EXHIBIT 99.2
Published on August 9, 2006
Exhibit
99.2
Item
7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Cautionary
Statements
Certain
statements made below are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. We intend such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Reform Act of 1995 and included
this statement for purposes of complying with these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe
our future plans, strategies and expectations, are generally identifiable by
use
of the words ‘believe’, ‘expect’, ‘intend’, ‘anticipate’, ‘estimate’, ‘project’,
or similar expressions. You should not rely on forward-looking statements since
they involve known and unknown risks, uncertainties and other factors which
are,
in some cases, beyond our control and which could materially affect our actual
results, performance or achievements. Factors which may cause actual results
to
differ materially from current expectations include, but are not limited to,
those set forth under Item 1A - Risk Factors.
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.
General
Overview
In
November 2005 we completed the acquisition of the final two-thirds interest
in
the COROC joint venture which owned nine factory outlet centers totaling
approximately 3.3 million square feet. We originally purchased a one-third
interest in December 2003. From December 2003 to November 2005, COROC was
consolidated for financial reporting purposes under the provisions of FASB
Interpretation No. 46 (Revised 2003): “Consolidation of Variable Interest
Entities: An Interpretation of ARB No. 51”, or FIN 46R. The purchase price for
the final two-thirds interest of COROC was $286.0 million (including closing
and
acquisition costs of $3.5 million) which we funded with a combination of
unsecured debt and equity raised through the capital markets in the fourth
quarter of 2005.
At
December 31, 2005, we had 31 wholly-owned centers in 22 states totaling 8.3
million square feet of GLA compared to 32 centers in 23 states totaling 8.3
million square feet of GLA as of December 31, 2004. The changes in the number
of
centers and GLA are due to the following events:
|
|
No.
of Centers
|
GLA
(000’s
|
)
|
States
|
||||||
|
As
of December 31, 2004
|
32
|
8,337
|
23
|
|||||||
|
New
development expansion:
|
||||||||||
|
Locust
Grove, Georgia
|
---
|
46
|
---
|
|||||||
|
Foley,
Alabama
|
---
|
21
|
---
|
|||||||
|
Dispositions:
|
||||||||||
|
Seymour,
Indiana
|
(1
|
)
|
(141
|
)
|
(1
|
)
|
||||
|
Other
|
---
|
(2
|
)
|
---
|
||||||
|
As
of December 31, 2005
|
31
|
8,261
|
22
|
Results
of Operations
2005
Compared to 2004
Base
rentals increased $3.9 million, or 3%, in the 2005 period compared to the 2004
period. Our overall occupancy rates were comparable from year to year at 97%.
Our base rental income increased $4.3 million due to increases in rental rates
on lease renewals and incremental rents from re-tenanting vacant space. During
2005, we executed 460 leases totaling 1.9 million square feet at an average
increase of 6.3%. This compares to our execution of 471 leases totaling 2.0
million square feet at an average increase of 5.5% during 2004. Base rentals
also increased approximately $400,000 due to the expansions of our Locust Grove,
Georgia and Foley, Alabama centers which both occurred late in the fourth
quarter of 2005. The impact of these increases was offset by decreases in the
amortization of above or below market leases totaling $324,000 and decreases
in
termination fees received of $432,000.
The
values of the above and below market leases are amortized and recorded as either
an increase (in the case of below market leases) or a decrease (in the case
of
above market leases) to rental income over the remaining term of the associated
lease. For the 2005 period, we recorded $741,000 to rental income for the net
amortization of market lease values compared with $1.1 million for the 2004
period. If a tenant vacates its space prior to the contractual termination
of
the lease and no rental payments are being made on the lease, any unamortized
balance of the related above or below market lease value will be written off
and
could materially impact our net income positively or negatively.
Percentage
rentals, which represent revenues based on a percentage of tenants' sales volume
above predetermined levels (the "breakpoint"), increased $1.1 million or 20%.
The percentage rents in 2004 were reduced by an allocation to the previous
owner
of the COROC portfolio for their pro-rata share of percentage rents associated
with tenants whose sales lease year began prior to December 19, 2003, the date
of the initial acquisition. Reported same-space sales per square foot for the
twelve months ended December 31, 2005 were $320 per square foot, a 3.4% increase
over the prior year ended December 31, 2004. Same-space sales is defined as
the
weighted average sales per square foot reported in space open for the full
duration of each comparison period. Our ability to attract high volume tenants
to many of our outlet centers continues to improve the average sales per square
foot throughout our portfolio.
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 related
reimbursable property operating expenses to which it relates. Expense
reimbursements increased $4.1 million, or 8%, in the 2005 period versus the
2004
period. Expense reimbursements, expressed as a percentage of property operating
expenses, were 88%
and 89%
in the 2005 and 2004 periods, respectively.
Other
income decreased $873,000, or 13%, in 2005 compared to 2004 primarily due to
a
decrease in gains from sales of outparcels of land. Gains of $127,000 and $1.5
million were recognized in the 2005 and 2004 periods respectively. The decrease
was offset by an increase in interest income from proceeds from debt and equity
offerings, which were temporarily invested in short-term investments until
the
acquisition of COROC was completed as well as increases in vending income.
Property
operating expenses increased by $5.0 million, or 9%, in the 2005 period as
compared to the 2004 period. Property operating expenses increased due to
portfolio wide increases in advertising and common area maintenance projects.
Real estate taxes, which are also a part of property operating expenses,
increased due to the COROC portfolio property values being revalued in several
jurisdictions at the 2003 purchase price value.
General
and administrative expenses increased $1.0 million, or 8%, in the 2005 period
as
compared to the 2004 period. The increase is primarily due to compensation
expense related to employee share options granted in the second quarter of
2004
and restricted shares granted in 2004 and 2005 all of which are accounted for
under FAS 123. As
a
percentage of total revenues, general and administrative expenses remained
constant at 7% in both the 2005 and 2004 periods.
Depreciation
and amortization decreased from $50.7 million in the 2004 period to $48.2
million in the 2005 period. This was due principally to the accelerated
depreciation and amortization of certain assets in the acquisition of the COROC
properties in December 2003 accounted for under FAS 141 for tenants that
terminated their leases during the 2004 period.
Interest
expense increased $7.8 million, or 22%, during the 2005 period as compared
to
the 2004 period due primarily to the $9.4 million prepayment premium and the
write off of deferred loan costs totaling $500,000 incurred in the fourth
quarter of 2005 relating to the early extinguishment of the $77.4 million John
Hancock Life Insurance Company mortgages. The increase in interest expense
caused by this charge was partially offset by lower borrowings throughout the
year prior to the acquisition of our interest in COROC in November 2005 and
the
related $250 million senior unsecured note issuance.
In
November 2005, we purchased our consolidated joint venture partner’s interest in
COROC. Therefore, consolidated joint venture minority interest decreased $3.1
million due to less than a full year of allocation of earnings to our joint
venture partner during 2005. The allocation of earnings to our joint venture
partner was based on a preferred return on investment as opposed to their
ownership percentage and accordingly had a significant impact on our
earnings.
In
accordance with FAS 144, our Pigeon Forge, Tennessee property was classified
as
an asset held for sale as of December 31, 2005 and therefore its results of
operations for the year were reclassified into discontinued operations. Also,
in
order to comply with SEC filing requirements, we have amended the consolidated
statements of operations to reclassify the results of operations of our North
Branch, Minnesota property to discontinued operations. This property was sold
on
March 31, 2006 and was not accounted for as a property held for sale at December
31, 2005. The 2004 period includes the results of the Pigeon Forge and North
Branch centers as well as a loss on sale of the Dalton, Georgia property in
the
2004 period of approximately $3.5 million. This loss was partially offset by
the
gain on sale of the Clover and LL Bean, New Hampshire properties of
approximately $2.1 million in the 2004 period.
During
the first quarter of 2005, we sold our outlet center at our Seymour, Indiana
property. Due to significant continuing involvement the sale did not qualify
as
discontinued operations under the provisions of FAS 144. We recorded a loss
on
sale of real estate of $3.8 million, net of minority interest of $847,000,
as a
result of the sale. Net proceeds received for the center were approximately
$2.0
million.
2004
Compared to 2003
Base
rentals increased $51.8 million, or 69%, in the 2004 period when compared to
the
same period in 2003. The increase is primarily due to the December 2003
acquisition of the COROC portfolio of nine outlet center properties. In
addition, the overall portfolio occupancy at December 31, 2004 increased 1%
from
96% to 97% compared to December 31, 2003. Also, base rent is impacted by the
amortization of above or below market rate lease values recorded as part of
the
required purchase price allocation associated with the acquisition of the COROC
portfolio. The values of the above and below market leases are amortized and
recorded as either an increase (in the case of below market leases) or a
decrease (in the case of above market leases) to rental income over the
remaining term of the associated lease. For the 2004 period, we recorded $1.1
million of rental income for net amortization of market leases compared to
$37,000 for the 2003 period of 13 days that we owned the COROC portfolio. If
a
tenant vacates its space prior to the contractual termination of the lease
and
no rental payments are being made on the lease, any unamortized balance of
the
related above/below market lease value will be written off and could materially
impact our net income positively or negatively.
Percentage
rentals, which represent revenues based on a percentage of tenants' sales volume
above predetermined levels (the "breakpoint"), increased $2.2 million or 70%.
Reported same-space sales per square foot for the twelve months ended December
31, 2004 were $310 per square foot, a 3.2% increase over the prior year ended
December 31, 2003. Same-space sales is defined as the weighted average sales
per
square foot reported in space open for the full duration of each comparison
period. Our ability to attract high volume tenants to many of our outlet centers
continues to improve the average sales per square foot throughout our portfolio.
Expense
reimbursements, which represent the contractual recovery from tenants of certain
common area maintenance, insurance, property tax, promotional, advertising
and
management expenses generally fluctuates consistently with the reimbursable
property operating expenses to which it relates. Expense reimbursements,
expressed as a percentage of property operating expenses, were 89% and 85%
in
the 2004 and 2003 periods, respectively. The increase in this percentage is
due
to higher reimbursement rates at the COROC portfolio.
Other
income increased $3.2 million, or 95%, in 2004 compared to 2003 primarily due
to
an increase in gains on sales of outparcels of land of $1.5 million in 2004.
Also, there were increases in vending and other miscellaneous income and an
increase in fees from managed properties.
Property
operating expenses increased by $20.6 million, or 56%, in the 2004 period as
compared to the 2003 period. The increase is the result of the additional
operating costs of the COROC portfolio in the 2004 period.
General
and administrative expenses increased $3.3 million, or 34%, in the 2004 period
as compared to the 2003 period. The increase is primarily due to the additional
employees hired as a result of the acquisition of the COROC portfolio. However,
as a percentage of total revenues, general and administrative expenses decreased
from 8% in the 2003 period to 7% in the 2004 period.
Depreciation
and amortization increased from $27.1 million in the 2003 period to $50.7
million in the 2004 period. In the acquisition of the COROC portfolio in
December 2003, accounted for under SFAS 141 “Business Combinations”, or FAS 141,
significant amounts were allocated to deferred lease costs and other intangible
assets which are amortized over shorter lives than building costs.
Interest
expense increased $8.6 million, or 33%, during the 2004 period as compared
to
the 2003 period due primarily to the assumption of $186.4 million of
cross-collateralized debt in the fourth quarter of 2003 related to the
acquisition of the COROC portfolio. The increase was offset by the retirement
of
$47.5 million of senior unsecured notes, which matured in October 2004 at an
interest rate of 7.875%, with proceeds from our property and land parcel sales
and amounts available under our unsecured lines of credit.
Equity
in
earnings from unconsolidated joint ventures increased $223,000 in the 2004
period compared to the 2003 period due to the expansions during the summers
of
2003 and 2004 at TWMB Associates, LLC, or TWMB, outlet center in Myrtle Beach,
South Carolina of approximately 64,000 and 78,000 square feet respectively.
The
total square footage of the center is now approximately 402,000 square
feet.
In
December 2003, we and Blackstone originally acquired the COROC portfolio through
the formation of the joint venture COROC which was consolidated under the
provisions of FIN46R. Therefore, consolidated joint venture minority interest
increased $26.2 million due a full year of allocation of earnings to our joint
venture partner in 2004. The allocation of earnings to our joint venture partner
is based on a preferred return on investment as opposed to their ownership
percentage and accordingly has a significant impact on our
earnings.
Earnings
allocated to the minority interest in the Operating Partnership decreased $1.4
million in direct correlation to the changes in the earnings from the Operating
Partnership as described in the preceding paragraphs.
Discontinued
operations resulted in income of approximately $521,000 due mainly to the
results of operations reclassified for our Pigeon Forge, Tennessee and North
Branch, Minnesota properties offset by the loss on sale of the Dalton, Georgia
property in the 2004 period of approximately $3.5 million. This loss was
partially offset by the gain on sale of the Clover and LL Bean, New Hampshire
properties of approximately $2.1 million in the 2004 period. Also, included
in
the 2003 period is the sale of the Martinsburg, West Virginia center and the
Casa Grande, Arizona center which resulted in a net gain of approximately
$147,000.
Liquidity
and Capital Resources
Net
cash
provided by operating activities was $83.9, $84.8 and $46.6 million for the
years ended December 31, 2005, 2004 and 2003, respectively. The decrease from
2004 to 2005 is due to a prepayment penalty of $9.4 million associated with
the
early extinguishment of the John Hancock Life Insurance Company mortgages in
October 2005 offset by the change in accounts payable and accrued expenses.
The
increase in cash provided from operating activities from 2003 to 2004 is
primarily due to the incremental income from the COROC acquisition in December
2003.
Net
cash
provided by (used in) investing activities amounted to $(336.6), $2.6 and
$(327.1) million during 2005, 2004 and 2003, respectively, and reflects the
acquisitions, expansions and dispositions of real estate during each year.
In
November 2005 we completed the acquisition of the final two-thirds interest
of
the Charter Oak Partners' portfolio of nine factory outlet centers totaling
approximately 3.3 million square feet. We originally purchased a one-third
interest in December 2003.
Net
cash
provided by (used in) financing activities of $251.5, $(93.2) and $289.3 million
in 2005, 2004 and 2003, respectively, has fluctuated consistently with the
capital needed to fund the current development and acquisition activity and
reflects increases in dividends paid during 2005, 2004 and 2003. During 2005
we
raised approximately $381.3 million in the public debt and equity markets in
order to fund the acquisition described above and to repay the John Hancock
Life
Insurance mortgages. 2004 reflects an increase in cash used related to $22.6
million of distributions to our venture partner in the COROC joint venture
which
was created in December 2003. Cash provided in 2003 is due primarily to the
contribution by Blackstone related to the COROC acquisition and the net proceeds
from the issuance of 4.6 million common shares.
Current
Developments and Dispositions
Any
developments or expansions that we, or a joint venture that we are involved
in,
have planned or anticipated may not be started or completed as scheduled, or
may
not result in accretive net income or funds from operations. In addition, we
regularly evaluate acquisition or disposition proposals and engage from time
to
time in negotiations for acquisitions or dispositions of properties. We may
also
enter into letters of intent for the purchase or sale of properties. Any
prospective acquisition or disposition that is being evaluated or which is
subject to a letter of intent may not be consummated, or if consummated, may
not
result in an increase in net income or funds from operations.
WHOLLY
OWNED CURRENT DEVELOPMENTS
During
September 2005, we completed the construction of a 46,400 square foot expansion
at our center located in Locust Grove, Georgia. Tenants within the expansion
include Polo/Ralph Lauren, Sketchers, Children's Place and others. The Locust
Grove center now totals approximately 294,000 square feet.
During
December 2005, we completed the construction of a 21,300 square foot expansion
at our center located in Foley, Alabama. Tenants within the expansion include
Ann Taylor, Skechers, Tommy Hilfiger and others. The Foley center now totals
approximately 557,000 square feet.
In
the
fourth quarter of 2005, we met our internal minimum pre-leasing requirement
of
50% and closed on the acquisition of the land for a center located near
Charleston, South Carolina. Construction is currently taking place and we expect
the center to be approximately 350,000 square feet upon total build out with
a
scheduled opening date in late 2006.
We
have
an option to purchase land and have begun the early development and leasing
of a
site located approximately 30 miles south of Pittsburgh, Pennsylvania. We
currently expect the center to be approximately 420,000 square feet upon total
build out with the initial phase scheduled to open in late 2007.
WHOLLY
OWNED DISPOSITIONS
In
February 2005, we completed the sale of the outlet center on a portion of our
property located in Seymour, Indiana and recognized a loss of $3.8 million,
net
of minority interest of $847,000. Net proceeds received from the sale of the
center were approximately $2.0 million. We continue to have a significant
involvement in this location by retaining several outparcels and significant
excess land adjacent to the disposed property. As such, the results of
operations from the property continue to be recorded as a component of income
from continuing operations and the loss on sale of real estate is reflected
outside the discontinued operations caption under the guidance of Regulation
S-X
210.3-15.
In
June
and September 2004, we completed the sale of two non-core properties located
in
North Conway, New Hampshire and in Dalton, Georgia, respectively. Net proceeds
received from the sales of these properties were approximately $17.5 million.
We
recorded a gain on sale of the North Conway, New Hampshire properties of
approximately $2.1 million during the second quarter of 2004 and recorded a
loss
on the sale of the Dalton, Georgia property of approximately $3.5 million during
the third quarter of 2004, resulting in a net loss for the year ended December
31, 2004
of
approximately $1.5 million which is included in discontinued
operations.
In
May
and October 2003, we completed the sale of properties located in Martinsburg,
West Virginia and Casa Grande, Arizona, respectively. Net proceeds received
from
the sales of these properties were approximately $8.7 million. We recorded
a
loss on sale of real estate of approximately $147,000 in discontinued operations
for the year ended December 31, 2003.
CONSOLIDATED
JOINT VENTURES
COROC
Holdings, LLC
On
December 19, 2003, COROC, a joint venture in which we had an initial one-third
ownership interest and consolidated for financial reporting purposes under
the
provisions of FIN 46R, purchased the 3.3 million square foot Charter Oak
portfolio of outlet center properties for $491.0 million, including the
assumption of $186.4 million of cross-collateralized debt which has a stated,
fixed interest rate of 6.59% and matures in July 2008. We recorded the debt
at
its fair value of $198.3 million, with an effective interest rate of 4.97%.
Accordingly, a debt premium of $11.9 million was recorded and is being amortized
over the life of the debt. We funded the majority of our share of the equity
required for the transaction through the issuance of 4.6 million common shares
on December 10, 2003, generating approximately $88.0 million in net proceeds.
The results of the Charter Oak portfolio have been included in the consolidated
financial statements since December 19, 2003.
In
November 2005, we purchased for $286.0 million (including acquisition costs)
the
remaining two-thirds interest from our joint venture partner. We recorded a
debt
discount of $883,000 with an effective interest rate of 5.25% to reflect the
fair value of the debt deemed to have been acquired in the acquisition. The
all
cash transaction was funded with a combination of common shares, preferred
shares and unsecured senior notes. The transaction completes the Charter Oak
acquisition which solidifies our position in the outlet industry. In addition,
the centers acquired provide an excellent geographic fit, a diversified tenant
portfolio and are in line with our strategy of creating an increased presence
in
high-end resort locations.
UNCONSOLIDATED
JOINT VENTURES
TWMB
Associates, LLC
In
September 2001, we established TWMB, a joint venture in which we have a 50%
ownership interest, to construct and operate the Tanger Outlet Center in Myrtle
Beach, South Carolina. We and our joint venture partner each contributed $4.3
million in cash for a total initial equity in TWMB of $8.6 million. In June
2002
the first phase opened with approximately 260,000 square feet. Since 2002 we
have opened two additional phases with the final one opening in the summer
of
2004. Total additional equity contributions for the second and third phases
aggregated $2.8 million by each partner. The Myrtle Beach center now consists
of
approximately 402,000 square feet and has over 90 name brand tenants. The center
cost approximately $51.1 million to construct.
During
March 2005, TWMB, entered into an interest rate swap agreement with Bank of
America with a notional amount of $35 million for five years. Under this
agreement, TWMB receives a floating interest rate based on the 30 day LIBOR
index and pays a fixed interest rate of 4.59%. This swap effectively changes
the
rate of interest on $35 million of variable rate mortgage debt to a fixed rate
of 5.99% for the contract period.
In
April
2005, TWMB obtained non-recourse, permanent financing to replace the
construction loan debt that was utilized to build the outlet center in Myrtle
Beach, South Carolina. The new mortgage amount is $35.8 million with a rate
of
LIBOR + 1.40%. The note is for a term of five years with payments of interest
only. In April 2010, TWMB has the option to extend the maturity date of the
loan
two more years until 2012. All debt incurred by this unconsolidated joint
venture is collateralized by its property.
Either
partner in TWMB has the right to initiate the sale or purchase of the other
party’s interest at certain times. If such action is initiated, one member would
determine the fair market value purchase price of the venture and the other
would determine whether they would take the role of seller or purchaser. The
members’ roles in this transaction would be determined by the tossing of a coin,
commonly known as a Russian roulette provision. If either partner enacts this
provision and depending on our role in the transaction as either seller or
purchaser, we could potentially incur a cash outflow for the purchase of our
partner’s interest. However, we do not expect this event to occur in the near
future based on the positive results and expectations of developing and
operating an outlet center in the Myrtle Beach, South Carolina area.
Tanger
Wisconsin Dells, LLC
In
March
2005, we established Wisconsin Dells, a joint venture in which we have a 50%
ownership interest, to construct and operate a Tanger Outlet center in Wisconsin
Dells, Wisconsin. We and our venture partner each made an initial capital
contribution of $50,000 to the joint venture in June 2005. During the fourth
quarter of 2005, our venture partner contributed land to Wisconsin Dells with
a
value of approximately $5.7 million and we made an equal capital contribution
to
Wisconsin Dells of approximately $5.7 million in cash. Construction of the
outlet center, which is currently expected to be approximately 265,000 square
feet upon total build out, began during the fourth quarter of 2005 with a
scheduled opening in the fourth quarter of 2006.
In
conjunction with the construction of the center during the first quarter of
2006, Wisconsin Dells closed on a construction loan in the amount of $30.25
million with Wells Fargo Bank, NA due in February 2009. The construction loan
requires monthly payments of interest only with interest floating based on
the
30, 60 or 90 day LIBOR index plus 1.30%. The construction loan incurred by
this
unconsolidated joint venture is collateralized by its property as well as joint
and several guarantees by us and designated guarantors of our venture partner.
Deer
Park Enterprise, LLC
In
October 2003, Deer Park Enterprise, LLC, which we refer to as Deer Park, a
joint
venture in which we have a one-third ownership interest, entered into a
sale-leaseback transaction for the location on which it ultimately will develop
a shopping center that will contain both outlet and big box retail tenants
in
Deer Park, New York.
In
conjunction with the real estate purchase, Deer Park closed on a loan with
Bank
of America in the amount of $19 million due in October 2005 and a purchase
money
mortgage note with the seller in the amount of $7 million. In October 2005,
Bank
of America extended the maturity of the loan until October 2006. The loan with
Bank of America incurs interest at a floating interest rate equal to LIBOR
plus
2.00% and is collateralized by the property as well as joint and several
guarantees by all three venture partners. The purchase money mortgage note
bears
no interest. However, interest has been imputed for financial statement purposes
at a rate which approximates fair value.
The
agreement consisted of the sale of the property to Deer Park for $29 million
which was being leased back to the seller under an operating lease agreement.
At
the end of the lease in May 2005, the tenant vacated the property. However,
the
tenant did not satisfy all of the conditions necessary to terminate the lease
and Deer Park is currently in litigation to recover from the tenant its on-going
monthly lease payments and will continue to do so until recovered. Annual rents
due from the tenant are $3.4 million. Deer Park intends to demolish the building
and begin construction of the shopping center as soon as these conditions are
satisfied
and Deer
Park’s internal minimum pre-leasing requirements are met. During 2005, we made
additional equity contributions totaling $1.4 million to Deer Park. Both of
the
other venture partners made equity contributions equal to ours during the
periods described above.
Under
the
provisions of FASB Statement No. 67 “Accounting for Costs and Initial Rental
Operations of Real Estate Projects”, current rents received from this project,
net of applicable expenses, are treated as incidental revenues and will be
recognized as a reduction in the basis of the assets, as opposed to rental
revenues over the life of the lease, until such time that the current project
is
demolished and the intended assets are constructed.
Preferred
Share Redemption
In
June
2003, we redeemed all of our outstanding Series A Cumulative Convertible
Redeemable Preferred Shares, or Series A Preferred Shares, held by the Preferred
Stock Depositary in the form of Depositary Shares, each representing 1/10th
of a
Series A Preferred Share. The redemption price was $250 per Series A Preferred
Share ($25 per Depositary Share), plus accrued and unpaid dividends, if any,
to,
but not including, the redemption date. In total, 787,008 of the Depositary
Shares were converted into 1,418,156 common shares and we redeemed the remaining
14,889 Depositary Shares for $25 per share, plus accrued and unpaid dividends.
We funded the redemption, totaling approximately $372,000, from cash flows
from
operations.
Financing
Arrangements
In
October 2005, we repaid in full our mortgage debt outstanding with John Hancock
Mutual Life Insurance Company totaling approximately $77.4 million, with
interest rates ranging from 7.875% to 7.98% and an original maturity date of
April 1, 2009. As a result of the early repayment, we recognized a charge for
the early extinguishment of the John Hancock mortgage debt of approximately
$9.9
million. The charge, which is included in interest expense, was recorded in
the
fourth quarter of 2005 and consisted of a prepayment premium of approximately
$9.4 million and the write-off of deferred loan fees totaling approximately
$500,000.
In
October 2005, following the early repayment of the John Hancock mortgage debt,
Standard & Poor’s Ratings Service announced an upgrade of our senior
unsecured debt rating to an investment grade rating of BBB-, citing our progress
in unencumbering a number of our properties resulting in over half of our fully
consolidated net operating income being generated by unencumbered properties.
Moody’s Investors Services had previously announced in June 2005 their upgrade
of our senior unsecured debt rating to an investment grade rating of
Baa3.
In
November 2005, we closed on $250 million of 6.15% senior unsecured notes,
receiving net proceeds of approximately $247.2 million. These ten year notes
were issued by the Operating Partnership and were priced at 99.635% of par
value. The proceeds were used to fund a portion of the COROC acquisition
described above.
During
2004, we retired $47.5 million, 7.875% senior unsecured notes which matured
on
October 24, 2004 with proceeds from our property and land parcel sales and
amounts available under our unsecured lines of credit. We also obtained the
release of two properties which had been securing $53.5 million in mortgage
loans with Wells Fargo Bank, thus creating an unsecured note with Wells Fargo
Bank for the same face amount.
As
part
of the COROC acquisition, we assumed $186.4 million of cross-collateralized
debt
which has a stated, fixed interest rate of 6.59% and matures in July 2008.
We
initially recorded the debt at its fair value of $198.3 million with an
effective interest rate of 4.97%. Accordingly, a debt premium of $11.9 million
was recorded and is being amortized over the life of the debt. When the
remainder of the portfolio was acquired in November 2005, we recorded a debt
discount of $883,000 with an effective interest rate of 5.25%. The net premium
had a recorded value of $5.8 and $9.3 million as of December 31, 2005 and 2004,
respectively.
During
2005, we obtained an additional $25 million unsecured line of credit from Wells
Fargo Bank, bringing the total committed unsecured lines of credit to $150
million. In addition, we completed the extension of the maturity dates on all
four of our unsecured lines of credit with Bank of America, Wachovia
Corporation, Citigroup and Wells Fargo Bank until June of 2008. Amounts
available under these facilities at December 31, 2005 totaled $90.2 million.
Interest is payable based on alternative interest rate bases at our option.
Certain of our properties, which had a net book value of approximately $506.6
million at December 31, 2005, serve as collateral for the fixed rate
mortgages.
We
anticipate that adequate cash will be available to fund our 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 we receive most of our 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.
Contractual
Obligations and Commercial Commitments
The
following table details our contractual obligations over the next five years
and
thereafter as of December 31, 2005 (in thousands):
|
Contractual
|
||||||||||||||||||||||
|
Obligations
|
2006
|
2007
|
2008
|
2009
|
2010
|
Thereafter
|
Total
|
|||||||||||||||
|
Debt
|
$
|
3,849
|
$
|
4,121
|
$
|
386,314
|
$
|
394
|
$
|
14,059
|
$
|
250,000
|
$
|
658,737
|
||||||||
|
Operating
leases
|
3,115
|
2,988
|
2,659
|
2,271
|
2,024
|
83,420
|
96,477
|
|||||||||||||||
|
Preferred
share
|
||||||||||||||||||||||
|
dividends
(2)
|
4,125
|
4,125
|
4,125
|
4,125
|
59,125
|
---
|
75,625
|
|||||||||||||||
|
Interest
payments (1)
|
43,718
|
43,446
|
34,760
|
21,202
|
17,225
|
76,875
|
237,226
|
|||||||||||||||
|
$
|
54,807
|
$
|
54,680
|
$
|
427,858
|
$
|
27,992
|
$
|
92,433
|
$
|
410,295
|
$
|
1,068,065
|
| (1) |
These
amounts represent future interest payments related to our debt obligations
based on the fixed and variable interest rates specified in the associated
debt agreements. All of our variable rate agreements are based on
the
30-day LIBOR rate. For calculating future interest amounts on variable
interest rate debt, the rate at December 31, 2005 was
used.
|
| (2) |
Preferred
share dividends reflect cumulative dividends on our Class C Preferred
Shares on which we pay an annual dividend of $1.875 per share on
2,200,000
outstanding shares as of December 31, 2005. The Class C Preferred
Shares
are redeemable at the option of the Company for $25.00 per share
after the
respective optional redemption date. The future obligations include
future
dividends on preferred shares/units through the optional redemption
date
and the redemption amount is included on the optional redemption
date.
|
Our
debt
agreements require the maintenance of certain ratios, including debt service
coverage and leverage, and limit the payment of dividends such that dividends
and distributions will not exceed funds from operations, as defined in the
agreements, for the prior fiscal year on an annual basis or 95% on a cumulative
basis. We have historically been and currently are in compliance with all of
our
debt covenants. We expect to remain in compliance with all our existing debt
covenants; however, should circumstances arise that would cause us to be in
default, the various lenders would have the ability to accelerate the maturity
on our outstanding debt.
We
currently maintain four unsecured, revolving credit facilities with major
national banking institutions, totaling $150 million. As of December 31, 2005,
amounts outstanding under these credit facilities totaled $59.8 million. As
of
February 1, 2006, all four credit facilities will expire in June
2008.
We
operate in a manner intended to enable us to qualify as a REIT under the
Internal Revenue Code, or the Code. A REIT which distributes at least 90% of
its
taxable income to its shareholders each year and which meets certain other
conditions is not taxed on that portion of its taxable income which is
distributed to its shareholders. Based on our 2005 taxable income to
shareholders, we were required to distribute approximately $13.7 million in
order to maintain our REIT status as described above. We distributed
approximately $36.3 million to common shareholders which significantly exceeds
our required distributions. If events were to occur that would cause our
dividend to be reduced, we believe we still have an adequate margin regarding
required dividend payments based on our historic dividend and taxable income
levels to maintain our REIT status.
The
following table details our commercial commitments as of December 31, 2005
(in
thousands):
|
Commercial
Commitments
|
2006
|
|
Construction
commitments
|
$
34,431
|
|
Unconsolidated
joint venture debt guarantees
|
18,191
|
|
$
52,622
|
Construction
commitments presented in the table represent new developments, renovations
and
expansions that we have committed to the completion of construction. The timing
of these expenditures may vary due to delays in construction or acceleration
of
the opening date of a particular project. The amount includes our share of
committed costs for joint venture developments.
Off-Balance
Sheet Arrangements
We
are
party to a joint and several guarantee with respect to the $30.25 million
construction loan obtained by Wisconsin Dells during the first quarter of 2006.
We are also party to a joint and several guarantee with respect to the loan
obtained by Deer Park which currently has a balance of $18.2 million. See “Joint
Ventures” section above for further discussion of off-balance sheet arrangements
and their related guarantees. Our pro-rata portion of the TWMB mortgage secured
by the center is $17.9 million. There is no guarantee provided for the TWMB
mortgage by us.
Related
Party Transactions
As
noted
above in “Unconsolidated Joint Ventures”, we are 50% owners of the TWMB and
Wisconsin Dells joint ventures. TWMB and Wisconsin Dells pay us management,
leasing and development fees, which we believe approximates current market
rates, for services provided to the joint venture. During 2005, 2004 and 2003,
we recognized approximately $327,000, $288,000 and $174,000 in management fees,
$6,000, $212,000 and $214,000 in leasing fees and $0, $28,000 and $9,000 in
development fees, respectively.
TFLP
is a
related party which holds a limited partnership interest in and is the minority
owner of the Operating Partnership. Stanley K. Tanger, the Company’s Chairman of
the Board and Chief Executive Officer, is the sole general partner of TFLP.
The
only material related party transaction with TFLP is the payment of quarterly
distributions of earnings which were $7.8, $7.6 and $7.5 million for the years
ended December 31, 2005, 2004 and 2003, respectively.
Critical
Accounting Policies
We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements.
Principles
of Consolidation
The
consolidated financial statements include our accounts, our wholly-owned
subsidiaries, as well as the Operating Partnership and its subsidiaries.
Intercompany balances and transactions have been eliminated in consolidation.
Investments in real estate joint ventures that represent non-controlling
ownership interests are accounted for using the equity method of accounting.
Under the provisions of FIN 46R, we were considered the primary beneficiary
of
our joint venture, COROC. Therefore, the results of operations and financial
position of COROC were included in our Consolidated Financial Statements prior
to November 2005 when we acquired the remaining two-thirds interest in the
joint
venture.
In
2003,
the FASB issued FIN 46R which clarifies the application of existing accounting
pronouncements to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The provisions of FIN 46R
were effective for all variable interests in variable interest entities in
2004
and thereafter. We have evaluated Deer Park, Wisconsin Dells and TWMB (Note
5)
and have determined that under the current facts and circumstances we are not
required to consolidate these entities under the provisions of FIN 46R.
Acquisition
of Real Estate
In
accordance with Statement of Financial Accounting Standards No. 141
“Business Combinations”, or FAS 141, we allocate the purchase price of
acquisitions based on the fair value of land, building, tenant improvements,
debt and deferred lease costs and other intangibles, such as the value of leases
with above or below market rents, origination costs associated with the in-place
leases, and the value of in-place leases and tenant relationships, if any.
We
depreciate the amount allocated to building, deferred lease costs and other
intangible assets over their estimated useful lives, which generally range
from
three to 40 years. The values of the above and below market leases are
amortized and recorded as either an increase (in the case of below market
leases) or a decrease (in the case of above market leases) to rental income
over
the remaining term of the associated lease. The value associated with in-place
leases is amortized over the remaining lease term and tenant relationships
is
amortized over the expected term, which includes an estimated probability of
the
lease renewal. If a tenant vacates its space prior to the contractual
termination of the lease and no rental payments are being made on the lease,
any
unamortized balance of the related deferred lease costs will be written off.
The
tenant improvements and origination costs are amortized as an expense over
the
remaining life of the lease (or charged against earnings if the lease is
terminated prior to its contractual expiration date). We assess fair value
based
on estimated cash flow projections that utilize appropriate discount and
capitalization rates and available market information.
If
we do
not allocate appropriately to the separate components of rental property,
deferred lease costs and other intangibles or if we do not estimate correctly
the total value of the property or the useful lives of the assets, our
computation of depreciation expense may be significantly understated or
overstated.
Cost
Capitalization
In
accordance with SFAS No. 91 “Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases—an amendment of FASB Statements No. 13, 60, and 65 and a rescission of
FASB Statement No. 17”, we capitalize all incremental, direct fees and costs
incurred to initiate operating leases, including certain general and overhead
costs, as deferred charges. The amount of general and overhead costs we
capitalized is based on our estimate of the amount of costs directly related
to
executing these leases. We amortize these costs to expense over the estimated
average minimum lease term.
We
capitalize all costs incurred for the construction and development of
properties, including certain general and overhead costs and interest costs.
The
amount of general and overhead costs we capitalize is based on our estimate
of
the amount of costs directly related to the construction or development of
these
assets. Direct costs to acquire assets are capitalized once the acquisition
becomes probable.
If
we
incorrectly estimate the amount of costs to capitalize, our financial condition
and results of operations could be adversely affected.
Impairment
of Long-Lived Assets
Rental
property held and used by us is reviewed for impairment in the event that facts
and circumstances indicate the carrying amount of an asset may not be
recoverable. In such an event, we compare the estimated future undiscounted
cash
flows associated with the asset to the asset’s carrying amount, and if less,
recognize an impairment loss in an amount by which the carrying amount exceeds
its fair value. If we do not recognize impairments at appropriate times and
in
appropriate amounts, our consolidated balance sheet may overstate the value
of
our long-lived assets. We believe that no impairment existed at December 31,
2005.
Revenue
Recognition
Base
rentals are recognized on a straight-line basis over the term of the lease.
Substantially all leases contain provisions which provide additional rents
based
on tenants’ sales volume (“percentage rentals”) and reimbursement of the
tenants’ share of advertising and promotion, common area maintenance, insurance
and real estate tax expenses. Percentage rentals are recognized when specified
targets that trigger the contingent rent are met. Expense reimbursements are
recognized in the period the applicable expenses are incurred. Payments received
from the early termination of leases are recognized as revenue over the
remaining lease term, as adjusted to reflect the early termination date.
New
Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 123R (Revised), “Share-Based Payment”,
or FAS 123R. FAS 123R is a revision of FAS No. 123, “Accounting for Stock Based
Compensation”, and supersedes APB 25. Among other items, FAS 123R eliminates the
use of APB 25 and the intrinsic value method of accounting and requires
companies to recognize the cost of employee services received in exchange for
awards of equity instruments, based on the grant date fair value of those
awards, in the financial statements. We adopted FAS 123R effective January
1,
2006 using a modified prospective application. FAS 123R, which provides certain
changes to the method for valuing share-based compensation among other changes,
will apply to new awards and to awards that are outstanding on the effective
date and subsequently modified or cancelled. Compensation expense for
outstanding awards for which the requisite service had not been rendered as
of
the effective date and which are ultimately expected to vest will be recognized
over the remaining service period using the compensation cost calculated under
FAS 123, which we adopted on January 1, 2003. We will incur additional expense
during 2006 related to new awards granted during 2006 that cannot yet be
quantified. We are in the process of determining how the guidance regarding
valuing share-based compensation as prescribed in FAS 123R will be applied
to
valuing share-based awards granted after the effective date and the impact
that
the recognition of compensation expense related to such awards will have on
our
financial statements.
In
March
2005, the FASB issued Interpretation No. 47, “Accounting for Conditional
Asset Retirement Obligations, an interpretation of FASB Statement No. 143”,
which we refer to as FIN 47. FIN 47 refers to a legal obligation to perform
an
asset retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of
the
entity. An entity is required to recognize a liability for the fair value of
a
conditional asset retirement obligation if the fair value of the liability
can
be reasonably estimated. The fair value of a liability for the conditional
asset
retirement obligation should be recognized when incurred, generally upon
acquisition, construction, or development and through the normal operation
of
the asset. This interpretation is effective no later than the end of fiscal
years ending after December 31, 2005. Adoption did not have a material
effect on our consolidated financial statements.
Funds
from Operations
Funds
from Operations, which we refer to as FFO, represents income before
extraordinary items and gains (losses) on sale or disposal of depreciable
operating properties, plus depreciation and amortization uniquely significant
to
real estate and after adjustments for unconsolidated partnerships and joint
ventures.
FFO
is
intended to exclude Generally Accepted Accounting Principles, which we refer
to
as GAAP, historical cost depreciation of real estate, which assumes that the
value of real estate assets diminish ratably over time. Historically, however,
real estate values have risen or fallen with market conditions. Because FFO
excludes depreciation and amortization unique to real estate, gains and losses
from property dispositions and extraordinary items, it provides a performance
measure that, when compared year over year, reflects the impact to operations
from trends in occupancy rates, rental rates, operating costs, development
activities and interest costs, providing perspective not immediately apparent
from net income.
We
present FFO because we consider it an important supplemental measure of our
operating performance and believe it is frequently used by securities analysts,
investors and other interested parties in the evaluation of REITs, any of which
present FFO when reporting their results. FFO is widely used by us and others
in
our industry to evaluate and price potential acquisition candidates. The
National Association of Real Estate Investment Trusts, Inc., of which we are
a
member, has encouraged its member companies to report their FFO as a
supplemental, industry-wide standard measure of REIT operating performance.
In
addition a percentage of bonus compensation to certain members of management
is
based on our FFO performance.
FFO
has
significant limitations as an analytical tool, and you should not consider
it in
isolation, or as a substitute for analysis of our results as reported under
GAAP. Some of these limitations are:
| § |
FFO
does not reflect our cash expenditures, or future requirements, for
capital expenditures or contractual
commitments;
|
| § |
FFO
does not reflect changes in, or cash requirements for, our working
capital
needs;
|
| § |
Although
depreciation and amortization are non-cash charges, the assets being
depreciated and amortized will often have to be replaced in the future,
and FFO does not reflect any cash requirements for such
replacements;
|
| § |
FFO
does not reflect the impact of earnings or charges resulting from
matters
which may not be indicative of our ongoing operations;
and
|
| § |
Other
companies in our industry may calculate FFO differently than we do,
limiting its usefulness as a comparative
measure.
|
Because
of these limitations, FFO should not be considered as a measure of discretionary
cash available to us to invest in the growth of our business or our dividend
paying capacity. We compensate for these limitations by relying primarily on
our
GAAP results and using FFO only supplementally. See the Statements of Cash
Flow
included in our consolidated financial statements.
Below
is
a reconciliation of FFO to net income for the years ended December 31, 2005,
2004 and 2003 as well as other data for those respective periods (in
thousands):
|
2005
|
2004
|
2003
|
||||||||
|
Funds
from Operations:
|
||||||||||
|
Net
income
|
$
|
5,089
|
$
|
7,046
|
$
|
12,849
|
||||
|
Adjusted
for:
|
||||||||||
|
Minority
interest in operating partnership
|
1,348
|
1,457
|
2,853
|
|||||||
|
Minority
interest adjustment - consolidated joint venture
|
(315
|
)
|
(180
|
)
|
(33
|
)
|
||||
|
Minority
interest, depreciation and amortization
|
||||||||||
|
attributable
to discontinued operations
|
1,210
|
1,410
|
3,265
|
|||||||
|
Depreciation
and amortization uniquely significant
|
||||||||||
|
to
real estate - consolidated
|
47,916
|
50,491
|
26,857
|
|||||||
|
Depreciation
and amortization uniquely significant
to
real estate - unconsolidated joint venture
|
1,493
|
1,334
|
1,101
|
|||||||
|
Loss
on sale of real estate
|
3,843
|
1,460
|
147
|
|||||||
|
Funds
from operations (1)
|
60,584
|
63,018
|
47,039
|
|||||||
|
Preferred
share dividends
|
(538
|
)
|
---
|
---
|
||||||
|
Funds
from operations available to common shareholders
|
$
|
60,046
|
$
|
63,018
|
$
|
47,039
|
||||
|
Weighted
average shares outstanding (2)
|
34,713
|
33,328
|
27,283
|
|||||||
(1)
The years ended December 31, 2005 and 2004 include gains on sales of outparcels
of land of $1,554 and $1,510, respectively.
(2)
Assumes the partnership units of the Operating Partnership held by the minority
interest, convertible preferred shares of the Company and share and unit options
are converted to common shares of the Company.
Economic
Conditions and Outlook
The
majority of our leases contain provisions designed to mitigate the impact of
inflation. Such provisions include clauses for the escalation of base rent
and
clauses enabling us to receive percentage rentals based on tenants’ gross sales
(above predetermined levels, which we believe often are lower than traditional
retail industry standards) 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.
During
2006, we have approximately 1,820,000 square feet, or 22%, of our portfolio
coming up for renewal. If we 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 our results of operations.
We
renewed 84% of the 1,812,000 square feet that came up for renewal in 2005 with
the existing tenants at a 6% increase in the average base rental rate compared
to the expiring rate. We also re-tenanted 419,000 square feet during 2005 at
a
7% increase in the average base rental rate.
Existing
tenants’ sales have remained stable and renewals by existing tenants have
remained strong. The existing tenants have already renewed approximately
848,000, or 47%, of the square feet scheduled to expire in 2006 as of February
1, 2006. In addition, we continue to attract and retain additional tenants.
Our
factory outlet centers typically include well-known, national, brand name
companies. By maintaining a broad base of creditworthy tenants and a
geographically diverse portfolio of properties located across the United States,
we reduce our operating and leasing risks. No one tenant (including affiliates)
accounts for more than 6.2% of our combined base and percentage rental revenues.
Accordingly, we do not expect any material adverse impact on our results of
operations and financial condition as a result of leases to be renewed or stores
to be released.
As
of
both December 31, 2005 and 2004, occupancy at our wholly owned centers was
97%.
Consistent with our long-term strategy of re-merchandising centers, we will
continue to hold space off the market until an appropriate tenant is identified.
While we believe this strategy will add value to our centers in the long-term,
it may reduce our average occupancy rates in the near term.
Sales
at
our outlet centers along the Gulf of Mexico were adversely affected by the
hurricanes during 2005 and 2004. Fortunately, the structural damage caused
by
the hurricanes was minimal and our property insurance will cover the vast
majority of the repair work that is being completed as well as lost revenues
during the days the centers were closed. We do not expect this to have a
material impact on our financial results.
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
Market
Risk
We
are
exposed to various market risks, including changes in interest rates. Market
risk is the potential loss arising from adverse changes in market rates and
prices, such as interest rates. We may periodically enter into certain interest
rate protection and interest rate swap agreements to effectively convert
floating rate debt to a fixed rate basis and to hedge anticipated future
financings. We do not enter into derivatives or other financial instruments
for
trading or speculative purposes.
In
September 2005, we entered into two forward starting interest rate lock
protection agreements to hedge risks related to anticipated future financings
in
2005 and 2008. The 2005 agreement locked the US Treasury index rate at 4.279%
on
a notional amount of $125 million for 10 years from such date in December 2005.
This lock was unwound in the fourth quarter of 2005 in conjunction with the
issuance of the $250 million senior unsecured notes due in 2015 discussed in
Note 8 and, as a result, we received a cash payment of $3.2 million. The gain
was recorded in other comprehensive income and is being amortized into earnings
using the effective interest method over a 10 year period that coincides with
the interest payments associated with the senior unsecured notes due in 2015.
The 2008 agreement locked the US Treasury index rate at 4.526% on a notional
amount of $100 million for 10 years from such date in July 2008. In November
2005, we entered into an additional agreement which locked the US Treasury
index
rate at 4.715% on a notional amount of $100 million for 10 years from such
date
in July 2008. We anticipate unsecured debt transactions of at least the notional
amount to occur in the designated periods.
The
fair
value of the interest rate protection agreements represents the estimated
receipts or payments that would be made to terminate the agreement. At December
31, 2005, we would have paid approximately $313,000 if we terminated the
agreements. A 1% decrease in the US Treasury rate index would increase the
amount we would pay if the agreements were terminated by $15.5 million. The
fair
value is based on dealer quotes, considering current interest rates and
remaining term to maturity. We do not intend to terminate the agreements prior
to their maturity because we plan on entering into the debt transactions as
indicated.
During
March 2005, TWMB, entered into an interest rate swap agreement with a notional
amount of $35 million for five years to hedge floating rate debt on the
permanent financing that was obtained in April 2005. Under this agreement,
TWMB
receives a floating interest rate based on the 30 day LIBOR index and pays
a
fixed interest rate of 4.59%. This swap effectively changes the rate of interest
on $35 million of variable rate mortgage debt to a fixed rate debt of 5.99%
for
the contract period.
The
fair
value of the interest rate swap agreement represents the estimated receipts
or
payments that would be made to terminate the agreement. At December 31, 2005,
TWMB would have received approximately $181,000 if the agreement was terminated.
A 1% decrease in the 30 day LIBOR index would decrease the amount received
by
TWMB by $1.3 million. The fair value is based on dealer quotes, considering
current interest rates and remaining term to maturity. TWMB does not intend
to
terminate the interest rate swap agreement prior to its maturity. The fair
value
of this derivative is currently recorded as a liability in TWMB’s balance sheet;
however, if held to maturity, the value of the swap will be zero at that
time.
The
fair
market value of long-term fixed interest rate debt is subject to market risk.
Generally, the fair market value of fixed interest rate debt will increase
as
interest rates fall and decrease as interest rates rise. The estimated fair
value of our total long-term debt at December 31, 2005 was $670.0 million and
its recorded value was $663.6 million. A 1% increase from prevailing interest
rates at December 31, 2005 would result in a decrease in fair value of total
long-term debt by approximately $25.9 million. Fair values were determined
from
quoted market prices, where available, using current interest rates considering
credit ratings and the remaining terms to maturity.