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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 June 30, 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 Numbers:
33-99736-01
333-3526-01
333-39365-01
333-61394-01
TANGER PROPERTIES LIMITED PARTNERSHIP
(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 PARTNERHSIP
Index
Part I. Financial Information
Page Number
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations
For the three and six months ended June 30, 2004 and 2003 3
Consolidated Balance Sheets
As of June 30, 2004 and December 31, 2003 4
Consolidated Statements of Cash Flows
For the six months ended June 30, 2004 and 2003 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
Item 4. Controls and Procedures 26
Part II. Other Information
Item 1. Legal proceedings 27
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 28
2
TANGER PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per unit data)
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
REVENUES
Base rentals $ 32,440 $ 19,306 $ 64,277 $ 38,361
Percentage rentals 957 549 1,670 944
Expense reimbursements 13,173 8,226 25,189 16,435
Other income 2,395 791 3,253 1,450
- -------------------------------------------------------------------------------------------------------------------------------
Total revenues 48,965 28,872 94,389 57,190
- -------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Property operating 14,926 9,749 28,514 19,314
General and administrative 3,254 2,451 6,413 4,881
Depreciation and amortization 13,117 6,880 25,429 13,936
- -------------------------------------------------------------------------------------------------------------------------------
Total expenses 31,297 19,080 60,356 38,131
- -------------------------------------------------------------------------------------------------------------------------------
Operating income 17,668 9,792 34,033 19,059
Interest expense 8,900 6,556 17,764 13,279
- -------------------------------------------------------------------------------------------------------------------------------
Income before equity in earnings of unconsolidated joint ventures,
minority interest and discontinued operations 8,768 3,236 16,269 5,780
Equity in earnings of unconsolidated joint ventures 275 279 440 372
Minority interest in consolidated joint venture (6,619) --- (13,212) ---
- -------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 2,424 3,515 3,497 6,152
Discontinued operations 2,162 (593) 2,331 (461)
- -------------------------------------------------------------------------------------------------------------------------------
Net income 4,586 2,922 5,828 5,691
Less applicable preferred unit distributions --- (363) --- (806)
- -------------------------------------------------------------------------------------------------------------------------------
Net income available to partners 4,586 2,559 5,828 4,885
Income allocated to the limited partners 4,544 2,529 5,775 4,826
- -------------------------------------------------------------------------------------------------------------------------------
Income allocated to the general partner $ 42 $ 30 $ 53 $ 59
- -------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common unit:
Income from continuing operations $ .15 $ .25 $ .21 $ .43
Net income $ .28 $ .20 $ .35 $ .39
- -------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common unit:
Income from continuing operations $ .15 $ .25 $ .21 $ .43
Net income $ .28 $ .20 $ .35 $ .39
- -------------------------------------------------------------------------------------------------------------------------------
Distributions paid per common unit $ .6250 $ .6150 $ 1.2400 $ 1.2275
- -------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
3
TANGER PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS (unaudited)
Rental property
Land $ 115,541 $ 119,833
Buildings, improvements and fixtures 965,394 958,720
- --------------------------------------------------------------------------------------------------------------------------------
1,080,935 1,078,553
Accumulated depreciation (209,359) (192,698)
- --------------------------------------------------------------------------------------------------------------------------------
Rental property, net 871,576 885,855
Cash and cash equivalents 8,677 9,864
Deferred charges, net 64,747 68,568
Other assets 26,701 22,528
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $ 971,701 $ 986,815
- --------------------------------------------------------------------------------------------------------------------------------
LIABILITIES, MINORITY INTEREST AND PARTNERS' EQUITY
Liabilities
Debt
Senior, unsecured notes $ 147,509 $ 147,509
Mortgages payable (including a debt premium of $10,608 and $11,852, respectively) 366,065 370,160
Lines of credit --- 22,650
- --------------------------------------------------------------------------------------------------------------------------------
513,574 540,319
Construction trade payables 6,300 4,345
Accounts payable and accrued expenses 18,300 17,403
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 538,174 562,067
- --------------------------------------------------------------------------------------------------------------------------------
Commitments
Minority interest in consolidated joint venture 220,225 218,148
- --------------------------------------------------------------------------------------------------------------------------------
Partners' equity
General partner 816 949
Limited partner 215,912 205,733
Deferred compensation (3,406) ---
Accumulated other comprehensive loss (20) (82)
- --------------------------------------------------------------------------------------------------------------------------------
Total partners' equity 213,302 206,600
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities, minority interest and partners' equity $ 971,701 $ 986,815
- --------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
4
TANGER PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
June 30,
2004 2003
- ------------------------------------------------------------------------------------------------------------------
(unaudited)
OPERATING ACTIVITIES
Net income $ 5,828 $ 5,691
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization (including discontinued operations) 25,559 14,468
Amortization of deferred financing costs 727 623
Equity in earnings of unconsolidated joint ventures (440) (372)
Consolidated joint venture minority interest 13,212 ---
Compensation expense related to restricted shares and share and unit options granted 1,003 51
Amortization of premium on assumed indebtedness (1,245) ---
(Gain) loss on sale of real estate (included in discontinued operations) (2,084) 735
(Gain) on sale of outparcels of land (1,219) ---
Net accretion of market rent rate adjustment (370) ---
Straight-line base rent adjustment (218) 112
Increase (decrease) due to changes in:
Other assets (1,363) 1,674
Accounts payable and accrued expenses 959 (1,512)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activites 40,349 21,470
- ------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to rental property (6,907) (5,036)
Acquisition of rental property --- (4,700)
Additions to investments in unconsolidated joint ventures --- (952)
Additions to deferred lease costs (924) (836)
Net proceeds from sale of real estate 8,945 2,076
(Increase) decrease in escrow from rental property purchase (6,565) 4,006
Distributions received from unconsolidated joint ventures 750 650
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,701) (4,792)
- ------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Cash distributions paid (20,386) (15,960)
Distributions to consolidated joint venture minority interest (11,135) ---
Contribution from sole shareholder of general partner 13,173 ---
Payments for redemption of preferred units --- (372)
Proceeds from issuance of debt 40,350 48,815
Repayments of debt (65,850) (61,233)
Additions to deferred financing costs (9) (80)
Proceeds from exercise of unit options 7,022 11,284
- ------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (36,835) (17,546)
- ------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,187) (868)
Cash and cash equivalents, beginning of period 9,864 1,068
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 8,677 $ 200
- ------------------------------------------------------------------------------------------------------------------
Supplemental schedule of non-cash 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 June 30, 2004 and 2003 amounted to $6,300 and
$8,010, respectively.
We recognized charges to deferred compensation related to the Company's issuance
of restricted common shares and our issuance of unit options in the 2004 period
of $4,381.
The accompanying notes are an integral part of these consolidated financial
statements.
5
TANGER PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
1. Business
Tanger Properties Limited Partnership, a North Carolina limited partnership,
develops, owns, operates and manages factory outlet centers. At June 30, 2004,
we had ownership interests in or management responsibilities for 38 centers in
23 states totaling 9.3 million square feet of gross leasable area ("GLA"). 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. We provide all development,
leasing and management services for our centers. Unless the context indicates
otherwise, the term the "Operating Partnership" refers to Tanger Properties
Limited Partnership and subsidiaries 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 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 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. We have evaluated
Deer Park Enterprise, LLC ("Deer Park"), which was created after January 31,
2003 (Note 3) and have determined that under the current facts and circumstances
we are not required to consolidate this entity under the provisions of FIN 46.
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 June 30, 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 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 three and six months ended June 30, 2004
and 2003 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
--------------------- ---------- ------------ ------------ --------------
Fee:
Management $ 69 $ 34 $ 137 $ 68
Leasing 78 76 139 133
Development 17 (4) 22 9
--------------------- --------- ------------ ------------ --------------
Total Fees $ 164 $ 106 $ 298 $ 210
--------------------- ---------- ------------ ------------ --------------
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.
During the second quarter, TWMB completed the construction of a 79,000 square
foot third-phase expansion of the Myrtle Beach center at an approximate cost of
$9.7 million. As of June 30, 2004, 50,000 square feet were open with the
remainder of the stores scheduled to open during July and August 2004. The
completion of this expansion brings the total gross leasable area of TWMB's
Myrtle Beach center to approximately 403,000 square feet.
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 June 30, 2004, the
construction loan had a balance of $32.0 million.
7
Summary unaudited financial information of joint ventures accounted for using
the equity method is as follows (in thousands):
As of As of
Summary Balance Sheets June 30, December 31,
- Unconsolidated Joint Ventures: 2004 2003
- ---------------------------------------------- -------------- --------------
Assets:
Operating real estate at cost, net $42,847 $36,096
Other real estate investment (1) 27,108 27,803
- ---------------------------------------------- -------------- --------------
Total real estate 69,955 63,899
Cash and cash equivalents 1,381 4,145
Deferred charges, net 1,535 1,652
Other assets 3,879 3,277
- ---------------------------------------------- -------------- --------------
Total assets $76,750 $72,973
- ---------------------------------------------- -------------- --------------
Liabilities and Owners' Equity:
Mortgages payable $57,156 $54,683
Construction trade payables 3,090 1,164
Accounts payable and other liabilities 508 564
- ---------------------------------------------- -------------- --------------
Total liabilities 60,754 56,411
Owners' equity 15,996 16,562
- ---------------------------------------------- -------------- --------------
Total liabilities and owners' equity $76,750 $72,973
- ---------------------------------------------- -------------- --------------
(1) Other real estate investment represents a development property that
generates net income considered incidental to its intended future operation
as an outlet center. As such, the net income generated from this property is
recorded as a reduction to the carrying value of the property.
Three Months Six Months
Ended Ended
Consolidated Statements of Operations - June 30, June 30,
Unconsolidated Joint Ventures 2004 2003 2004 2003
--------------------------------------------- ------------ -------------- -------------- -------------
Revenues $ 2,507 $ 2,158 $4,582 $ 3,885
--------------------------------------------- ------------ -------------- -------------- -------------
Expenses:
Property operating 946 782 1,721 1,486
General and administrative 12 3 13 20
Depreciation and amortization 631 552 1,254 1,080
--------------------------------------------- ------------ -------------- -------------- -------------
Total expenses 1,589 1,337 2,988 2,586
--------------------------------------------- ------------ -------------- -------------- -------------
Operating income 918 821 1,594 1,299
Interest expense 405 294 785 619
------------------------------------------------ ------------ -------------- -------------- ----------
Net income $ 513 $ 527 $ 809 $ 680
--------------------------------------------- ------------ -------------- -------------- -------------
Tanger's share of:
--------------------------------------------- ------------ -------------- -------------- -------------
Net income $ 275 $ 279 $ 440 $ 372
Depreciation (real estate related) 304 266 604 520
--------------------------------------------- ------------ -------------- -------------- -------------
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 are reflected in the consolidated statements
of operations as discontinued operations for all periods presented.
In June 2004, we completed the sale of two non-core properties located in North
Conway, New Hampshire. Net proceeds received from the sales of these properties
were approximately $6.5 million. We recorded a gain on sale of real estate of
approximately $2.1 million which is included in discontinued operations for the
three and six months ended June 30, 2004.
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 related to the Martinsburg sale of
approximately $735,000 which is included in discontinued operations for the
three and six months ended June 30, 2003.
Below is a summary of the results of operations of these properties (in
thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
- ----------------------------------------------------- ----------- ------------ ------------ --------------
Base rentals $ 174 $ 531 $ 397 $ 1,136
Percentage rentals -- 6 -- 6
Expense reimbursements 82 240 213 481
Other income 2 15 3 26
- ----------------------------------------------------- ----------- ------------ ------------ --------------
Total revenues 258 792 613 1,649
Property operating expenses 111 389 233 841
General and administrative 3 1 3 2
Depreciation and amortization 66 260 130 532
- ----------------------------------------------------- ----------- ------------ ------------ --------------
Total expenses 180 650 366 1,375
- ----------------------------------------------------- ----------- ------------ ------------ --------------
Income before gain (loss) on sale of real estate 78 142 247 274
Gain (loss) on sale of real estate 2,084 (735) 2,084 (735)
- ----------------------------------------------------- ----------- ------------ ------------ --------------
Discontinued operations $ 2,162 $ (593) $ 2,331 $(461)
- ----------------------------------------------------- ----------- ------------ ------------ --------------
During the second quarter of 2004 we sold three outparcels of undeveloped land
at our Branson, Missouri; Westbrook, Connecticut; and Gonzales, Louisiana
centers. Net proceeds received were approximately $2.5 million and a gain of
approximately $1.2 million was recorded in other income in the second quarter of
2004.
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 June 30, 2004, our portion of the fair
value of TWMB's hedge is recorded as a reduction to investment in joint ventures
of $20,000. For the three and six months ended June 30, 2004, the change in the
fair value of the derivative instrument is recorded as $35,000 and $62,000 of
other comprehensive income, respectively.
9
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
- ------------------------------------------------- ----------- ------------ ------------ ------------
Net income $ 4,586 $ 2,922 $ 5,828 $ 5,691
- ------------------------------------------------- ----------- ------------ ------------ ------------
Other comprehensive income:
Change in fair value of our portion of
TWMB cash flow hedge 35 4 62 (10)
Change in fair value of cash flow hedge, --- --- --- 98
- ------------------------------------------------- ----------- ------------ ------------ ------------
Other comprehensive income 35 4 62 88
- ------------------------------------------------- ----------- ------------ ------------ ------------
Total comprehensive income $ 4,621 $ 2,926 $ 5,890 $ 5,779
- ------------------------------------------------- ----------- ------------ ------------ ------------
6. 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 Six Months Ended
June 30, June 30,
2004 2003 2004 2003
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Numerator:
Income from continuing operations $ 2,424 $ 3,515 $ 3,497 $ 6,152
Less applicable preferred unit distributions --- (363) --- (806)
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Income from continuing operations available to
common unitholders - basic and diluted 2,424 3,152 3,497 5,346
Discontinued operations 2,162 (593) 2,331 (461)
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Net income available to common unitholders -
basic and diluted $ 4,586 $ 2,559 $5,828 $4,885
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Denominator:
Basic weighted average common units 16,537 12,623 16,453 12,420
Effect of outstanding unit options 74 206 100 216
Effect of unvested restricted share awards 6 --- 5 ---
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Diluted weighted average common units 16,617 12,829 16,558 12,636
Basic earnings per common unit:
Income from continuing operations $ .15 $ .25 $ .21 $ .43
Discontinued operations .13 (.05) .14 (.04)
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Net income $ .28 $ .20 $ .35 $ .39
Diluted earnings per common unit:
Income from continuing operations $ .15 $ .25 $ .21 $ .43
Discontinued operations .13 (.05) .14 (.04)
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Net income $ .28 $ .20 $ .35 $ .39
- ------------------------------------------------------- ------------ ----------- ------------ -------------
10
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 Company. Options
excluded totaled 199,000 and 92,000 for the three and six months ended June 30,
2004. There were no options excluded from the computation for the three and six
months ended June 30, 2003. The assumed conversion of preferred units as of the
beginning of the year would have been anti-dilutive.
At June 30, 2004 and December 31, 2003, the ownership interests of the Operating
Partnership consisted of the following:
2004 2003
- ------------------------------------------- -------------- --------------
Common units:
General partner 150,000 150,000
Limited partners 16,465,075 15,843,948
- ------------------------------------------- -------------- --------------
Total 16,615,075 15,993,948
- ------------------------------------------- -------------- --------------
7. Partners' Equity
In December 2003, the Company 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 which were contributed to the Operating Partnership in exchange
for 2,300,000 limited partnership units. 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. The Company received net proceeds of
approximately $13.2 million from the exercise of the over-allotment, which were
contributed to the Operating Partnership in exchange for 345,000 limited
partnership units.
8. Employee Benefit Plans
During the second quarter of 2004, the Company's 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 was approved by a vote of shareholders at the Company's Annual
Shareholders' Meeting. The Board of Directors approved the grant of 106,125
restricted common shares to the independent directors and certain employees of
the Operating Partnership in April 2004. As a result of the granting of the
restricted common shares and since the Operating Partnership will issue a unit
for each restricted share that vests, we recorded a charge to deferred
compensation of $4.1 million in the partners' equity section of the consolidated
balance sheet. During the second quarter, we recognized expense related to the
amortization of the deferred compensation of approximately $932,000 in
accordance with the vesting schedule of the restricted shares.
11
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 "Operating Partnership" refers to Tanger Properties Limited
Partnership and subsidiaries 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 text requires.
The discussion of our results of operations reported in the unaudited
consolidated statements of operations compares the three and six months ended
June 30, 2004 with the three and six months ended June 30, 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;
- - 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;
12
- - 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.
13
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
Company's issuance of 2.3 million common shares at $40.50 per share which were
contributed to the Operating Partnership in exchange for 2.3 million limited
partnership units. The successful equity financing allows us to maintain a
strong balance sheet and our current financial flexibility.
At June 30, 2004, we had ownership interests in or management responsibilities
for 38 centers in 23 states totaling 9.3 million square feet compared to 33
centers in 20 states totaling 6.2 million square feet at June 30, 2003. The
activity in our portfolio of properties since June 30, 2003 is summarized below:
No. of GLA
Centers (000's) States
- ---------------------------------------------------------------- ------------ ------------ -----------
As of June 30, 2003 33 6,215 20
Acquisitions/Expansions:
Sevierville, Tennessee (wholly-owned) --- 35 ---
Myrtle Beach Hwy 17, South Carolina - --- 65 ---
(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:
Bourne, Massachusetts (managed) (1) (23) (1)
Casa Grande, Arizona (wholly-owned) (1) (185) (1)
Clover, New Hampshire (wholly-owned) (1) (11) ---
LLBean, New Hampshire (wholly-owned) (1) (51) ---
Other --- 3 ---
- ---------------------------------------------------------------- ------------ ------------ -----------
As of June 30, 2004 38 9,321 23
- ---------------------------------------------------------------- ------------ ------------ -----------
14
A summary of the operating results for the three and six months ended June
30, 2004 and 2003 is presented in the following table, expressed in amounts
calculated on a weighted average GLA basis.
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
- ---------------------------------------------------------------------- ------------ ------------ ------------ ------------
GLA at end of period (000's)
Wholly owned 5,240 5,449 5,240 5,449
Partially-owned (consolidated) (1) 3,273 --- 3,273 ---
Partially owned (unconsolidated) (2) 374 309 374 309
Managed 434 457 434 457
- ---------------------------------------------------------------------- ------------ ------------ ------------ ------------
Total GLA at end of period (000's) 9,321 6,215 9,321 6,215
- ---------------------------------------------------------------------- ------------ ------------ ------------ ------------
Weighted average GLA (000's) (3) 8,513 5,201 8,513 5,199
Occupancy percentage at end of period (1) (2) 95% 96% 95% 96%
Per square foot for wholly owned properties
Revenues
Base rentals $3.81 $3.71 $7.55 $7.38
Percentage rentals .11 .11 .20 .18
Expense reimbursements 1.55 1.58 2.96 3.16
Other income .28 .15 .38 .28
- ---------------------------------------------------------------------- ------------ ------------ ------------ ------------
Total revenues 5.75 5.55 11.09 11.00
- ---------------------------------------------------------------------- ------------ ------------ ------------ ------------
Expenses
Property operating 1.75 1.88 3.35 3.71
General and administrative .38 .47 .75 .94
Depreciation and amortization 1.54 1.32 2.99 2.68
- ---------------------------------------------------------------------- ------------ ------------ ------------ ------------
Total expenses 3.67 3.67 7.09 7.33
- ---------------------------------------------------------------------- ------------ ------------ ------------ ------------
Operating income 2.08 1.88 4.00 3.67
- ---------------------------------------------------------------------- ------------ ------------ ------------ ------------
Interest expense 1.05 1.26 2.09 2.56
- ---------------------------------------------------------------------- ------------ ------------ ------------ ------------
In Income before equity in earnings of unconsolidated joint ventures,
minority interest and discontinued operations $1.03 $.62 $1.91 $1.11
- ---------------------------------------------------------------------- ------------ ------------ ------------ ------------
(1) Includes the nine centers from the Charter Oak portfolio acquired on
December 19, 2003 of which we own 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.
15
The table set forth below summarizes certain information with respect to
our existing centers in which we have an ownership interest as of June 30,
2004.
Mortgage
Debt
Outstanding
GLA % (000's) as of
Location (sq. ft.) Occupied June 30, 2004
- ---------------------------------- ----------- ----------- ---------------
Riverhead, NY (1) 729,238 99 $ ---
Rehoboth, DE (1) (3) 568,787 99 39,568
Foley, AL (3) 535,675 99 32,357
San Marcos, TX 442,486 96 36,957
Myrtle Beach Hwy 501, SC (3) 427,388 97 22,973
Sevierville, TN (1) 419,023 100 ---
Hilton Head, SC (3) 393,094 89 18,558
Commerce II, GA 342,556 97 29,500
Howell, MI 325,231 100 ---
Myrtle Beach Hwy 17, SC (1) (2) 374,399 100 ---
Park City, UT (3) 300,602 97 12,642
Westbrook, CT (3) 291,051 90 15,023
Branson, MO 277,883 100 24,000
Williamsburg, IA 277,230 96 18,870
Lincoln City, OR (3) 270,280 93 10,447
Tuscola, IL (3) 258,114 77 20,274
Lancaster, PA 255,152 96 13,997
Locust Grove, GA 247,454 99 ---
Gonzales, LA 245,199 93 ---
Tilton, NH (3) 227,966 98 13,054
Fort Meyers, FL 198,789 82 ---
Commerce I, GA 185,750 68 7,558
Terrell, TX 177,490 97 ---
Dalton, GA 173,430 79 10,812
Seymour, IN 141,051 82 ---
North Branch, MN 134,480 99 ---
West Branch, MI 112,420 100 6,864
Barstow, CA 108,950 95 ---
Blowing Rock, NC 105,448 100 9,443
Pigeon Forge, TN (1) 94,558 93 ---
Nags Head, NC 82,178 100 6,408
Boaz, AL 79,575 97 ---
Kittery I, ME 59,694 100 6,152
Kittery II, ME 24,619 100 ---
- --------------------------------- ------------ -------- -----------------
8,887,240 95 355,457
Debt premium 10,608
- --------------------------------- --------------------- -----------------
$366,065
================================= ============ ===== ======== ===========
(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 $32.0 million
of construction loan debt as of June 30, 2004.
(3) Represents properties that are currently held through a consolidated joint
venture in which we own a one-third interest.
16
RESULTS OF OPERATIONS
Comparison of the three months ended June 30, 2004 to the three months ended
June 30, 2003
Base rentals increased $13.1 million, or 68%, in the 2004 period when compared
to the same period in 2003. The increase is primarily due to the December 2003
acquisition of the COROC portfolio of nine outlet center properties. Base rent
per weighted average GLA increased by $.10 per square foot from $3.71 per square
foot in the 2003 period to $3.81 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 pre-acquisition
portfolio average. In addition, base rent is impacted by the amortization of
above/below market rate lease values associated with the required purchase price
allocation associated with the acquisition of the COROC portfolio. The values of
the above and below market leases are amortized and recorded as either an
increase (in the case of below market leases) or a decrease (in the case of
above market leases) to rental income over the remaining term of the associated
lease. If a tenant vacates its space prior to the contractual termination of the
lease and no rental payments are being made on the lease, any unamortized
balance of the related above/below market lease value will be written off and
could materially impact our net income and funds from operations positively or
negatively. The overall portfolio occupancy at June 30, 2004 decreased 1% from
96% to 95% compared to June 30, 2003 due to the addition of the COROC portfolio
which had a lower average occupancy rate, 94% compared to the remaining
properties that had an average occupancy rate of 96%. One center experienced a
negative occupancy trend of at least 10% from June 30, 2003 to June 30, 2004
offset by two centers 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 $408,000
or 74%, and on a weighted average GLA basis, remained at $.11 per square foot in
the 2004 and 2003 periods. The dollar 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 June 30, 2004 were $309 per square foot. This represents a
5% 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
88% and 84% in the 2004 and 2003 periods, respectively. The increase is due to
higher reimbursement rates at the COROC portfolio.
Other income increased $1.6 million, or 203%, in the 2004 period compared to the
2003 period and on a weighted average GLA basis, increased $.13 per square foot
from $.15 to $.28. Other income in the 2004 period includes gains from the sales
of three outparcels of land of $1.2 million. In the 2003 period there were no
sales of outparcels of land. The remaining increase is primarily attributable to
increases in vending income and management fees.
Property operating expenses increased by $5.2 million, or 53%, in the 2004
period as compared to the 2003 period and, on a weighted average GLA basis,
decreased $.13 per square foot from $1.88 to $1.75. 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 portfolio per square foot being lower than the portfolio average for the
second quarter.
17
General and administrative expenses increased $803,000, or 33%, 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 period to 6.6% in the
2004 period and, on a weighted average GLA basis, decreased from $.47 per square
foot in the 2003 period to $.38 per square foot in the 2004 period.
Depreciation and amortization per weighted average GLA increased from $1.32 per
square foot in the 2003 period to $1.54 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 portfolio 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.
Interest expense increased $2.3 million, or 36%, during the 2004 period as
compared to the 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 COROC portfolio.
Consolidated joint venture minority interest increased $6.6 million due to the
allocation of earnings to our joint venture partner with whom we own the COROC
portfolio. The COROC portfolio was acquired in late December 2003. The
allocation of earnings to our joint venture partner is based on a preferred
return on investment as opposed to their ownership percentage and, accordingly,
has a significant impact on our earnings.
Discontinued operations increased $2.8 million due to the sale of the Clover and
LLBean, New Hampshire properties in the 2004 period resulting in a gain on sale
of real estate of approximately $2.1 million. Also, included in the 2003 period
is the sale of the Martinsburg, West Virginia center which was sold at a loss of
approximately $735,000.
Comparison of the six months ended June 30, 2004 to the six months ended June
30, 2003
Base rentals increased $25.9 million, or 68%, 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 $.17 per square foot from $7.38 per square foot in the 2003
period to $7.55 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 pre-acquisition portfolio average. In
addition, base rent is impacted by the amortization of above/below market rate
lease values associated with the required purchase price allocation associated
with the acquisition of the COROC portfolio. The values of the above and below
market leases are amortized and recorded as either an increase (in the case of
below market leases) or a decrease (in the case of above market leases) to
rental income over the remaining term of the associated lease. If a tenant
vacates its space prior to the contractual termination of the lease and no
rental payments are being made on the lease, any unamortized balance of the
related above/below market lease value will be written off and could materially
impact our net income and funds from operations positively or negatively. The
overall portfolio occupancy at June 30, 2004 decreased 1% from 96% to 95%
compared to June 30, 2003 due to the addition of the COROC portfolio which had a
lower average occupancy rate, 94% compared to the remaining properties that had
an average occupancy rate of 96%. One center experienced a negative occupancy
trend of at least 10% from June 30, 2003 to June 30, 2004 offset by two centers
which experienced a positive occupancy gain of at least 10%.
18
Percentage rentals, which represent revenues based on a percentage of tenants'
sales volume above predetermined levels (the "breakpoint"), increased $726,000
or 77%, and on a weighted average GLA basis, increased $.02 per square foot in
the 2004 period compared to the 2003 period. 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 June 30, 2004 were $309 per square foot. This
represents a 5% 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
88% and 85% in the 2004 and 2003 periods, respectively. The increase is due to
higher reimbursement rates at the COROC properties.
Other income increased $1.8 million, or 124%, in the 2004 period compared to the
2003 period and on a weighted average GLA basis, increased $.10 per square foot
from $.28 to $.38. Other income in the 2004 period includes gains from the sales
of three outparcels of land of $1.2 million. In the 2003 period there were no
sales of outparcels of land. The remaining increase is primarily attributable to
increases in vending income and management fees.
Property operating expenses increased by $9.2 million, or 48%, in the 2004
period as compared to the 2003 period and, on a weighted average GLA basis,
decreased $.36 per square foot from $3.71 to $3.35. 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 portfolio per square foot being lower than the portfolio average for the
first six months of 2004.
General and administrative expenses increased $1.5 million, or 31%, 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 period to 6.8% in the
2004 period and, on a weighted average GLA basis, decreased from $.94 per square
foot in the 2003 period to $.75 per square foot in the 2004 period.
Depreciation and amortization per weighted average GLA increased from $2.68 per
square foot in the 2003 period to $2.99 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 portfolio 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.
Interest expense increased $4.5 million, or 34%, during the 2004 period as
compared to the 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 COROC portfolio.
Equity in earnings from unconsolidated joint ventures increased $68,000, or 18%,
in the 2004 period compared to the 2003 period due to the TWMB Associates, LLC
("TWMB"), outlet center in Myrtle Beach, South Carolina having 65,000 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.
19
Consolidated joint venture minority interest increased $13.2 million due to the
allocation of earnings to our joint venture partner with whom we own the COROC
portfolio. The COROC portfolio was acquired in late December 2003. The
allocation of earnings to our joint venture partner is based on a preferred
return on investment as opposed to their ownership percentage and, accordingly,
has a significant impact on our earnings.
Discontinued operations increased $2.8 million due to the sale of the Clover and
LLBean, New Hampshire properties in the 2004 period resulting in a gain on sale
of real estate of approximately $2.1 million. Also, included in the 2003 period
is the sale of the Martinsburg, West Virginia center which was sold at a loss of
approximately $735,000.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $40.3 million and $21.5 million
for the six months ended June 30, 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 $4.7 and $4.8 million during the first six months of 2004 and
2003, respectively. Net cash used in financing activities was $36.8 million and
$17.5 million during the first six months of 2004 and 2003, respectively. Cash
used was higher in 2004 due primarily to increased distributions in 2004
compared to 2003, debt repayments and distributions paid to the minority
interest partner in our consolidated joint venture offset by proceeds received
from the Company's sale of common shares in exchange for units.
Our consolidated cash balance increased $8.5 million from June 30, 2003 to June
30, 2004 due primarily to cash held in reserve at our consolidated joint
venture, COROC.
Development and Dispositions
Pittsburgh, Pennsylvania
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 2006.
Charleston, South Carolina
We have an option to purchase land and have begun the early development and
leasing of a site located near Charleston, South Carolina. We currently expect
the center to be approximately 370,000 square feet upon total build out with the
initial phase scheduled to open in 2006.
Wisconsin Dells, Wisconsin
We have begun the early development and leasing of a site located near Wisconsin
Dells, Wisconsin. We currently expect the center to be approximately 300,000
square feet upon total build out with the initial phase scheduled to open in
2006.
20
Outparcels
During the second quarter of 2004 we sold three outparcels of undeveloped land
at our Branson, Missouri; Westbrook, Connecticut; and Gonzales, Louisiana
centers. Net proceeds received were approximately $2.5 million and a gain of
approximately $1.2 million was recorded in other income in the second quarter of
2004.
Joint Ventures
TWMB Associates, LLC
During the second quarter, TWMB completed the construction of a 79,000 square
foot third-phase expansion of the Myrtle Beach center at an approximate cost of
$9.7 million. As of June 30, 2004, 50,000 square feet were open with the
remainder of the stores scheduled to open during July and August 2004. We and
our partner each made capital contributions during the fourth quarter of 2003 of
$1.7 million for the third phase. The completion of this expansion brings the
total gross leasable area of TWMB's Myrtle Beach center to approximately 403,000
square feet.
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 June 30, 2004 the
construction loan had a balance of $32.0 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. We currently expect the center to be
approximately 790,000 square feet upon 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.
21
Financing Arrangements
At June 30, 2004, approximately 29% of our outstanding long-term debt
represented unsecured borrowings and approximately 34% 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 June 30, 2004 was 7.54%.
In December 2003, the Company 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, which were contributed to the Operating Partnership in exchange
for 2,300,000 limited partnership units. 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 of the Company's common
shares at the offering price of $40.50 per share. The Company received net
proceeds of approximately $13.2 million from the exercise of the over-allotment,
which were contributed to the Operating Partnership in exchange for 345,000
limited partnership units.
Together with the Company, 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 unitholders' best interests. Prior to the Company's 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 of the
Company 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 June 30, 2004. Subsequent to June 30, 2004,
we were successful in obtaining a commitment for an additional $25 million
unsecured line of credit from Citicorp North America, Inc., a subsidiary of
Citigroup, bringing the total committed unsecured lines of credit to $125
million. In addition, we have obtained commitments to extend the maturity dates
on all of our lines of credit until June of 2007. 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
distributions in order for the Company to maintain its status 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
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 July 15, 2004, our Board of Trustees declared a $.6250 cash distribution per
common unit payable on August 16, 2004 to each unitholder of record on July 30,
2004.
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.
22
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 a
portion of their 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 distribution 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.
23
Below is a calculation of FFO for the three and six months ended June 30,
2004 and 2003 and other data for those respective periods (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---------------------------------------------------------------------- ------------ ------------ ------------ -------------
Funds from Operations:
Net income $ 4,586 $ 2,922 $ 5,828 $ 5,691
Adjusted for:
Minority interest adjustment - consolidated joint venture --- (296) ---
(329)
Depreciation and amortization
attributable to discontinued operations 67 260 131 531
Depreciation and amortization uniquely significant to real estate -
wholly owned 13,062 6,806 25,316 13,790
Depreciation and amortization uniquely significant to real estate -
unconsolidated joint venture 304 266 604 520
(Gain)/loss on sale of real estate (2,084) 735 (2,084) 735
---------------------------------------------------------------------- ------------ ------------ ------------ -------------
Funds from operations $15,606 $ 10,989 $ 29,499 $ 21,267
---------------------------------------------------------------------- ------------ ------------ ------------ -------------
Weighted average units outstanding (1) 16,617 13,418 16,558 13,291
---------------------------------------------------------------------- ------------ ------------ ------------ -------------
---------------------------------------------------------------------- ------------ ------------ ------------ -------------
(1) Assumes the unit options and unvested restricted share awards are
converted to common units.
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 19% 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.
24
As of June 30, 2004, we have renewed approximately 1,041,000 square feet, or 58%
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 282,000 square feet of vacant space
during the first six months of 2004 at a 2% 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 June 30,
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 June 30, 2004 and 2003, 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.
We negotiate long-term fixed rate debt instruments and enter into interest rate
swap agreements to manage our exposure to interest rate changes. The swaps
involve the exchange of fixed and variable interest rate payments based on a
contractual principal amount and time period. Payments or receipts on the
agreements are recorded as adjustments to interest expense. At June 30, 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%.
The fair value of the interest rate swap agreement represents the estimated
receipts or payments that would be made to terminate the agreement. At June 30,
2004, TWMB would have paid approximately $40,000 to terminate the agreement. A
1% decrease in the 30 day LIBOR index would increase the amount paid by TWMB by
$32,000 to approximately $72,000. The fair value is based on dealer quotes,
considering current interest rates and the 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 June 30, 2004 was $536.6 million and its
recorded value was $513.6 million. A 1% increase from prevailing interest rates
at June 30, 2004 would result in a decrease in fair value of total long-term
debt by approximately $8.7 million. Fair values were determined from quoted
market prices, where available, using current interest rates considering credit
ratings and the remaining terms to maturity.
25
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 on June 30, 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.
26
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 for Stanley K. Tanger as of
January 1, 2004.
10.2 Amended and Restated Employment Agreement for Steven B. Tanger as of
January 1, 2004.
10.3 Amended and Restated Employment Agreement for Frank C. Marchisello,
Jr. as of January 1, 2004.
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: August 6, 2004
27
Exhibit Index
Exhibit No. Description
- -------------------------------------------------------------------------------
10.1 Amended and Restated Employment Agreement of Stanley K. Tanger
as of January 1, 2004.
10.2 Amended and Restated Employment Agreement of Steven B. Tanger as
of January 1, 2004.
10.3 Amended and Restated Employment Agreement of Frank C.
Marchisello, Jr. as of January 1, 2004.
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.
28