10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 12, 1999
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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File No. 1-11986
TANGER FACTORY OUTLET CENTERS, INC.
(Exact name of Registrant as specified in its Charter)
NORTH CAROLINA 56-1815473
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3200 Northline Avenue, Suite 360, Greensboro,
North Carolina 27408 (Address of principal
executive offices)
(Zip code)
(336) 292-3010
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
7,850,256 Common Shares, $.01 par value,
outstanding as of November 1, 1999
TANGER FACTORY OUTLET CENTERS, INC.
Index
Part I. Financial Information
Page Number
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations
For the three and nine months ended September 30, 1999 and 1998 3
Consolidated Balance Sheets
As of September 30, 1999 and December 31, 1998 4
Consolidated Statements of Cash Flows
For the nine months ended September 30, 1999 and 1998 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 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
2
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(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 Consolidated Financial Statements and Notes
thereto of the Company's Annual Report on Form 10-K for the year ended
December 31, 1998. 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. Rental Properties
During the first nine months of 1999, the Company opened expansions in four
of its centers totaling 139,000 square feet. Additionally, approximately
154,000 square feet of expansions in four of the Company's centers are
currently under construction and are scheduled to begin opening by the end
of 1999.
On September 14, 1999, the Company announced that it had signed definitive
agreements to acquire a total of 27 acres of land from Bass Pro Outdoor
World, L.P., known as "Sportsman's Park", located on I-95 near Fort
Lauderdale, Florida. The Company expects to complete the purchase of the
initial 15 acre parcel of the development project, which includes an
existing 165,000 square foot Bass Pro Shops Outdoor World store, by the end
of the year. Bass Pro Outdoor World, L.P. will in turn enter into a long
term lease with the Company for the existing store.
On May 3, 1999, a tornado destroyed the Company's outlet center in Stroud,
Oklahoma, rendering the center non-operational. The Company has filed
claims with its insurance carrier for both replacement cost and business
interruption losses applicable to this property and is currently in the
process of negotiating a final settlement. The Company has received $7.9
million in insurance proceeds for the replacement of the property as of
September 30, 1999. As a result, the Company removed the costs and related
accumulated depreciation and amortization of the portion of the Stroud
assets destroyed by the tornado during the third quarter, recognizing a
gain on disposal of $1.3 million. Business interruption insurance is being
recognized on a straight-line basis over the expected period of business
interruption. Proceeds totaling $523,000 have been recognized as Other
Income for the second and third quarters.
Commitments to complete construction of the expansions to the existing
centers and other capital expenditure requirements amounted to
approximately $5.4 million at September 30, 1999. 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, 1999
and 1998 amounted to $293,000 and $113,000, respectively, and during the
nine months ended September 30, 1999 and 1998 amounted to $903,000 and
$512,000, respectively.
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3. Other Assets
Other assets include notes receivable totaling $2.4 million from Stanley K.
Tanger, the Company's Chairman of the Board and Chief Executive Officer.
Mr. Tanger and the Company have entered into demand note agreements whereby
he may borrow up to $3 million through various advances from the Company
for an investment in a separate E-commerce outlet retail business venture.
The notes bear interest at a rate of 8% per annum and are secured by Mr.
Tanger's limited partnership interest in Tanger Investments Limited
Partnership. Mr. Tanger intends to fully repay the loan.
For the three and nine months ended September 30, 1999, Other Income
includes $687,000 in gains on sales of outparcels of land.
4. Long-Term Debt
On March 18, 1999, the Company obtained a $66.5 million non-recourse loan
due April 1, 2009 with John Hancock Mutual Life Insurance at a fixed
interest rate of 7.875%. The new loan refinanced a prior loan, also with
John Hancock, which had a balance of approximately $47.3 million, an
interest rate of 8.92% and a scheduled maturity of January 1, 2002. The
additional proceeds were used to reduce amounts outstanding under the
revolving lines of credit. The unamortized deferred financing costs
associated with the prior loan were expensed during the first quarter and
are reflected as an extraordinary item, net of minority interest, in the
accompanying statements of operations.
The Company has revolving unsecured lines of credit with a borrowing
capacity of $100 million, of which $34.5 million was available for
additional borrowings at September 30, 1999. During the first nine months
of 1999, the Company extended the maturities of all of its lines of credit
by one year. The lines of credit now have maturity dates in the years 2001
and 2002.
In June 1999, the Company terminated its interest rate swap agreement with
a notional amount of $20 million and, based on its fair value at that time,
received cash proceeds of $146,000. The agreement was scheduled to expire
in October 2001. The proceeds have been recorded as deferred income and are
being amortized as a reduction to interest expense over the remaining life
of the original contract term.
5. Stock Repurchases
In 1998, the Board of Directors authorized the Company to repurchase up to
$6 million of its outstanding common shares. During the nine months ended
September 30, 1999, the Company repurchased and retired an additional
48,300 shares at an average price $19.83 per share for approximately
$958,000, leaving a balance of $4.8 million authorized for future
repurchases.
7
6. Earnings Per Share
The following table sets forth a reconciliation of the numerators and
denominators in computing earnings per share in accordance with Statement
of Financial Accounting Standards No. 128, Earnings Per Share (in
thousands, except per share amounts):
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 370,000 and 272,000
for the three months ended September 30, 1999 and 1998, respectively, and
684,000 and 267,000 for the nine months ended September 30, 1999 and 1998,
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 since the allocation of earnings to a partnership unit is equivalent
to earnings allocated to a common share.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with the consolidated
financial statements appearing elsewhere in this report. 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, 1999 with the three and nine months ended September 30, 1998.
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. The Company intends 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
8
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:
- - general economic and local real estate conditions could change (for
example, our tenants' business may change if the economy changes, which
might effect (1) the amount of rent they pay us, (2) their ability to pay
rent to us, (3) their demand for new space, or (4) our ability to renew or
re-lease a significant amount of available space on favorable terms);
- - the laws and regulations that apply to us could change (for instance, a
change in the tax laws that apply to REITs could result in unfavorable tax
treatment for us);
- - capital availability (for instance, financing opportunities may not be
available to us, or may not be available to us on favorable terms);
- - our operating costs may increase or our costs to construct or acquire new
properties or expand our existing properties may increase or exceed our
original expectations.
General Overview
At September 30, 1999, the Company owned 30 centers in 22 states totaling
4,946,000 square feet of GLA compared to 31 centers in 23 states totaling
4,954,000 square feet of GLA at September 30, 1998. GLA has decreased a net
amount of 8,000 square feet since September 30, 1998, comprised of an increase
of 190,000 square feet due to expansions in four of the Company's centers and a
decrease of 198,000 square feet due to the tornado destruction of the center in
Stroud, Oklahoma.
During the first nine months of 1999, the Company opened expansions in four of
its centers totaling 139,000 square feet. Additionally, approximately 154,000
square feet of expansions in four of the Company's centers are currently under
construction and are scheduled to begin opening by the end of 1999.
On May 3, 1999, a tornado destroyed the Company's outlet center in Stroud,
Oklahoma, rendering the center non-operational. The Company has filed claims
with its insurance carrier for both replacement cost and business interruption
losses applicable to this property and is currently in the process of
negotiating a settlement. The Company has received $7.9 million in insurance
proceeds for the replacement of the property as of September 30, 1999. As a
result, the Company removed the costs and related accumulated depreciation and
amortization of the portion of the Stroud assets destroyed by the tornado during
the third quarter, recognizing a gain on disposal of $1.3 million. Business
interruption insurance is being recognized on a straight-line basis over the
expected period of business interruption. Proceeds totaling $523,000 have been
recognized as Other Income for the second and third quarters.
A summary of the operating results for the three and nine months ended September
30, 1999 and 1998 is presented in the following table, expressed in amounts
calculated on a weighted average GLA basis.
9
RESULTS OF OPERATIONS
Comparison of the three months ended September 30, 1999 to the three months
ended September 30, 1998
Base rentals increased $380,000, or 2%, in the 1999 period when compared to the
same period in 1998. The increase is primarily due to the effect of a full three
months of rent in 1999 from a center acquired on July 31, 1998 and due to the
expansions as mentioned in the Overview above, offset by the loss of rent from
the destruction of the outlet center in Stroud, Oklahoma by a tornado on May 3,
1999. Base rent per weighted average GLA increased $.03 per foot in the three
months ended September 30, 1999 compared to the same period in 1998 due to the
loss of the Stroud center which had a lower average base rent per square foot
compared to the portfolio average.
Percentage rentals, which represent revenues based on a percentage of tenants'
sales volume above predetermined levels (the "breakpoint"), increased $85,000,
and on a weighted average GLA basis, increased $.02 per square foot in the 1999
period compared to the same period in 1998. The increase reflects higher sales
for certain tenants who normally achieve sales over their breakpoints in the
third quarter.
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,
increased from 87% in the 1998 three month period to 89% in the 1999 three month
period primarily as a result of lower property operating expenses per square
foot in the 1999 period compared to the 1998 period.
10
Other income has increased $1.2 million in the 1999 period as compared to the
1998 period. The increase is primarily due to gains on sale of out parcels of
land totaling $687,000 during the 1999 three month period as well as to the
recognition of $523,000 of business interruption insurance proceeds relating to
the Stroud, Oklahoma center.
Property operating expenses decreased by $12,000 in the 1999 period as compared
to the 1998 period reflecting increases due to expansions of existing properties
offset by the loss of the Stroud, Oklahoma center. On a weighted average GLA
basis, property operating expenses decreased $.02 per square foot from $1.64 to
$1.62. Higher real estate taxes per square foot were offset by considerable
decreases in advertising and promotion and common area maintenance expenses per
square foot.
General and administrative expenses increased $253,000, or 16%, in the 1999
quarter as compared to the 1998 quarter. As a percentage of revenues, general
and administrative expenses increased to 7% of revenues in the 1999 quarter
compared to 6.5% in the 1998 quarter. On a weighted average GLA basis, general
and administrative expenses increased $.05 per square foot from $.33 in 1998 to
$.38 in 1999. The increase in general and administrative expenses is primarily
due to rental and related expenses for the new corporate office space to which
the Company relocated its corporate headquarters in April 1999.
Interest expense increased $117,000 during the 1999 period as compared to the
1998 period due to financing the July 1998 acquisition and the 1999 expansions.
However, interest expense was favorably impacted by the reduction in the
Company's lines of credit with the insurance proceeds received from the loss of
the Stroud center. Depreciation and amortization per weighted average GLA
increased from $1.18 per square foot in the 1998 period to $1.26 per square foot
in the 1999 period due to a higher mix of tenant finishing allowances included
in buildings and improvements which are depreciated over shorter lives (i.e.,
over lives generally ranging from 3 to 10 years as opposed to other construction
costs which are depreciated over lives ranging from 15 to 33 years.)
The gain on disposal of real estate during the three months ended September 30,
1999 represents the amount of insurance proceeds received to date from the loss
of the Stroud, Oklahoma center in excess of the carrying amount of the related
assets which were destroyed by a tornado on May 3, 1999.
Comparison of the nine months ended September 30, 1999 to the nine months ended
September 30, 1998
Base rentals increased $2.4 million, or 5%, in the 1999 period when compared to
the same period in 1998. The increase is primarily due to the effect of a full
nine months of rent in 1999 from centers acquired on March 31, 1998 and July 31,
1998 as well as the expansions mentioned in the Overview above, offset by the
loss of rent from the destruction of the outlet center in Stroud, Oklahoma by a
tornado on May 3, 1999. Base rent per weighted average GLA decreased $.09 per
foot due to the portfolio of properties having a lower overall average occupancy
rate in the first nine months of 1999 compared to the same period in 1998. Base
rent per square foot, however, was favorably impacted in the first nine months
of 1999 due to the loss of Stroud which had a lower average base rent per square
foot than the portfolio average.
Percentage rentals, which represent revenues based on a percentage of tenants'
sales volume above predetermined levels (the "breakpoint"), increased by
$96,000, and on a weighted average GLA basis, remained flat with the prior year
at $.36 per square foot. For the nine months ended September 30, 1999, reported
same-store sales, defined as the weighted average sales per square foot reported
by tenants for stores open since January 1, 1998, were down less than 1% with
that of the previous year, while same space sales for the rolling 12 months
ended September 30, 1999 have actually increased 6% to $263 per square foot due
to the Company's efforts to re-merchandise selected centers by replacing low
volume tenants with high volume tenants.
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,
11
decreased from 93% in the 1998 nine month period to 91% in the 1999 nine month
period primarily as a result of a lower average occupancy rate in the 1999
period compared to the 1998 period.
Other income has increased $1.6 million in the 1999 period as compared to the
1998 period. The increase is primarily due to gains on sale of out parcels of
land totaling $687,000 during the 1999 nine month period as well as to the
recognition of $523,000 of business interruption insurance proceeds relating to
the Stroud, Oklahoma center.
Property operating expenses increased by $191,000, or 1%, in the 1999 period as
compared to the 1998. However, on a weighted average GLA basis, property
operating expenses decreased $.22 per square foot from $4.69 to $4.47. Higher
real estate taxes per square foot were offset by considerable decreases in
advertising and promotion and common area maintenance expenses per square foot.
General and administrative expenses increased $443,000, or 9%, in the 1999 nine
month period as compared to the 1998 period. As a percentage of revenues,
general and administrative expenses were approximately 7% of revenues in both
the 1999 and 1998 periods and, on a weighted average GLA basis, increased
$.03per square foot from $1.06 in 1998 to $1.09 in 1999. The increase in general
and administrative expenses per square foot reflects the rental and related
expenses for the new corporate office space to which the Company relocated its
corporate headquarters in April 1999.
Interest expense increased $1.9 million during the 1999 period as compared to
the 1998 period due to financing the 1998 acquisitions and the 1998 and 1999
expansions. However, interest expense was favorably impacted by the insurance
proceeds received from the loss of the Stroud center which were used to
immediately reduce outstanding amounts under the Company's lines of credit.
Depreciation and amortization per weighted average GLA increased from $3.49 per
square foot in the 1998 period to $3.72 per square foot in the 1999 period due
to a higher mix of tenant finishing allowances included in buildings and
improvements which are depreciated over shorter lives (i.e., over lives
generally ranging from 3 to 10 years as opposed to other construction costs
which are depreciated over lives ranging from 15 to 33 years.)
The gain on disposal of real estate during the nine months ended September 30,
1999 represents the amount of insurance proceeds received to date from the loss
of the Stroud, Oklahoma center in excess of the carrying amount of the related
assets which were destroyed by a tornado on May 3, 1999. The gain on sale of
real estate for the nine months ended September 30, 1998 is due primarily to the
sale of an 8,000 square foot, single tenant property in Manchester, VT.
The extraordinary losses recognized in each nine month period represent the
write-off of unamortized deferred financing costs related to debt that was
extinguished during each period prior to its scheduled maturity.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $33.8 million and $29.9 million
for the nine months ended September 30, 1999 and 1998, respectively. The
increase in cash provided by operating activities is due to increases in
operating income from the 1998 acquisitions and 1999 expansions and in accounts
payable during 1999 when compared to the same period in 1998. Net cash used in
investing activities was $20.9 million and $70.2 million during the first nine
months of 1999 and 1998, respectively. Cash used was higher in 1998 primarily
due to the acquisitions of factory outlet centers in Dalton, Georgia and in Ft.
Myers, Florida in 1998. Cash used in investing activities also decreased due to
the $7.9 million in insurance proceeds from the loss of the Stroud, Oklahoma
center. Likewise, net cash provided by (used in) financing activities amounted
to $(19.0) million and $39.4 million during the first nine months of 1999 and
1998, respectively, decreasing consistently with the capital needs of the
current acquisition and expansion activity. Also attributing to the decrease in
cash from financing activities in the first nine months of 1999 compared to the
same period in 1998 was an increase in dividends paid of $662,000 and the
repurchase and retirement of some of the Company's common shares totaling
$958,000 in 1999.
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During the first nine months of 1999, the Company opened expansions in four of
its centers totaling 139,000 square feet. Additionally, approximately 154,000
square feet of expansions in four of the Company's centers are currently under
construction and are scheduled to begin opening by the end of 1999. Commitments
to complete construction of the expansions to the existing centers and other
capital expenditure requirements amounted to approximately $5.4 million at
September 30, 1999. Commitments for construction represent only those costs
contractually required to be paid by the Company.
On September 14, 1999, the Company announced that it had signed definitive
agreements to acquire a total of 27 acres of land from Bass Pro Outdoor World,
L.P., known as "Sportsman's Park", located on I-95 near Fort Lauderdale,
Florida. The Company expects to complete the purchase of the initial 15 acre
parcel of the development project which includes an existing 165,000 square foot
Bass Pro Shops Outdoor World store, by the end of the year. Bass Pro Outdoor
World, L.P. will in turn enter into a long term lease with the Company for the
existing store. The Company is in the preleasing stages to develop the remaining
12 acre parcel of land with outlet tenants which would bring the total shopping
center to approximately 300,000 square feet upon completion.
The Company also is in the process of developing plans for additional expansions
and new centers for completion in 2000 and beyond. Currently, the Company is in
the preleasing stages for a future center in Bourne, Massachusetts and for
further expansions of existing Centers. However, these anticipated or planned
developments or expansions may not be started or completed as scheduled, or may
not result in accretive funds from operations. In addition, the Company
regularly evaluates acquisition or disposition proposals, engages from time to
time in negotiations for acquisitions or dispositions and may from time to time
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 also may not be consummated, or if consummated,
may not result in accretive funds from operations.
Other assets include a receivable totaling $2.4 million from Stanley K. Tanger,
the Company's Chairman of the Board and Chief Executive Officer. During the
first nine months, Mr. Tanger and the Company entered into demand note
agreements whereby he may borrow up to $3 million through various advances from
the Company for an investment in a separate E-commerce outlet retail business
venture. The notes bear interest at a rate of 8% per annum and are secured by
Mr. Tanger's limited partnership interest in Tanger Investments Limited
Partnership. Mr. Tanger intends to fully repay the loans.
The Company maintains revolving lines of credit which provide for unsecured
borrowings up to $100 million, of which $34.5 million was available for
additional borrowings at September 30, 1999. As a general matter, the Company
anticipates utilizing its lines of credit as an interim source of funds to
acquire, develop and expand factory outlet centers and to repay the credit lines
with longer-term debt or equity when management determines that market
conditions are favorable. Under joint shelf registration, the Company and the
Operating Partnership could issue up to $100 million in additional equity
securities and $100 million in additional debt securities. With the decline in
the real estate debt and equity markets, the Company may not, in the short term,
be able to access these markets on favorable terms. Management believes the
decline is temporary and may utilize these funds as the markets improve to fund
its continued growth. In the interim, the Company may consider the use of
operational and developmental joint ventures and other related strategies to
generate additional capital. Based on cash provided by operations, 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 capital
expenditures during 1999.
On March 18, 1999, the Company refinanced its 8.92% notes which had a carrying
amount of $47.3 million. The refinancing reduced the interest rate to 7.875%,
increased the loan amount to $66.5 million and extended the maturity date to
April 2009. The additional proceeds were used to reduce amounts outstanding
under the revolving lines of credit. As a result of this refinancing, management
expects to realize a savings in interest cost of approximately $300,000 over the
next twelve months. In addition, the Company has extended the maturities of all
of its revolving lines of credit by one year. The lines of credit now have
maturity dates in the years 2001 and 2002.
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At September 30, 1999, approximately 70% 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, 1999 was 8.0%.
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 limit the payment of dividends such that dividends will not
exceed funds from operations ("FFO"), as defined in the agreements, for the
prior fiscal year on an annual basis or 95% of FFO on a cumulative basis from
the date of the agreement.
On October 7, 1999, the Board of Directors of the Company declared a $.605 cash
dividend per common share payable on November 15, 1999 to each shareholder of
record on October 29, 1999, and caused a $.605 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 $.5451 per preferred depositary
share payable on November 15, 1999 to each shareholder of record on October 29,
1999.
Market Risk
The Company is 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. The Company does not enter into
derivatives or other financial instruments for trading or speculative purposes.
The Company enters into interest rate swap agreements to manage its exposure to
interest rate changes. The swaps involve the exchange of fixed and variable
interest rate payments based on a contractual principal amount and time period.
Payments or receipts on the agreements are recorded as adjustments to interest
expense. In June 1999, the Company terminated its only interest rate swap
agreement effective through October 2001 with a notional amount of $20 million.
Under this agreement, the Company received a floating interest rate based on the
30 day LIBOR index and paid a fixed interest rate of 5.47%. Upon termination of
the agreement, the Company received $146,000 in cash proceeds. The proceeds have
been recorded as deferred income and are being amortized as a reduction to
interest expense over the remaining life of the original contract term.
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 the Company's total long-term debt at September 30, 1999 was $301.5
million. A 1% increase from prevailing interest rates at September 30, 1999
would result in a decrease in fair value of total long-term debt by
approximately $5.2 million. Fair values were determined from quoted market
prices, where available, using current interest rates considering credit ratings
and the remaining terms to maturity.
New Accounting Pronouncements
On June 15, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). SFAS 133, as amended by SFAS 137, is
effective for the first quarter of fiscal 2001. SFAS 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 SFAS 133 will not have a significant
effect on the Company's results of operations or its financial position.
14
Funds from Operations
Management believes that for a clear understanding of the consolidated
historical operating results of the Company, FFO should be considered along 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 real estate, 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 calculation of funds from operations for the three and nine months
ended September 30, 1999 and 1998 as well as actual cash flow and other data for
those respective periods (in thousands):
Economic Conditions and Outlook
The majority 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 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.
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As part of its strategy of aggressively managing its assets, the Company is
strengthening the tenant base in several of its centers by adding strong new
anchor tenants, such as Nike, GAP and Nautica. To accomplish this strategy,
stores may remain vacant for a longer period of time in order to recapture
enough space to meet the size requirement of these upscale, high volume tenants.
Consequently, the Company anticipates that its average occupancy level will
remain strong, but may be more in line with the industry average.
As of September 30, 1999, the Company has renewed approximately 588,000 square
feet, or 79% of the square feet scheduled to expire in 1999. Approximately
633,000 square feet will come up for renewal in 2000. If the Company were 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 its
results of operations. However, existing tenants' sales have remained stable and
renewals by existing tenants have remained strong. In addition, the Company
continues 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 creditworthy 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 8% 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
The year 2000 ("Y2K") issue refers generally to computer applications using only
the last two digits to refer to a year rather than all four digits. As a result,
these applications could fail or create erroneous results if they recognize "00"
as the year 1900 rather than the year 2000. The Company has taken Y2K
initiatives in three general areas which represent the areas that could have an
impact on the Company - information technology systems, non-information
technology systems and third-party issues. The following is a summary of these
initiatives:
INFORMATION TECHNOLOGY SYSTEMS. The Company has focused its efforts on the
high-risk areas of the computer hardware and operating systems and software
applications at the corporate office. The Company's assessment and testing of
existing equipment and software revealed that certain older desktop personal
computers, the network operating system and the DOS-based accounting system were
not Y2K compliant The Company has replaced all critical non-compliant equipment
and also has installed current upgrades for the DOS-based accounting software
and the network operating systems which has made these systems compliant with
Y2K.
NON-INFORMATION TECHNOLOGY SYSTEMS. Non-information technology consists mainly
of facilities management systems such as telephone, utility and security systems
for the corporate office and the outlet centers. The Company has reviewed the
corporate facility management systems and made inquiry of the building
owner/manager and concluded that the corporate office building systems including
telephone, utilities, fire and security systems are Y2K compliant. The Company
has also identified date sensitive systems and equipment including HVAC units,
telephones, security systems and alarms, fire warning systems and general office
systems at each of its outlet centers. The Company has replaced, or will have
replaced by the end of 1999, all critical non-compliant systems. Based on our
current assessment, the cost of replacement is not expected to be significant.
THIRD PARTIES. The Company has third-party relationships with approximately 260
tenants and over 8,000 suppliers and contractors. Many of these third party
tenants are publicly-traded corporations and subject to disclosure requirements.
The Company has begun assessment of major third parties' Y2K readiness including
tenants, key suppliers of outsourced services including stock transfer, debt
servicing, banking collection and disbursement, payroll and benefits, while
simultaneously responding to their inquiries regarding the Company's readiness.
The majority of the Company's vendors are small suppliers that the Company
believes can manually execute their business and are readily replaceable.
Management also believes there is no material risk of being unable to procure
necessary supplies and services from third parties who have not already
indicated that they are currently Y2K compliant. The Company is diligently
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working to substantially complete its third party assessment. The Company has
received responses to approximately 73% of the surveys sent to tenants, banks
and key suppliers and intends to contact the remaining companies for a response.
Of the companies who responded, 99% have indicated they are presently, or will
be by December 31, 1999, Y2K compliant. The Company also intends to monitor Y2K
disclosures in SEC filings of publicly-owned third parties commencing with the
current quarter filings.
COSTS. The accounting software and network operating system upgrades were
executed under existing maintenance and support agreements with software
vendors, and thus the Company did not incur incremental costs to bring those
systems in compliance. Approximately $220,000 has been spent to upgrade or
replace equipment or systems specifically to bring them in compliance with Y2K.
The total cost of Y2K compliance activities, expected to be less than $400,000,
has not been, and is not expected to be material to the operating results or
financial position of the Company.
The identification and remediation of systems at the outlet centers is being
accomplished by in-house business systems personnel and outlet center general
managers whose costs are recorded as normal operating expenses. The assessment
of third-party readiness is also being conducted by in-house personnel whose
costs are recorded as normal operating expenses. The Company is not yet in a
position to estimate the cost of third-party compliance issues, but has no
reason to believe, based upon its evaluations to date, that such costs will
exceed $100,000.
RISKS. The principal risks to the Company relating to the completion of its
accounting software conversion is failure to correctly bill tenants by December
31, 1999 and to pay invoices when due. Management believes it has adequate
resources, or could obtain the needed resources, to manually bill tenants and
pay bills until the systems became operational.
The principal risks to the Company relating to non-information systems at the
outlet centers are failure to identify time-sensitive systems and inability to
find a suitable replacement system. The Company believes that adequate
replacement components or new systems are available at reasonable prices and are
in good supply. The Company also believes that adequate time and resources are
available to remediate these areas as needed.
The principal risks to the Company in its relationships with third parties are
the failure of third-party systems used to conduct business such as tenants
being unable to stock stores with merchandise, use cash registers and pay
invoices; banks being unable to process receipts and disbursements; vendors
being unable to supply needed materials and services to the centers; and
processing of outsourced employee payroll. Based on Y2K compliance work done to
date, the Company has no reason to believe that key tenants, banks and suppliers
will not be Y2K compliant in all material respects or can not be replaced within
an acceptable time frame. The Company will attempt to obtain compliance
certification from suppliers of key services as soon as such certifications are
available.
CONTINGENCY PLANS. Contingency plans generally involve the development and
testing of manual procedures or the use of alternate systems. Viable contingency
plans are difficult to develop for potential third party Y2K failures. The
Company continues to explore and research alternate systems or uses which may be
necessary in the event that a critical third party is not Y2K compliant by
December 31, 1999 and will update its contingency plans as additional
information becomes available.
The Company description of its Y2K compliance issues are based upon information
obtained by management through evaluations of internal business systems and from
tenant and vendor compliance efforts. No assurance can be given that the Company
will be able to address the Y2K issues for all its systems in a timely manner or
that it will not encounter unexpected difficulties or significant expenses
relating to adequately addressing the Y2K issue. If the Company or the major
tenants or vendors with whom the Company does business fail to address their
major Y2K issues, the Company's operating results or financial position could be
materially adversely affected. The most likely worst case scenario would be that
certain tenants would not be able to pay their rent and that certain accounting
functions would have to be processed manually.
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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
(a) Exhibits
10.1 Promissory Notes by and between Tanger Properties Limited
Partnership and John Hancock Mutual Life Insurance Company
aggregating $66,500,000 incorporated herein by reference to
the Company's exhibits to the Quarterly Report of Form 10-Q
for the period ended March 31, 1999.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
TANGER FACTORY OUTLET CENTERS, INC.
By: /s/ FRANK C. MARCHISELLO, JR.
------------------------------
Frank C. Marchisello, Jr.
Senior Vice President, Chief Financial Officer
DATE: November 11, 1999
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