10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 1, 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 JUNE 30, 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 July 31, 1997
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 six months ended June 30, 1997 and 1996 3
Consolidated Balance Sheets
As of June 30, 1997 and December 31, 1996 4
Consolidated Statements of Cash Flows
For the six months ended June 30, 1997 and 1996 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 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
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TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
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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.
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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 June 30, 1997 and
1996 amounted to $13,226 and $7,363, 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
June 30, 1997
(Unaudited)
1. INTERIM FINANCIAL STATEMENTS
The unaudited consolidated financial statements of Tanger Factory Outlet
Centers, Inc., (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. ACQUISITION 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 241,620 square foot
expansion in Riverhead, NY, and stores began opening in late April 1997.
Construction has also begun on properties in Lancaster, PA (26,000
square feet); Commerce, GA (61,000 square feet); Sevierville, TN (50,000
square feet) and San Marcos, TX (23,000 square feet). In addition, the
Board of Directors approved construction of another expansion in
Riverhead, NY (59,000 square feet).
Construction in progress amounted to $41.6 million and commitments to
complete construction of new developments and additions to existing
properties amounted to approximately $7.7 million at June 30, 1997.
Commitments for construction represent only those costs contractually
required to be paid by the Company.
Interest costs capitalized during the three months ended June 30, 1997
and 1996 amounted to $651,000 and $166,000, respectively, and during the
six months ended June 30, 1997 and 1996 amounted to $1,052,000 and
$456,000, respectively.
3. ACCUMULATED DEPRECIATION
Accumulated depreciation at June 30, 1997 and December 31, 1996 was
approximately $55,233,000 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, by the weighted average number of common shares
outstanding. 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.
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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 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 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. 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 following 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 six months ended
June 30, 1997 with the three and six months ended June 30, 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. During the quarter, construction continued on a
241,620 square foot expansion in Riverhead, NY, and stores began opening in late
April 1997. Construction has also begun on expansions in Lancaster, PA (26,000
square feet); Commerce, GA (61,000 square feet); Sevierville, TN (50,000 square
feet) and San Marcos, TX (23,000 square feet). In addition, the Board of
Directors approved construction of another expansion in Riverhead, NY (59,000
square feet).
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A summary of the operating results for three and six months ended June 30, 1997
and 1996, calculated on a weighted average GLA basis, is presented in the
following table.
(A) GLA WEIGHTED BY MONTHS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1997 TO THE THREE MONTHS ENDED
JUNE 30, 1996
Base rentals increased $1.3 million, or 10%, in the 1997 period when compared to
the same period in 1996 primarily as a result of the 8% increase in weighted
average GLA. Base rentals increased approximately $500,000 due to the effect of
a full year's operation of expansions completed in 1996 and approximately
$800,000 for new or acquired leases added during 1997.
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 94% in
the 1996 period to 95% in the 1997 period due primarily to a reduction in
nonreimbursable property operating expenses.
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Property operating expenses increased by $962,000, or 17%, in the 1997 period as
compared to the 1996 period and, on a weighted average GLA basis, increased 8%
to $1.67 from $1.54 per square foot. The increases are due primarily to higher
advertising and promotional expenses incurred during the 1997 period compared to
the 1996 period.
Interest expense increased $352,000 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 $1.15 per square foot to
$1.18 per square foot. The increase reflects the effect of accelerating the
recognition of depreciation expense on certain tenant finishing allowances
related to vacant space.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1997 TO THE SIX MONTHS ENDED JUNE
30, 1996
Base rentals increased $2.2 million, or 9%, in the 1997 period when compared to
the same period in 1996 primarily as a result of the 8% increase in weighted
average GLA. Base rent increased approximately $1.1 million due to the effect of
a full year's operation of expansions completed in 1996 and approximately
$950,000 for new or acquired leases added during 1997.
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 93% in
the 1996 period to 95% in the 1997 period due primarily to a reduction in
nonreimbursable property operating expenses.
Property operating expenses increased by $783,000, or 7%, in the 1997 period as
compared to the 1996 period. However, on a weighted average GLA basis, property
operating expenses decreased to $3.16 from $3.18 per square foot. The decrease
is primarily due to lower common area maintenance expenses as a result of a
milder winter season in the 1997 period compared to the 1996 period.
Interest expense increased $1,111,000 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 $2.27 per square foot to
$2.31 per square foot. The increase reflects the effect of accelerating the
recognition of depreciation expense on certain tenant finishing allowances
related to vacant space.
The extraordinary item in the 1996 period 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 $16.5 and $19.4 million for the
six months ended June 30, 1997 and 1996, respectively. The decrease of $2.9
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 $25.3 million the first six months of 1997 compared to the first six
months of 1996 due primarily to the acquisition of the outlet center in
Sevierville, Tennessee and continued construction of the Riverhead expansion.
Net cash from financing activities increased $30.5 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, five expansions totaling
approximately 400,000 square feet are currently under construction (See "General
Overview"). Commitments for construction of these projects (which represent only
those costs contractually required to be paid by the Company) amounted to $7.7
million at June 30, 1997.
The Company also is in the process of developing plans for additional expansions
for completion in 1997 and beyond and new centers for completion in 1998 and
beyond. For example, the Company is in the preleasing stages for future
centers at three potential sites located in Concord, North Carolina (Charlotte),
Romulus, Michigan (Detroit), and Ashburn, Virginia (Washington, D.C.) 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 borrowings of up to $95.0 million, of which $29.7 million was
available for additional borrowings as of June 30, 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 are 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, on an annual basis or 95% of FFO on a cumulative
basis from the date of the agreement.
On July 10, 1997, the Board of Directors of the Company declared a $.55 cash
dividend per common share payable on August 15, 1997 to each shareholder of
record on July 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 August 15, 1997 to each shareholder of record on July 25, 1997.
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
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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 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 six months ended June 30, 1997 and 1996.
(1) ASSUMES CONVERSION OF ALL PARTNERSHIP UNITS HELD BY THE MINORITY INTEREST
AND PREFERRED SHARES TO COMMON SHARES.
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 74% of total debt outstanding as of June 30, 1997.
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Approximately 164,000 square feet of space is currently up for renewal during
the remainder of 1997 and approximately 436,000 square feet will come up for
renewal in 1998. The Company's portfolio is currently 97% leased, but down
approximately 2% since December 1996 primarily as a result of certain tenants
closing stores from the early termination of their lease or after filing for
protection under bankruptcy laws. However, 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. 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. No one tenant (including
affiliates) accounts for more than 10% of the Company's combined base and
percentage rental revenues.
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 Company's majority owned subsidiary, Tanger
Properties Limited Partnership, (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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 9, 1997, the Company held its Annual Meeting of Shareholders. The matters
on which common shareholders voted were the election of five directors to serve
until the next Annual Meeting of Shareholders and the ratification of an
amendment to the 1993 Stock Option Plan and the 1993 Unit Option Plan to
increase the number of shares of the Company's Common Shares which may be issued
under the Stock Option Plan and the number of units of the Operating Partnership
which may be issued under the Unit Option Plan from 1,000,000 in the aggregate
to 1,500,000 in the aggregate. The results of the voting are shown below:
ELECTION OF DIRECTORS
Nominees Votes For Votes Withheld
- -------- --------- --------------
Stanley K. Tanger 6,009,833 244,376
Steven B. Tanger 6,011,381 242,828
Jack Africk 6,008,133 246,076
William G. Benton 6,011,084 243,125
Thomas E. Robinson 6,010,884 243,325
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AMENDMENT TO STOCK AND UNIT OPTION PLANS
Votes cast for amendment 3,413,524
Votes cast against amendment 1,069,910
Votes abstained 71,179
No vote 1,699,595
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated April 28, 1997 to
file its press release announcing the financial results for the quarter
ended March 31, 1997.
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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: July 31, 1997
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