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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 nine months ended September 30, 2004 and 2003 3
Consolidated Balance Sheets
As of September 30, 2004 and December 31, 2003 4
Consolidated Statements of Cash Flows
For the nine months ended September 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 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
Item 4. Controls and Procedures 29
Part II. Other Information
Item 1. Legal proceedings 29
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 30
2
TANGER PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per unit data)
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
REVENUES
Base rentals $32,879 $19,124 $ 96,380 $ 56,534
Percentage rentals 1,289 774 2,958 1,717
Expense reimbursements 13,060 8,028 37,956 24,081
Other income 1,816 1,040 5,054 2,478
- -------------------------------------------------------------------------------------------------------------------------------
Total revenues 49,044 28,966 142,348 84,810
- -------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Property operating 14,953 9,527 43,095 28,472
General and administrative 3,346 2,489 9,757 7,367
Depreciation and amortization 14,042 6,734 39,154 20,361
- -------------------------------------------------------------------------------------------------------------------------------
Total expenses 32,341 18,750 92,006 56,200
- -------------------------------------------------------------------------------------------------------------------------------
Operating income 16,703 10,216 50,342 28,610
Interest expense 8,919 6,427 26,684 19,707
- -------------------------------------------------------------------------------------------------------------------------------
Income before equity in earnings of unconsolidated joint ventures,
minority interest and discontinued operations 7,784 3,789 23,658 8,903
Equity in earnings of unconsolidated joint ventures 359 267 799 639
Minority interest in consolidated joint venture (7,198) --- (20,410) ---
- -------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 945 4,056 4,047 9,542
Discontinued operations (3,409) 490 (683) 695
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) (2,464) 4,546 3,364 10,237
Less applicable preferred unit distributions --- --- --- (806)
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) available to common unitholders $(2,464) $ 4,546 $ 3,364 $ 9,431
Income (loss) allocated to limited partners $(2,442) $ 4,495 $ 3,333 $ 9,321
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) allocated to general partner $ (22) $ 51 $ 31 $ 110
- -------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common unit:
Income from continuing operations $ .06 $ .30 $ .25 $ .68
Net income (loss) $ (.15) $ .34 $ .20 $ .74
- -------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common unit:
Income from continuing operations $ .06 $ .30 $ .24 $ .67
Net income (loss) $ (.15) $ .33 $ .20 $ .73
- -------------------------------------------------------------------------------------------------------------------------------
Distributions paid per common unit $ .6250 $ .6150 $ 1.8650 $ 1.8425
- -------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
3
TANGER PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2004 2003
- ----------------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
Rental Property
Land $ 113,869 $ 119,833
Buildings, improvements and fixtures 956,109 958,720
- ----------------------------------------------------------------------------------------------------------------------------
1,069,978 1,078,553
Accumulated depreciation (215,172) (192,698)
- ----------------------------------------------------------------------------------------------------------------------------
Rental property, net 854,806 885,855
Cash and cash equivalents 27,101 9,864
Deferred charges, net 60,958 68,568
Other assets 19,258 22,528
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $ 962,123 $ 986,815
- ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES, MINORITY INTEREST AND PARTNERS' EQUITY
Liabilities
Debt
Senior, unsecured notes $ 147,509 $ 147,509
Mortgages payable (including a debt premium of $9,976 and $11,852, respectively) 310,483 370,160
Unsecured note 53,500 ---
Lines of credit --- 22,650
- ----------------------------------------------------------------------------------------------------------------------------
511,492 540,319
Construction trade payables 10,361 4,345
Accounts payable and accrued expenses 17,116 17,403
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 538,969 562,067
- ----------------------------------------------------------------------------------------------------------------------------
Commitments
Minority interest in consolidated joint venture 221,400 218,148
- ----------------------------------------------------------------------------------------------------------------------------
Partners' equity
General partner 700 949
Limited partner 205,278 205,733
Deferred compensation (4,224) ---
Accumulated other comprehensive loss --- (82)
- ----------------------------------------------------------------------------------------------------------------------------
Total partners' equity 201,754 206,600
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities, minority interest and partners' equity $ 962,123 $ 986,815
- ----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
4
TANGER PROPERTIES LIMITED PARTNERHSIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
September 30,
2004 2003
- --------------------------------------------------------------------------------------------------------------------
(unaudited)
OPERATING ACTIVITIES
Net income $ 3,364 $10,237
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization (including discontinued operations) 39,706 21,552
Amortization of deferred financing costs 1,107 955
Equity in earnings of unconsolidated joint ventures (799) (639)
Consolidated joint venture minority interest 20,410 ---
Compensation expense related to restricted shares and share options granted 1,239 76
Amortization of premium on assumed indebtedness (1,879) ---
Loss on sale of real estate (included in discontinued operations) 1,460 735
Gain on sale of outparcels of land (1,391) ---
Net accretion of market rent rate adjustment (647) ---
Straight-line base rent adjustment (300) 147
Increase (decrease) due to changes in:
Other assets (956) 529
Accounts payable and accrued expenses (205) (885)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activites 61,109 32,707
- --------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to rental property (9,943) (7,970)
Acquisition of rental property --- (4,700)
Additions to investments in unconsolidated joint ventures --- (952)
Additions to deferred lease costs (1,450) (1,188)
Net proceeds from sale of real estate 20,255 2,076
Decrease in escrow from rental property purchase --- 4,006
Distributions received from unconsolidated joint ventures 1,525 1,125
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 10,387 (7,603)
- --------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Cash dividends paid (30,780) (24,184)
Distributions to consolidated joint venture minority interest (17,158) ---
Contribution from sole shareholder of general partner 13,173 ---
Payments for redemption of preferred units --- (372)
Proceeds from issuance of debt 43,350 73,657
Repayments of debt (70,298) (91,329)
Additions to deferred financing costs (621) (521)
Proceeds from exercise of unit options 8,075 16,777
- --------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (54,259) (25,972)
- --------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents 17,237 (868)
Cash and cash equivalents, beginning of period 9,864 1,068
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $27,101 $ 200
- --------------------------------------------------------------------------------------------------------------------
Supplemental schedule of non-cash activities:
We purchase capital equipment and incurs costs relating to construction of new
facilities, including tenant finishing allowances. Expenditures included in
construction trade payables as of September 30, 2004 and 2003 amounted to
$10,361 and $7,188, 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 $5,422.
The accompanying notes are an integral part of these consolidated financial
statements.
5
TANGER PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
1. Business
Tanger Properties Limited Partnership, a North Carolina limited partnership,
develops, owns, operates and manages factory outlet centers. At September 30,
2004, we had ownership interests in or management responsibilities for 37
centers in 23 states totaling 9.2 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 "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 and our wholly-owned subsidiaries and reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the interim
unaudited 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 equity in the venture's net income (loss) and cash contributions and
distributions. These 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 September 30,
2004 and December 31, 2003 was $6.9 million and $7.5 million, respectively.
These investments include our 50% ownership investment in TWMB and our one-third
ownership interest in Deer Park.
Our investment in TWMB is 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 nine months ended September 30, 2004 and 2003 (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
- --------------------------- ----------- ------------ ------------ ------------
Fee:
Management $ 91 $ 37 $ 228 $ 105
Leasing 42 40 181 173
Development 8 (6) 30 4
- --------------------------- ----------- ------------ ------------ ------------
Total Fees $141 $ 71 $ 439 $ 282
- --------------------------- ----------- ------------ ------------ ------------
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 of 2004, TWMB completed the construction of a 78,000
square foot third-phase expansion of the Myrtle Beach center at an approximate
cost of $9.7 million. As of September 30, 2004, 66,000 square feet were open
with the remainder of the stores scheduled to open during 2004. The completion
of this expansion brings the total gross leasable area of TWMB's Myrtle Beach
center to approximately 402,000 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 September 30, 2004, the
construction loan had a balance of $34.0 million.
7
Summary unaudited financial information of joint ventures accounted for using
the equity method is as follows (in thousands):
Summary Balance Sheets As of As of
- Unconsolidated Joint Ventures: September 30, December 31,
2004 2003
- --------------------------------------------- --------------- ---------------
Assets:
Operating real estate at cost, net $41,842 $36,096
Other real estate investment (1) 26,773 27,803
- --------------------------------------------- --------------- ---------------
Total real estate 68,615 63,899
Cash and cash equivalents 2,184 4,145
Deferred charges, net 2,076 1,652
Other assets 3,168 3,277
- --------------------------------------------- --------------- ---------------
Total assets $76,043 $72,973
- --------------------------------------------- --------------- ---------------
Liabilities and Owners' Equity:
Mortgages payable $59,233 $54,683
Construction trade payables 1,328 1,164
Accounts payable and other liabilities 730 564
- --------------------------------------------- --------------- ---------------
Total liabilities 61,291 56,411
Owners' equity 14,752 16,562
- --------------------------------------------- --------------- ---------------
Total liabilities and owners' equity $76,043 $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 Ended Nine Months Ended
Consolidated Statements of Operations - September 30, September 30,
Unconsolidated Joint Ventures 2004 2003 2004 2003
- -------------------------------------------------- ------------------- -------------- -------------- ---------------
Revenues $2,682 $2,195 $7,264 $6,080
- -------------------------------------------------- ------------------- -------------- -------------- ---------------
Expenses:
Property operating 918 725 2,639 2,211
General and administrative 8 1 21 21
Depreciation and amortization 723 599 1,977 1,679
- -------------------------------------------------- ------------------- -------------- -------------- ---------------
Total expenses 1,649 1,325 4,637 3,911
- -------------------------------------------------- ------------------- -------------- -------------- ---------------
Operating income 1,033 870 2,627 2,169
Interest expense 346 372 1,131 991
- -------------------------------------------------- ------------------- -------------- -------------- ---------------
Net income $ 687 $ 498 $1,496 $1,178
- -------------------------------------------------- ------------------- -------------- -------------- ---------------
Tanger's share of:
- -------------------------------------------------- ------------------- -------------- -------------- ---------------
Net income $ 359 $ 267 $ 799 $ 639
Depreciation 351 287 955 808
- -------------------------------------------------- ------------------- -------------- -------------- ---------------
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 September 2004, we completed the sale of our property located in Dalton,
Georgia. Net proceeds received from the sale of the property were approximately
$11.1 million. We recorded a loss on sale of real estate of approximately $3.5
million, which is included in discontinued operations for the three and nine
months ended September 30, 2004.
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
nine months ended September 30, 2004.
In May and October 2003 respectively, we completed the sale of properties
located in Martinsburg, West Virginia and Casa Grande, Arizona. 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 nine
months ended September 30, 2003.
Below is a summary of the results of operations of these properties (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
- --------------------------------------------------- ------------- ----------- ------------ -------------
Base rentals $ 279 $ 947 $ 1,453 $3,034
Percentage rentals 2 20 4 26
Expense reimbursements 112 391 618 1,253
Other income 10 32 28 72
- --------------------------------------------------- ------------- ----------- ------------ -------------
Total revenues 403 1,390 2,103 4,385
Property operating expenses 151 546 755 1,756
General and administrative 11 3 17 8
Depreciation and amortization 106 351 554 1,191
- --------------------------------------------------- ------------- ----------- ------------ -------------
Total expenses 268 900 1,326 2,955
- --------------------------------------------------- ------------- ----------- ------------ -------------
Income before loss on sale of real estate 135 490 777 1,430
Loss on sale of real estate (3,544) --- (1,460) (735)
- --------------------------------------------------- ------------- ----------- ------------ -------------
Discontinued operations $(3,409) $ 490 $ (683) $ 695
- --------------------------------------------------- ------------- ----------- ------------ -------------
During the second and third quarters of 2004, we sold a total of four outparcels
of undeveloped land at our Branson, Missouri; Westbrook, Connecticut; Gonzales,
Louisiana and West Branch, Michigan centers, respectively. Net proceeds received
were approximately $2.7 million and a gain of approximately $1.4 million was
recorded in other income.
9
5. Debt
During the third quarter of 2004, we obtained an additional $25 million
unsecured line of credit from Citicorp North America, Inc., a subsidiary of
Citigroup; bringing our total committed unsecured lines of credit to $125
million. In addition, we have completed the extension of the maturity dates on
all of our lines of credit until June of 2007. We also obtained the release of
two properties which had been securing $53.5 million in mortgage loans with
Wells Fargo Bank, thus creating an unsecured note with Wells Fargo Bank for the
same face amount.
The Dalton, Georgia property, as mentioned above in Footnote 4, served as
collateral in a cross-collateralized mortgage with John Hancock Life Insurance
Company ("John Hancock") along with several other properties. Upon its
disposition, the Dalton property was released as collateral and replaced with a
$6.4 million standby letter of credit issued by Bank of America. The letter of
credit includes an issuance fee of 1.25% annually. The required amount of the
letter of credit decreases ratably over the remaining term of the John Hancock
mortgage which matures in April 2009. Throughout the term of the letter of
credit, its required amount serves as a reduction in the amount available under
our unsecured $50 million line of credit with Bank of America.
6. Other Comprehensive Income - Derivative Financial Instruments
TWMB's interest rate swap agreement, which had been designated as a cash flow
hedge expired during the third quarter of 2004 and therefore the fair value of
the swap became zero resulting in a change in fair value of $20,000 for the
quarter. 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. For the three
and nine months ended September 30, 2004, the change in the fair value of the
derivative instrument is recorded as $20,000 and $82,000, respectively, of other
comprehensive income.
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
- ------------------------------------------------- ----------- ------------ ------------ --------------
Net income (loss) $ (2,464) $4,546 $ 3,364 $10,237
- ------------------------------------------------- ----------- ------------ ------------ --------------
Other comprehensive income:
Change in fair value of our portion of
TWMB cash flow hedge 20 31 82 21
Change in fair value of cash flow hedge, --- --- --- 98
- ------------------------------------------------- ----------- ------------ ------------ --------------
Other comprehensive income 20 31 82 119
- ------------------------------------------------- ----------- ------------ ------------ --------------
Total comprehensive income (loss) $ (2,444) $4,577 $ 3,446 $10,356
- ------------------------------------------------- ----------- ------------ ------------ --------------
10
7. Earnings Per Unit
The following table sets forth a reconciliation of the numerators and
denominators in computing earnings per unit in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (in thousands,
except per unit amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
- ------------------------------------------------------- ------------- ----------- ----------- -------------
Numerator:
Income from continuing operations $ 945 $4,056 $4,047 $9,542
Less applicable preferred unit distributions --- --- -- - (806)
- ------------------------------------------------------- ------------- ----------- ----------- -------------
Income from continuing operations available to
common unitholders - basic and diluted 945 4,056 4,047 8,736
Discontinued operations (3,409) 490 (683) 695
- ------------------------------------------------------- ------------- ----------- ----------- -------------
Net income (loss) available to common shareholders
- basic and diluted $(2,464) $4,546 $3,364 $9,431
- ------------------------------------------------------- ------------- ----------- ----------- -------------
Denominator:
Basic weighted average common units 16,645 13,437 16,518 12,763
Effect of outstanding unit options 49 178 84 212
Effect of unvested restricted share awards 11 --- 9 ---
- ------------------------------------------------------- ------------- ----------- ----------- -------------
Diluted weighted average common units 16,705 13,615 16,611 12,975
Basic earnings per common unit:
Income from continuing operations $ .06 $ .30 $ .25 $ .68
Discontinued operations (.21) .04 (.05) .06
- ------------------------------------------------------- ------------- ----------- ----------- -------------
Net income (loss) $(.15) $ .34 $ .20 $ .74
Diluted earnings per common unit:
Income from continuing operations $ .06 $ .30 $ .24 $ .67
Discontinued operations (.21) .03 (.04) .06
- ------------------------------------------------------- ------------- ----------- ----------- -------------
Net income (loss) $(.15) $ .33 $ .20 $ .73
- ------------------------------------------------------- ------------- ----------- ----------- -------------
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 the Company.
Options excluded totaled 284,200 for the three months ended September 30, 2004
and 156,496 for the nine months ended September 30, 2004. There were no options
excluded from the computation for the three and nine months ended September 30,
2003. For the nine months ended September 30, 2003, the assumed conversion of
preferred units to common units as of the beginning of the year would have been
anti-dilutive.
At September 30, 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 16,601,513 15,843,948
------------------------------------ -------------- --------------
Total 16,751,513 15,993,948
------------------------------------ -------------- --------------
11
8. 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.
9. 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 every 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 and third quarters, we recognized expense
related to the amortization of the deferred compensation of approximately $1.1
million in accordance with the vesting schedule of the restricted shares.
10. Subsequent Events
On October 25, 2004, we repaid $47.5 million, 7.875% unsecured notes at
maturity, using approximately $20.2 million in net proceeds from the sale of the
three properties and four parcels of land during the first nine months of 2004,
plus other funds available under our unsecured lines of credit.
12
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 nine months ended
September 30, 2004 with the three and nine months ended September 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;
13
- - 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.
14
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. The successful equity
financing allows us to maintain a strong balance sheet and our current financial
flexibility.
At September 30, 2004, we had ownership interests in or management
responsibilities for 37 centers in 23 states totaling 9.2 million square feet
compared to 33 centers in 20 states totaling 6.3 million square feet at
September 30, 2003. The activity in our portfolio of properties since September
30, 2003 is summarized below:
No. of GLA
Centers (000's) States
- --------------------------------------------------------------------- ---------------- ------------ -----------
As of September 30, 2003 33 6,258 20
Acquisitions/Expansions:
Myrtle Beach Hwy 17, South Carolina - --- 72 ---
(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) ---
Dalton, Georgia (wholly-owned) (1) (173) ---
- --------------------------------------------------------------------- ---------------- ------------ ------------
As of September 30, 2004 37 9,160 23
- --------------------------------------------------------------------- ---------------- ------------ ------------
15
A summary of the operating results for the three and nine months ended September
30, 2004 and 2003 is presented in the following table, expressed in amounts
calculated on a weighted average GLA basis.
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
- ---------------------------------------------------------------------- ----- ------------ ------------ ------------ -------------
GLA at end of period (000's)
Wholly owned 5,066 5,483 5,066 5,483
Partially-owned (consolidated) (1) 3,271 --- 3,271 ---
Partially owned (unconsolidated) (2) 391 318 391 318
Managed 432 457 432 457
- ---------------------------------------------------------------------- ----- ------------ ------------ ------------ -------------
Total GLA at end of period (000's) 9,160 6,258 9,160 6,258
- ---------------------------------------------------------------------- ----- ------------ ------------ ------------ -------------
Weighted average GLA (000's) (3) 8,338 5,051 8,338 5,034
Occupancy percentage at end of period (1) (2) 96% 95% 96% 95%
Per square foot for wholly owned and partially owned (consolidated) properties
Revenues
Base rentals $3.95 $3.79 $11.56 $11.23
Percentage rentals .15 .15 .35 .34
Expense reimbursements 1.56 1.59 4.55 4.78
Other income .22 .20 .61 .49
- ---------------------------------------------------------------------- ----- ------------ ------------ ------------ -------------
Total revenues 5.88 5.73 17.07 16.84
- ---------------------------------------------------------------------- ----- ------------ ------------ ------------ -------------
Expenses
Property operating 1.79 1.89 5.17 5.66
General and administrative .40 .49 1.17 1.46
Depreciation and amortization 1.69 1.33 4.70 4.04
- ---------------------------------------------------------------------- ----- ------------ ------------ ------------ -------------
Total expenses 3.88 3.71 11.04 11.16
- ---------------------------------------------------------------------- ----- ------------ ------------ ------------ -------------
Operating income 2.00 2.02 6.03 5.68
- ---------------------------------------------------------------------- ----- ------------ ------------ ------------ -------------
Interest expense 1.07 1.27 3.20 3.91
- ---------------------------------------------------------------------- ----- ------------ ------------ ------------ -------------
Income before equity in earnings of unconsolidated joint ventures,
minority interest and discontinued operations $ .93 $ .75 $ 2.83 $ 1.77
- ---------------------------------------------------------------------- ----- ------------ ------------ ------------ -------------
(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.
16
The table set forth below summarizes certain information related to GLA and
occupancy with respect to our existing centers in which we have an ownership
interest as of September 30, 2004.
GLA %
Location (sq. ft.) Occupied
------------------------------------------- ----------- ----- -----------
Riverhead, NY (1) 729,238 99
Rehoboth, DE (1) (3) 568,873 99
Foley, AL (3) 535,675 99
San Marcos, TX 442,486 97
Myrtle Beach Hwy 501, SC (3) 427,388 96
Sevierville, TN (1) 419,023 100
Hilton Head, SC (3) 393,094 91
Myrtle Beach Hwy 17, SC (1) (2) 390,547 100
Commerce II, GA 342,556 98
Howell, MI 324,631 100
Park City, UT (3) 300,602 97
Westbrook, CT (3) 291,051 93
Branson, MO 277,883 100
Williamsburg, IA 277,230 97
Lincoln City, OR (3) 270,280 95
Tuscola, IL (3) 256,514 76
Lancaster, PA 255,152 99
Locust Grove, GA 247,454 98
Gonzales, LA 245,199 97
Tilton, NH (3) 227,966 98
Fort Meyers, FL 198,789 87
Commerce I, GA 185,750 68
Terrell, TX 177,490 97
Seymour, IN 141,051 85
North Branch, MN 134,480 100
West Branch, MI 112,420 100
Barstow, CA 108,950 100
Blowing Rock, NC 105,332 100
Pigeon Forge, TN (1) 94,694 96
Nags Head, NC 82,178 100
Boaz, AL 79,575 95
Kittery I, ME 59,694 100
Kittery II, ME 24,619 100
------------------------------------------- ----------- ----- --------
8,727,864 96
========================================== ============ ===== ========
(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 $34.0 million
of construction loan debt as of September 30, 2004.
(3) Represents properties that are currently held through a consolidated joint
venture in which we own a one-third interest.
17
The table set forth below summarizes certain information related to GLA and
debt with respect to our existing centers in which we have an ownership
interest as of September 30, 2004.
Mortgage
Debt (000's)
as of
GLA September Interest Maturity
Location (sq. ft.) 30, 2004 Rate Date
- ------------------------ -------------- -------------- ---------- ------------
Lancaster, PA 255,152 $ 13,903 9.770% 4/10/2005
Commerce I, GA 185,750 7,426 9.125% 9/10/2005
Williamsburg, IA 277,230
San Marcos I, TX 221,049
West Branch, MI 112,420
Kittery I, ME 59,694
- ------------------------ -------------- -------------- ---------- ------------
670,693 60,739 7.875% 4/01/2009
San Marcos II, TX 221,437 18,513 7.980% 4/01/2009
Blowing Rock, NC 105,332 9,405 8.860% 9/01/2010
Nags Head, NC 82,178 6,382 8.860% 9/01/2010
Rehoboth Beach, DE 568,873
Foley, AL 535,675
Myrtle Beach Hwy 501, SC 427,388
Hilton Head, SC 393,094
Park City, UT 300,602
Westbrook, CT 291,051
Lincoln City, OR 270,280
Tuscola, IL 256,514
Tilton, NH 227,966
- ------------------------ -------------- -------------- ---------- ------------
3,271,443 184,139 6.590% 7/10/2008
Debt premium 9,976
- --------------------------------------- -------------- ---------- ------------
Totals 4,791,985 $310,483
======================================= ============== ========== ============
18
RESULTS OF OPERATIONS
Comparison of the three months ended September 30, 2004 to the three months
ended September 30, 2003
Base rentals increased $13.8 million, or 72%, 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 $.16 per square foot from $3.79 per square
foot in the 2003 period to $3.95 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, the overall portfolio occupancy at September 30,
2004 increased 1% from 95% to 96% compared to September 30, 2003. Also, 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. For the 2004 period we
recorded an increase of $277,000 to rental income for net amortization of market
leases. 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. For the period from September 30, 2003 to September 30, 2004, none
of our centers experienced a negative occupancy trend of more than 10%.
Percentage rentals, which represent revenues based on a percentage of tenants'
sales volume above predetermined levels (the "breakpoint"), increased $515,000
or 67%, and on a weighted average GLA basis, remained at $.15 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 September 30, 2004 were $309 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
87% and 84% in the 2004 and 2003 periods, respectively. The increase in this
percentage is due to higher reimbursement rates at the COROC portfolio.
Other income increased $776,000, or 75%, in the 2004 period compared to the 2003
period and on a weighted average GLA basis, increased $.02 per square foot from
$.20 to $.22. Other income in the 2004 period includes a gain from the sale of
one outparcel of land of $172,000 compared to no outparcel sales in the 2003
period. The remaining increase is primarily attributable to the COROC portfolio
acquisition and increases in vending and management income.
Property operating expenses increased by $5.4 million, or 57%, in the 2004
period as compared to the 2003 period and, on a weighted average GLA basis,
decreased $.10 per square foot from $1.89 to $1.79. 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 pre-acquisition portfolio
average for the third quarter.
19
General and administrative expenses increased $857,000, or 34%, 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 9% in the 2003 period to 7% in the 2004
period and, on a weighted average GLA basis, decreased from $.49 per square foot
in the 2003 period to $.40 per square foot in the 2004 period.
Depreciation and amortization per weighted average GLA increased from $1.33 per
square foot in the 2003 period to $1.69 per square foot in the 2004 period due
certain assets in the acquisition of the COROC portfolio in December 2003
accounted for under SFAS 141 "Business Combinations" ("FAS 141") which were
allocated to deferred lease costs and other intangible assets which are
amortized over shorter lives than building costs.
Interest expense increased $2.5 million, or 39%, 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 $92,000, or 34%,
in the 2004 period compared to the 2003 period due to the TWMB Associates, LLC
("TWMB"), outlet center in Myrtle Beach, South Carolina having approximately
72,000 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.
Consolidated joint venture minority interest amounted to $7.2 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 resulted in a net loss of $3.4 million in 2004 due
mainly to the sale of the Dalton, Georgia property at a loss on sale of real
estate of approximately $3.5 million.
Comparison of the nine months ended September 30, 2004 to the nine months ended
September 30, 2003
Base rentals increased $39.8 million, or 70%, 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 $.33 per square foot from $11.23 per
square foot in the 2003 period to $11.56 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, the overall portfolio occupancy at September 30,
2004 increased 1% from 95% to 96% compared to September 30, 2003. Also, 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. For the 2004 period we
recorded an increase of $647,000 to rental income for net amortization of market
leases. 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. For the period from September 30, 2003 to September 30, 2004, none
of our centers experienced a negative occupancy trend of more than 10%.
20
Percentage rentals, which represent revenues based on a percentage of tenants'
sales volume above predetermined levels (the "breakpoint"), increased $1.2
million or 72%, and on a weighted average GLA basis, increased $.01 per square
foot in the 2004 period to $.35 compared to $.34 in 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 September 30, 2004
were $309 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
88% and 85% in the 2004 and 2003 periods, respectively. The increase in this
percentage is due to higher reimbursement rates at the COROC properties.
Other income increased $2.6 million, or 104%, in the 2004 period compared to the
2003 period and on a weighted average GLA basis, increased $.12 per square foot
from $.49 to $.61. Other income in the 2004 period includes gains from the sales
of four outparcels of land of $1.4 million. In the 2003 period there were no
sales of outparcels of land. The remaining increase is primarily attributable to
the COROC portfolio acquisition and increases in vending and management income.
Property operating expenses increased by $14.6 million, or 51%, in the 2004
period as compared to the 2003 period and, on a weighted average GLA basis,
decreased $.49 per square foot from $5.66 to $5.17. 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 pre-acquisition portfolio
average for the first nine months of 2004.
General and administrative expenses increased $2.4 million, or 32%, 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 9% in the 2003 period to 7% in the 2004
period and, on a weighted average GLA basis, decreased from $1.46 per square
foot in the 2003 period to $1.17 per square foot in the 2004 period.
Depreciation and amortization per weighted average GLA increased from $4.04 per
square foot in the 2003 period to $4.70 per square foot in the 2004 period due
to certain assets in the acquisition of the COROC portfolio in December 2003
accounted for under SFAS 141 "Business Combinations" ("FAS 141") which were
allocated to deferred lease costs and other intangible assets which are
amortized over shorter lives than building costs.
Interest expense increased $7.0 million, or 35%, 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 $160,000, or
25%, in the 2004 period compared to the 2003 period due to the TWMB having
approximately 72,000 more square feet of GLA open in the 2004 period versus the
2003 period.
21
Consolidated joint venture minority interest amounted to $20.4 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 resulted in a loss of approximately $683,000 due mainly
to the loss on sale of the Dalton, Georgia property in the 2004 period of
approximately $3.5 million offset by the gain on sale of the Clover and LLBean,
New Hampshire properties of approximately $2.1 million in the 2004 period. 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 $61.1 million and $32.7 million
for the nine months ended September 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
provided by (used in) investing activities was $10.4 million and ($7.6) million
during the first nine months of 2004 and 2003, respectively. The increase of
$18.0 million in cash provided by investing activities is primarily due to the
proceeds received from sales of real estate totaling $20.3 million. Net cash
used in financing activities was $54.3 million and $26.0 million during the
first nine months of 2004 and 2003, respectively. Cash used for financing
activities 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 from the
sale of common shares by the Company.
Our consolidated cash balance increased $26.9 million from September 30, 2003 to
September 30, 2004 due primarily to: cash held in reserve at our consolidated
joint venture, COROC; proceeds from the sales of our North Conway, New Hampshire
properties and Dalton, Georgia property; and the sale of four outparcels of
undeveloped land during the first nine months of 2004; the proceeds from which
were used to help fund our repayment of the $47.5 million of bond debt which
matured in October 2004.
Development and Dispositions
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.
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 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.
22
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.
Property Dispositions
In September 2004, we completed the sale of our property located in Dalton,
Georgia. Net proceeds received from the sale of the property were approximately
$11.1 million. We recorded a loss on sale of real estate of approximately $3.5
million which is included in discontinued operations for the three and nine
months ended September 30, 2004
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 nine months ended September 30, 2004.
Outparcels
During the first nine months of 2004 we sold four outparcels of undeveloped land
at our Branson, Missouri; Westbrook, Connecticut; Gonzales, Louisiana; and West
Branch, Michigan centers respectively. Net proceeds received were approximately
$2.7 million and a gain of approximately $1.4 million was recorded in other
income.
Joint Ventures
TWMB Associates, LLC
TWMB, an unconsolidated joint venture in which we have a 50% ownership interest,
consists of one center located in Myrtle Beach, South Carolina. We provide
operating, management, leasing and marketing services to the property for a fee.
During the second quarter, TWMB completed the construction of a 78,000 square
foot third-phase expansion of the Myrtle Beach center at an approximate cost of
$9.7 million. As of September 30, 2004, 66,000 square feet were open with the
remainder of the stores scheduled to open during the fourth quarter of 2004. The
completion of this expansion brings the total GLA of the center to approximately
402,000 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 September
30, 2004, the construction loan had a balance of $34.0 million.
Deer Park Enterprise, LLC
Deer Park Enterprise, LLC ("Deer Park") is an unconsolidated 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 2007.
23
COROC Holdings, LLC
COROC is a consolidated joint venture in which 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 owns the Charter Oak
Partners' portfolio of nine factory outlet centers totaling approximately 3.3
million square feet. The joint venture has approximately $184.1 million of
cross-collateralized debt which has a stated, fixed interest rate of 6.59% and
matures in July 2008.
There are buy/sell agreements in each of the three above mention joint ventures
that can be triggered under certain circumstances. Should any of these events
occur, there could be a material impact on our financial position.
Financing Arrangements
At September 30, 2004, approximately 39% of our outstanding long-term debt
represented unsecured borrowings and approximately 42% of the gross book value
of our real estate portfolio was unencumbered. The average interest rate,
including loan cost amortization, on average debt outstanding for the three
months ended September 30, 2004 was 7.61%.
The Dalton, Georgia property as mentioned above in "Property Dispositions"
served as collateral in a cross-collateralized mortgage with John Hancock Life
Insurance Company ("John Hancock") along with several other properties. Upon its
disposition, the Dalton property was released as collateral and replaced with a
$6.4 million standby letter of credit issued by Bank of America. The letter of
credit includes an issuance fee of 1.25% annually. The required amount of the
letter of credit decreases ratably over the remaining term of the John Hancock
mortgage which matures in April 2009. Throughout the term of the letter of
credit, its required amount serves as a reduction in the amount available under
our unsecured $50 million line of credit with Bank of America.
During the third quarter of 2004, we obtained 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 completed the extension of the maturity dates on all of
our lines of credit until June of 2007. We also obtained the release of two
properties which had been securing $53.5 million in mortgage loans with Wells
Fargo Bank, thus creating an unsecured note with Wells Fargo Bank for the same
face amount. Based on cash provided by operations, existing credit facilities,
ongoing negotiations with certain financial institutions and our ability to
issue 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.
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.
24
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 2005. 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 and disposing of outparcels on
existing properties.
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 markets or other suitable instruments.
On October 14, 2004, our Board of Trustees declared a $.6250 cash distribution
per common unit payable on November 15, 2004 to each unitholder of record on
October 29, 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.
25
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:
|X| FFO does not reflect our cash expenditures, or future requirements, for
capital expenditures or contractual commitments;
|X| FFO does not reflect changes in, or cash requirements for, our working
capital needs;
|X| 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;
|X| FFO may reflect the impact of earnings or charges resulting from matters
which may not be indicative of our ongoing operations; and
|X| 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.
26
Below is a calculation of FFO for the three and nine months ended September
30, 2004 and 2003 and other data for those respective periods (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
---------------------------------------------------------------------- ------------ ------------ ------------ -------------
Funds from Operations:
Net income (loss) $(2,464) $ 4,546 $ 3,364 $10,237
Adjusted for:
Minority interest adjustment - consolidated joint venture 314 --- 18 ---
Depreciation and amortization
attributable to discontinued operations 106 351 554 1,191
Depreciation and amortization uniquely significant to real estate -
wholly owned 13,986 6,670 38,985 20,150
Depreciation and amortization uniquely significant to real estate -
unconsolidated joint venture 351 287 955 808
Loss on sale of real estate 3,544 --- 1,460 735
---------------------------------------------------------------------- ------------ ------------ ------------ -------------
Funds from operations $15,837 $11,854 $45,336 $33,121
---------------------------------------------------------------------- ------------ ------------ ------------ -------------
Weighted average units outstanding (1) 16,705 13,615 16,611 13,410
---------------------------------------------------------------------- ------------ ------------ ------------ -------------
(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 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.
27
As of September 30, 2004, we have renewed approximately 1,452,000 square feet,
or 81% of the square feet scheduled to expire in 2004. The existing tenants have
renewed at an average base rental rate approximately 6% higher than the expiring
rate. We also re-tenanted approximately 420,000 square feet of vacant space
during the first nine months of 2004 at a 4% increase in the average base rental
rate from that which was previously charged. Our factory outlet centers
typically include well-known, national, brand name companies. By maintaining a
broad base of creditworthy tenants and a geographically diverse portfolio of
properties located across the United States, we reduce our operating and leasing
risks. No one tenant (including affiliates) accounted for more than 6.8% of our
combined base and percentage rental revenues for the three months ended
September 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 September 30, 2004 and 2003, our centers were 96% 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.
Sales at our outlet centers along the east coast and the Gulf of Mexico were
adversely affected by the hurricanes in September of 2004. Fortunately, the
structural damage caused by the hurricanes was minimal and our property
insurance will cover the vast majority of the repair work that is being
completed as well as lost revenues during the days the centers were closed.
Customer traffic at these centers, particularly our center in Foley, Alabama,
however continues to be down significantly. We do not expect this to have a
material impact on our financial results.
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. During August 2004,
TWMB had an interest rate swap agreement with a notional amount of $19 million
expire. Under this agreement, TWMB received a floating interest rate based on
the 30 day LIBOR index and paid a fixed interest rate of 2.49%. This swap
effectively changed 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%.
As of September 30, 2004, we had no interest rate swap agreements.
The fair market value of long-term fixed interest rate debt is subject to market
risk. Generally, the fair market value of fixed interest rate debt will increase
as interest rates fall and decrease as interest rates rise. The estimated fair
value of our total long-term debt at September 30, 2004 was $536.9 million and
its recorded value was $511.5 million. A 1% increase in prevailing interest
rates at September 30, 2004 would decrease the fair value of our total long-term
debt by approximately $8.2 million. Fair values were determined from quoted
market prices, where available, using current interest rates considering credit
ratings and the remaining terms to maturity.
28
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 September 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.
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. (Note 1)
10.2 Amended and Restated Employment Agreement for Steven B. Tanger as of
January 1, 2004. (Note 1)
10.3 Amended and Restated Employment Agreement for Frank C. Marchisello, Jr.
as of January 1, 2004. (Note 1)
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.
29
Notes to Exhibits:
1. Incorporated by reference to the exhibits to the Operating
Partnership's Quarterly report on Form 10-Q for the quarter ended June
30, 2004.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
TANGER PROPERTIES LIMITED PARTNERSHIP
By: Tanger GP Trust, its general partner
By: /s/ Frank C. Marchisello Jr.
----------------------------
Frank C. Marchisello, Jr.
Treasurer and Assistant Secretary
DATE: November 8, 2004
30
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.
31