10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 8, 1997
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 MARCH 31, 1997
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)
(910) 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
6,742,885 shares of Common Stock,
$.01 par value, outstanding as of May 1, 1997
TANGER FACTORY OUTLET CENTERS, INC.
INDEX
PART I. FINANCIAL INFORMATION
2
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share data)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
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 March 31, 1997 and
1996 amounted to $9,401 and $7,226, respectively.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
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TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(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 the Securities and Exchange Commissions' ("SEC")
rules and regulations and should be read in conjunction with the
Financial Statements and Notes thereto of the Company's Annual Report on
Form 10-K for the year ended December 31, 1996. 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 such 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 AND DEVELOPMENT OF RENTAL PROPERTIES
On February 28, 1997, the Company completed the acquisition of Five Oaks
Factory Stores, a factory outlet center in Sevierville, TN, containing
approximately 123,000 square feet, for an aggregate purchase price of
$18 million. The acquisition was accounted for using the purchase method
whereby the purchase price was allocated to assets acquired based on
their fair values. The results of operations of the acquired property
have been included in the consolidated results of operations since the
acquisition date.
During the quarter, construction continued on a 241,436 square foot
expansion in Riverhead, NY, and stores began opening in late April 1997.
In addition, construction has also begun on a 26,815 expansion to the
property in Lancaster, PA and construction has been approved by the
Board of Directors on a 57,851 square foot expansion to the property in
Commerce, GA.
Construction in progress amounted to $25.9 million and commitments to
complete construction of the expansions to the existing properties
amounted to approximately $12.2 million at March 31, 1997. Commitments
for construction represent only those costs contractually required to be
paid by the Company.
Interest costs capitalized during the three months ended March 31, 1997
and 1996 amounted to $401,000 and $290,000, respectively.
3. ACCUMULATED DEPRECIATION
Accumulated depreciation at March 31, 1997 and December 31, 1996 was
$50,933,000 and $46,907,000, respectively.
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4. INCOME PER SHARE
Income per share is computed by dividing income, less applicable
preferred dividends of $412,000 and $647,000 and for the three months
ended March 31, 1997 and 1996, by the weighted average number of common
shares outstanding (6,705,969 and 6,291,281 for the three months ended
March 31, 1997 and 1996). Options outstanding are not included since
their inclusion would not be materially dilutive. 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 minority
interest, would have no impact on earnings per share since the
allocation of earnings to an Operating Partnership Unit is equivalent to
earnings allocated to a common share.
In February 1997, the Financial Accounting Standards Board issued SFAS
#128, EARNINGS PER SHARE, effective for fiscal periods ending after
December 15, 1997. The new standard simplifies the computation of income
per share by replacing primary income per share with basic income per
share. Basic income per share will not include the effect of any
potentially dilutive securities, as under the current accounting
standard, and will be computed by dividing reported income available to
common shareholders by the weighted average common shares outstanding
during the period. Fully diluted income per share will now be called
diluted income per share and will reflect the dilution of all
potentially dilutive securities. Companies will be required to restate
all prior period income per share data. The adoption of this standard by
the Company will have no impact on the historical reported income per
share amounts since the effect of potentially dilutive securities have
been immaterial and, therefore, have been excluded from the historical
income per share computations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CAUTIONARY STATEMENTS
The discussion below contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 which reflect
management's current views with respect to future events and financial
performance. Such forward-looking statements are subject to certain risks and
uncertainties including, but not limited to, 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 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 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.
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.
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The discussion of the Company's results of operations reported in the
Consolidated Statements of Operations compares the three months ended March 31,
1997 with the three months ended March 31, 1996. 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 and expansion or disposition of rental properties.
The computation of weighted average GLA, however, does not adjust for
fluctuations in occupancy during each period shown since GLA is not reduced when
original occupied space subsequently becomes vacant.
The Company continues to grow principally through acquisitions, new development
and expansions of factory outlet centers. On February 28, 1997, the Company
completed the acquisition of the Five Oaks Factory Stores center located in
Sevierville, TN, containing approximately 123,000 square feet, for an aggregate
purchase price of $18 million. Also during the quarter, construction continued
on a 241,436 square foot expansion in Riverhead, NY, and stores began opening in
late April 1997. In addition, construction has also begun on a 26,815 expansion
to the property in Lancaster, PA and construction has been approved by the Board
of Directors on a 57,851 square foot expansion to the property in Commerce, GA.
A summary of the operating results for three months ended March 31, 1997 and
1996, calculated on a weighted average GLA basis, is presented in the following
table.
(A) GLA WEIGHTED BY MONTHS OF OPERATIONS.
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RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1997 TO THE THREE MONTHS ENDED
MARCH 31, 1996
Base rentals increased $953,000, or 8%, in the 1997 period when compared to the
same period in 1996 primarily as a result of a 7% increase in weighted average
GLA and a 1% increase in average rent across the portfolio of properties.
Percentage rentals, which represent revenues based on a percentage of tenants'
sales volume above predetermined levels (the "breakpoint"), increased $131,000,
or 49%, in the 1997 period compared to the 1996 period due primarily to an
increase in tenant sales. Total tenant sales for all centers increased
approximately 17% during the 1997 period compared to the 1996 period and tenant
sales for stores open the first quarter of 1997 and 1996 increased approximately
10%. Percentage rentals per weighted average GLA increased from $.08 per square
foot in the 1996 period to $.11 per square foot in the 1997 period due to the
increase in sales as well as to the dilutive effect on the 1996 amounts of the
increase in additional square footage associated with the expansions during that
period, since tenant sales at stores in their first year of operation often do
not reach the breakpoint.
Expense reimbursements, which represent the contractual recovery from tenants of
certain common area maintenance, operating, property tax, promotional 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 92% in
the 1996 period to 96% in the 1997 period due primarily to a reduction in
nonreimbursable property operating expenses.
Property operating expenses decreased by $179,000, or 3%, in the 1997 period as
compared to the 1996 period and, on a weighted average GLA basis, decreased 9%
to $1.49 from $1.64 per square foot. The decreases are primarily due to
reductions in advertising and promotional expenses incurred during the first
three months in 1997 compared to the first three months in 1996.
Interest expense increased $759,000 during the 1997 period as compared to the
1996 period due to higher average borrowings outstanding during the period.
Average borrowings have increased principally to finance the acquisition (see
"Overview" above) and expansions to existing centers. Depreciation and
amortization per weighted average GLA increased from $1.11 per square foot to
$1.13 per square foot.
The extraordinary item for the three months ended March 31, 1996 represents a
write-off of the unamortized deferred financing costs related to the lines of
credit which were extinguished using the proceeds from the Company's $75 million
senior unsecured notes issued in March 1996.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $7.8 and $11.4 million for the
three months ended March 31, 1997 and 1996, respectively. The decrease of $3.6
million was primarily due to the timing of the Company's semiannual interest
payment on the senior unsecured notes issued in March 1996 with payments due in
March and September of each year. Net cash used in investing activities
increased $18.5 million the first three months of 1997 compared to the first
three months of 1996 due primarily to the acquisition of the outlet center in
Sevierville, Tennessee. Net cash from financing activities increased $25.3
million as a result of the incremental financing used for the acquisition in
addition to an increase in construction activity during the 1997 period compared
to the 1996 period primarily for the continued construction of the Riverhead
expansion.
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Management believes, based upon its discussions with present and prospective
tenants, that many tenants, including prospective tenants new to the factory
outlet business, desire to open a number of new factory outlet stores in the
next several years, particularly where there are successful factory outlet
centers in which such tenants do not have a significant presence or where there
are few factory outlet centers. Currently, two expansions totalling 268,251
square feet are under construction and an additional 57,851 square feet has been
approved by the Board of Directors for construction to begin . Commitments for
construction of these projects (which represent only those costs contractually
required to be paid by the Company) amounted to $12.2 million at March 31, 1997.
The Company also is in the process of developing plans for additional expansions
in 1997 and beyond and new centers for completion in 1998 and beyond and will
consider other acquisitions that are suitable for its portfolio. For example,
the Company is in the preleasing stages for future centers at four potential
sites located in Concord, North Carolina (Charlotte), Romulus, Michigan
(Detroit), Ashburn, Virginia (Washington, D.C.) and an additional center in
Sevierville, Tennessee (the Great Smoky Mountains). 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 acquisitions will be made
or that any development, expansion or acquisition will result in an advantageous
return on investment.
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 borrowings of up to $90.0 million, of which $36.3 million was
available for additional borrowings as of March 31, 1997. 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 capital
expenditures during 1997.
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 are made quarterly. Amounts accumulated for
distribution will be used 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 April 10, 1997, the Board of Directors of the Company declared a $.55 cash
dividend per common share payable on May 15, 1997 to each shareholder of record
on April 25, 1997, and caused a $.55 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 $.4955 per preferred depositary share
payable on May 15, 1997 to each shareholder of record on April 25, 1997. Both
dividends represent a 5.8% increase from the quarterly distributions previously
paid to holders of shares and Operating Partnership units.
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NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued SFAS #128,
EARNINGS PER SHARE, effective for fiscal periods ending after December 15, 1997.
The new standard simplifies the computation of income per share by replacing
primary income per share with basic income per share. Basic income per share
will not include the effect of any potentially dilutive securities, as under the
current accounting standard, and will be computed by dividing reported income
available to common shareholders by the weighted average common shares
outstanding during the period. Fully diluted income per share will now be called
diluted income per share and will reflect the dilution of all potentially
dilutive securities. Companies will be required to restate all prior period
income per share data. The adoption of this standard by the Company will have no
impact on the historical reported income per share amounts since the effect of
potentially dilutive securities have been immaterial and, therefore, have been
excluded from the historical income per share computations.
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. Management generally considers FFO
to be an appropriate measure of the performance of an equity real estate
investment trust ("REIT"). FFO is generally defined as net income (loss),
computed in accordance with generally accepted accounting principles, before
extraordinary item 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 months ended March 31, 1997 and 1996.
(1) ASSUMES CONVERSION OF ALL PARTNERSHIP UNITS HELD BY THE MINORITY INTEREST
AND PREFERRED SHARES TO COMMON SHARES.
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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 and promotion, thereby reducing
exposure to increases in costs and operating expenses resulting from inflation.
In addition, the Company has an interest rate protection agreement which limits
the effect of changes in interest rates on approximately $10 million of its
floating rate debt through October 1998. This agreement, combined with the
existing fixed rate mortgages, mitigate the Company's exposure to interest rate
risk on approximately 78% of total debt outstanding as of March 31, 1997.
Approximately 240,000 square feet of space is currently up for renewal or
re-tenanting in 1997. Existing tenants' sales have remained stable and renewals
to existing tenants have remained strong. In addition, the Company has continued
to attract and retain additional tenants. However, as typical in the factory
outlet industry, certain tenants have either filed for protection under
bankruptcy laws or have elected to close some or all of their stores, resulting
in approximately a 2% decrease in occupancy to 97% since year end. Although
there can be no assurance that any tenant whose lease expires will renew such
lease or that terminated leases will be re-leased on economically favorable
terms, management currently does not expect any material adverse impact as a
result of these leases up for renewal, bankruptcy filings or notices of store
closings. 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.
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
None.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
TANGER FACTORY OUTLET CENTERS, INC.
By: /s/ FRANK C. MARCHISELLO, JR.
Frank C. Marchisello, Jr.
Vice President, Chief Financial Officer
DATE: May 6, 1997
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