FORM 10-Q
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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____ to_____
Commission File No. 1-11986
TANGER FACTORY OUTLET CENTERS, INC.
(Exact name of Registrant as specified in its Charter)
NORTH CAROLINA 56-1815473
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1400 West Northwood Street, Greensboro, North Carolina 27408
(Address of principal executive offices)
(Zip code)
(336) 274-1666
(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
-- ---
7,902,607 shares of Common Stock,
$.01 par value, outstanding as of October 30, 1998
<PAGE>
TANGER FACTORY OUTLET CENTERS, INC.
Index
Part I. Financial Information
<TABLE>
<CAPTION>
Page Number
Item 1. Financial Statements (Unaudited)
<S> <C>
Consolidated Statements of Operations
For the three and nine months ended September 30, 1998 and 1997 3
Consolidated Balance Sheets
As of September 30, 1998 and December 31, 1997 4
Consolidated Statements of Cash Flows
For the nine months ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. Other Information
Item 1. Legal proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
2
<PAGE>
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-----------------------------------------------------
(Unaudited) (Unaudited)
REVENUES
<S> <C> <C> <C> <C>
Base rentals $16,771 $14,404 $48,895 $41,362
Percentage rentals 803 779 1,678 1,482
Expense reimbursements 6,957 6,200 20,442 17,799
Other income 536 274 1,208 695
---------- ----------- ----------- -----------
Total revenues 25,067 21,657 72,223 61,338
---------- ----------- ----------- -----------
EXPENSES
Property operating 7,981 6,584 22,030 18,732
General and administrative 1,627 1,500 4,966 4,528
Interest 5,840 4,414 16,065 12,193
Depreciation and amortization 5,728 4,790 16,407 13,694
---------- ----------- ----------- -----------
Total expenses 21,176 17,288 59,468 49,147
---------- ----------- ----------- -----------
Income before gain on sale of real estate,
minority interest and extraordinary item 3,891 4,369 12,755 12,191
Gain on sale of real estate --- --- 994 ---
---------- ----------- ----------- -----------
Income before minority interest
and extraordinary item 3,891 4,369 13,749 12,191
Minority interest (946) (1,207) (3,424) (3,357)
---------- ----------- ----------- -----------
Income before extraordinary item 2,945 3,162 10,325 8,834
Extraordinary item - Loss on early extinguishment
of debt, net of minority interest of $128 --- --- (332) ---
---------- ----------- ----------- -----------
Net income $2,945 $3,162 $9,993 $8,834
========== =========== =========== ===========
Basic earnings per common share
Income before extraordinary item $.31 $.40 $1.13 $1.11
Extraordinary item --- --- (.04) ---
---------- ----------- ----------- -----------
Net income $.31 $.40 $1.09 1.11
========== =========== =========== ===========
Diluted earnings per common share:
Income before extraordinary item $.31 $.39 $1.11 $1.09
Extraordinary item --- --- (.05) ---
---------- ----------- ----------- -----------
Net income $.31 $.39 $1.06 $1.09
========== =========== =========== ===========
Dividends paid per common share $.60 $.55 $1.75 $1.62
========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Rental property
Land $53,869 $48,059
Buildings, improvements and fixtures 456,510 379,842
Developments under construction 9,299 26,807
---------------- --------------
519,678 454,708
Accumulated depreciation (79,282) (64,177)
---------------- --------------
Rental property, net 440,396 390,531
Cash and cash equivalents 2,659 3,607
Deferred charges, net 8,765 8,651
Other assets 12,224 13,225
---------------- --------------
Total assets $464,044 $416,014
================ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Long-term debt
Senior, unsecured notes $150,000 $150,000
Mortgages payable 73,116 74,050
Lines of credit 65,330 5,000
---------------- --------------
288,446 229,050
Construction trade payables 8,649 12,913
Accounts payable and accrued expenses 12,698 13,526
---------------- --------------
Total liabilities 309,793 255,489
---------------- --------------
Commitments
Minority interest 36,628 38,406
---------------- --------------
Shareholders' equity
Preferred shares, $.01 par value, 1,000,000 shares authorized, 88,770 and
90,689 shares issued and outstanding
at September 30, 1998 and December 31, 1997 1 1
Common shares, $.01 par value, 50,000,000 shares authorized,
7,903,102 and 7,853,936 shares issued and outstanding
at September 30, 1998 and December 31, 1997 79 78
Paid in capital 137,724 137,020
Distributions in excess of net income (20,181) (14,980)
---------------- --------------
Total shareholders' equity 117,623 122,119
---------------- --------------
Total liabilities and shareholders' equity $464,044 $416,014
================ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
---------------------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $9,993 $8,834
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 16,407 13,694
Amortization of deferred financing costs 810 780
Minority interest 3,296 3,357
Loss on early extinguishment of debt 460 ---
Gain on sale of real of estate (994) ---
Straight-line base rent adjustment (573) (328)
Compensation under Unit Option Plan 177 253
Increase (decrease) due to changes in:
Other assets 1,159 (107)
Accounts payable and accrued expenses (828) (1,140)
---------- ----------------
Net cash provided by operating activities 29,907 25,343
---------- ----------------
INVESTING ACTIVITIES
Acquisition of rental properties (44,650) (37,500)
Additions to rental properties (26,267) (36,231)
Additions to deferred lease costs (1,891) (1,489)
Net proceeds from sale of real estate 2,561 ---
---------- ----------------
Net cash used in investing activities (70,247) (75,220)
---------- ----------------
FINANCING ACTIVITIES
Net proceeds from issuance of common shares --- 27,038
Cash dividends paid (15,194) (12,249)
Distributions to minority interest (5,308) (4,914)
Repayments on notes payable (934) (856)
Proceeds from revolving lines of credit 112,945 107,050
Repayments on revolving lines of credit (52,615) (65,800)
Additions to deferred financing costs (264) (102)
Proceeds from exercise of unit options 762 483
---------- ----------------
Net cash provided by financing activities 39,392 50,650
---------- ----------------
Net increase (decrease) in cash and cash equivalents (948) 773
Cash and cash equivalents, beginning of period 3,607 2,585
---------- ----------------
Cash and cash equivalents, end of period $2,659 $3,358
========== ================
</TABLE>
Supplemental schedule of non-cash investing activities:
The Company purchases 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, 1998
and 1997 amounted to $8,649 and $19,160, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(In thousands, except per share and square feet data)
(Unaudited)
1. Interim Financial Statements
The unaudited Consolidated Financial Statements of Tanger Factory Outlet
Centers, Inc., a North Carolina corporation (the "Company"), have been
prepared pursuant to generally accepted accounting principles and should
be read in conjunction with the Financial Statements and Notes thereto of
the Company's Annual Report on Form 10-K, as amended, for the year ended
December 31, 1997. Certain information and note disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles 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 Consolidated 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.
2. Acquisitions, Dispositions and Development of Rental Properties
On July 31, 1998, the Company completed the acquisition of Sanibel
Factory Stores, a factory outlet center on the Gulf coast of Florida
between Fort Myers and Sanibel Island containing approximately 186,000
square feet, for a purchase price of $27,650. On March 31, 1998, the
Company completed the acquisition of Dalton Factory Stores, a factory
outlet center in Dalton, GA containing approximately 173,000 square feet,
for an aggregate purchase price of $17,000. The acquisitions were
accounted for using the purchase method whereby the purchase price is
allocated to assets acquired based on their fair values. The results of
operations of the acquired properties have been included in the
consolidated results of operations since the respective acquisition
dates.
During the first nine months, the Company completed the sale of its 8,000
square foot, single tenant property in Manchester, VT for $1,850 and the
sale of three outparcels at other centers for sales prices aggregating
$940. As a result of these dispositions, the Company recognized a gain on
sale of real estate of $994 for the nine months ended September 30, 1998.
During the first nine months, the Company completed the construction and
opened approximately 130,600 square feet in expansions which were
significantly underway at December 31, 1997. In addition, the Company
substantially completed construction and opened 20,000 square feet of a
25,000 square foot expansion to its property in Branson, MO and
construction has begun on additional expansions in Sevierville, TN
(96,000 square feet) and Riverhead, NY (67,000 square feet). Commitments
to complete construction of the expansions to the existing properties and
other capital expenditure requirements amounted to approximately $4,800
at September 30, 1998. Commitments for construction represent only those
costs contractually required to be paid by the Company.
Interest costs capitalized during the three months ended September 30,
1998 and 1997 amounted to $113 and $399, respectively, and during the
nine months ended September 30, 1998 and 1997 amounted to $512 and
$1,451, respectively.
6
<PAGE>
3. Long-Term Debt
During the first nine months, the Company amended certain of its
unsecured lines of credit to increase the maximum borrowing capacity by
an aggregate amount of $25,000. In addition, the Company terminated its
$50,000 secured line of credit and expensed the related unamortized
deferred financing costs, recognizing an extraordinary loss, net of
minority interest, of $332 in the accompanying statements of operations.
At September 30, 1998, the Company had revolving lines of credit with an
unsecured borrowing capacity of $100,000, of which $34,670 was available
for additional borrowings.
In October 1998, the Company entered into an interest rate swap effective
through October 2001 with a notional amount of $20,000 which fixed the 30
day LIBOR index at 5.47%.
4. Income Per Share
The following table sets forth a reconciliation of the numerators and
denominators in computing earnings per share in accordance with Statement
of Financial Accounting Standards No. 128, which the Company adopted in
its financial statements for the year ended December 31, 1997.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------ ---------- ---- ------------ -----------
<S> <C> <C> <C> <C>
Basic earnings per share
Income before extraordinary item $2,945 $3,162 $10,325 $8,834
Less: Preferred Share dividends (481) (450) (1,433) (1,358)
------------ ---------- ---- ------------ -----------
Income available to common shareholders $2,464 $2,712 $8,892 $7,476
Weighted average Common Shares 7,901 6,819 7,881 6,756
------------ ---------- ---- ------------ -----------
Basic earnings per share $.31 $.40 $1.13 $1.11
============ ========== ==== ============ ===========
Diluted earnings per share
Income before extraordinary item $2,945 $3,162 $10,325 $8,834
Less: Preferred Share dividends (481) (450) (1,433) (1,358)
------------ ---------- ---- ------------ -----------
Income available to common shareholders $2,464 $2,712 $8,892 $7,476
------------ ---------- ---- ------------ -----------
Shares:
Weighted average Common Shares 7,901 6,819 7,881 6,756
Effect of outstanding share and unit options 117 147 163 95
------------ ---------- ---- ------------ -----------
Weighted average Common Shares plus
assumed conversions 8,018 6,966 8,044 6,851
------------ ---------- ---- ------------ -----------
Diluted earnings per share $.31 $.39 $1.11 $1.09
============ ========== ==== ============ ===========
</TABLE>
Options to purchase Common Shares which were excluded from the computation
of diluted earnings per share because the exercise price was greater than
the average market price of the Common Shares totaled 272 and 9 for the
three months ended September 30, 1998 and 1997, and 267 and 9 for the nine
months ended September 30, 1998 and 1997, respectively. The assumed
conversion of Preferred Shares to Common Shares as of the beginning of the
year would have been anti-dilutive. The assumed conversion of the
partnership Units held by the limited partner as of the beginning of the
year, which would result in the elimination of earnings allocated to the
minority interest, would have no impact on earnings per share
7
<PAGE>
since the allocation of earnings to a partnership Unit is equivalent to
earnings allocated to a Common Share.
5. Shareholders' Equity
On July 30, 1998, the Company's Board of Directors declared a distribution
of one Preferred Share Purchase Right (a "Right") for each then
outstanding Common Share of the Company to shareholders of record on
August 27, 1998.
The Rights are exercisable only if a person or group acquires 15% or more
of the Company's outstanding Common Shares or announces a tender offer the
consummation of which would result in ownership by a person or group of
15% or more of the Common Shares. Each Right entitles shareholders to buy
one-hundredth of a share of a new series of Junior Participating Preferred
Shares of the Company at an exercise price of $120, subject to adjustment.
If an acquiring person or group acquires 15% or more of the Company's
outstanding Common Shares, an exercisable Right will entitle its holder
(other than the acquirer) to buy, at the Right's then-current exercise
price, Common Shares of the Company having a market value of two times the
exercise price of one Right. If an acquirer acquires at least 15%, but
less than 50%, of the Company's Common Shares, the Board may exchange each
Right (other than those of the acquirer) for one Common Share (or
one-hundredth of a Class B Preferred Share) per Right. In addition, under
certain circumstances, if the Company is involved in a merger or other
business combination where it is not the surviving corporation, an
exercisable Right will entitle its holder to buy, at the Right's
then-current exercise price, Common Shares of the acquiring company having
a market value of two times the exercise price of one Right.
The Company may redeem the Rights at $.01 per Right at any time prior to a
person or group acquiring a 15% position. The Rights will expire on August
26, 2008.
On October 13, 1998, the Company's Board of Directors authorized the
repurchase of up to $5 million of the Company's Common Shares. The timing
and amount of purchases will be at the discretion of management.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
CAUTIONARY STATEMENTS
Certain statements contained in the discussion below, including, without
limitation, statements containing the words "believes," "anticipates,"
"expects," and words of similar import, constitute "forward-looking statements"
within the meaning of the Private Securities Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
the effects of future events on the Company's financial performance; the risk
that the Company may not be able to finance its planned development, acquisition
and expansion activities; risks related to the retail industry in which the
Company's outlet centers 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 the Company's development, acquisition and expansion activities,
such as the potential for cost overruns, delays and lack of predictability with
respect to the financial returns associated with these development activities;
the risk of potential increase in market interest rates from current rates;
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
the Company's properties; and the risks that a significant number of tenants may
become unable to meet their lease obligations or that the Company may be unable
to renew or re-lease a significant amount of available space on economically
favorable terms. Given these uncertainties, current and prospective investors
are cautioned not to place undue reliance on such forward-looking statements.
The Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
OVERVIEW
The discussion and analysis of the consolidated financial condition and results
of operations should be read in conjunction with the Consolidated Financial
Statements and Notes thereto. Historical results and percentage relationships
set forth in the Consolidated Statements of Operations, including trends which
might appear, are not necessarily indicative of future operations.
The discussion of the Company's results of operations reported in the
Consolidated Statements of Operations compares the three and nine months ended
September 30, 1998 with the three and nine months ended September 30, 1997.
Certain comparisons between the periods are also 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.
The Company continues to grow principally through acquisitions and expansions of
existing factory outlet centers. On July 31, 1998, the Company completed the
acquisition of Sanibel Factory Stores, a factory outlet center on the Gulf coast
of Florida between Fort Myers and Sanibel Island containing approximately
186,000 square feet, for a purchase price of $27.65 million. On March 31, 1998,
the Company completed the acquisition of Dalton Factory Stores, a factory outlet
center in Dalton, GA containing approximately 173,000 square feet, for an
aggregate purchase price of $17.0 million. On March 31, 1998, the Company also
completed the sale of its 8,000 square foot, single tenant property in
Manchester, VT for $1.85 million.
9
<PAGE>
During the first nine months, the Company completed the construction and opened
approximately 130,600 square feet in expansions which were significantly
underway at December 31, 1997. In addition, the Company substantially completed
construction and opened 20,000 square feet of a 25,000 square foot expansion to
its property in Branson, MO and construction has begun on additional expansions
in Sevierville, TN (96,000 square feet) and Riverhead, NY (67,000 square feet).
A summary of the operating results for three and nine months ended September 30,
1998 and 1997, calculated on a weighted average GLA basis, is presented in the
following table.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
--------- ------------ ----- ------------- --------------
<S> <C> <C> <C> <C>
GLA at end of period (000's) 4,954 4,289 4,954 4,289
Weighted Average GLA(a) (000's) 4,869 4,079 4,700 3,928
Outlet centers in operation 31 30 31 30
New centers acquired 1 2 2 3
Centers sold --- --- 1 ---
Centers expanded 1 1 1 2
States operated in at end of period 23 23 23 23
Per square foot
Revenues
Base rentals $3.44 $3.53 $10.40 $10.53
Percentage rentals .16 .19 .36 .38
Expense reimbursements 1.43 1.52 4.35 4.53
Other income .11 .07 .26 .18
--------- ------------ ----- ------------- --------------
Total revenue 5.14 5.31 15.37 15.62
--------- ------------ ----- ------------- --------------
Expenses
Property operating 1.64 1.61 4.69 4.77
General and administrative .33 .37 1.06 1.15
Interest 1.20 1.08 3.42 3.10
Depreciation and amortization 1.18 1.17 3.49 3.49
--------- ------------ ----- ------------- --------------
Total expenses 4.35 4.23 12.66 12.51
--------- ------------ ----- ------------- --------------
Income before gain on sale of real estate,
minority interest and extraordinary item $.79 $1.08 $2.71 $3.11
========= ============ ===== ============= ==============
</TABLE>
(a) GLA weighted by months of operations. GLA is not adjusted for fluctuations
in occupancy which may occur subsequent to the original opening date.
10
<PAGE>
RESULTS OF OPERATIONS
Comparison of the three months ended September 30, 1998 to the three months
ended September 30, 1997
Base rentals increased $2.4 million, or 16%, in the 1998 period when compared to
the same period in 1997 primarily as a result of a 19% increase in weighted
average GLA. The increase in weighted average GLA is due to the acquisitions in
October 1997 (180,000 square feet), March 1998 (173,000 square feet), and July
1998 (186,000 square feet) as well as expansions completed in the fourth quarter
of 1997 and first quarter 1998. The decrease in base rentals per weighted
average GLA of $.09 in the three months ended September 30, 1998 compared to the
same period in 1997 reflects the impact of these acquisitions, which
collectively have a lower average base rental rate per square foot, as well as a
decrease in the occupancy rate from 98% at September 30, 1997 to 95% at
September 30, 1998. Base rentals per weighted average GLA, excluding these
acquisitions, during the 1998 period decreased $.06 per foot to $3.47.
Percentage rentals, which represent revenues based on a percentage of tenants'
sales volume above predetermined levels (the "breakpoint"), increased $24,000,
or 3%, due primarily to the expansions and acquisitions completed in 1997. On a
weighted average GLA basis, percentage rentals decreased $.03 per square foot
primarily as a result of the dilutive effect of the increase in additional
square footage associated with the 1998 acquisitions, without a corresponding
increase in percentage rentals.
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,
decreased from 94% in the 1997 period to 87% in the 1998 period primarily as a
result of the decrease in occupancy rates and an increase in expenses incurred
from 1997 to 1998 of $.03 per square foot.
Property operating expenses increased by $1.4 million, or 21%, in the 1998
period as compared to the 1997 period. On a weighted average GLA basis, property
operating expenses increased $.03 per square foot, or 2%, from $1.61 to $1.64.
The increase in somewhat offset by the impact of the acquisitions, which
collectively have a lower average operating cost per foot. Property operating
expenses per weighted average GLA, excluding the acquisitions, increased $.06
per foot to $1.67, due primarily to an increase in expenses for advertising and
promotion incurred in the 1998 period compared to the 1997 period.
General and administrative expenses increased $127,000, or 8%, in the 1998
quarter as compared to the 1997 quarter. As a percentage of revenues, general
and administrative expenses decreased in the 1998 period compared to the 1997
period from 6.9% to 6.5%, and on a weighted average GLA basis, decreased $.04
per square foot to $.33 in 1998.
Interest expense increased $1.4 million during the 1998 period as compared to
the 1997 period due to higher average borrowings outstanding during the period
and due to less interest capitalized during the 1998 period as a result of a
decrease in ongoing construction activity relative to the 1997 period. Average
borrowings have increased principally to finance the acquisitions and expansions
to existing centers (see "Overview" above). Depreciation and amortization per
weighted average GLA increased $.01 per square foot to $1.18 per square foot
during the 1998 period compared to the 1997 period.
11
<PAGE>
Comparison of the nine months ended September 30, 1998 to the nine months ended
September 30, 1997
Base rentals increased $7.5 million, or 18%, in the 1998 period when compared to
the same period in 1997 primarily as a result of a 20% increase in weighted
average GLA. The increase in weighted average GLA is due to the acquisitions in
February 1997 (approximately 123,000 square feet), October 1997 (180,000 square
feet), March 1998 (173,000 square feet), and July 1998 (186,000 square feet), as
well as expansions completed in the fourth quarter of 1997 and first quarter
1998. The decrease in base rentals per weighted average GLA of $.13 in the first
nine months of 1998 compared to the same period in 1997 reflects the impact of
these acquisitions, which collectively have a lower average base rental rate per
square foot, as well as a decrease in the occupancy rate from 98% at September
30, 1997 to 95% at September 30, 1998. Base rentals per weighted average GLA,
excluding these acquisitions, during the 1998 period decreased $.06 per square
foot to $10.47.
Percentage rentals increased $196,000, or 13%, due to the acquisitions and
expansions completed in 1997. On a weighted average GLA basis, percentage
rentals decreased slightly from $.38 to $.36 per square foot. For the nine
months ended September 30, 1998, reported same-store sales, defined as the
weighted average sales per square foot reported by tenants for stores open since
January 1,1997, decreased 2% compared with the same period in 1997. Total tenant
sales for all centers increased approximately 20% for the first nine months in
1998 to $770 million compared to $642 million for the same period in 1997.
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,
decreased from 95% in the 1997 period to 93% in the 1998 period primarily as a
result of the decrease in occupancy.
Property operating expenses increased by $3.3 million, or 18%, in the 1998
period as compared to the 1997 period but, on a weighted average GLA basis,
decreased $.08 per square foot from $4.77 to $4.69. The decrease reflects the
impact of the acquisitions, which collectively have a lower average operating
cost per foot. Property operating expenses per weighted average GLA, excluding
the acquisitions, decreased $.01 per foot to $4.76.
General and administrative expenses increased $438,000, or 10%, in the 1998
quarter as compared to the 1997 quarter. As a percentage of revenues, general
and administrative expenses decreased from approximately 7.4% of revenues in the
1997 period to 6.9% in the 1998 period and, on a weighted average GLA basis,
decreased $.09 per square foot to $1.06 in 1998.
Interest expense increased $3.9 million during the 1998 period as compared to
the 1997 period due to higher average borrowings outstanding during the period
and due to less interest capitalized during the 1998 period as a result of a
decrease in ongoing construction activity relative to the 1997 period. Average
borrowings have increased principally to finance the acquisitions and expansions
to existing centers (see "Overview" above). Depreciation and amortization per
weighted average GLA remained level in the 1998 period when compared with the
1997 period at $3.49 per square foot.
The gain on sale of real estate for the nine months ended September 30, 1998
represents the sale of an 8,000 square foot, single tenant property in
Manchester, VT for $1.85 million and the sale of three outparcels at other
centers for sales prices aggregating $940,000.
The extraordinary loss for the nine months ended September 30, 1998 represents a
write-off of the unamortized deferred financing costs due to the termination of
a $50 million secured line of credit.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $29.9 and $25.3 million for the
nine months ended September 30, 1998 and 1997, respectively. Net cash used in
investing activities amounted to $70.2 and $75.2 million during the first nine
months of 1998 and 1997, respectively, reflecting lower levels of construction
activity in the 1998 period compared to the 1997 period. The net decrease in the
1998 period is also attributable to the proceeds received from the sale of one
factory outlet center and three outparcels located at other existing centers.
Net cash from financing activities amounted to $39.4 and $50.7 million during
the first nine months of 1998 and 1997, respectively, and has decreased
consistently with the capital needs of the current acquisition and expansion
activity. The net decrease of $11.3 million in the 1998 period compared with the
1997 period also reflects additional dividends paid as a result of additional
Common Shares outstanding and a $.13 per share increase in the year-to-date
dividend distributions.
During the first nine months, the Company completed the construction and opened
approximately 130,600 square feet in expansions which were significantly
underway at December 31, 1997. In addition, the Company substantially completed
construction of an expansion to its property in Branson, MO (25,000 square feet)
and construction has begun on additional expansions in Sevierville, TN (96,000
square feet) and Riverhead, NY (67,000 square feet). Commitments to complete
construction of the expansions to the existing properties and other capital
expenditure requirements amounted to approximately $4,800 at September 30, 1998.
Commitments for construction represent only those costs contractually required
to be paid by the Company.
In September 1998, the Company sold its interest, approximately 35 acres, in a
planned site in Concord, North Carolina due to the project not meeting the
Company's investment criteria. The net proceeds from the sale approximated the
asset's carrying cost at the time of sale.
The Company is in the process of developing plans for additional expansions and
new centers for completion in 1999 and beyond and will consider other
acquisitions that are suitable for its portfolio. The Company is continuing the
preleasing of a planned site located in Romulus, Michigan (Detroit). However,
there can be no assurance that any of these anticipated or planned developments
or expansions will be started or completed as scheduled, or that any development
or expansion will result in accretive funds from operations. In addition, the
Company regularly evaluates acquisition proposals, engages from time to time in
negotiations for acquisitions and may from time to time enter into letters of
intent for the purchase of properties. No assurance can be given that any of the
prospective acquisitions that are being evaluated or which are subject to a
letter of intent will be consummated, or if consummated, will result in
accretive funds from operations.
Management intends to continually have access to the capital resources necessary
to expand and develop its business and, accordingly, may seek to obtain
additional funds through equity offerings or debt financing. The Company has an
active shelf registration with the SEC providing for the issuance of up to $100
million in additional equity securities and $100 million in additional debt
securities. In addition, the Company maintains revolving lines of credit which
provide for unsecured borrowings of up to $100 million, of which $34.67 million
was available for additional borrowings as of September 30, 1998. Based on
existing credit facilities, ongoing negotiations with certain financial
institutions and funds available under the shelf registration, management
believes that the Company has access to the necessary financing to fund the
planned remaining capital expenditures during 1999.
During the first nine months of 1998, the Company terminated a $50 million
secured line of credit and increased the unsecured lines of credit by $25
million. At September 30, 1998, approximately 75% of the outstanding long-term
debt represented unsecured borrowings and approximately 79% of the Company's
real estate portfolio was unencumbered. The weighted average interest rate on
debt outstanding on September 30,
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1998 was 8.2%.
The Company anticipates that adequate cash will be available to fund its
operating and administrative expenses, regular debt service obligations, and the
payment of dividends in accordance with REIT requirements in both the short and
long term. Although the Company receives most of its rental payments on a
monthly basis, distributions to shareholders are made quarterly and interest
payments on the senior, unsecured notes are made semi-annually. Amounts
accumulated for such payments will be used in the interim to reduce the
outstanding borrowings under the existing lines of credit or invested in
short-term money market or other suitable instruments. Certain of the Company's
debt agreements or instruments limit the payment of dividends such that
dividends will not exceed funds from operations ("FFO"), as defined in the
agreements, on an annual basis or 95% of FFO on a cumulative basis from the date
of the agreement.
On October 8, 1998, the Board of Directors of the Company declared a $.60 cash
dividend per common share payable on November 16, 1998 to each shareholder of
record on October 30, 1998, and caused a $.60 per Operating Partnership unit
cash distribution to be paid to the minority interests. The Board of Directors
of the Company also declared a cash dividend of $.5406 per preferred depositary
share payable on November 16, 1998 to each shareholder of record on October 30,
1998.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, " Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 requires public business enterprises to adopt its provisions for
fiscal years beginning after December 15, 1997, and to report certain
information about operating segments in complete sets of financial statements of
the enterprise issued to shareholders. Segment disclosures will also be required
in interim financial statements beginning in the second year of application. The
Company does not believe the provisions of SFAS No. 131 will have a significant
impact to the financial statements.
In May 1998, the Emerging Issues Task Force of the FASB reached a consensus on
Issue 98-9, "Accounting for Contingent Rent in Interim Financial Periods". The
consensus states that a lessor should defer recognition of contingent rental
income until specified targets that trigger the contingent rent are met. Since
the Company is currently, and has historically, followed this practice when
recognizing percentage rental income, the adoption of this consensus did not
have any impact on the Company's current accounting practices.
On June 15, 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities (FAS
133). FAS 133 is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. FAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. Management of the
Company anticipates that, due to its limited use of derivative instruments, the
adoption of FAS 133 will not have a significant effect on the Company's results
of operations or its financial position.
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FUNDS FROM OPERATIONS
Management believes that to facilitate a clear understanding of the consolidated
historical operating results of the Company, FFO should be considered in
conjunction with net income as presented in the unaudited consolidated 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 of properties,
plus depreciation and amortization uniquely significant to real estate. The
Company cautions that the calculation of FFO may vary from entity to entity and
as such the presentation of FFO by the Company 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 dividends to shareholders and other cash needs.
Below is a computation of FFO for the three and nine months ended September 30,
1998 and 1997 as well as actual cash flow and other data for applicable
reporting periods:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
-------------------- --------------------
1998 1997 1998 1997
----------- ------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Income before gain on sale or real estate, minority
interest and extraordinary item $ 3,891 $ 4,369 $ 12,755 $ 12,191
Adjusted for depreciation and amortization uniquely
significant to real estate 5,661 4,745 16,250 13,556
-------- -------- -------- --------
Funds from operations before minority interest $ 9,552 $ 9,114 $ 29,005 $ 25,747
======== ======== ======== ========
Diluted weighted average shares outstanding(1) 11,853 10,817 11,885 10,715
======== ======== ======== ========
Cash flows provided by (used in):
Operating activities $ 29,907 $ 25,343
Investing activities ($70,247) ($75,220)
Financing activities $ 39,392 $ 50,650
</TABLE>
(1) Assumes the partnership units of the Operating Partnership held by the
minority interest, preferred shares of the Company and stock and unit options
are converted to common shares of the Company.
ECONOMIC CONDITIONS AND OUTLOOK
Substantially all of the Company's leases contain provisions designed to
mitigate the impact of inflation. Such provisions include clauses for the
escalation of base rent and clauses enabling the Company to receive percentage
rentals based on tenants' gross sales (above predetermined levels, which the
Company believes often are lower than traditional retail industry standards)
which 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, advertising and promotion, thereby
reducing exposure to increases in costs and operating expenses resulting from
inflation.
Approximately 731,000 square feet will come up for renewal in 1999. In addition,
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. There can be no
assurance that any
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tenant whose lease expires will renew such lease or that renewals or terminated
leases will be released on economically favorable terms. Also, certain tenants
have requested, or may request, and management may grant, from time to time, a
reduction in rent to remain in operation.
The Company's portfolio is currently 95% leased. Existing tenants' sales have
remained stable and renewals by existing tenants have remained strong. In
addition, the Company has continued to attract and retain additional tenants.
The Company's factory outlet centers typically include well known, national,
brand name companies. By maintaining a broad base of credit tenants and a
geographically diverse portfolio of properties located across the United States,
the Company reduces its operating and leasing risks. No one tenant (including
affiliates) accounts for more than 10% of the Company's combined base and
percentage rental revenues. Accordingly, management currently does not expect
any material adverse impact on the Company's results of operation and financial
condition as a result of leases to be renewed or stores to be released.
YEAR 2000 COMPLIANCE
Many currently installed computer systems are not capable of distinguishing 21st
century dates with 20th century dates. As a result, in less than two years,
computer systems and/or software used by many companies in a very wide variety
of applications will experience operating difficulties unless they are modified
or upgraded to adequately process information involving, related to or dependent
upon the century change. Significant uncertainty exists concerning the scope and
magnitude of problems associated with the century change.
The Company recognizes the need to ensure its operations will not be adversely
impacted by Year 2000 software failures and has established a project team to
address Year 2000 risks. The project team has coordinated the identification of
and will coordinate the implementation of changes to computer hardware and
software applications that will attempt to ensure availability, integrity and
reliability of the Company's information systems. The Company is also assessing
the potential overall impact of the impending century change on its business,
results of operations and financial position.
The Company has reviewed its information and operational systems in order to
identify those services and systems that are not Year 2000 compliant. As a
result of this review, the Company has determined that it will be required to
modify or replace certain information and operational systems so they will be
Year 2000 compliant. These modifications and replacements are being, and will
continue to be, made in conjunction with the Company's overall systems
initiatives. The total cost of these Year 2000 compliance activities, estimated
at less than $200,000, has not been, and is not anticipated to be, material to
the Company's financial position or its results of operations. The Company
expects to complete its Year 2000 project during 1999. Based on available
information, the Company does not believe any material exposure to significant
business interruption exist as a result of Year 2000 compliance issues. However,
the Company is in the process of developing a contingency plan in the event its
Year 2000 project is not completed in a timely manner. These costs and the
timing in which the Company plans to complete its Year 2000 modification and
testing processes are based on management's best estimates. However, there can
be no assurance that the Company will timely identify and remediate all
significant Year 2000 problems, that remedial efforts will not involve
significant time and expense, or that such problems will not have a material
adverse effect on the Company's business, results of operations or financial
position.
The Company also faces the risk to the extent that suppliers of products,
services and systems purchased by the Company and others with whom the Company
transacts business do not comply with Year 2000 requirements. The Company has
initiated formal communications with significant suppliers and customers to
determine the extent to which the Company is vulnerable to these third parties'
failure to remediate their own Year 2000 issues. In the event any such third
parties cannot provide the Company with products, services or systems that
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meet the Year 2000 requirements on a timely basis, or in the event Year 2000
issues prevent such third parties from timely delivery of products or services
required by the Company, the Company's results of operations could be materially
adversely affected. To the extent Year 2000 issues cause significant delays in,
or cancellation of, payments from tenants of their monthly rental obligations,
the Company's business, results of operations and financial position would be
materially adversely affected.
CONTINGENCIES
There are no recorded amounts resulting from environmental liabilities as there
are no known material loss contingencies with respect thereto. Future claims for
environmental liabilities are not measurable given the uncertainties surrounding
whether there exists a basis for any such claims to be asserted and, if so,
whether any claims will, in fact, be asserted. Furthermore, no condition is
known to exist that would give rise to a material environmental liability for
site restoration, post-closure and monitoring commitments, or other costs that
may be incurred upon the sale or disposal of a property. Management has no plans
to abandon any of the properties and is unaware of any other material loss
contingencies.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor the Operating Partnership is presently involved in any
material litigation nor, to their knowledge, is any material litigation
threatened against the Company or the Operating Partnership or its properties,
other than routine litigation arising in the ordinary course of business and
which is expected to be covered by the liability insurance.
Item 6. Exhibits and Reports on Form 8-K
The Company file the following reports on Form 8-K during the three months ended
September 30, 1998:
Current Report on Form 8-K dated July 31, 1998 to file the financial
statements and related schedules related to the acquisition of
Sanibel Factory Stores, a factory outlet center in Fort Myers,
Florida.
Current Report on Form 8-K dated August 27, 1998 to report the
declaration of a dividend of one preferred share purchase right for
each outstanding common share and file the related Rights Agreement
dated August 20, 1998 between Tanger Factory Outlet Centers, Inc. and
BankBoston, N.A.
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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 FACTORY OUTLET CENTERS, INC.
By: /s/ FRANK C. MARCHISELLO, JR.
---------------------------------------
Frank C. Marchisello, Jr.
Vice President, Chief Financial Officer
DATED: November 11, 1998
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