,915 56,411 24,761 23,999
Owners' equity 16,144 16,562 7,256 7,465
- ---------------------------------------------------------------------------------------------
Total liabilities and owners' equity $74,059 $72,973 $32,017 $31,464
- ---------------------------------------------------------------------------------------------
Summary Statement of Operations Three months ended Three months ended
- Unconsolidated Joint Ventures: March 31, 2004 March 31, 2003
- -------------------------------------------------------------------------------
Revenues $2,075 $ 1,727
- -------------------------------------------------------------------------------
Expenses:
Property operating 775 704
General and administrative 1 17
Depreciation and amortization 623 528
- -------------------------------------------------------------------------------
Total expenses 1,399 1,249
- -------------------------------------------------------------------------------
Operating income 676 478
Interest expense 380 325
- -------------------------------------------------------------------------------
Net income $ 296 $ 153
- -------------------------------------------------------------------------------
Tanger's share of:
- -------------------------------------------------------------------------------
Net income $ 165 $ 92
Depreciation (real estate related) $ 300 $ 255
- -------------------------------------------------------------------------------
8
4. Disposition of Properties
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"),
results of operations and gain/(loss) on sales of real estate for properties
with identifiable cash flows sold subsequent to December 31, 2001 are reflected
in the consolidated statements of operations as discontinued operations for all
periods presented.
In May and October 2003, we completed the sale of properties located in
Martinsburg, West Virginia and Casa Grande, Arizona, respectively. Net proceeds
received from the sales of these properties were approximately $8.7 million. We
recorded a loss on sale of real estate of approximately $147,000 which is
included in discontinued operations for the year ended December 31, 2003.
Below is a summary of the results of operations of these properties (in
thousands):
Three Months Ended
March 31,
2003
- ----------------------------------------------------------------------
Revenues:
Base rentals $ 376
Expense reimbursements 137
Other income 9
- ----------------------------------------------------------------------
Total revenues 522
- ----------------------------------------------------------------------
Expenses:
Property operating 315
General and administrative 2
Depreciation and amortization 201
- ----------------------------------------------------------------------
Total expenses 518
- ----------------------------------------------------------------------
Discontinued operations before minority interest 4
Minority interest ---
- ----------------------------------------------------------------------
Discontinued operations $ 4
- ----------------------------------------------------------------------
5. Other Comprehensive Income - Derivative Financial Instruments
During the first quarter of 2003 our interest rate swap, which had been
designated as a cash flow hedge, expired and therefore the fair value of the
swap became zero resulting in a change in fair value of $98,000. TWMB's interest
rate swap agreement has been designated as a cash flow hedge and is carried on
TWMB's balance sheet at fair value. At March 31, 2004, our portion of the fair
value of TWMB's hedge is recorded as a reduction to investment in joint ventures
of $56,000. For the three months ended March 31, 2004, the change in the fair
value of the derivative instruments is recorded as $21,000 of other
comprehensive income, net of minority interest of $5,000.
Three Months Ended
March 31,
2004 2003
- -----------------------------------------------------------------------------
Net income $ 1,012 $2,191
- -----------------------------------------------------------------------------
Other comprehensive income (loss):
Change in fair value of our portion of
TWMB cash flow hedge,
net of minority interest of $5 and $(3) 21 (11)
Change in fair value of cash flow hedge,
net of minority interest of $24 --- 74
- -----------------------------------------------------------------------------
Other comprehensive income 21 63
- -----------------------------------------------------------------------------
Total comprehensive income $ 1,033 $ 2,254
- -----------------------------------------------------------------------------
9
6. Earnings Per Share
The following table sets forth a reconciliation of the numerators and
denominators in computing earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share (in thousands, except
per share amounts):
Three Months Ended
March 31,
2004 2003
- ------------------------------------------------------------------------------
Numerator:
Income from continuing operations $1,012 $2,187
Less applicable preferred share dividends --- (443)
- ------------------------------------------------------------------------------
Income from continuing operations available to
common shareholders - basic and diluted 1,012 1,744
Discontinued operations --- 4
- ------------------------------------------------------------------------------
Net income available to common shareholders
basic and diluted $ 1,012 $1,748
- ------------------------------------------------------------------------------
Denominator:
Basic weighted average common shares 13,337 9,181
Effect of outstanding share and unit options 151 227
- ------------------------------------------------------------------------------
Diluted weighted average common shares 13,448 9,408
- ------------------------------------------------------------------------------
Basic earnings per common share:
Income from continuing operations $.08 $.19
Discontinued operations --- ---
- ------------------------------------------------------------------------------
Net income $.08 $.19
- ------------------------------------------------------------------------------
Diluted earnings per common share:
Income from continuing operations $.08 $.19
Discontinued operations --- ---
- ------------------------------------------------------------------------------
Net income $.08 $.19
- ------------------------------------------------------------------------------
The computation of diluted earnings per share excludes options to purchase
common shares when the exercise price is greater than the average market price
of the common shares for the period. Options excluded from the computation of
diluted earnings per share for the three months ended March 31, 2004 and 2003,
were zero and 232,000, respectively. The assumed conversion of preferred shares
to common shares as of the beginning of the year would have been anti-dilutive.
The assumed conversion of the partnership units held by the minority interest
limited partner as of the beginning of the year, which would result in the
elimination of earnings allocated to the minority interest in the Operating
Partnership, would have no impact on earnings per share since the allocation of
earnings to a partnership unit is equivalent to earnings allocated to a common
share.
7. Shareholders' Equity
In December 2003, we completed a public offering of 2,300,000 common shares at a
price of $40.50 per share, receiving net proceeds of approximately $88.0
million. The net proceeds were used together with other available funds to
finance our portion of the equity required to purchase the COROC portfolio of
outlet shopping centers as mentioned in Note 2 above and for general corporate
purposes. In addition in January 2004, the underwriters of the December 2003
offering exercised in full their over-allotment option to purchase an additional
345,000 common shares at the offering price of $40.50 per share. We received net
proceeds of approximately $13.2 million from the exercise of the over-allotment.
10
8. Subsequent Events
In April 2004 we sold an outparcel of undeveloped land at our Branson, Missouri
center. Net proceeds received were approximately $512,000 and a gain of
approximately $223,000 was recorded in other income in the second quarter of
2004.
During the second quarter of 2004, the Board of Directors approved amendments to
the Company's Share Option Plan to add restricted shares and other share-based
grants to the plan, to merge the Operating Partnership's Unit Option Plan into
the Share Option Plan and to rename the plan as the Amended and Restated
Incentive Award Plan (the "Incentive Award Plan"). The Incentive Award Plan has
been submitted to shareholders for approval at our Annual Shareholders' Meeting
on May 14, 2004. On April 27, 2004, certain executive officers were granted a
total of 105,000 restricted shares subject to shareholder approval of the
Incentive Award Plan.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with the unaudited
consolidated financial statements appearing elsewhere in this report. Historical
results and percentage relationships set forth in the unaudited, consolidated
statements of operations, including trends which might appear, are not
necessarily indicative of future operations. Unless the context indicates
otherwise, the term "Company" refers to Tanger Factory Outlet Centers, Inc. and
subsidiaries and the term "Operating Partnership" refers to Tanger Properties
Limited Partnership and subsidiaries. The terms "we", "our" and "us" refer to
the Company or the Company and the Operating Partnership together, as the text
requires.
The discussion of our results of operations reported in the unaudited,
consolidated statements of operations compares the three months ended March 31,
2004 with the three months ended March 31, 2003. Certain comparisons between the
periods are made on a percentage basis as well as on a weighted average gross
leasable area ("GLA") basis, a technique which adjusts for certain increases or
decreases in the number of centers and corresponding square feet related to the
development, acquisition, expansion or disposition of rental properties. The
computation of weighted average GLA, however, does not adjust for fluctuations
in occupancy which may occur subsequent to the original opening date.
Cautionary Statements
Certain statements made below are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. We intend for such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Reform Act of 1995 and included
this statement for purposes of complying with these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "believe", "expect", "intend", "anticipate", "estimate", "project",
or similar expressions. You should not rely on forward-looking statements since
they involve known and unknown risks, uncertainties and other factors which are,
in some cases, beyond our control and which could materially affect our actual
results, performance or achievements. Factors which may cause actual results to
differ materially from current expectations include, but are not limited to, the
following:
- - national and local general economic and market conditions;
- - demographic changes; our ability to sustain, manage or forecast our growth;
existing government regulations and changes in, or the failure to comply
with, government regulations;
- - adverse publicity; liability and other claims asserted against us;
11
- - competition;
- - the risk that we may not be able to finance our planned development
activities;
- - risks related to the retail real estate industry in which we compete,
including the potential adverse impact of external factors such as
inflation, tenant demand for space, consumer confidence, unemployment rates
and consumer tastes and preferences;
- - risks associated with our development activities, such as the potential for
cost overruns, delays and lack of predictability with respect to the
financial returns associated with these development activities;
- - risks associated with real estate ownership, such as the potential adverse
impact of changes in the local economic climate on the revenues and the
value of our properties;
- - risks that a significant number of tenants may become unable to meet their
lease obligations or that we may be unable to renew or re-lease a
significant amount of available space on economically favorable terms;
- - fluctuations and difficulty in forecasting operating results; changes in
business strategy or development plans;
- - business disruptions;
- - the ability to attract and retain qualified personnel;
- - the ability to realize planned costs savings in acquisitions; and
- - retention of earnings.
12
General Overview
In December 2003 we completed the acquisition of the Charter Oak Partners'
portfolio of nine factory outlet centers totaling approximately 3.3 million
square feet. We and an affiliate of Blackstone Real Estate Advisors
("Blackstone") acquired the portfolio through a joint venture in the form of a
limited liability company, COROC Holdings, LLC ("COROC"). We own one-third and
Blackstone owns two-thirds of the joint venture. We provide operating,
management, leasing and marketing services to the properties for a fee. COROC is
consolidated for financial reporting purposes under the provisions of Financial
Accounting Standard Board Interpretation No. 46 ("FIN 46").
The purchase price for this transaction was $491.0 million, including the
assumption of approximately $186.4 million of cross-collateralized debt which
has a stated, fixed interest rate of 6.59% and matures in July 2008. We recorded
the debt at its fair value of $198.3 million, with an effective interest rate of
4.97%. Accordingly, a debt premium of $11.9 million was recorded and is being
amortized using the effective interest method over the life of the debt. We
financed the majority of our equity in the joint venture with proceeds from the
issuance of 2.3 million common shares at $40.50 per share and expect that the
transaction will be accretive to our operating results in 2004. The successful
equity financing allows us to maintain a strong balance sheet and our current
financial flexibility.
At March 31, 2004, we had ownership interests in or management responsibilities
for 40 centers in 23 states totaling 9.3 million square feet compared to 34
centers in 21 states totaling 6.2 million square feet at March 31, 2003. The
activity in our portfolio of properties since March 31, 2003 is summarized
below:
No. of GLA
Centers (000's) States
- --------------------------------------------------------------------------------
As of March 31, 2003 34 6,214 21
Acquisitions/Expansions:
Sevierville, Tennessee (wholly-owned) --- 35 ---
Myrtle Beach Hwy 17, South Carolina - --- 64 ---
(unconsolidated joint venture)
Charter Oak portfolio (consolidated joint venture)
Rehoboth, Delaware 1 569 1
Foley, Alabama 1 536 ---
Myrtle Beach Hwy 501, South Carolina 1 427 ---
Hilton Head, South Carolina 1 393 ---
Park City, Utah 1 301 1
Westbrook, Connecticut 1 291 1
Lincoln City, Oregon 1 270 1
Tuscola, Illinois 1 258 1
Tilton, New Hampshire 1 228 ---
Dispositions:
Martinsburg, West Virginia (wholly-owned) (1) (49) (1)
Casa Grande, Arizona (wholly-owned) (1) (185) (1)
Bourne, Massachusetts (managed) (1) (23) (1)
Other --- 4 ---
- --------------------------------------------------------------------------------
As of March 31, 2004 40 9,333 23
- --------------------------------------------------------------------------------
13
A summary of the operating results for the three months ended March 31, 2004 and
2003 is presented in the following table, expressed in amounts calculated on a
weighted average GLA basis.
Three Months Ended
March 31,
2004 2003
- --------------------------------------------------------------------------=-----
GLA at end of period (000's)
Wholly owned 5,302 5,497
Partial owned (consolidated) (1) 3,273 ---
Partially owned (unconsolidated) (2) 324 260
Managed 434 457
- --------------------------------------------------------------------------------
Total GLA at end of period (000's) 9,333 6,214
Weighted average GLA (000's) (3) 8,574 5,258
Occupancy percentage at end of period (1) (2) 94% 95%
Per square foot for wholly owned properties
Revenues
Base rentals $ 3.74 3.67
Percentage rentals .08 .07
Expense reimbursements 1.42 1.58
Other income .10 .13
- --------------------------------------------------------------------------------
Total revenues 5.34 5.45
- --------------------------------------------------------------------------------
Expenses
Property operating 1.60 1.84
General and administrative .37 .46
Depreciation and amortization 1.44 1.36
- --------------------------------------------------------------------------------
Total expenses 3.41 3.66
- --------------------------------------------------------------------------------
Operating income 1.93 1.79
Interest expense 1.03 1.27
- --------------------------------------------------------------------------------
Income before equity in earnings of unconsolidated joint
ventures, minority interest and discontinued operations $ .90 $ .52
- --------------------------------------------------------------------------------
(1) Includes the nine centers from the Charter Oak portfolio acquired on
December 19, 2003 of which Tanger owns a one-third interest through a joint
venture arrangement..
(2) Includes Myrtle Beach, South Carolina Hwy 17
property which we operate through a 50% ownership joint venture.
(3) Represents GLA of wholly-owned and partially owned consolidated operating
properties weighted by months of operation.. GLA is not adjusted for
fluctuations in occupancy that may occur subsequent to the original opening
date. Excludes GLA of properties for which their results are included in
discontinued operations.
14
The table set forth below summarizes certain information with respect to our
existing centers in which we have an ownership interest as of March 31, 2004.
Mortgage
Debt
Outstanding
GLA % 000's) as of March
Location (sq. ft.) Occupied 31, 2004
- --------------------------------------------------------------------------------
Riverhead, NY (1) 729,238 99 $ ---
Rehoboth, DE (1) (3) 568,787 99 39,719
Foley, AL (3) 535,675 97 32,481
San Marcos, TX 442,486 92 37,130
Myrtle Beach Hwy 501, SC (3) 427,472 96 23,062
Sevierville, TN (1) 419,023 100 ---
Hilton Head, SC (3) 393,094 88 18,630
Commerce II, GA 342,556 92 29,500
Howell, MI 325,231 100 ---
Myrtle Beach Hwy 17, SC (1) (2) 324,333 100 ---
Park City, UT (3) 300,602 95 12,691
Westbrook, CT (3) 291,051 89 15,080
Branson, MO 277,883 97 24,000
Williamsburg, IA 277,230 96 18,967
Lincoln City, OR (3) 270,280 93 10,487
Tuscola, IL (3) 258,114 78 20,352
Lancaster, PA 255,152 95 14,089
Locust Grove, GA 247,454 98 ---
Gonzales, LA 245,199 93 ---
Tilton, NH (3) 227,966 96 13,104
Fort Meyers, FL 198,789 86 ---
Commerce I, GA 185,750 69 7,687
Terrell, TX 177,490 96 ---
Dalton, GA 173,430 79 10,868
Seymour, IN 141,051 80 ---
North Branch, MN 134,480 100 ---
West Branch, MI 112,420 100 6,899
Barstow, CA 108,950 88 ---
Blowing Rock, NC 105,448 93 9,481
Pigeon Forge, TN (1) 94,558 88 ---
Nags Head, NC 82,178 100 6,434
Boaz, AL 79,575 97 ---
Kittery I, ME 59,694 100 6,184
LL Bean, North Conway, NH 50,745 100 ---
Kittery II, ME 24,619 100 ---
Clover, North Conway, NH 11,000 100 ---
- --------------------------------------------------------------------------------
8,899,003 94 356,845
Debt premium 11,242
- --------------------------------------------------------------------------------
$368,087
================================================================================
(1) These properties or a portion thereof are subject to a ground lease.
(2) Represents property that is currently held through an unconsolidated joint
venture in which we own a 50% interest. The joint venture had $29.7 million
of construction loan debt as of March 31, 2004.
(3) Represents properties that are currently held through a consolidated joint
venture in which we own a one-third interest.
15
RESULTS OF OPERATIONS
Comparison of the three months ended March 31, 2004 to the three months ended
March 31, 2003
Base rentals increased $12.8 million, or 66%, in the 2004 period when compared
to the same period in 2003. The increase is primarily due to the acquisition of
the COROC portfolio of outlet center properties. Base rent per weighted average
GLA increased by $.07 per square foot from $3.67 per square foot in the 2003
period to $3.74 per square foot in the 2004 period. The increase is primarily
the result of the COROC portfolio acquisition which had a higher average base
rent per square foot compared to the portfolio average. The overall portfolio
occupancy at March 31, 2004 decreased 1% from 95% to 94% compared to March 31,
2003. Three centers experienced a negative occupancy trend of at least 10% from
March 31, 2003 to March 31, 2004 offset by one center which experienced a
positive occupancy gain of at least 10%.
Percentage rentals, which represent revenues based on a percentage of tenants'
sales volume above predetermined levels (the "breakpoint"), increased $318,000
or 81%, and on a weighted average GLA basis, increased $.01 per square foot in
2004 compared to 2003. The increase was partially the result of the COROC
portfolio acquisition as well as an increase in tenant sales during the last
twelve months. Reported same-space sales per square foot for the rolling twelve
months ended March 31, 2004 were $306 per square foot. This represents a 4%
increase compared to the same period in 2003. Same-space sales is defined as the
weighted average sales per square foot reported in space open for the full
duration of each comparison period.
Expense reimbursements, which represent the contractual recovery from tenants of
certain common area maintenance, insurance, property tax, promotional,
advertising and management expenses generally fluctuates consistently with the
reimbursable property operating expenses to which it relates. Expense
reimbursements, expressed as a percentage of property operating expenses, were
89% and 86% in the 2004 and 2003 periods, respectively. The increase is due to
higher reimbursement rates at the COROC properties.
Other income increased $197,000, or 30%, in 2004 compared to 2003 and on a
weighted average GLA basis, decreased $.03 per square foot from $.13 to $.10.
The overall increase is due primarily to increases in vending income and
management fees. The decrease is due to the COROC portfolio having a lower per
square foot average for other income. As the vending programs at the COROC
properties become fully operational we expect vending revenues from these
centers to increase.
Property operating expenses increased by $4.0 million, or 41%, in the 2004
period as compared to the 2003 period and, on a weighted average GLA basis,
decreased $.24 per square foot from $1.84 to $1.60. The dollar increase is the
result of the additional operating costs of the COROC portfolio in the 2004
period. The decrease on a weighted average GLA basis is due to expenses at the
COROC properties per square foot being lower than the portfolio average for the
first quarter.
General and administrative expenses increased $731,000, or 30%, in the 2004
period as compared to the 2003 period. The increase is primarily due to the
additional employees hired as a result of the acquisition of the COROC
portfolio. However, as a percentage of total revenues, general and
administrative expenses decreased from 8.5% in the 2003 to 6.9% in 2004 and, on
a weighted average GLA basis, decreased from $.46 per square foot in the 2003
period to $.37 per square foot in the 2004 period.
16
Interest expense increased $2.1 million, or 32%, during the 2004 period as
compared to 2003 period due primarily to the assumption of $186.4 million of
cross-collateralized debt in the fourth quarter of 2003 related to the
acquisition of the Charter Oak Partners' portfolio.
Depreciation and amortization per weighted average GLA increased from $1.36 per
square foot in the 2003 period to $1.44 per square foot in the 2004 period due
to a higher mix of tenant finishing allowances included in buildings and
improvements which are depreciated over shorter lives (i.e. over lives generally
ranging from 3 to 10 years as opposed to other construction costs which are
depreciated over lives ranging from 15 to 33 years). Also, certain assets in the
acquisition of the COROC properties in December 2003 accounted for under SFAS
141 "Business Combinations" ("FAS 141") were allocated to lease costs which are
amortized over shorter lives than building costs.
Equity in earnings from unconsolidated joint ventures increased $73,000, or 79%,
in the 2004 period compared to the 2003 period due to the TWMB Associates, LLC
("TWMB"), outlet center in Myrtle Beach, South Carolina having 64,000 more
square feet of GLA open in the 2004 period versus the 2003 period. TWMB is an
unconsolidated joint venture in which we have a 50% ownership interest.
In accordance with SFAS 144 "Accounting for the Impairment or Disposal of Long
Lived Assets," effective for financial statements issued for fiscal years
beginning after December 15, 2001, results of operations and gain/ (loss) on
sales of real estate for properties sold subsequent to December 31, 2001 are
reflected in the consolidated statements of operations as discontinued
operations for the 2003 period presented because of the sale of Martinsburg,
West Virginia and Casa Grande, Arizona centers during that time.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $20.1 million and $8.9 million for
the three months ended March 31, 2004 and 2003, respectively. The increase in
cash provided by operating activities is due primarily to the incremental income
from the COROC acquisition in December 2003. Net cash used in investing
activities was $2.4 and $3.3 million during the first three months of 2004 and
2003, respectively. Net cash used in financing activities was $16.8 million and
$6.5 million during the first three months of 2004 and 2003, respectively. Cash
used was higher in 2004 due primarily to increased dividends in 2004 compared to
2003, debt repayments and distributions paid to the minority interest partner in
our consolidated joint venture.
Development and Dispositions
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 late 2005 or early 2006.
In April 2004 we sold an outparcel of undeveloped land at our Branson, Missouri
center. Net proceeds received were approximately $512,000 and a gain of
approximately $223,000 was recorded in other income in the second quarter of
2004.
17
Joint Ventures
TWMB Associates, LLC
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. We and our partner each made capital contributions during
the fourth quarter of 2003 of $1.7 million for the third phase. Upon completion
of this third phase in 2004, TWMB's Myrtle Beach center will total 403,000
square feet. At March 31, 2004, commitments for construction of the third phase
expansion amounted to $2.2 million. Commitments for construction represent only
those costs contractually required to be paid by TWMB.
In conjunction with the construction of the center, TWMB maintains a
construction loan in the amount of $36.2 million with Bank of America, NA
(Agent) and SouthTrust Bank due in September 2005. As of March 31, 2004 the
construction loan had a balance of $29.7 million. In August of 2002, TWMB
entered into an interest rate swap agreement with Bank of America, NA effective
through August 2004 with a notional amount of $19 million. Under this agreement,
TWMB receives a floating interest rate based on the 30 day LIBOR index and pays
a fixed interest rate of 2.49%. This swap effectively changes the payment of
interest on $19 million of variable rate debt to fixed rate debt for the
contract period at a rate of 4.49%. All debt incurred by this unconsolidated
joint venture is collateralized by its property as well as joint and several
guarantees by both partners.
Either partner in TWMB has the right to initiate the sale or purchase of the
other party's interest at certain times. If such action is initiated, one member
would determine the fair market value purchase price of the venture and the
other would determine whether they would take the role of seller or purchaser.
The members' roles in this transaction would be determined by the tossing of a
coin, commonly known as a Russian roulette provision. If either partner enacts
this provision and depending on our role in the transaction as either seller or
purchaser, we could potentially incur a cash outflow for the purchase of our
partner's interest. However, we do not expect this event to occur in the near
future based on the positive results and expectations of developing and
operating an outlet center in the Myrtle Beach, South Carolina area.
Deer Park Enterprise, LLC
Deer Park Enterprise, LLC ("Deer Park") is a joint venture agreement in which we
have a one-third ownership interest entered into by us in September 2003 with
two other members for the purpose of, but not limited to, developing a site
located in Deer Park, New York with approximately 790,000 square feet planned at
total buildout. We expect the site will contain both outlet and big box retail
tenants with the initial phase scheduled for delivery in late 2006 or early
2007.
Any developments or expansions that we, or a joint venture that we are involved
in, have planned or anticipated may not be started or completed as scheduled, or
may not result in accretive net income or funds from operations. In addition, we
regularly evaluate acquisition or disposition proposals and engage from time to
time in negotiations for acquisitions or disposals of properties. We may also
enter into letters of intent for the purchase or sale of properties. Any
prospective acquisition or disposition that is being evaluated or which is
subject to a letter of intent may not be consummated, or if consummated, may not
result in an increase in net income or funds from operations.
Financing Arrangements
At March 31, 2004, approximately 30% of our outstanding long-term debt
represented unsecured borrowings and approximately 35% 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 March 31, 2004 was 7.30%.
18
In December 2003, we completed a public offering of 2,300,000 common shares at a
price of $40.50 per share, receiving net proceeds of approximately $88.0
million. The net proceeds were used together with other available funds to
finance our portion of the equity required to purchase the COROC portfolio of
outlet shopping centers as mentioned in General Overview above and for general
corporate purposes. In addition in January 2004, the underwriters of the
December 2003 offering exercised in full their over-allotment option to purchase
an additional 345,000 common shares at the offering price of $40.50 per share.
We received net proceeds of approximately $13.2 million from the exercise of the
over-allotment.
We intend to retain the ability to raise additional capital, including public
debt or equity, to pursue attractive investment opportunities that may arise and
to otherwise act in a manner that we believe to be in our shareholders' best
interests. Prior to the common share offerings in 2002, 2003 and 2004, we had
established a shelf registration to allow us to issue up to $400 million in
either all debt or all equity or any combination thereof. We intend to restock
this shelf up to its $400 million level during 2004. To generate capital to
reinvest into other attractive investment opportunities, we may also consider
the use of additional operational and developmental joint ventures, selling
certain properties that do not meet our long-term investment criteria as well as
outparcels on existing properties.
We maintain unsecured, revolving lines of credit that provided for unsecured
borrowings of up to $100 million at March 31, 2004. All of our lines of credit
have maturity dates of June 30, 2005. Based on cash provided by operations,
existing credit facilities, ongoing negotiations with certain financial
institutions and our ability to sell debt or equity subject to market
conditions, we believe that we have access to the necessary financing to fund
the planned capital expenditures during 2004.
We anticipate that adequate cash will be available to fund our operating and
administrative expenses, regular debt service obligations, and the payment of
dividends in accordance with Real Estate Investment Trust ("REIT") requirements
in both the short and long term. Although we receive most of our rental payments
on a monthly basis, distributions to shareholders are made quarterly and
interest payments on the senior, unsecured notes are made semi-annually. Amounts
accumulated for such payments will be used in the interim to reduce the
outstanding borrowings under the existing lines of credit or invested in
short-term money market or other suitable instruments.
On April 15, 2004, our Board of Directors declared a $.6250 cash dividend per
common share payable on May 14, 2004 to each shareholder of record on April 30,
2004, and caused a $.6250 per Operating Partnership unit cash distribution to be
paid to the Operating Partnership's minority interest.
Critical Accounting Policies and Estimates
Refer to our 2003 Annual Report on Form 10-K for a discussion of our critical
accounting policies which include principles of consolidation, acquisition of
real estate, cost capitalization, impairment of long-lived assets and revenue
recognition. There have been no material changes to these policies in 2004.
19
Funds from Operations ("FFO")
Funds from Operations ("FFO"), represents income before extraordinary items and
gains (losses) on sale or disposal of depreciable operating properties, plus
depreciation and amortization uniquely significant to real estate and after
adjustments for unconsolidated partnerships and joint ventures.
FFO is intended to exclude GAAP historical cost depreciation of real estate,
which assumes that the value of real estate assets diminish ratably over time.
Historically, however, real estate values have risen or fallen with market
conditions. Because FFO excludes depreciation and amortization unique to real
estate, gains and losses from property dispositions and extraordinary items, it
provides a performance measure that, when compared year over year, reflects the
impact to operations from trends in occupancy rates, rental rates, operating
costs, development activities and interest costs, providing perspective not
immediately apparent from net income.
We present FFO because we consider it an important supplemental measure of our
operating performance and believe it is frequently used by securities analysts,
investors and other interested parties in the evaluation of REITs, any of which
present FFO when reporting their results. FFO is widely used by us and others in
our industry to evaluate and price potential acquisition candidates. The
National Association of Real Estate Investment Trusts, Inc., of which we are a
member, has encouraged its member companies to report their FFO as a
supplemental, industry-wide standard measure of REIT operating performance. In
addition, our employment agreements with certain members of management base
bonus compensation on our FFO performance.
FFO has significant limitations as an analytical tool, and should not be
considered in isolation, or as a substitute for analysis of our results as
reported under GAAP. Some of these limitations are:
- - FFO does not reflect our cash expenditures, or future requirements, for
capital expenditures or contractual commitments;
- - FFO does not reflect changes in, or cash requirements for, our working
capital needs;
- - Although depreciation and amortization are non-cash charges, the assets
being depreciated and amortized will often have to be replaced in the
future, and FFO does not reflect any cash requirements for such
replacements;
- - FFO may reflect the impact of earnings or charges resulting from matters
which may not be indicative of our ongoing operations; and
- - Other companies in our industry may calculate FFO differently than we do,
limiting its usefulness as a comparative measure.
Because of these limitations, FFO should not be considered as a measure of
discretionary cash available to us to invest in the growth of our business or
our dividend paying capacity. We compensate for these limitations by relying
primarily on our GAAP results and using FFO only supplementally. See the
Statements of Cash Flow included in our consolidated financial statements.
20
Below is a calculation of FFO for the three months ended March 31, 2004 and 2003
and other data for those respective periods (in thousands):
Three Months Ended
March 31,
2004 2003
--------------------------------------------------------------------------------------------
Funds from Operations:
Net income $ 1,012 $2,191
Adjusted for:
Minority interest in operating partnership 230 578
Minority interest adjustment - consolidated joint venture 33 ---
Minority interest, depreciation and amortization
attributable to discontinued operations --- 201
Depreciation and amortization uniquely significant
to real estate - wholly owned 12,318 7,054
Depreciation and amortization uniquely significant
to real estate - nconsolidated joint venture 300 254
---------------------------------------------------------------------------------------------
Funds from operations $13,893 $10,278
---------------------------------------------------------------------------------------------
Weighted average shares outstanding (1) 16,521 13,164
-------------------------------------------------------------------------------------------
(1)Assumes the partnership units of the Operating Partnership held by the
minority interest in the Operating Partnership, preferred shares of the
Company and share and unit options are converted to common shares of the
Company.
21
Economic Conditions and Outlook
The majority of our leases contain provisions designed to mitigate the impact of
inflation. Such provisions include clauses for the escalation of base rent and
clauses enabling us to receive percentage rentals based on tenants' gross sales
(above predetermined levels, which we believe often are lower than traditional
retail industry standards) that generally increase as prices rise. Most of the
leases require the tenant to pay their share of property operating expenses,
including common area maintenance, real estate taxes, insurance and advertising
and promotion, thereby reducing exposure to increases in costs and operating
expenses resulting from inflation.
While factory outlet stores continue to be a profitable and fundamental
distribution channel for brand name manufacturers, some retail formats are more
successful than others. As typical in the retail industry, certain tenants have
closed, or will close, certain stores by terminating their lease prior to its
natural expiration or as a result of filing for protection under bankruptcy
laws.
During 2004, we have approximately 1,790,000 square feet, or 20% of our
portfolio, coming up for renewal. If we were unable to successfully renew or
re-lease a significant amount of this space on favorable economic terms, the
loss in rent could have a material adverse effect on our results of operations.
As of March 31, 2004, we have renewed approximately 756,000 square feet, or 42%
of the square feet scheduled to expire in 2004. The existing tenants have
renewed at an average base rental rate approximately 8% higher than the expiring
rate. We also re-tenanted approximately 131,000 square feet of vacant space
during the first three months of 2004 at an 8% increase in the average base
rental rate from that which was previously charged. Our factory outlet centers
typically include well-known, national, brand name companies. By maintaining a
broad base of creditworthy tenants and a geographically diverse portfolio of
properties located across the United States, we reduce our operating and leasing
risks. No one tenant (including affiliates) accounted for more than 5.8% of our
combined base and percentage rental revenues for the three months ended March
31, 2004. Accordingly, we do not expect any material adverse impact on our
results of operations and financial condition as a result of leases to be
renewed or stores to be re-leased.
As of March 31, 2004 and 2003, our centers were 94% and 95% occupied,
respectively. Consistent with our long-term strategy of re-merchandising
centers, we will continue to hold space off the market until an appropriate
tenant is identified. While we believe this strategy will add value to our
centers in the long-term, it may reduce our average occupancy rates in the near
term.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to various market risks, including changes in interest rates.
Market risk is the potential loss arising from adverse changes in market rates
and prices, such as interest rates. We do not enter into derivatives or other
financial instruments for trading or speculative purposes.
We negotiate long-term fixed rate debt instruments and enter into interest rate
swap agreements to manage our exposure to interest rate changes. The swaps
involve the exchange of fixed and variable interest rate payments based on a
contractual principal amount and time period. Payments or receipts on the
agreements are recorded as adjustments to interest expense. At March 31, 2004,
TWMB had an interest rate swap agreement effective through August 2004 with a
notional amount of $19 million. Under this agreement, TWMB receives a floating
interest rate based on the 30 day LIBOR index and pays a fixed interest rate of
2.49%. This swap effectively changes the payment of interest on $19 million of
variable rate construction debt to fixed rate debt for the contract period at a
rate of 4.49%.
22
The fair value of the interest rate swap agreement represents the estimated
receipts or payments that would be made to terminate the agreement. At March 31,
2004, TWMB would have paid approximately $112,000 to terminate the agreement. A
1% decrease in the 30 day LIBOR index would increase the amount paid by TWMB by
$80,000 to approximately $192,000. 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
balance sheet; however, if held to maturity, the value of the swap will be zero
at that time.
The fair market value of long-term fixed interest rate debt is subject to market
risk. Generally, the fair market value of fixed interest rate debt will increase
as interest rates fall and decrease as interest rates rise. The estimated fair
value of our total long-term debt at March 31, 2004 was $546.7 million and its
recorded value was $520.4 million. A 1% increase from prevailing interest rates
at March 31, 2004 would result in a decrease in fair value of total long-term
debt by approximately $9.2 million. Fair values were determined from quoted
market prices, where available, using current interest rates considering credit
ratings and the remaining terms to maturity.
Item 4. Controls and Procedures
The Chief Executive Officer, Stanley K. Tanger, and Chief Financial Officer,
Frank C. Marchisello, Jr., evaluated the effectiveness of the registrant's
disclosure controls and procedures on March 31, 2004 (Evaluation Date), and
concluded that, as of the Evaluation Date, the registrant's disclosure controls
and procedures were effective to ensure that information the registrant is
required to disclose in its filings with the Securities and Exchange Commission
under the Securities and Exchange Act of 1934 is recorded, processed, summarized
and reported, within the time periods specified in the Commission's rules and
forms, and to ensure that information required to be disclosed by the registrant
in the reports that it files under the Exchange Act is accumulated and
communicated to the registrant's management, including its principal executive
officer and principal financial officer, as appropriate to allow timely
decisions regarding required disclosure.
There were no significant changes in the registrant's internal controls or in
other factors that could significantly affect these controls subsequent to the
Evaluation Date.
23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor the Operating Partnership is presently involved in any
material litigation nor, to their knowledge, is any material litigation
threatened against the Company or the Operating Partnership or its properties,
other than routine litigation arising in the ordinary course of business and
which is expected to be covered by liability insurance.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Principal Executive Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes -
Oxley Act of 2002.
31.2 Principal Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes -
Oxley Act of 2002.
32.1 Principal Executive Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes -
Oxley Act of 2002.
32.2 Principal Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes -
Oxley Act of 2002.
(b) Reports on Form 8-K
We filed the following reports on Form 8-K during the three months ended
March 31, 2004:
Current Report on Form 8-K dated February 24, 2004 to furnish the December
31, 2003 Supplemental Operating and Financial Data
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
TANGER FACTORY OUTLET CENTERS, INC.
By: /s/ Frank C. Marchisello Jr.
----------------------------
Frank C. Marchisello, Jr.
Executive Vice President, Chief Financial Officer
DATE: May 7, 2004
24
Exhibit Index
Exhibit No. Description
- -------------------------------------------------------------------------------
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.
25