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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Numbers:
33-99736-01
333-3526-01
333-39365-01
333-61394-01
TANGER PROPERTIES LIMITED 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 PARTNERSHIP
Index
Part I. Financial Information
Page Number
Item 1. Financial Statements (Unaudited)
Statements of Operations
For the three and six months ended June 30, 2003 and 2002 3
Balance Sheets
As of June 30, 2003 and December 31, 2002 4
Statements of Cash Flows
For the six months ended June 30, 2003 and 2002 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
Item 4. Controls and Procedures 27
Part II. Other Information
Item 1. Legal proceedings 28
Item 2. Changes in Securities and Use of Proceeds 28
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
2
TANGER PROPERTIES LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
(In thousands, except per unit data)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
REVENUES
Base rentals $ 19,806 $ 18,364 $ 39,428 $ 36,386
Percentage rentals 555 581 950 1,178
Expense reimbursements 8,456 7,275 16,886 14,515
Other income 803 583 1,474 1,145
- --------------------------------------------------------------------------------------------------------------------------------
Total revenues 29,620 26,803 58,738 53,224
- --------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Property operating 10,109 8,585 20,062 17,146
General and administrative 2,453 2,092 4,883 4,367
Interest 6,556 7,118 13,280 14,247
Depreciation and amortization 7,099 7,048 14,379 14,064
- --------------------------------------------------------------------------------------------------------------------------------
Total expenses 26,217 24,843 52,604 49,824
- --------------------------------------------------------------------------------------------------------------------------------
Income before equity in earnings of unconsolidated joint
ventures and discontinued operations 3,403 1,960 6,134 3,400
Equity in earnings of unconsolidated joint ventures 280 (75) 372 (67)
- --------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 3,683 1,885 6,506 3,333
Discontinued operations (761) 834 (815) 1,213
- --------------------------------------------------------------------------------------------------------------------------------
Net income 2,922 2,719 5,691 4,546
Less applicable preferred unit distributions (363) (442) (806) (886)
- --------------------------------------------------------------------------------------------------------------------------------
Income available to common unitholders $ 2,559 $ 2,277 $ 4,885 $ 3,660
Income allocated to limited partners $ 2,529 $ 2,246 $ 4,826 $ 3,610
- --------------------------------------------------------------------------------------------------------------------------------
Income allocated to general partner $ 30 $ 31 $ 59 $ 50
- --------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common unit:
Income from continuing operations $ .26 $ .13 $ .46 $ .22
Net income $ .20 $ .21 $ .39 $ .33
- --------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common unit:
Income from continuing operations $ .26 $ .13 $ .45 $ .22
Net income $ .20 $ .20 $ .39 $ .33
- --------------------------------------------------------------------------------------------------------------------------------
Distributions paid per common unit $ .62 $ .61 $ 1.23 $ 1.22
- --------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
3
TANGER PROPERTIES LIMITED PARTNERSHIP
BALANCE SHEETS
(In thousands)
June 30, December 31,
2003 2002
- -------------------------------------------------------------------------------------------
(unaudited)
ASSETS
Rental Property
Land $ 50,474 $ 51,274
Buildings, improvements and fixtures 578,665 571,125
Developments under construction 2,490 ---
- -------------------------------------------------------------------------------------------
631,629 622,399
Accumulated depreciation (185,071) (174,199)
- -------------------------------------------------------------------------------------------
Rental property, net 446,558 448,200
Cash and cash equivalents 200 1,068
Deferred charges, net 9,389 10,104
Other assets 12,685 18,008
- -------------------------------------------------------------------------------------------
Total assets $ 468,832 $ 477,380
- -------------------------------------------------------------------------------------------
LIABILITIES AND PARTNERS' EQUITY
Liabilities
Debt
Senior, unsecured notes $ 147,509 $ 150,109
Mortgages payable 173,188 174,421
Lines of credit 11,890 20,475
- -------------------------------------------------------------------------------------------
332,587 345,005
Construction trade payables 8,010 3,310
Accounts payable and accrued expenses 13,188 14,800
- -------------------------------------------------------------------------------------------
Total liabilities 353,785 363,115
- -------------------------------------------------------------------------------------------
Commitments
Partners' equity
General partner 1,016 1,141
Limited partners 114,180 113,361
Accumulated other comprehensive loss (149) (237)
- -------------------------------------------------------------------------------------------
Total partners' equity 115,047 114,265
- -------------------------------------------------------------------------------------------
Total liabilities and partners' equity $ 468,832 $ 477,380
- -------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
4
TANGER PROPERTIES LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
June 30,
2003 2002
- -----------------------------------------------------------------------------------------------------------
(unaudited)
OPERATING ACTIVITIES
Net income $ 5,691 $ 4,546
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization (including discontinued operations) 14,468 14,371
Amortization of deferred financing costs 623 628
Equity in earnings of unconsolidated joint ventures (372) 67
Compensation under Unit Option Plan 51 ---
Loss/(gain) on sale of real estate (included in discontinued operations) 735 (460)
Gain on sale of outparcels of land --- (31)
Straight-line base rent adjustment 112 101
Increase (decrease) due to changes in:
Other assets 1,674 (519)
Accounts payable and accrued expenses (1,512) (3,144)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activites 21,470 15,559
- -----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to rental property (5,036) (2,944)
Acquisition of rental property (4,700) ---
Additions to investments in unconsolidated joint ventures (952) (80)
Additions to deferred lease costs (836) (753)
Net proceeds from sale of real estate 2,076 17,291
Decrease/(increase) in escrow from rental property sale 4,006 (16,826)
Distributions received from unconsolidated joint ventures 650 ---
Collections from officers --- 86
- -----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,792) (3,226)
- -----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Cash distributions paid (15,960) (14,332)
Payments for redemption of preferred units (372) ---
Proceeds from issuance of debt 48,815 50,651
Repayments of debt (61,233) (51,009)
Additions to deferred financing costs (80) (11)
Proceeds from exercise of unit options 11,284 2,065
- -----------------------------------------------------------------------------------------------------------
Net cash used in financing activities (17,546) (12,636)
- -----------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (868) (303)
Cash and cash equivalents, beginning of period 1,068 503
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 200 $ 200
- -----------------------------------------------------------------------------------------------------------
Supplemental schedule of non-cash investing activities:
We purchase capital equipment and incurs costs relating to construction of
new facilities, including tenant finishing allowances. Expenditures included in
construction trade payables as of June 30, 2003 and 2002 amounted to $8,010 and
$4,141, respectively.
The accompanying notes are an integral part of these financial statements.
5
TANGER PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
1. Business
Tanger Properties Limited Partnership, a North Carolina limited partnership,
develops, owns, operates and manages factory outlet centers. At June 30, 2003,
we operated 33 centers in 20 states totaling 6.2 million square feet. We are
controlled by Tanger Factory Outlet Centers, Inc., a fully-integrated,
self-administered, self-managed real estate investment trust ("REIT"), as sole
shareholder of our general partner, Tanger GP Trust. Unless the context
indicates otherwise, the term "Operating Partnership" refers to Tanger
Properties Limited Partnership and the term "Company" refers to Tanger Factory
Outlet Centers, Inc. and Subsidiaries. The terms "we", "our" and "us" refer to
the Operating Partnership or the Operating Partnership and the Company together,
as the context requires.
2. Basis of Presentation
Our unaudited financial statements have been prepared pursuant to accounting
principles generally accepted in the United States of America and should be read
in conjunction with the financial statements and notes thereto of our Annual
Report on Form 10-K for the year ended December 31, 2002. Certain information
and note disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to the Securities and Exchange
Commission's ("SEC") rules and regulations, although management believes that
the disclosures are adequate to make the information presented not misleading.
The accompanying unaudited financial statements reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the interim
financial statements. All such adjustments are of a normal and recurring nature.
Investments in real estate joint ventures that represent non-controlling
ownership interests are accounted for using the equity method of accounting.
These investments are recorded initially at cost and subsequently adjusted for
our net equity in the venture's income (loss) and cash contributions and
distributions. Our investments are included in other assets in our Balance
Sheets.
Certain amounts in the 2002 financial statements have been reclassified to
conform to the 2003 presentation. See Footnote 5.
6
3. Changes in Significant Accounting Policy
The Company has a non-qualified and incentive share option plan (the "Share
Option Plan") and the Operating Partnership has a non-qualified Unit option plan
(the "Unit Option Plan"). Prior to 2003, these plans were accounted for under
the recognition and measurement provisions of APB Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. No share-based
employee compensation cost was reflected in 2002 net income, as all options
granted under those plans had an exercise price equal to the market value of the
underlying common share on the date of grant. Effective January 1, 2003, we
adopted the fair value recognition provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123"). Under the modified prospective method of adoption selected by us under
the provisions of Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure",
compensation cost recognized in 2003 is the same as that which would have been
recognized had the recognition provisions of FAS 123 been applied from its
original effective date. Results for prior periods have not been restated. The
following table illustrates the effect on net income and earnings per unit if
the fair value based method had been applied to all outstanding and unvested
awards in each period (in thousands except per unit data):
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
- -------------------------------------------------------------- --- -------------- ------------ ------------ -------------
Net income $ 2,922 $2,719 $5,691 $4,546
Add: Stock-based employee compensation expense
included in net income 25 --- 51 ---
Less: Total stock based employee compensation expense
determined under fair value based method for all
awards (25) (43) (51) (84)
- -------------------------------------------------------------- --- -------------- ------------ ------------ -------------
Pro forma net income $ 2,922 $2,676 $5,691 $4,462
- -------------------------------------------------------------- --- -------------- ------------ ------------ -------------
Earnings per unit:
Basic - as reported $.20 $.21 $.39 $.33
Basic - pro forma .20 .20 .39 .32
Diluted - as reported $.20 $.20 $.39 $.33
Diluted - pro forma .20 .20 .38 .32
- -------------------------------------------------------------- --- -------------- ------------ ------------ -------------
4. Acquisition and Development of Owned Rental Properties
In January 2003, we acquired a 29,000 square foot, 100% leased expansion located
contiguous with our existing factory outlet center in Sevierville, Tennessee for
$4.7 million. Construction of an additional 35,000 square foot expansion of the
center is currently under way, with stores expected to begin opening during the
third quarter of 2003.
Commitments to complete construction of the expansions to the existing
properties and other capital expenditure requirements amounted to approximately
$137,000 at June 30, 2003. Commitments for construction represent only those
costs contractually required to be paid by us.
7
Interest costs capitalized during the three months ended June 30, 2003 and 2002
amounted to $7,000 and $80,000, respectively, and for the six months ended June
30, 2003 and 2002 amounted to $21,000 and $159,000, respectively.
5. Disposition of Owned Rental Properties
In May 2003, we completed the sale of our property located in Martinsburg, West
Virginia. Net proceeds received from the sale of this property were
approximately $2.1 million. As a result of the sale, we recognized a loss on
sale of real estate of approximately $735,000.
In June and November 2002, respectively, we completed the sale of two of our
non-core properties located in Ft. Lauderdale, Florida and Bourne,
Massachusetts. Net proceeds received from the sales of these properties were
approximately $19.9 million. We retained management responsibility for the
Bourne center after the completion of the sale, however these responsibilities
are not considered a significant interest in the property. Management fees
received were immaterial.
In August and December 2002, respectively, we sold two outparcels of land which
had related land leases with identifiable cash flows, at two properties in our
portfolio. These sales totaled $700,000 in net proceeds.
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"),
results of operations and gain/(loss) on sales of real estate for properties
with identifiable cash flows sold subsequent to December 31, 2001 are reflected
in the Statements of Operations as discontinued operations for all periods
presented. Below is a summary of the results of operations of these properties
(in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
- ----------------------------------------------------- ----------- ------------ ------------ --------------
Base rentals $ 31 $ 558 $ 70 $ 1,125
Expense reimbursements 10 155 30 365
Other income 1 --- 2 2
- ----------------------------------------------------- ----------- ------------ ------------ --------------
Total revenues 42 713 102 1,492
Property operating expenses 28 190 93 432
Depreciation and amortization 40 149 89 307
- ----------------------------------------------------- ----------- ------------ ------------ --------------
Total expenses 68 339 182 739
- ----------------------------------------------------- ----------- ------------ ------------ --------------
Income before (loss)/gain on sale of real estate (26) 374 (80) 753
(Loss)/gain on sale of real estate (735) 460 (735) 460
- ----------------------------------------------------- ----------- ------------ ------------ --------------
Discontinued operations (761) 834 (815) 1,213
- ----------------------------------------------------- ----------- ------------ ------------ --------------
8
6. Investments in Real Estate Joint Ventures
In September 2001, we established Tanger-Warren Myrtle Beach, LLC ("TWMB"), a
joint venture in which we have a 50% ownership interest with Rosen-Warren Myrtle
Beach LLC ("Rosen-Warren") as our venture partner, to construct and operate the
Tanger Outlet center in Myrtle Beach, South Carolina. We and Rosen-Warren each
contributed $4.3 million in cash for a total initial equity in TWMB of $8.6
million. In June 2002, the first phase opened 100% leased at a cost of
approximately $35.4 million with approximately 260,000 square feet and 60 brand
name outlet tenants. In May and June 2003, 49,000 square feet of stores opened
in our 64,000 square foot second phase which is expected to cost approximately
$6.5 million. The remaining 15,000 square feet is expected to open later in
2003. We and Rosen-Warren have contributed approximately $1.1 million each
toward this second phase which will contain approximately 22 additional brand
name outlet tenants.
In conjunction with the construction of the center, TWMB closed on a
construction loan in September 2001 in the amount of $36.2 million with Bank of
America, NA (Agent) and SouthTrust Bank due in August 2005. As of June 30, 2003,
the construction loan had a $28.7 million balance. In August 2002, TWMB entered
into an interest rate swap agreement with Bank of America, NA effective through
August 2004 with a notional amount of $19 million. Under this agreement, TWMB
receives a floating interest rate based on the 30 day LIBOR index and pays a
fixed interest rate of 2.49%. This swap effectively changes the payment of
interest on $19 million of variable rate debt to fixed rate debt for the
contract period at a rate of 4.49%. TWMB pays interest on the balance of the
outstanding loan at a floating interest rate equal to LIBOR plus 2.00%. All debt
incurred by this unconsolidated joint venture is collateralized by its property
as well as joint and several guarantees by Rosen-Warren and us.
Our investment in unconsolidated real estate joint ventures as of June 30, 2003
and December 31, 2002 was $4.6 million and $3.9 million, respectively. These
investments are recorded initially at cost and subsequently adjusted for our net
equity in the venture's income (loss) and cash contributions and distributions.
Our investment in real estate joint ventures are included in other assets and
are also reduced by 50% of the profits earned for leasing and development
services we provided to the joint ventures. The following management, leasing
and development fees were recognized from services provided to TWMB during the
three and six months ended June 30, 2003 and 2002 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
- --------------------------- ----------- ------------ ------------ --------------
Fee:
Management $ 34 $ --- $ 68 $ ---
Leasing 76 35 133 62
Development (4) 30 9 102
- --------------------------- ----------- ------------ ------------ --------------
Total Fees $ 106 $ 65 $ 210 $ 164
- --------------------------- ----------- ------------ ------------ --------------
9
Summary unaudited financial information of joint ventures accounted for using
the equity method is as follows (in thousands):
June 30, December 31,
Summary Balance Sheets - Unconsolidated Joint Ventures: 2003 2002
- --------------------------------------------------------- ---------------- ----------------
Assets:
Investment properties at cost, net $35,439 $32,153
Cash and cash equivalents 634 514
Deferred charges, net 1,872 1,751
Other assets 1,995 1,491
- --------------------------------------------------------- ---------------- ----------------
Total assets $39,940 $35,909
- --------------------------------------------------------- ---------------- ----------------
Liabilities and Owners' Equity
Mortgage payable $28,692 $25,513
Construction trade payables 1,026 1,644
Accounts payable and other liabilities 828 522
- --------------------------------------------------------- ---------------- ----------------
Total liabilities 30,546 27,679
Owners' equity 9,394 8,230
- --------------------------------------------------------- ---------------- ----------------
Total liabilities and owners' equity $39,940 $35,909
- --------------------------------------------------------- ---------------- ----------------
Three Months Ended Six Months Ended
Summary Statements of Operations- June 30, June 30,
Unconsolidated Joint Ventures 2003 2002 2003 2002
- ------------------------------------------------------ ----------- ------------ ------------ --------------
Revenues $ 2,158 $ 225 $ 3,885 $ 241
- ------------------------------------------------------ ----------- ------------ ------------ --------------
Expenses:
Property operating expenses 782 385 1,486 385
General and administrative 3 --- 20 ---
Interest 294 --- 619 ---
Depreciation and amortization 552 --- 1,080 ---
- ------------------------------------------------------ ----------- ------------ ------------ --------------
Total expenses 1,631 385 3,205 385
- ------------------------------------------------------ ----------- ------------ ------------ --------------
Net income/(loss) 527 (160) 680 (144)
- ------------------------------------------------------ ----------- ------------ ------------ --------------
Tanger Properties Limited Partnership share of:
- ------------------------------------------------------ ----------- ------------ ------------ --------------
Net income/(loss) 280 (75) 372 (67)
Depreciation (real estate related) 266 --- 520 ---
- ------------------------------------------------------ ----------- ------------ ------------ --------------
7. Preferred Unit Redemption
On May 2, 2003, the Company announced that it would call for the redemption of
all of its outstanding Series A Cumulative Convertible Redeemable Preferred
Shares (the "Preferred Shares") held by the Preferred Stock Depositary. Since
preferred units held by the Company's majority owned subsidiary, Tanger LP
Trust, are to be redeemed by the Operating Partnership to the extent any
Preferred Shares of the Company are redeemed, proceeds required to redeem the
Company's preferred shares were funded by the Operating Partnership in exchange
for the preferred units held by the Company. Likewise, preferred units are
automatically converted into limited partnership units to the extent of any
conversion of the Company's preferred shares into Common Shares.
The Company's Board of Directors set June 20, 2003 as the redemption date on
which all outstanding Depositary Shares, each representing 1/10th of a Preferred
Share would be redeemed. The Preferred Stock Depositary in turn called for
redemption, as of the same redemption date, of all of the Preferred Shares. The
redemption price was $250 per Preferred Share ($25 per Depositary Share), plus
accrued and unpaid dividends, if any, to, but not including, the redemption
date.
10
In lieu of receiving the cash redemption price, holders of the Depositary
Shares, at their option, could exercise their right to convert each Depositary
Share into .901 common shares by following the instructions for, and completing
the Notice of Conversion located on the back of their Depositary Share
certificates. Those Depositary Shares, and the corresponding Preferred Shares,
that were converted to common shares did not receive accrued and unpaid
dividends, if any, but were entitled to receive common dividends declared after
the date on which the Depositary Shares were converted to common shares.
On or after the redemption date, the Depositary Shares, and the corresponding
Preferred Shares, were no longer deemed to be outstanding, dividends on the
Depositary Shares, and the corresponding Preferred Shares, ceased to accrue, and
all rights of the holders of the Depositary Shares, and the corresponding
Preferred Shares, ceased, except for the right to receive the redemption price
and accrued and unpaid dividends, without interest thereon, upon surrender of
certificates representing the Depositary Shares, and the corresponding Preferred
Shares.
As of May 2, 2003, 80,190 Preferred Shares, representing approximately 801,897
Depositary Shares, were outstanding. In total 787,008 of the Depositary Shares
were converted into 709,078 common shares and the Company redeemed the remaining
14,889 Depositary Shares for $25 per share, plus accrued and unpaid dividends.
Likewise, 787,008 preferred units were converted into 709,078 limited
partnership units and the Operating Partnership redeemed the remaining 14,889
preferred units. The Operating Partnership funded the redemption, totaling
approximately $375,000 from cash flow from operations.
8. Earnings Per Unit
The following table sets forth a reconciliation of the numerators and
denominators in computing earnings per unit in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share (in thousands, except
per unit amounts):
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Numerator:
Income from continuing operations $3,683 $1,885 $6,506 $3,333
Less applicable preferred unit distributions (363) (442) (806) (886)
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Income from continuing operations available
to common unitholders - basic and diluted 3,320 1,443 5,700 2,447
Discontinued operations (761) 834 (815) 1,213
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Net income available to common unitholders -
basic and diluted $2,559 $ 2,277 $4,885 $3,660
Denominator:
Basic weighted average common units 12,623 11,048 12,420 11,015
Effect of outstanding unit options 206 204 216 145
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Diluted weighted average common units 12,829 11,252 12,636 11,160
Basic earnings per common unit:
Income from continuing operations $ .26 $.13 $.46 $.22
Discontinued operations (.06) .08 (.07) .11
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Net income $ .20 $.21 $.39 $.33
Diluted earnings per common unit:
Income from continuing operations $ .26 $.13 $.45 $.22
Discontinued operations (.06) .07 (.06) .11
- ------------------------------------------------------- ------------ ----------- ------------ -------------
Net income $ .20 $.20 $.39 $.33
- ------------------------------------------------------- ------------ ----------- ------------ -------------
11
The computation of diluted earnings per unit excludes options to purchase common
units when the exercise price is greater than the average market price of the
common units for the period. The market price of the common units is considered
to be equivalent to the market price of the common shares of Tanger Factory
Outlet Centers, Inc., sole owner of the Operating Partnership's general partner.
Options excluded totaled 211,000 and 316,000 for the three and six months ended
June 30, 2002. There were no options excluded from the computation for the three
or six months ended June 30, 2003. The assumed conversion of preferred units to
common units as of the beginning of the year would have been anti-dilutive.
At June 30, 2003 and December 31, 2002, the ownership interests of the Operating
Partnership consisted of the following:
2003 2002
- --------------------------------------- -------------- --------------
Preferred units --- 80,190
- --------------------------------------- -------------- --------------
Common units:
General partner 150,000 150,000
Limited partners 13,153,748 11,944,330
- --------------------------------------- -------------- --------------
Total 13,303,748 12,094,330
- --------------------------------------- -------------- --------------
9. 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, 2003, our portion of the fair
value of TWMB's hedge is recorded as a $149,000 reduction to investment in joint
ventures. Total comprehensive income for the three and six months ended June 30,
2003 and 2002 is as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
- ----------------------------------------------------- ----------- ------------ ------------ --------------
Net income $2,922 $ 2,719 $5,691 $ 4,546
- ----------------------------------------------------- ----------- ------------ ------------ --------------
Other comprehensive income:
Change in fair value of our portion of
TWMB cash flow hedge 4 --- (10) ---
Change in fair value of cash flow hedge --- 86 98 377
- ----------------------------------------------------- ----------- ------------ ------------ --------------
Other comprehensive income 4 86 88 377
- ----------------------------------------------------- ----------- ------------ ------------ --------------
Total comprehensive income $2,926 $ 2,805 $5,779 $ 4,923
- ----------------------------------------------------- ----------- ------------ ------------ --------------
12
10. New Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board (FASB or the "Board")
issued Statement of Financial Accounting Standards No. 145 (FAS 145),
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections". In rescinding FASB Statement No. 4 (FAS 4),
"Reporting Gains and Losses from Extinguishment of Debt", and FASB Statement No.
64 (FAS 64), "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements", FAS 145 eliminates the requirement that gains and losses from the
extinguishment of debt be aggregated and, if material, classified as an
extraordinary item. Generally, FAS 145 is effective for transactions occurring
after December 31, 2002. We adopted this statement effective January 1, 2003,
and it had no significant impact on our results of operations or financial
position for the 2003 or 2002 periods.
In January of 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of
existing accounting pronouncements to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The provisions of
FIN 46 are effective immediately for all variable interests in variable interest
entities created after January 31, 2003, and we will need to apply its
provisions to any existing variable interests in variable interest entities
beginning July 1, 2003. We are in the process of evaluating TWMB (Note 6) in
order to determine whether the entity is a variable interest entity and whether
we are considered to be the primary beneficiary or whether we hold a significant
variable interest. TWMB is a joint venture arrangement where it is possible that
we may be required to consolidate or disclose additional information about our
50% interest in TWMB in the future. Our maximum exposure to loss as a result of
our involvement in this joint venture is equal to our investment in the joint
venture and our obligation under our joint and several guarantee of TWMB's debt,
all as disclosed in Note 6.
In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", effective at
the beginning of the first interim period beginning after June 15, 2003. The
Board initiated its liabilities and equity project in response to concerns
regarding the current balance sheet classifications of certain financial
instruments. The standard specifies that instruments within its scope, which
include mandatorily redeemable financial instruments, obligations to repurchase
the issuer's equity shares by transferring assets, and certain obligations to
issue a variable number of shares, represent obligations of the issuer and,
therefore, the issuer must classify them as liabilities. We adopted this
statement effective July 1, 2003, and it had no significant impact on our
results of operations or financial position.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with the unaudited
financial statements appearing elsewhere in this report. Historical results and
percentage relationships set forth in the unaudited Statements of Operations,
including trends which might appear, are not necessarily indicative of future
operations. Unless the context indicates otherwise, the term "Operating
Partnership" refers to Tanger Properties Limited Partnership and the term
"Company" refers to Tanger Factory Outlet Centers, Inc. and Subsidiaries. The
terms "we", "our" and "us" refer to the Operating Partnership or the Operating
Partnership and the Company together, as the context requires.
The discussion of our results of operations reported in the unaudited Statements
of Operations compares the three and six months ended June 30, 2003 with the
three and six months ended June 30, 2002. Certain comparisons between the
periods are made on a percentage basis as well as on a weighted average gross
leasable area ("GLA") basis, a technique which adjusts for certain increases or
decreases in the number of centers and corresponding square feet related to the
development, acquisition, expansion or disposition of rental properties. The
computation of weighted average GLA, however, does not adjust for fluctuations
in occupancy which may occur subsequent to the original opening date.
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;
14
- - risks associated with real estate ownership, such as the potential adverse
impact of changes in the local economic climate on the revenues and the
value of our properties;
- - risks that a significant number of tenants may become unable to meet their
lease obligations or that we may be unable to renew or re-lease a
significant amount of available space on economically favorable terms;
- - fluctuations and difficulty in forecasting operating results; changes in
business strategy or development plans;
- - business disruptions;
- - the ability to attract and retain qualified personnel;
- - the ability to realized planned costs savings in acquisitions; and
- - retention of earnings.
15
General Overview
At June 30, 2003, we have ownership interests in or management responsibilities
for 33 centers in 20 states totaling 6.2 million square feet compared to 32
centers in 21 states totaling 5.5 million square feet at June 30, 2002. The
activity in our portfolio of properties since June 30, 2002 is summarized below:
No.
of GLA
Centers (000's) States
- ----------------------------------------------------------- ------------ ------------ -----------
As of June 30, 2002 32 5,532 21
- ----------------------------------------------------------- ------------ ------------ -----------
New development expansion:
Myrtle Beach, South Carolina (joint venture) --- 49 ---
Acquisitions:
Howell, Michigan (wholly-owned) 1 325 ---
Vero Beach, Florida (managed) 1 329 ---
Bourne, Massachusetts (managed) 1 23 1
Sevierville, Tennessee (wholly-owned) --- 29 ---
Dispositions:
Bourne, Massachusetts (wholly-owned) (1) (23) (1)
Martinsburg, West Virginia (wholly-owned) (1) (49) (1)
- ----------------------------------------------------------- ------------ ------------ -----------
As of June 30, 2003 33 6,215 20
- ----------------------------------------------------------- ------------ ------------ -----------
A summary of the operating results for the three and six months ended June 30,
2003 and 2002 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,
2003 2002 2003 2002
- ---------------------------------------------------------------------- ----- ------------ ------------ ------------ -------------
GLA at end of period (000's)
Wholly owned 5,449 5,167 5,449 5,167
Partially owned (1) 309 260 309 260
Managed 457 105 457 105
- ---------------------------------------------------------------------- ----- ------------ ------------ ------------ -------------
Total GLA at end of period (000's) 6,215 5,532 6,215 5,532
- ---------------------------------------------------------------------- ----- ------------ ------------ ------------ -------------
Weighted average GLA (000's) (2) 5,448 5,094 5,445 5,094
Occupancy percentage at end of period (1) 96% 96% 96% 96%
Per square foot for wholly owned properties
Revenues
Base rentals $3.64 $3.61 $7.24 $7.14
Percentage rentals .10 .11 .18 .23
Expense reimbursements 1.55 1.43 3.10 2.85
Other income .15 .11 .27 .23
- ---------------------------------------------------------------------- ----- ------------ ------------ ------------ -------------
Total revenues 5.44 5.26 10.79 10.45
- ---------------------------------------------------------------------- ----- ------------ ------------ ------------ -------------
Expenses
Property operating 1.86 1.69 3.68 3.36
General and administrative .45 .41 .90 .86
Interest 1.20 1.40 2.44 2.80
Depreciation and amortization 1.30 1.38 2.64 2.76
- ---------------------------------------------------------------------- ----- ------------ ------------ ------------ -------------
Total expenses 4.81 4.88 9.66 9.78
- ---------------------------------------------------------------------- ----- ------------ ------------ ------------ -------------
Income before equity in earnings of unconsolidated joint ventures
and discontinued operations $.63 $.38 $1.13 $.67
- ---------------------------------------------------------------------- ----- ------------ ------------ ------------ -------------
(1) Includes Myrtle Beach, SC property which we operate and have a 50%
ownership in through a joint venture.
(2) GLA of 100% owned properties weighted by months of operations. GLA is not
adjusted for fluctuations in occupancy that may occur subsequent to the
original opening date.
16
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, 2003.
Mortgage Debt
Outstanding
GLA (000's) as of %
Date Opened Location (sq. ft.) June 30, 2003 Occupied
- ---------------------------- ------------------------------- ------------ --- ---------------- ------- --------------
Aug. 1994 Riverhead, NY 729,238 --- 100
May 1993 San Marcos, TX 441,936 $37,629 96
Feb. 1997 (1) Sevierville, TN 384,193 --- 100
Dec. 1995 Commerce II, GA 342,556 29,500 97
Sept. 2002 (1) Howell, MI 325,231 --- 99
Nov. 1994 Branson, MO 277,562 24,000 99
May 1991 Williamsburg, IA 277,230 19,250 98
Jun. 2002 (2) Myrtle Beach, SC 309,037 --- 100
Oct. 1994 (1) Lancaster, PA 255,059 14,351 96
Nov. 1994 Locust Grove, GA 248,854 --- 99
Feb. 1993 Gonzales, LA 245,199 --- 99
Jul. 1998 (1) Fort Meyers, FL 198,789 --- 89
Jul. 1989 Commerce, GA 185,750 8,056 71
Feb. 1992 Casa Grande, AZ 184,768 --- 88
Aug. 1994 Terrell, TX 177,490 --- 97
Mar. 1998 (1) Dalton, GA 173,430 11,030 95
Sept. 1994 Seymour, IN 141,051 --- 74
Dec. 1992 North Branch, MN 134,480 --- 99
Feb. 1991 West Branch, MI 112,420 7,002 98
Jan. 1995 Barstow, CA 105,950 --- 80
Sept. 1997 (1) Blowing Rock, NC 105,448 9,588 90
Jul. 1988 Pigeon Forge, TN 94,558 --- 97
Sept. 1997 (1) Nags Head, NC 82,254 6,506 100
Jul. 1988 Boaz, AL 79,575 --- 92
Jun. 1986 Kittery I, ME 59,694 6,276 100
Apr. 1988 LL Bean, North Conway, NH 50,745 --- 91
Jun. 1988 Kittery II, ME 24,619 --- 100
Mar. 1987 Clover, North Conway, NH 11,000 --- 100
- ---------------------------- ------------------------------- ------------ --- ---------------- ------- ----------
Total 5,758,116 $173,188 96%
============================ =============================== ============ === ================ ======= ==========
(1) Represents date acquired by us.
(2) Represents center operated by us through a 50% ownership joint venture.
Mortgage debt of the joint venture outstanding as of June 30, 2003 on this
property is $28.7 million.
17
RESULTS OF OPERATIONS
Comparison of the three months ended June 30, 2003 to the three months ended
June 30, 2002
Base rentals increased $1.4 million, or 8%, in the 2003 period when compared to
the same period in 2002. The increase is primarily due to the acquisition of the
Howell, Michigan center during the third quarter of 2002 and the additional GLA
acquired at our Sevierville, Tennessee center early during the first quarter of
2003. Base rent per weighted average GLA increased by $.03 per square foot from
$3.61 per square foot in the 2002 period compared to $3.64 per square foot in
the 2003 period. The increase is primarily the result of the addition of the
Howell, Michigan acquisition which had a higher average base rent per square
foot compared to the portfolio average. While the overall portfolio occupancy at
June 30, 2003 remained constant at 96% compared to June 30, 2002, one center
experienced negative occupancy trends which were offset by positive occupancy
gains in other centers.
Percentage rentals, which represent revenues based on a percentage of tenants'
sales volume above predetermined levels (the "breakpoint"), decreased $26,000 or
4%, and on a weighted average GLA basis, decreased $.01 per square foot in 2003
compared to 2002. Reported same-space sales per square foot for the rolling
twelve months ended June 30, 2003 were $300 per square foot. This represents a
1.5% increase compared to the same period in 2002. Same-space sales is defined
as the weighted average sales per square foot reported in space open for the
full duration of each comparison period. Same-space sales for the three months
ended June 30, 2003 increased 6.3% compared to the same period of 2002.
Expense reimbursements, which represent the contractual recovery from tenants of
certain common area maintenance, insurance, property tax, promotional,
advertising and management expenses generally fluctuates consistently with the
reimbursable property operating expenses to which it relates. Expense
reimbursements, expressed as a percentage of property operating expenses, were
84% and 85%, respectively, in the 2003 and 2002 periods.
Other income increased $220,000, or 38%, in 2003 compared to 2002 and on a
weighted average GLA basis, increased $.04 per square foot from $.11 to $.15.
The increase is due primarily to increases in vending income and income from
property management services.
Property operating expenses increased by $1.5 million, or 18%, in the 2003
period as compared to the 2002 period and, on a weighted average GLA basis,
increased $.17 per square foot from $1.69 to $1.86. The increase is the result
of the additional operating costs of the Howell, Michigan center that we
acquired in September as well as portfolio wide increases in advertising,
property taxes and property insurance costs.
General and administrative expenses increased $361,000, or 17%, in the 2003
period as compared to the 2002 period. The increase is primarily due to
increases in employee compensation from headcount increases and increased travel
expenses. Also, as a percentage of total revenues, general and administrative
expenses were 8% in the 2003 and 2002 periods and, on a weighted average GLA
basis increased $.04 per square foot from $.41in the 2002 period to $.45 in the
2003 period.
Interest expense decreased $562,000, or 8%, during 2003 as compared to 2002 due
primarily to lower outstanding debt and lower average interest rates during
2003. Since the 2002 period, we have reduced our outstanding borrowings through
operating cash flows, proceeds from unit option exercises, property sales and a
common share offering by the Company. Also, since June 30, 2002, we have
purchased, $8.1 million of our outstanding 7.875% senior, unsecured public notes
that mature in October 2004. The purchases were funded by amounts available
under our unsecured lines of credit. The replacement of the 2004 bonds with
funding through lines of credit provided us with additional interest expense
reduction as the lines of credit currently have a lower interest rate.
18
Depreciation and amortization per weighted average GLA decreased from $1.38 per
square foot in the 2002 period to $1.30 per square foot in the 2003 period due
to a lower mix of tenant finishing allowances included in buildings and
improvements which are depreciated over shorter lives (i.e. over lives generally
ranging from 3 to 10 years as opposed to other construction costs which are
depreciated over lives ranging from 15 to 33 years).
Equity in earnings from unconsolidated joint ventures increased $355,000 in the
2003 period compared to the 2002 period due to the opening of the Myrtle Beach,
South Carolina outlet center by TWMB in late June of 2002.
In accordance with SFAS 144 "Accounting for the Impairment or Disposal of Long
Lived Assets," effective for financial statements issued for fiscal years
beginning after December 15, 2001, results of operations and gain/ (loss) on
sales of real estate for properties sold subsequent to December 31, 2001 are
reflected in the unaudited Statements of Operations as discontinued operations
for both periods presented. The decrease in discontinued operations is due to
the 2003 period reflecting the discontinued operations and loss on sale of the
Martinsburg, West Virginia center only. The 2002 period includes Martinsburg
results as well as discontinued operations from the Ft. Lauderdale, Florida and
Bourne, Massachusetts properties and a gain on the sale of the Ft. Lauderdale
property and discontinued operations from two outparcels of land which had
related land leases with identifiable cash flows. . Comparison of the six months
ended June 30, 2003 to the six months ended June 30, 2002
Base rentals increased $3.0 million, or 8%, in the 2003 period when compared to
the same period in 2002. The increase is primarily due to the acquisition of the
Howell, Michigan center during the third quarter of 2002 and the additional GLA
acquired at our Sevierville, Tennessee center early during the first quarter of
2003. Base rent per weighted average GLA increased by $.10 per square foot from
$7.14 per square foot in the 2002 period compared to $7.24 per square foot in
the 2003 period. The increase per square foot is primarily the result of the
addition of the Howell, Michigan acquisition which had a higher average base
rent per square foot compared to the portfolio average. In addition, we had an
increase in termination revenue, a component of base rentals, of $163,000 during
the 2003 period compared to 2002. While the overall portfolio occupancy at June
30, 2003 remained constant at 96% compared to June 30, 2002, one center
experienced negative occupancy trends which were offset by positive occupancy
gains in other centers.
Percentage rentals, which represent revenues based on a percentage of tenants'
sales volume above predetermined levels (the "breakpoint"), decreased $228,000
or 19%, and on a weighted average GLA basis, decreased $.05 per square foot in
2003 compared to 2002.
Expense reimbursements, which represent the contractual recovery from tenants of
certain common area maintenance, insurance, property tax, promotional,
advertising and management expenses generally fluctuates consistently with the
reimbursable property operating expenses to which it relates. Expense
reimbursements, expressed as a percentage of property operating expenses, were
84% and 85%, respectively, in the 2003 and 2002 periods.
Other income increased $329,000, or 29%, in 2003 compared to 2002 and on a
weighted average GLA basis, increased $.04 per square foot from $.23 to $.27.
The increase is due primarily to increases in vending income and income from
property management services.
Property operating expenses increased by $2.9 million, or 17%, in the 2003
period as compared to the 2002 period and, on a weighted average GLA basis,
increased $.32 per square foot from $3.36 to $3.68. The increase is the result
of the additional operating costs of the Howell, Michigan center that we
acquired in September 2002 as well increases in snow removal, property taxes and
property insurance costs.
19
General and administrative expenses increased $516,000, or 12%, in the 2003
period as compared to the 2002 period. The increase is primarily due to
increases in employee compensation from headcount increases and increased travel
expenses. Also, as a percentage of total revenues, general and administrative
expenses were 8% in the 2003 and 2002 periods and, on a weighted average GLA
basis increased $.04 per square foot in the 2003 period compared to the 2002
period.
Interest expense decreased $967,000, or 7%, during 2003 as compared to 2002 due
primarily to lower outstanding debt and lower average interest rates during
2003. Since the 2002 period, we have reduced our outstanding borrowings through
operating cash flows, proceeds from unit option exercises, property sales and a
common share offering by the Company. Also, since June 30, 2002, we have
purchased, $8.1 million of our outstanding 7.875% senior, unsecured public notes
that mature in October 2004. The purchases were funded by amounts available
under our unsecured lines of credit. The replacement of the 2004 bonds with
funding through lines of credit provided us with additional interest expense
reduction as the lines of credit currently have a lower interest rate.
Depreciation and amortization per weighted average GLA decreased from $2.76 per
square foot in the 2002 period to $2.64 per square foot in the 2003 period due
to a lower mix of tenant finishing allowances included in buildings and
improvements which are depreciated over shorter lives (i.e. over lives generally
ranging from 3 to 10 years as opposed to other construction costs which are
depreciated over lives ranging from 15 to 33 years).
Equity in earnings from unconsolidated joint ventures increased $439,000 in the
2003 period compared to the 2002 period due to the opening of the Myrtle Beach,
South Carolina outlet center by TWMB in late June of 2002.
In accordance with SFAS 144 "Accounting for the Impairment or Disposal of Long
Lived Assets," effective for financial statements issued for fiscal years
beginning after December 15, 2001, results of operations and gain/ (loss) on
sales of real estate for properties sold subsequent to December 31, 2001 are
reflected in the unaudited Statements of Operations as discontinued operations
for both periods presented. The decrease in discontinued operations is due to
the 2003 period reflecting the discontinued operations and loss on sale of the
Martinsburg, West Virginia center only. The 2002 period includes Martinsburg
results as well as discontinued operations from the Ft. Lauderdale, Florida and
Bourne, Massachusetts properties and a gain on the sale of the Ft. Lauderdale
property and discontinued operations from two outparcels of land which had
related land leases with identifiable cash flows.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $21.5 million and $15.6 million
for the six months ended June 30, 2003 and 2002, respectively. The increase in
cash provided by operating activities is due primarily to the increases in
income after adjustments for non-cash items of approximately $2.1 million when
comparing 2003 and 2002 and by changes in accounts payable and accrued expenses
and other assets in 2003 compared to 2002. Net cash used in investing activities
was $4.8 and $3.2 million during the first six months of 2003 and 2002,
respectively. Cash used was higher in 2003 primarily due to the cash needed to
pay for the acquisition and subsequent expansion in the Sevierville, Tennessee
center offset by the cash provided by the sale of our Martinsburg, West Virginia
center. Net cash used in financing activities was $17.5 million and $12.6
million during the six months of 2003 and 2002, respectively. Cash used was
higher in 2003 due to increased distributions in 2003 compared to 2002 and due
to cash used to reduce our overall debt at June 30, 2003.
20
Acquisitions and Dispositions
In January 2003, we acquired a 29,000 square foot, 100% leased expansion located
contiguous with our existing factory outlet center in Sevierville, Tennessee at
a purchase price of $4.7 million. Construction of an additional 35,000 square
foot expansion of the center is currently under way, with stores expected to
begin opening during the third quarter of 2003. The estimated cost of the
expansion is approximately $4 million. Upon completion of the expansion, the
Sevierville center will total approximately 419,000 square feet.
During the second quarter of 2003, TWMB completed the 64,000 square foot second
phase of its center in Myrtle Beach, South Carolina. The center now totals over
324,000 square feet. Stores, aggregating 49,000 square feet, commenced
operations during May and June 2003, with the remaining stores expected to open
later this year. The estimated cost of this second phase is approximately $6.5
million.
In May 2003, we completed the sale of our property located in Martinsburg, West
Virginia. Net proceeds received from the sale of this property were
approximately $2.1 million. As a result of the sale, we recognized a loss on
sale of real estate of approximately $735,000, which is included in discontinued
operations.
Joint Ventures
In September 2001, we established Tanger-Warren Myrtle Beach, LLC ("TWMB"), a
joint venture in which we have a 50% ownership interest with Rosen-Warren Myrtle
Beach LLC ("Rosen-Warren") as our venture partner, to construct and operate the
Tanger Outlet center in Myrtle Beach, South Carolina. We and Rosen-Warren each
contributed $4.3 million in cash for a total initial equity in TWMB of $8.6
million. In June 2002 the first phase opened 100% leased at a cost of
approximately $35.4 million with approximately 260,000 square feet and 60 brand
name outlet tenants. In May and June 2003, 49,000 square feet of stores opened
in our 64,000 square foot second phase which is expected to cost approximately
$6.5 million. The remaining 15,000 square feet is expected to open later in
2003. We and Rosen-Warren have contributed approximately $1.1 million each
toward this second phase which will contain approximately 22 additional brand
name outlet tenants.
In conjunction with the construction of the center, TWMB closed on a
construction loan in September 2001 in the amount of $36.2 million with Bank of
America, NA (Agent) and SouthTrust Bank due in August 2005. As of June 30, 2003,
the construction loan had a $28.7 million balance. In August 2002, TWMB entered
into an interest rate swap agreement with Bank of America, NA effective through
August 2004 with a notional amount of $19 million. Under this agreement, TWMB
receives a floating interest rate based on the 30 day LIBOR index and pays a
fixed interest rate of 2.49%. This swap effectively changes the payment of
interest on $19 million of variable rate debt to fixed rate debt for the
contract period at a rate of 4.49%. TWMB pays interest on the balance of the
outstanding loan at a floating interest rate equal to LIBOR plus 2.00%. All debt
incurred by this unconsolidated joint venture is collateralized by its property
as well as joint and several guarantees by Rosen-Warren and us. We do not expect
events to occur that would trigger the provisions of the guarantee because our
properties have historically produced sufficient cash flow to meet the related
debt service requirements.
Either partner in TWMB has the right to initiate the sale or purchase of the
other party's interest. If such action is initiated, one partner 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 partners'
roles in this transaction would be determined by the tossing of a coin, commonly
known as a Russian roulette provision. If either Rosen-Warren or we enact this
provision and depending on our role in the transaction as either seller or
purchaser, we can potentially incur a cash outflow for the purchase of
Rosen-Warren's interest. However, we do not expect this event to occur in the
near future based on the positive results and expectations of developing and
operating an outlet center in the Myrtle Beach area.
21
Any developments or expansions that we, or a joint venture that we are involved
in, have planned or anticipated may not be started or completed as scheduled, or
may not result in accretive net income and funds from operations. In addition,
we regularly evaluate acquisition or disposition proposals and engage from time
to time in negotiations for acquisitions or dispositions of properties. We may
also enter into letters of intent for the purchase or sale of properties. Any
prospective acquisition or disposition that is being evaluated or which is
subject to a letter of intent may not be consummated, or if consummated, may not
result in an increase in net income or funds from operations (see "Funds from
Operations").
Preferred Unit Redemption
On May 2, 2003, the Company announced that it would call for the redemption of
all of its outstanding Series A Cumulative Convertible Redeemable Preferred
Shares (the "Preferred Shares") held by the Preferred Stock Depositary. Since
preferred units held by the Company's majority owned subsidiary, Tanger LP
Trust, are to be redeemed by the Operating Partnership to the extent any
Preferred Shares of the Company are redeemed, proceeds required to redeem the
Company's preferred shares were funded by the Operating Partnership in exchange
for the preferred units held by the Company. Likewise, preferred units are
automatically converted into limited partnership units to the extent of any
conversion of the Company's preferred shares into Common Shares.
The Company's Board of Directors set June 20, 2003 as the redemption date on
which all outstanding Depositary Shares, each representing 1/10th of a Preferred
Share would be redeemed. The Preferred Stock Depositary in turn called for
redemption, as of the same redemption date, of all of the Preferred Shares. The
redemption price was $250 per Preferred Share ($25 per Depositary Share), plus
accrued and unpaid dividends, if any, to, but not including, the redemption
date.
22
In lieu of receiving the cash redemption price, holders of the Depositary
Shares, at their option, could exercise their right to convert each Depositary
Share into .901 common shares by following the instructions for, and completing
the Notice of Conversion located on the back of their Depositary Share
certificates. Those Depositary Shares, and the corresponding Preferred Shares,
that were converted to common shares did not receive accrued and unpaid
dividends, if any, but were entitled to receive common dividends declared after
the date on which the Depositary Shares were converted to common shares.
On or after the redemption date, the Depositary Shares, and the corresponding
Preferred Shares, were no longer deemed to be outstanding, dividends on the
Depositary Shares, and the corresponding Preferred Shares, ceased to accrue, and
all rights of the holders of the Depositary Shares, and the corresponding
Preferred Shares, ceased, except for the right to receive the redemption price
and accrued and unpaid dividends, without interest thereon, upon surrender of
certificates representing the Depositary Shares, and the corresponding Preferred
Shares.
As of May 2, 2003, 80,190 Preferred Shares, representing approximately 801,897
Depositary Shares, were outstanding. In total 787,008 of the Depositary Shares
were converted into 709,078 common shares and the Company redeemed the remaining
14,889 Depositary Shares for $25 per share, plus accrued and unpaid dividends.
Likewise, 787,008 preferred units were converted into 709,078 limited
partnership units and the Operating Partnership redeemed the remaining 14,889
preferred units. The Operating Partnership funded the redemption, totaling
approximately $375,000 from cash flow from operations.
Financing Arrangements
During the six months of 2003, we purchased at a 2% premium, $2.6 million of our
outstanding 7.875% senior, unsecured public notes that mature in October 2004.
The purchases were funded by amounts available under our unsecured lines of
credit. These purchases were in addition to $24.9 million of the notes that were
purchased in 2001 and 2002.
At June 30, 2003, approximately 48% of our outstanding long-term debt
represented unsecured borrowings and approximately 61% of the gross book value
of our real estate portfolio was unencumbered. The average interest rate,
including loan cost amortization, on average debt outstanding for the three
months ended June 30, 2003 was 7.83%.
23
We intend to retain the ability to raise additional capital, including public
debt or equity, to pursue attractive investment opportunities that may arise and
to otherwise act in a manner that we believe to be in our best interest and our
unitholders' interests. To generate capital to reinvest into other attractive
investment opportunities, we may also consider the use of operational and
developmental joint ventures, selling certain properties that do not meet our
long-term investment criteria or selling outparcels on existing properties.
We maintain unsecured, revolving lines of credit that provided for unsecured
borrowings up to $85 million at June 30, 2003. All of our lines of credit have
maturity dates of June 30, 2005. We, together with the Company, also have the
ability through our shelf registration to issue up to $400 million in either all
debt or all equity or any combination thereof up to $400 million. Based on cash
provided by operations, existing credit facilities, ongoing negotiations with
certain financial institutions and our ability to sell debt or equity subject to
market conditions, we believe that we have access to the necessary financing to
fund the planned capital expenditures during 2003.
We anticipate that adequate cash will be available to fund our operating and
administrative expenses, regular debt service obligations, and the payment of
distributions in accordance with REIT requirements in both the short and long
term. Although we receive most of our rental payments on a monthly basis,
distributions to unitholders are made quarterly and interest payments on the
senior, unsecured notes are made semi-annually. Amounts accumulated for such
payments will be used in the interim to reduce the outstanding borrowings under
the existing lines of credit or invested in short-term money market or other
suitable instruments.
On July 10, 2003, our Board of Trustees declared a $.6150 cash distribution per
common unit payable on August 15, 2003 to each unitholder of record on July 31,
2003.
New Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board (FASB or the "Board")
issued Statement of Financial Accounting Standards No. 145 (FAS 145),
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections". In rescinding FASB Statement No. 4 (FAS 4),
"Reporting Gains and Losses from Extinguishment of Debt", and FASB Statement No.
64 (FAS 64), "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements", FAS 145 eliminates the requirement that gains and losses from the
extinguishment of debt be aggregated and, if material, classified as an
extraordinary item. Generally, FAS 145 is effective for transactions occurring
after December 31, 2002. We adopted this statement effective January 1, 2003,
and it had no significant impact on our results of operations or financial
position for the 2003 or 2002 periods.
In January of 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of
existing accounting pronouncements to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The provisions of
FIN 46 are effective immediately for all variable interests in variable interest
entities created after January 31, 2003, and we will need to apply its
provisions to any existing variable interests in variable interest entities
beginning July 1, 2003. We are in the process of evaluating TWMB (Note 6) in
order to determine whether the entity is a variable interest entity and whether
we are considered to be the primary beneficiary or whether we hold a significant
variable interest. TWMB is a joint venture arrangement where it is possible that
we may be required to consolidate or disclose additional information about our
50% interest in TWMB in the future. Our maximum exposure to loss as a result of
our involvement in this joint venture is equal to our investment in the joint
venture and our obligation under our joint and several guarantee of TWMB's debt,
all as disclosed in Note 6.
24
Funds from Operations ("FFO")
We believe that for a clear understanding of our historical operating results,
FFO should be considered along with net income as presented in the unaudited
financial statements included elsewhere in this report. FFO is presented because
it is a widely accepted financial indicator used by certain investors and
analysts to analyze and compare one equity real estate investment trust ("REIT")
with another on the basis of operating performance. FFO is generally defined as
net income (loss), computed in accordance with generally accepted accounting
principles, before extraordinary items and gains (losses) on sale or disposal of
depreciable operating properties, plus depreciation and amortization uniquely
significant to real estate and after adjustments for unconsolidated partnerships
and joint ventures. We caution that the calculation of FFO may vary from entity
to entity and as such our presentation of FFO may not be comparable to other
similarly titled measures of other reporting companies. FFO does not represent
net income or cash flow from operations as defined by generally accepted
accounting principles and should not be considered an alternative to net income
as an indication of operating performance or to cash from operations as a
measure of liquidity. FFO is not necessarily indicative of cash flows available
to fund distributions to unitholders and other cash needs.
Below is a calculation of funds from operations for the three and six months
ended June 30, 2003 and 2002 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
- ------------------------------------------------------------------------ ------------ ------------ ------------ -------------
Funds from Operations:
Net income $2,922 $2,719 $ 5,691 $4,546
Adjusted for:
Depreciation and amortization
attributable to discontinued operations 40 150 89 307
Depreciation and amortization uniquely significant to real estate -
wholly owned 7,026 6,974 14,232 13,917
Depreciation and amortization uniquely significant to real estate -
joint ventures 266 --- 520 ---
Loss/(gain) on sale of real estate 735 (460) 735 (460)
- ------------------------------------------------------------------------ ------------ ------------ ------------ -------------
Funds from operations $10,989 $9,383 $21,267 $18,310
- ------------------------------------------------------------------------ ------------ ------------ ------------ -------------
Weighted average units outstanding (1) 13,418 11,975 13,291 11,885
- ------------------------------------------------------------------------ ------------ ------------ ------------ -------------
- ------------------------------------------------------------------------ ------------ ------------ ------------ -------------
(1) Assumes our preferred units and unit options are all converted to common
units.
25
Economic Conditions and Outlook
The majority of our leases contain provisions designed to mitigate the impact of
inflation. Such provisions include clauses for the escalation of base rent and
clauses enabling us to receive percentage rentals based on tenants' gross sales
(above predetermined levels, which we believe often are lower than traditional
retail industry standards) that generally increase as prices rise. Most of the
leases require the tenant to pay their share of property operating expenses,
including common area maintenance, real estate taxes, insurance and advertising
and promotion, thereby reducing exposure to increases in costs and operating
expenses resulting from inflation.
While factory outlet stores continue to be a profitable and fundamental
distribution channel for brand name manufacturers, some retail formats are more
successful than others. As typical in the retail industry, certain tenants have
closed, or will close, certain stores by terminating their lease prior to its
natural expiration or as a result of filing for protection under bankruptcy
laws.
During 2003, we have approximately 1,070,000 square feet of our portfolio,
coming up for renewal. If we are unable to successfully renew or release a
significant amount of this space on favorable economic terms, the loss in rent
could have a material adverse effect on our results of operations.
As of June 30, 2003, we have renewed approximately 777,000 square feet, or 73%
of the square feet scheduled to expire in 2003. The existing tenants have
renewed at an average base rental rate approximately 1% higher than the expiring
rate. We also re-tenanted 207,000 square feet of vacant space during the first
six months of 2003 at a 3% 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 6.1% of our combined
base and percentage rental revenues for the six months ended June 30, 2003.
Accordingly, we do not expect any material adverse impact on our results of
operations and financial condition as a result of leases to be renewed or stores
to be released.
As of June 30, 2003 and 2002, our centers were 96% occupied. Consistent with our
long-term strategy of re-merchandising centers, we will continue to hold space
off the market until an appropriate tenant is identified. While we believe this
strategy will add value to our centers in the long-term, it may reduce our
average occupancy rates in the near term.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to various market risks, including changes in interest rates.
Market risk is the potential loss arising from adverse changes in market rates
and prices, such as interest rates. We do not enter into derivatives or other
financial instruments for trading or speculative purposes.
To manage our exposure to interest rate changes, we negotiate long-term fixed
rate debt instruments and from time to time enter into interest rate swap
agreements. The swaps involve the exchange of fixed and variable interest rate
payments based on a contractual principal amount and time period. Payments or
receipts on the agreements are recorded as adjustments to interest expense. At
June 30, 2003, TWMB had an interest rate swap agreement effective through August
2004 with a notional amount of $19 million. Under this agreement, TWMB receives
a floating interest rate based on the 30 day LIBOR index and pays a fixed
interest rate of 2.49%. This swap effectively changes the payment of interest on
$19 million of variable rate construction debt to fixed rate debt for the
contract period at a rate of 4.49%.
26
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,
2003, TWMB would have paid approximately $297,000 to terminate the agreement. A
1% decrease in the 30 day LIBOR index would increase the amount paid by TWMB by
$224,000 to approximately $521,000. The fair value is based on dealer quotes,
considering current interest rates and remaining term to maturity. TWMB does not
intend to terminate the interest rate swap agreement prior to its maturity. The
fair value of this derivative is currently recorded as a liability in TWMB's
unaudited Balance Sheets; however, if held to maturity, the value of the swap
will be zero at that time.
The fair market value of long-term fixed interest rate debt is subject to market
risk. Generally, the fair market value of fixed interest rate debt will increase
as interest rates fall and decrease as interest rates rise. The estimated fair
value of our total long-term debt at June 30, 2003 was $359.1 million and its
recorded value was $332.6 million. A 1% increase from prevailing interest rates
at June 30, 2003 would result in a decrease in fair value of total long-term
debt by approximately $11.5 million. Fair values were determined from quoted
market prices, where available, using current interest rates considering credit
ratings and the remaining terms to maturity.
Item 4. Controls and Procedures
The Chief Executive Officer, Stanley K. Tanger, and Treasurer, Frank C.
Marchisello, Jr., of Tanger GP Trust, sole general partner of the registrant,
evaluated the effectiveness of the registrant's disclosure controls and
procedures as of the report period ended June 30, 2003 (Evaluation Date), and
concluded that, as of the Evaluation Date, the registrant's disclosure controls
and procedures were effective to ensure that information the registrant is
required to disclose in its filings with the Securities and Exchange Commission
under the Securities and Exchange Act of 1934 is recorded, processed, summarized
and reported, within the time periods specified in the Commission's rules and
forms, and to ensure that information required to be disclosed by the registrant
in the reports that it files under the Exchange Act is accumulated and
communicated to the registrant's management, including its principal executive
officer and principal financial officer, as appropriate to allow timely
decisions regarding required disclosure.
There were no significant changes in the registrant's internal controls or in
other factors that could significantly affect these controls subsequent to the
Evaluation Date.
27
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 2. Changes in Securities and Use of Proceeds
During the second quarter the Company completed the redemption of all of its
outstanding Depositary Shares representing Series A Cumulative Convertible
Redeemable Preferred Shares and the Operating Partnership completed the
redemption of its like amount of preferred units held by the Company's wholly
owned subsidiary, Tanger LP Trust. As of May 2, 2003, 80,190 Preferred Shares,
representing approximately 801,897 Depositary Shares (and 801,897 preferred
units), were outstanding. In total 787,008 of the Depositary Shares were
voluntarily converted into 709,078 common shares by the preferred shareholders
and the Company redeemed the remaining 14,889 Depositary Shares for $25 per
share, plus accrued and unpaid dividends. Likewise, 787,008 preferred units were
converted into 709,078 limited partnership units and the Operating Partnership
redeemed the remaining 14,889 preferred units.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Principal Executive Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes -
Oxley Act of 2002.
31.2 Principal Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes -
Oxley Act of 2002.
32.1 Principal Executive Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes -
Oxley Act of 2002.
32.2 Principal Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes -
Oxley Act of 2002.
(b) Reports on Form 8-K - None.
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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 13, 2003
29
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.
30