United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
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 number 1-11986
TANGER FACTORY OUTLET CENTERS, INC.
(Exact name of Registrant as specified in its charter)
North Carolina 56-1815473
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3200 Northline Avenue
Suite 360
Greensboro, NC 27408 (336) 292-3010
(Address of principal executive offices) (Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
Common Shares, $.01 par value New York Stock Exchange
Series A Cumulative Convertible Redeemable New York Stock Exchange
Preferred Shares, $.01 par value
Securities registered pursuant to Section 12(g) of the Act: None
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
----- ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
The aggregate market value of voting shares held by non-affiliates of the
Registrant was approximately $266, 767,000 based on the closing price on the New
York Stock Exchange for such stock on March 21, 2003.
The number of Common Shares of the Registrant outstanding as of March 21, 2003
was 9,299,665.
Documents Incorporated By Reference
Part III incorporates certain information by reference from the Registrant's
definitive proxy statement to be filed with respect to the Annual Meeting of
Shareholders to be held May 9, 2003.
1
PART I
Item 1. Business
The Company
Tanger Factory Outlet Centers, Inc. and subsidiaries, a fully-integrated,
self-administered and self-managed real estate investment trust ("REIT"),
focuses exclusively on developing, acquiring, owning, operating and managing
factory outlet centers. Since entering the factory outlet center business 22
years ago, we have become one of the largest owners and operators of factory
outlet centers in the United States. As of December 31, 2002, we had ownership
interests in or management responsibilities for 34 centers with a total gross
leasable area ("GLA") of approximately 6.2 million square feet. These centers
were approximately 98% occupied, contained over 1,300 stores and represented
over 300 store brands as of such date.
Our factory outlet centers and other assets are held by, and all of our
operations are conducted by, Tanger Properties Limited Partnership. Accordingly,
the descriptions of our business, employees and properties are also descriptions
of the business, employees and properties of the Operating Partnership. Unless
the context indicates otherwise, the term "Company" refers to Tanger Factory
Outlet Centers, Inc. and subsidiaries and the term "Operating Partnership"
refers to Tanger Properties Limited Partnership. The terms "we", "our" and "us"
refer to the Company or the Company and the Operating Partnership together, as
the text requires.
We own the majority of the units of partnership interest issued by the Operating
Partnership (the "Units") through our two wholly-owned subsidiaries, the Tanger
GP Trust and the Tanger LP Trust. The Tanger GP Trust controls the Operating
Partnership as its sole general partner. The Tanger LP Trust holds a limited
partnership interest. The Tanger family, through its ownership of the Tanger
Family Limited Partnership ("TFLP"), holds the remaining Units as a limited
partner. Stanley K. Tanger, our Chairman of the Board and Chief Executive
Officer, is the sole general partner of TFLP.
As of December 31, 2002, our wholly-owned subsidiaries owned 9,061,025 Units,
and 80,190 Preferred Units (which are convertible into approximately 722,509
limited partnership Units) and TFLP owned 3,033,305 Units. TFLP's Units are
exchangeable, subject to certain limitations to preserve our status as a REIT,
on a one-for-one basis for our common shares. See "Business-The Operating
Partnership". Preferred Units are automatically converted into limited
partnership Units to the extent of any conversion of our preferred shares into
our common shares. As of March 21, 2003, our management beneficially owns
approximately 25% of all outstanding common shares (assuming the Series A
Preferred Shares and the limited partner's Units are exchanged for common shares
but without giving effect to the exercise of any outstanding stock and
partnership Unit options).
Ownership of our common and preferred shares is restricted to preserve our
status as a REIT for federal income tax purposes. Subject to certain exceptions,
a person may not actually or constructively own more than 4% of our common
shares (including common shares which may be issued as a result of conversion of
Series A Preferred Shares) or more than 29,400 Series A Preferred Shares (or a
lesser number in certain cases). We also operate in a manner intended to enable
us to preserve our status as a REIT, including, among other things, making
distributions with respect to our outstanding common and preferred shares equal
to at least 90% of our taxable income each year.
We are a North Carolina corporation that was formed in March 1993. The executive
offices are currently located at 3200 Northline Avenue, Suite 360, Greensboro,
North Carolina, 27408 and the telephone number is (336) 292-3010. The Company's
website can be accessed at www.tangeroutlet.com. A copy of our 10-K's, 10-Q's,
and 8-K's can be obtained, free of charge, on the Company's website.
2
Recent Developments
At December 31, 2002, we had ownership interests in or management
responsibilities for 34 centers in 21 states totaling 6.2 million square feet of
operating GLA compared to 32 centers in 20 states totaling 5.4 million square
feet of operating GLA as of December 31, 2001. The increase is due to the
following events:
o Disposition of our wholly-owned property in Fort Lauderdale, Florida,
totaling 165,000 square feet
o Development, through a 50% ownership joint venture, of our property in
Myrtle Beach, South Carolina totaling 260,000 square feet
o Acquisition of our wholly-owned property in Howell, Michigan totaling
325,000 square feet
o Obtained management responsibilities of a property in Vero Beach, Florida
totaling 329,000 square feet
o Disposition of our wholly-owned property in Bourne, Massachusetts, totaling
23,000 square feet at which we retain limited management responsibilities
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 accretive net income or funds from operations.
During 2002, we continued to maintain strong relationships with multiple sources
of capital. We completed the following liquidity transactions during the year:
o In September 2002, we completed a public offering of 1,000,000 common
shares at a price of $29.25 per share, receiving net proceeds of
approximately $28.0 million. The net proceeds were used, together with
other available funds to acquire the Kensington Valley Factory Shops in
Howell, Michigan mentioned above, reduce the outstanding balance on our
lines of credit and for general corporate purposes.
o We extended the maturities of our existing three unsecured lines of credit
totaling $75 million with Bank of America, Fleet National Bank and
SouthTrust Bank until June 30, 2004 and added an additional $10 million
line of credit with Wells Fargo Bank which also matures on June 30, 2004.
This addition brings our total capacity under lines of credit to $85
million.
o In conjunction with the construction of the Myrtle Beach, South Carolina
center mentioned above, we, through our 50% ownership joint venture, TWMB
Associates, LLC ("TWMB"), closed on a variable rate, construction loan in
the amount of $36.2 million with Bank of America, NA (Agent) and SouthTrust
Bank. In August of 2002, TWMB entered into an interest rate swap agreement
with Bank of America, NA effective through August 2004 with a notional
amount of $19 million. This swap effectively changes the payment of
interest on $19 million of variable rate debt to fixed rate debt for the
contract period at a rate of 4.49%.
During 2002, we purchased primarily at par, $10.4 million of our outstanding
7.875% senior, unsecured public notes that mature in October 2004. The purchases
were funded by amounts available under our unsecured lines of credit. During
2001, we purchased $14.5 million of these notes at par. In total, $24.9 million
of the October 2004 notes were purchased in 2001 and 2002. We currently have
authority from our Board of Directors to purchase an additional $25 million of
our outstanding 7.875% senior, unsecured public notes and may, from time to
time, do so at management's discretion.
The Factory Outlet Concept
Factory outlets are manufacturer-operated retail stores that sell primarily
first quality, branded products at significant discounts from regular retail
prices charged by department stores and specialty stores. Factory outlet centers
offer numerous advantages to both consumers and manufacturers. Manufacturers
selling in factory outlet stores are often able to charge customers lower prices
for brand name and designer products by eliminating the third party retailer.
Factory outlet centers also typically have lower operating costs than other
retailing formats, which enhance the manufacturer's profit potential. Factory
outlet centers enable manufacturers to optimize the size of production runs
while continuing to maintain control of their distribution channels. In
addition, factory outlet centers benefit manufacturers by permitting them to
sell out-of-season, overstocked or discontinued merchandise without alienating
department stores or hampering the manufacturer's brand name, as is often the
case when merchandise is distributed via discount chains.
3
Our factory outlet centers range in size from 11,000 to 729,238 square feet of
GLA and are typically located at least 10 miles from densely populated areas,
where major department stores and manufacturer-owned full-price retail stores
are usually located. Manufacturers prefer these locations so that they do not
compete directly with their major customers and their own stores. Many of our
factory outlet centers are located near tourist destinations to attract tourists
who consider shopping to be a recreational activity. These centers are typically
situated in close proximity to interstate highways that provide accessibility
and visibility to potential customers.
We believe that factory outlet centers continue to present attractive
opportunities for capital investment, particularly with respect to strategic
re-merchandising plans and expansions of existing centers. We believe that under
present conditions such development or expansion costs, coupled with current
market lease rates, permit attractive investment returns. We further believe,
based upon our contacts with present and prospective tenants, that many
companies, including prospective new entrants into 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
companies do not have a significant presence or where there are few factory
outlet centers.
Our Factory Outlet Centers
Each of our factory outlet centers carries the Tanger brand name. We believe
that both national manufacturers and consumers recognize the Tanger brand as one
that provides outlet shopping centers where consumers can trust the brand,
quality and price of the merchandise they purchase directly from the
manufacturers.
As one of the original participants in this industry, we have developed
long-standing relationships with many national and regional manufacturers.
Because of our established relationships with many manufacturers, we believe we
are well positioned to capitalize on industry growth.
As of March 1, 2003, we had a diverse tenant base comprised of over 300
different well-known, upscale, national designer or brand name concepts, such as
Dana Buchman, Liz Claiborne, Reebok, Nike, Tommy Hilfiger, Brooks Brothers,
Nautica, Coach, Polo Ralph Lauren, GAP, Old Navy and Banana Republic. Most of
the factory outlet stores are directly operated by the respective manufacturer.
No single tenant (including affiliates) accounted for 10% or more of combined
base and percentage rental revenues during 2002, 2001 and 2000. As of March 1,
2003, our largest tenant, including all of its store concepts, accounted for
approximately 6.6% of our GLA. Because our typical tenant is a large, national
manufacturer, we have not experienced any material problems with respect to rent
collections or lease defaults.
Revenues from fixed rents and operating expense reimbursements accounted for
approximately 91% of our total revenues in 2002. Revenues from contingent
sources, such as percentage rents, vending income and miscellaneous income,
accounted for approximately 8% of 2002 revenues. As a result, only small
portions of our revenues are dependent on contingent revenue sources.
Business History
Stanley K. Tanger, the Company's founder, Chairman and Chief Executive Officer,
entered the factory outlet center business in 1981. Prior to founding the
Company, Stanley K. Tanger and his son, Steven B. Tanger, the Company's
President and Chief Operating Officer, built and managed a successful family
owned apparel manufacturing business, Tanger/Creighton Inc.
("Tanger/Creighton"), which business included the operation of five factory
outlet stores. Based on their knowledge of the apparel and retail industries, as
well as their experience operating Tanger/Creighton's factory outlet stores, the
Tangers recognized that there would be a demand for factory outlet centers where
a number of manufacturers could operate in a single location and attract a large
number of shoppers.
From 1981 to 1986, Stanley K. Tanger solely developed the first successful
factory outlet centers. Steven Tanger joined the company in 1986 and by June
1993, together, the Tangers had developed 17 centers with a total GLA of
approximately 1.5 million square feet. In June of 1993, we completed our initial
public offering ("IPO"), making Tanger Factory Outlet Centers, Inc. the first
publicly traded outlet center company. Since our IPO, through strategic
development, acquisitions and some dispositions, we have added approximately 4.7
million square feet of GLA to our portfolio, bringing our portfolio of owned and
managed properties as of December 31, 2002 to 34 centers totaling approximately
6.2 million square feet of GLA.
4
Business and Operating Strategy
Our strategy is to increase revenues through new development, selective
acquisitions and expansions of factory outlet centers while minimizing our
operating expenses by designing low maintenance properties and achieving
economies of scale. We continue to focus on strengthening our tenant base in our
centers by replacing low volume tenants with high volume anchor tenants.
We typically seek opportunities to develop or acquire new centers in locations
that have at least 5 million people residing within an hour's drive, an average
household income within a 50-mile radius of at least $35,000 per year and access
to frontage on a major or interstate highway with a traffic count of at least
50,000 cars per day. We also seek to enhance our customer base by developing
centers near or at established tourist destinations. Our current goal is to
target sites that are large enough to support centers with approximately 75
stores totaling at least 300,000 square feet of GLA.
We generally prelease at least 50% of the space in each center prior to
acquiring the site and beginning construction. Construction of a new factory
outlet center has normally taken us four to six months from groundbreaking to
the opening of the first tenant store. Construction of expansions to existing
properties typically takes less time, usually between three to four months.
Capital Strategy
We intend to achieve a strong and flexible financial position by: (1)
maintaining a quality portfolio of strong income producing properties, (2)
managing our leverage position relative to our portfolio when pursuing new
development and expansion opportunities, (3) extending and sequencing debt
maturities, (4) managing our interest rate risk, (5) maintaining our liquidity
and (6) utilizing internally generated sources of capital by maintaining a low
distribution payout ratio, defined as annual distributions as a percent of funds
from operations, and subsequently reinvesting a significant portion of our cash
flow into our portfolio. For a discussion of funds from operations, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Funds From Operations".
We have successfully increased our dividend each of our first nine years as a
public company. At the same time, we continue to have a low distribution payout
ratio, which for the year ended December 31, 2002, was 72%. As a result, we
retained approximately $12.3 million of our 2002 FFO. A low distribution payout
ratio allows us to retain capital to maintain the quality of our portfolio, as
well as to develop, acquire and expand properties and reduce outstanding debt.
We intend to retain the ability to raise additional capital, including public
debt or equity, to pursue attractive investment opportunities that may arise and
to otherwise act in a manner that we believe to be in our shareholders' best
interests. During the second quarter of 2001, we amended our shelf registration
for the ability to issue up to $400 million, ($200 million in debt and $200
million in equity securities). In July 2002, we again amended the shelf
registration to allow us to issue the $400 million in either all debt or all
equity or any combination thereof up to $400 million. In September 2002, we
completed a public offering of 1,000,000 common shares at a price of $29.25 per
share, receiving net proceeds of approximately $28.0 million. We used the net
proceeds, together with other available funds, to acquire one outlet center in
Howell, Michigan, to reduce the outstanding balance on our lines of credit and
for general corporate purposes. To generate capital to reinvest into other
attractive investment opportunities, we may also consider the use of operational
and developmental joint ventures, selling certain properties that do not meet
our long-term investment criteria as well as outparcels on existing properties.
We maintain unsecured, revolving lines of credit that provided for unsecured
borrowings up to $85 million at December 31, 2002, an increase of $10 million in
capacity from December 31, 2001. During 2002, we extended the maturity of all
lines of credit to June 30, 2004.
Based on cash provided by operations, existing credit facilities, ongoing
negotiations with certain financial institutions and our ability to sell debt or
equity subject to market conditions, we believe that we have access to the
necessary financing to fund the planned capital expenditures during 2003.
5
The Operating Partnership
Our centers and other assets are held by, and all of our operations are
conducted by, the Operating Partnership. As of December 31, 2002, our
wholly-owned subsidiaries owned 9,061,025 Units, and 80,190 Preferred Units
(which are convertible into approximately 722,509 limited partnership Units) and
the Tanger Family owned the remaining 3,033,305 Units. TFLP's Units are
exchangeable, subject to certain limitations to preserve our status as a REIT,
on a one-for-one basis for our common shares.
Each preferred partnership Unit entitles us to receive distributions from the
Operating Partnership, in an amount equal to the distribution payable with
respect to a share of Series A Preferred Shares, prior to the payment by the
Operating Partnership of distributions with respect to the general partnership
Units. Preferred partnership Units will be automatically converted by holders
into limited partnership Units to the extent that the Series A Preferred Shares
are converted into Common Shares and will be redeemed by the Operating
Partnership to the extent that the Series A Preferred Shares are redeemed by us.
Competition
We carefully consider the degree of existing and planned competition in a
proposed area before deciding to develop, acquire or expand a new center. Our
centers compete for customers primarily with factory outlet centers built and
operated by different developers, traditional shopping malls and full- and
off-price retailers. However, we believe that the majority of our customers
visit factory outlet centers because they are intent on buying name-brand
products at discounted prices. Traditional full- and off-price retailers are
often unable to provide such a variety of name-brand products at attractive
prices.
Tenants of factory outlet centers typically avoid direct competition with major
retailers and their own specialty stores, and, therefore, generally insist that
the outlet centers be located not less than 10 miles from the nearest major
department store or the tenants' own specialty stores. For this reason, our
centers compete only to a very limited extent with traditional malls in or near
metropolitan areas.
We compete favorably with two large national developers of factory outlet
centers and numerous small developers. Competition with other factory outlet
centers for new tenants is generally based on cost, location, quality and mix of
the centers' existing tenants, and the degree and quality of the support and
marketing services provided. As a result of these factors and due to the strong
tenant relationships that presently exist with the current major outlet
developers, we believe there are significant barriers to entry into the outlet
center industry by new developers. We also believe that our centers have an
attractive tenant mix, as a result of our decision to lease substantially all of
our space to manufacturer operated stores rather than to off-price retailers,
and also as a result of the strong brand identity of our major tenants.
Corporate and Regional Headquarters
We rent space in an office building in Greensboro, North Carolina in which our
corporate headquarters are located. In addition, we rent a regional office in
New York City, New York under a lease agreement and sublease agreement,
respectively, to better service our principal fashion-related tenants, many of
who are based in and around that area.
We maintain offices and employ on-site managers at 26 centers. The managers
closely monitor the operation, marketing and local relationships at each of
their centers.
Insurance
We believe that as a whole our properties are covered by adequate comprehensive
liability, fire, flood and extended loss insurance provided by reputable
companies with commercially reasonable and customary deductibles and limits.
Specified types and amounts of insurance are required to be carried by each
tenant under their lease agreement with us. There are however, types of losses,
like those resulting from wars or earthquakes, which may either be uninsurable
or not economically insurable in some or all of our locations. An uninsured loss
could result in a loss to us of both our capital investment and anticipated
profits from the affected property.
6
Employees
As of March 1, 2003, we had 157 full-time employees, located at our corporate
headquarters in North Carolina, our regional office in New York and our 26
business offices. At that date, we also employed 169 part-time employees at
various locations.
Item 2. Properties
As of March 1, 2003, our portfolio consisted of 34 centers located in 21 states.
Our centers range in size from 11,000 to 729,238 square feet of GLA. These
centers are typically strip shopping centers that enable customers to view all
of the shops from the parking lot, minimizing the time needed to shop. The
centers are generally located near tourist destinations or along major
interstate highways to provide visibility and accessibility to potential
customers.
We believe that the centers are well diversified geographically and by tenant
and that we are not dependent upon any single property or tenant. The only
center that represents more than 10% of our consolidated total assets or
consolidated gross revenues as of and for the year ended December 31, 2002 is
the property in Riverhead, NY. See "Business and Properties - Significant
Property". No other center represented more than 10% of our consolidated total
assets or consolidated gross revenues as of December 31, 2002.
We have an ongoing strategy of acquiring centers, developing new centers and
expanding existing centers. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
for a discussion of the cost of such programs and the sources of financing
thereof.
Certain of our centers serve as collateral for mortgage notes payable. Of the 29
centers that we have ownership interests in, we own the land underlying 25 and
have ground leases on four. The land on which the Pigeon Forge and Sevierville
centers are located are subject to long-term ground leases expiring in 2086 and
2046, respectively. The land parcel on which the original Riverhead Center is
located, approximately 47 acres, is also subject to a ground lease with an
initial term expiring in 2004, with renewal at our option for up to seven
additional terms of five years each. The land parcel on which the Riverhead
Center expansion is located, containing approximately 43 acres, is owned by us.
The land parcel on which the Myrtle Beach center is located, is also subject to
a ground lease with an initial term expiring in 2026, with renewal at TWMB's
option for up to seven additional terms of ten years each.
The term of our typical tenant lease averages approximately five years.
Generally, leases provide for the payment of fixed monthly rent in advance.
There are often contractual base rent increases during the initial term of the
lease. In addition, the rental payments are customarily subject to upward
adjustments based upon tenant sales volume. Most leases provide for payment by
the tenant of real estate taxes, insurance, common area maintenance, advertising
and promotion expenses incurred by the applicable center. As a result,
substantially all operating expenses for the centers are borne by the tenants.
7
Location of Centers (as of March 1, 2003) (1)
Number of GLA %
State Centers (sq. ft.) of GLA
- --------------------------- ------------- -------------- ---------------
Georgia 4 950,590 17
New York 1 729,238 13
Texas 2 619,426 11
Tennessee 2 477,412 8
Michigan 2 437,651 8
Missouri 1 277,494 5
Iowa 1 277,230 5
South Carolina (2) 1 260,033 5
Pennsylvania 1 255,059 4
Louisiana 1 245,199 4
Florida 1 198,789 3
North Carolina 2 187,702 3
Arizona 1 184,768 3
Indiana 1 141,051 2
Minnesota 1 134,480 2
California 1 105,950 2
Maine 2 84,397 2
Alabama 1 79,575 1
New Hampshire 2 61,745 1
West Virginia 1 49,252 1
- --------------------------- ------------- -------------- ---------------
Total 29 5,757,041 100
=========================== ============= ============== ===============
(1) Excludes centers managed by us but in which we have no ownership interests.
(2) Represents property that is currently held through an unconsolidated joint
venture in which we own a 50% interest.
8
The table set forth below summarizes certain information with respect to our
existing centers, excluding centers we manage but in which we have no ownership
interests, as of March 1, 2003. Except as noted, all properties are fee owned.
Mortgage
Debt
Outstanding
GLA % (000's) as of
Location (sq. ft.) Occupied December 31, 2002
- ----------------------------- ----------- ----- ----------- --------------------
Riverhead, NY (1) 729,238 98 ---
San Marcos, TX 441,936 99 37,946
Sevierville, TN (2) 382,854 100 ---
Commerce II, GA 342,556 90 29,500
Howell, MI 325,231 99 ---
Branson, MO 277,494 96 24,000
Williamsburg, IA 277,230 98 19,429
Myrtle Beach, SC (2) (3) 260,033 100 ---
Lancaster, PA 255,059 90 14,516
Locust Grove, GA 248,854 99 ---
Gonzales, LA 245,199 98 ---
Fort Meyers, FL 198,789 99 ---
Commerce I, GA 185,750 79 8,288
Casa Grande, AZ 184,768 89 ---
Terrell, TX 177,490 96 ---
Dalton, GA 173,430 93 11,133
Seymour, IN 141,051 74 ---
North Branch, MN 134,480 99 ---
West Branch, MI 112,420 95 7,067
Barstow, CA 105,950 60 ---
Blowing Rock, NC 105,448 94 9,655
Pigeon Forge, TN (2) 94,558 95 ---
Nags Head, NC 82,254 100 6,552
Boaz, AL 79,575 89 ---
Kittery I, ME 59,694 100 6,335
LL Bean, North Conway, NH 50,745 100 ---
Martinsburg, WV 49,252 73 ---
Kittery II, ME 24,703 66 ---
Clover, North Conway, NH 11,000 100 ---
- ---------------------------- ------------ ----- -------- ---------------------
5,757,041 95 $ 174,421
============================ ============ ===== ======== =====================
(1) A portion of the Riverhead center (totaling approximately 298,000 square
feet) is subject to a ground lease through May 31, 2004 which may be
renewed at our option for up to seven additional terms of five years each.
(2) These properties are subject to a ground lease.
(3) Represents property that is currently held through an unconsolidated joint
venture in which we own a 50% interest. The joint venture had $25.5 million
of construction loan debt as of December 31, 2002.
9
Lease Expirations
The following table sets forth, as of March 1, 2003, scheduled lease
expirations, assuming none of the tenants exercise renewal options. Most leases
are renewable for five year terms at the tenant's option.
% of Gross
Annualized
Average Base Rent
No. of Approx. Annualized Annualized Represented
Leases GLA Base Rent Base Rent by Expiring
Year Expiring(1) (sq. ft.) (1) per sq. ft. (000's) (2) Leases
- ------------------------ ----------------- ----------------- ------------- --------------- --------------
2003 142 541,000 (3) $ 12.54 $6,783 10
2004 277 1,196,000 13.57 16,227 23
2005 190 835,000 15.69 13,098 16
2006 188 795,000 15.54 12,362 15
2007 204 839,000 18.10 15,177 16
2008 96 438,000 15.06 6,598 8
2009 20 137,000 12.30 1,689 3
2010 17 79,000 14.67 1,156 2
2011 9 94,000 12.75 1,193 2
2012 19 173,000 11.24 1,949 3
2013 & thereafter 21 110,000 12.50 1,375 2
- ------------------------ ----------- ----------------------- ---------- -------------- ------------------
Total 1,183 5,237,000 $ 14.82 $ 77,607 100
======================== =========== ======================= ========== ============== ==================
(1) Excludes leases that have been entered into but which tenant has not yet
taken possession, vacant suites, space under construction, temporary leases
and month-to-month leases totaling in the aggregate approximately 520,000
square feet.
(2) Base rent is defined as the minimum payments due, excluding periodic
contractual fixed increases and rents calculated based on a percentage of
tenants' sales.
(3) As of March 1, 2003, approximately 529,000 square feet of the total
scheduled to expire in 2003 had already renewed.
Rental and Occupancy Rates
The following table sets forth information regarding the expiring leases during
each of the last five calendar years.
Renewed by Existing Re-leased to
Total Expiring Tenants New Tenants
----------------------------------- ---------------------------- ----------------------------
% of % of % of
GLA Total Center GLA Expiring GLA Expiring
Year (sq. ft.) GLA (sq. ft.) GLA (sq. ft.) GLA
- ---------------- --------------- ---------------- ------------- ----------- ------------ ------------
2002 935,000 16 819,000 88 56,000 6
2001 684,000 13 560,000 82 55,000 8
2000 690,000 13 520,000 75 68,000 10
1999 715,000 14 606,000 85 23,000 3
1998 549,000 11 408,000 74 39,000 7
10
The following table sets forth the average base rental rate increases per square
foot upon re-leasing stores that were turned over or renewed during each of the
last five calendar years.
Renewals of Existing Leases Stores Re-leased to New Tenants (1)
---------------------------------------------------- ------------------------------------------------------
Average Annualized Base Rents Average Annualized Base Rents
($ per sq. ft.) ($ per sq. ft.)
-------------------------------------- ----------------------------------------
GLA % GLA
Year (sq. ft.) Expiring New Increase (sq. ft.) Expiring New % Change
- --------- ---------- ----------- --------- ---------- ---------- ----------- --------- ----------
2002 819,000 $14.86 $15.02 1 229,000 $15.14 $15.74 4
2001 560,000 14.08 14.89 6 269,000 14.90 16.43 10
2000 520,000 13.66 14.18 4 303,000 14.68 15.64 7
1999 606,000 14.36 14.36 -- 241,000 15.51 16.57 7
1998 407,000 13.83 14.07 2 221,000 15.33 13.87 (9)
- ---------------------
(1) The square footage released to new tenants for 2002, 2001, 2000, 1999 and
1998 contains 56,000, 55,000, 68,000, 23,000,and 39,000 square feet,
respectively, that was released to new tenants upon expiration of an
existing lease during the current year.
Occupancy Costs
We believe that our ratio of average tenant occupancy cost (which includes base
rent, common area maintenance, real estate taxes, insurance, advertising and
promotions) to average sales per square foot is low relative to other forms of
retail distribution. The following table sets forth, for each of the last five
years, tenant occupancy costs per square foot as a percentage of reported tenant
sales per square foot.
Occupancy Costs as a
Year % of Tenant Sales
------------------------------ --------------------------
2002 7.2
2001 7.1
2000 7.4
1999 7.8
1998 7.9
11
Tenants
The following table sets forth certain information with respect to our ten
largest tenants and their store concepts as of March 1, 2003.
Number GLA % of Total
Tenant of Stores (sq. ft.) GLA
- --------------------------------------------- ------------- ------------- ----------------
The Gap, Inc.:
GAP 18 157,702 2.7
Old Navy 13 183,585 3.2
Banana Republic 5 38,824 0.7
------------- ------------- ----------------
36 380,111 6.6
Phillips-Van Heusen Corporation:
Bass Shoe 22 146,666 2.5
Van Heusen 22 92,697 1.6
Geoffrey Beene Co. Store 12 46,001 0.8
Izod 14 33,300 0.6
------------- ------------- ----------------
70 318,664 5.5
Liz Claiborne:
Liz Claiborne 23 264,371 4.6
Elizabeth 7 25,984 0.5
DKNY Jeans 3 8,820 0.2
Dana Buchman 2 4,500 0.1
Special Brands By Liz Claiborne 2 5,880 0.1
Claiborne Mens 1 3,100 ---
------------- ------------- ----------------
38 312,655 5.5
Reebok International, Ltd.:
Reebok 21 171,661 3.0
Rockport 4 11,900 0.2
Greg Norman 1 3,000 ---
------------- ------------- ----------------
26 186,561 3.2
Dress Barn Inc. 20 143,512 2.5
Sara Lee Corporation:
L'eggs, Hanes, Bali 26 113,810 2.0
Socks Galore 5 6,230 0.1
Understatements 1 3,000 ---
------------- ------------- ----------------
32 123,040 2.1
Brown Group Retail, Inc:
Factory Brand Shoe 16 97,102 1.7
Naturalizer 9 23,344 0.4
------------- ------------- ----------------
25 120,446 2.1
American Commercial, Inc:
Mikasa Factory Store 15 120,086 2.1
Polo Ralph Lauren:
Polo Ralph Lauren 11 91,566 1.6
Polo Jeans 4 15,000 0.3
------------- ------------- ----------------
15 106,566 1.9
VF Factory Outlet, Inc. 4 105,697 1.8
- --------------------------------------------- ------------- ------------- ----------------
Total of all tenants listed in table 281 1,917,338 33.3
============================================= ============= ============= ================
12
Significant Property
The center in Riverhead, New York is our only center that comprises more than
10% of consolidated total assets or consolidated total gross revenues. The
Riverhead, NY center represented 19% of our consolidated total assets and 21% of
our consolidated gross revenue for the year ended December 31, 2002. The
Riverhead center was originally constructed in 1994 and now totals 729,238
square feet.
Tenants at the Riverhead center principally conduct retail sales operations. The
occupancy rate as of the end of 2002, 2001 and 2000 was 100%, 99% and 94%.
Average annualized base rental rates during 2002, 2001 and 2000 were $19.71,
$18.68 and $19.72 per weighted average GLA, respectively.
Depreciation on the Riverhead center is recognized on a straight-line basis over
33.33 years, resulting in a depreciation rate of 3% per year. At December 31,
2002, the net federal tax basis of this center was approximately $80.5 million.
Real estate taxes assessed on this center during 2002 amounted to $3.4 million.
Real estate taxes for 2003 are estimated to be approximately $3.6 million.
The following table sets forth, as of March 1, 2003, scheduled lease expirations
at the Riverhead center assuming that none of the tenants exercise renewal
options:
% of Gross
Annualized
Base Rent
No. of Annualized Annualized Represented
Leases GLA Base Rent Base Rent by Expiring
Year Expiring (1) (sq. ft.) (1) per sq. ft. (000) (2) Leases
- --------------------------- ----------------- ----------------- ------------------ ---------------- ----------------
2003 7 19,000 $ 21.48 $ 409 3
2004 31 138,000 19.48 2,697 20
2005 19 90,000 22.33 2,009 13
2006 13 46,000 23.17 1,055 7
2007 53 190,000 25.78 4,900 27
2008 20 91,000 21.61 1,965 13
2009 2 38,000 10.27 388 5
2010 --- --- --- --- ---
2011 2 31,000 12.69 393 4
2012 2 20,000 6.00 117 3
2013 and thereafter 3 36,000 16.12 588 5
- ---------------------------- --------- --------------------- ------------------ --------------- --------------------
Total 152 699,000 $ 20.77 $ 14,521 100
============================ ========= ===================== ================== =============== ====================
(1) Excludes leases that have been entered into but which tenant has not taken
possession, vacant suites, temporary leases and month-to-month leases
totaling in the aggregate approximately 30,000 square feet.
(2) Base rent is defined as the minimum payments due, excluding periodic
contractual fixed increases and rents calculated based on a percentage of
tenants' sales.
Item 3. Legal Proceedings
We are subject to legal proceedings and claims that have arisen in the ordinary
course of our business and have not been finally adjudicated. In our opinion,
the ultimate resolution of these matters will have no material effect on our
results of operations or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders, through
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended December 31, 2002.
13
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning our executive
officers:
NAME AGE POSITION
- --------------------------- --- -----------------------------------------------
Stanley K. Tanger.......... 79 Founder, Chairman of the Board of Directors
and Chief Executive Officer
Steven B. Tanger........... 54 Director, President and Chief Operating Officer
Rochelle G. Simpson ....... 64 Secretary and Executive Vice President -
Administration and Finance
Willard A. Chafin, Jr...... 65 Executive Vice President - Leasing, Site
Selection, Operations and Marketing
Frank C. Marchisello, Jr... 44 Senior Vice President - Chief Financial Officer
Joseph H. Nehmen........... 54 Senior Vice President - Operations
Carrie A. Warren........... 40 Senior Vice President - Marketing
Virginia R. Summerell...... 44 Treasurer and Assistant Secretary
Kevin M. Dillon............ 44 Vice President - Construction and
Development
Lisa J. Morrison........... 43 Vice President - Leasing
The following is a biographical summary of the experience of our executive
officers:
Stanley K. Tanger. Mr. Tanger is the founder, Chief Executive Officer and
Chairman of the Board of Directors of the Company. He also served as President
from inception of the Company to December 1994. Mr. Tanger opened one of the
country's first outlet shopping centers in Burlington, North Carolina in 1981.
Before entering the factory outlet center business, Mr. Tanger was President and
Chief Executive Officer of his family's apparel manufacturing business,
Tanger/Creighton, Inc., for 30 years.
Steven B. Tanger. Mr. Tanger is a director of the Company and was named
President and Chief Operating Officer effective January 1, 1995. Previously, Mr.
Tanger served as Executive Vice President since joining the Company in 1986. He
has been with Tanger-related companies for most of his professional career,
having served as Executive Vice President of Tanger/Creighton for 10 years. He
is responsible for all phases of project development, including site selection,
land acquisition and development, leasing, marketing and overall management of
existing outlet centers. Mr. Tanger is a graduate of the University of North
Carolina at Chapel Hill and the Stanford University School of Business Executive
Program. Mr. Tanger is the son of Stanley K. Tanger.
Rochelle G. Simpson. Ms. Simpson was named Executive Vice President -
Administration and Finance in January 1999. She previously held the position of
Senior Vice President - Administration and Finance since October 1995. She is
also the Secretary of the Company and previously served as Treasurer from May
1993 through May 1995. She entered the factory outlet center business in January
1981, in general management and as chief accountant for Stanley K. Tanger and
later became Vice President - Administration and Finance of the Predecessor
Company. Ms. Simpson oversees the accounting and finance departments and has
overall management responsibility for the Company's headquarters.
Willard A. Chafin, Jr. Mr. Chafin was named Executive Vice President -
Leasing, Site Selection, Operations and Marketing of the Company in January
1999. Mr. Chafin previously held the position of Senior Vice President -
Leasing, Site Selection, Operations and Marketing since October 1995. He joined
the Company in April 1990, and since has held various executive positions where
his major responsibilities included supervising the Marketing, Leasing and
Property Management Departments, and leading the Asset Management Team. Prior to
joining the Company, Mr. Chafin was the Director of Store Development for the
Sara Lee Corporation, where he spent 21 years. Before joining Sara Lee, Mr.
Chafin was employed by Sears Roebuck & Co. for nine years in advertising/sales
promotion, inventory control and merchandising.
14
Frank C. Marchisello, Jr. Mr. Marchisello was named Senior Vice President
and Chief Financial Officer in January 1999. He was named Vice President and
Chief Financial Officer in November 1994. Previously, he served as Chief
Accounting Officer since joining the Company in January 1993 and Assistant
Treasurer since February 1994. He was employed by Gilliam, Coble & Moser,
certified public accountants, from 1981 to 1992, the last six years of which he
was a partner of the firm in charge of various real estate clients. Mr.
Marchisello is a graduate of the University of North Carolina at Chapel Hill and
is a certified public accountant.
Joseph H. Nehmen. Mr. Nehmen was named Senior Vice President of Operations
in January 1999. He joined the Company in September 1995 and was named Vice
President of Operations in October 1995. Mr. Nehmen has over 20 years experience
in private business. Prior to joining Tanger, Mr. Nehmen was owner of Merchants
Wholesaler, a privately held distribution company in St. Louis, Missouri. He is
a graduate of Washington University. Mr. Nehmen is the son-in-law of Stanley K.
Tanger and brother-in-law of Steven B. Tanger.
Carrie A. Warren. Ms. Warren was named Senior Vice President - Marketing in
May 2000. Previously, she held the position of Vice President - Marketing since
September 1996 and Assistant Vice President - Marketing since joining the
Company in December 1995. Prior to joining Tanger, Ms. Warren was with Prime
Retail, L.P. for 4 years where she served as Regional Marketing Director
responsible for coordinating and directing marketing for five outlet centers in
the southeast region. Prior to joining Prime Retail, L.P., Ms. Warren was
Marketing Manager for North Hills, Inc. for five years and also served in the
same role for the Edward J. DeBartolo Corp. for two years. Ms. Warren is a
graduate of East Carolina University.
Virginia R. Summerell. Ms. Summerell was named Treasurer of the Company in
May 1995 and Assistant Secretary in November 1994. Previously, she held the
position of Director of Finance since joining the Company in August 1992, after
nine years with NationsBank. Her major responsibilities include maintaining
banking relationships, oversight of all project and corporate finance
transactions and development of treasury management systems. Ms. Summerell is a
graduate of Davidson College and holds an MBA from the Babcock School at Wake
Forest University.
Kevin M. Dillon. Mr. Dillon was named Vice President - Construction and
Development in May 2002. Previously, he held the positions of Vice President -
Construction from October 1997 to May 2002, Director of Construction from
September 1996 to October 1997 and Construction Manager from November 1993, the
month he joined the Company, to September 1996. Prior to joining the Company,
Mr. Dillon was employed by New Market Development Company for six years where he
served as Senior Project Manager. Prior to joining New Market, Mr. Dillon was
the Development Director of Western Development Company where he spent 6 years.
Lisa J. Morrison. Ms. Morrison was named Vice President - Leasing in May
2001. Previously, she held the position of Assistant Vice President of Leasing
from August 2000 to May 2001 and Director of Leasing from April 1999 until
August 2000. Prior to joining the Company, Ms. Morrison was employed by the
Taubman Company and Trizec Properties, Inc. where she served as a leasing agent.
Her major responsibilities include managing the leasing strategies for our
operating properties, as well as expansions and new development. She also
oversees the leasing personnel and the merchandising and occupancy for Tanger
properties.
15
PART II
Item 5. Market For Registrant's Common Equity and Related Shareholder Matters
The Common Shares commenced trading on the New York Stock Exchange on May 28,
1993. The initial public offering price was $22.50 per share. The following
table sets forth the high and low sales prices of the Common Shares as reported
on the New York Stock Exchange Composite Tape, during the periods indicated.
Common
2002 High Low Dividends Paid
- ------------------ ---------------- ------------------ -----------------
First Quarter $ 27.500 $ 20.750 $ .6100
Second Quarter 30.000 25.400 .6125
Third Quarter 29.900 23.000 .6125
Fourth Quarter 31.200 24.340 .6125
- ------------------ ---------------- ------------------ -----------------
Year 2002 $ 31.200 $ 20.750 $2.4475
- ------------------ ---------------- ------------------ -----------------
Common
2001 High Low Dividends Paid
- ------------------ ---------------- ------------------ -----------------
First Quarter $ 23.625 $ 19.750 $ .6075
Second Quarter 23.000 20.340 .6100
Third Quarter 23.000 19.100 .6100
Fourth Quarter 21.400 19.900 .6100
- ------------------ ---------------- ------------------ -----------------
Year 2001 $ 23.625 $ 19.100 $2.4375
- ------------------ ---------------- ------------------ -----------------
As of March 1, 2003, there were approximately 710 shareholders of record.
Certain of our debt agreements limit the payment of dividends such that
dividends shall not exceed FFO, as defined in the agreements, for the prior
fiscal year on an annual basis or 95% of FFO on a cumulative basis. Based on
continuing favorable operations and available funds from operations, we intend
to continue to pay regular quarterly dividends.
16
Item 6. Selected Financial Data
2002 2001 2000 1999 1998
- ------------------------------------------ ------------- ------------- -------------- ------------ ----------------
(In thousands, except per share and center data)
OPERATING DATA
Total revenues $ 113,167 $ 108,266 $ 106,137 $ 103,093 $ 97,094
Income before equity in earnings of
unconsolidated joint ventures,
minority interest, discontinued
operations,(loss)gain on sale or
disposal of real estate and
extraordinary item 10,642 7,790 10,598 16,505 14,688
Income from continuing operations 8,628 6,125 8,165 12,444 11,139
Income before extraordinary item 11,007 7,356 4,312 15,837 12,159
Net income 11,007 7,112 4,312 15,588 11,827
- ------------------------------------------ -------------- --------------- ------------- ------------ --------------
SHARE DATA
Basic:
Income from continuing operations $ .82 $ .55 $ .80 $ 1.34 $ 1.17
Net income $ 1.11 $ .67 $ .32 $ 1.74 $ 1.26
Weighted average common shares 8,322 7,926 7,894 7,861 7,886
Diluted:
Income from continuing operations $ .80 $ .55 $ .80 $ 1.34 $ 1.15
Net income $ 1.08 $ .67 $ .31 $ 1.74 $ 1.24
Weighted average common shares 8,514 7,948 7,922 7,872 8,009
Common dividends paid $ 2.45 $ 2.44 $ 2.43 $ 2.42 $ 2.35
- ------------------------------------------ -------------- --------------- ------------- ------------ --------------
BALANCE SHEET DATA
Real estate assets, before depreciation $ 622,399 $ 599,266 $ 584,928 $ 566,216 $ 529,247
Total assets 477,675 476,272 487,408 490,069 471,795
Debt 345,005 358,195 346,843 329,647 302,485
Shareholders' equity 90,635 76,371 90,877 107,764 114,039
- ------------------------------------------ -------------- --------------- ------------- ------------ --------------
OTHER DATA
Cash flows provided by (used in):
Operating activities $ 39,167 $ 44,626 $ 38,420 $ 43,175 $ 35,787
Investing activities $ (26,363) $ (23,269) $ (25,815) $ (45,959) $ (79,236)
Financing activities $ (12,247) $ (21,476) $ (12,474) $ (3,043) $ 46,172
Funds from operations (1) $ 41,695 $ 37,768 $ 38,203 $ 41,673 $ 37,048
Gross leasable area open at year end 6,186 5,437 5,284 5,254 5,116
Number of centers 34 32 32 34 34
- -----------------------
(1) Funds from Operations ("FFO") is a widely accepted financial indicator used
by certain investors and analysts to analyze and compare companies on the basis
of operating performance. FFO is defined as net income (loss), computed in
accordance with generally accepted accounting principles, 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.
We caution that the calculation of FFO may vary from entity to entity and as
such the presentation of FFO by us may not be comparable to other similarly
titled measures of other reporting companies. FFO is not intended to represent
cash flows for the period. FFO has not been presented as an alternative to
operating income or as an indicator of operating performance, and should not be
considered in isolation or as a substitute for measures of performance prepared
in accordance with generally accepted accounting principles.
17
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the consolidated
financial statements appearing elsewhere in this report. Historical results and
percentage relationships set forth in the consolidated statements of operations,
including trends which might appear, are not necessarily indicative of future
operations. Unless the context indicates otherwise, the term "Company" refers to
Tanger Factory Outlet Centers, Inc. and subsidiaries and the term "Operating
Partnership" refers to Tanger Properties Limited Partnership. The terms "we",
"our" and "us" refer to the Company or the Company and the Operating Partnership
together, as the text requires.
The discussion of our results of operations reported in the consolidated
statements of operations compares the years ended December 31, 2002 and 2001, as
well as December 31, 2001 and 2000. Certain comparisons between the periods are
made on a percentage basis as well as on a weighted average gross leasable area
("GLA") basis, a technique which adjusts for certain increases or decreases in
the number of centers and corresponding square feet related to the development,
acquisition, expansion or disposition of rental properties. The computation of
weighted average GLA, however, does not adjust for fluctuations in occupancy
that may occur subsequent to the original opening date.
Cautionary Statements
Certain statements made below are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. 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, the
following:
o national and local general economic and market conditions;
o demographic changes; our ability to sustain, manage or forecast our growth;
existing government regulations and changes in, or the failure to comply
with, government regulations;
o adverse publicity; liability and other claims asserted against us;
o competition;
o the risk that we may not be able to finance our planned development
activities;
o risks related to the retail real estate industry in which we 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;
o risks associated with our 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;
o 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 our properties;
o risks that a significant number of tenants may become unable to meet their
lease obligations or that we may be unable to renew or re-lease a
significant amount of available space on economically favorable terms;
o fluctuations and difficulty in forecasting operating results; changes in
business strategy or development plans;
o business disruptions;
18
o the ability to attract and retain qualified personnel;
o the ability to realize planned costs savings in acquisitions; and
o retention of earnings.
General Overview
At December 31, 2002, we had ownership interests in or management
responsibilities for 34 centers in 21 states totaling 6.2 million square feet
compared to 32 centers in 20 states totaling 5.4 million square feet at December
31, 2001. The increase is due to the following events:
o Disposition of our wholly-owned property in Fort Lauderdale, Florida,
totaling 165,000 square feet
o Development, through a 50% ownership joint venture, of our property in
Myrtle Beach, South Carolina totaling 260,000 square feet
o Acquisition of our wholly-owned property in Howell, Michigan totaling
325,000 square feet
o Obtained management responsibilities of a property in Vero Beach, Florida
totaling 329,000 square feet
o Disposition of our wholly-owned property in Bourne, Massachusetts, totaling
23,000 square feet for which we retain limited management responsibilities
Results of Operations
In accordance with SFAS 144 "Accounting for the Impairment or Disposal of Long
Lived Assets," effective for financial statements issued for fiscal years
beginning after December 15, 2001, results of operations and gain/(loss) on
sales of real estate that have separable, identifiable cash flows for properties
sold subsequent to December 31, 2001 are reflected in the Consolidated
Statements of Operations as discontinued operations for all periods presented.
19
A summary of the operating results for the years ended December 31, 2002, 2001
and 2000 is presented in the following table, expressed in amounts calculated on
a weighted average GLA basis.
2002 2001 2000
- ----------------------------------------- ---------- -------------- ------------
GLA open at end of period (000's)
Wholly owned 5,469 5,332 5,179
Partially owned (1) 260 --- ---
Managed 457 105 105
- ----------------------------------------- ---------- -------------- ------------
Total GLA at end of period (000's) 6,186 5,437 5,284
Weighted average GLA (000's) (2) 5,245 5,111 4,926
States operated in at end of period 21 20 20
Occupancy percentage at end of period 98% 96% 96%
Per square foot data
Revenues
Base rentals $ 14.44 $14.33 $14.08
Percentage rentals .68 .54 .66
Expense reimbursements 5.82 5.77 5.98
Other income .63 .54 .82
- ----------------------------------------- ---------- -------------- ------------
Total revenues 21.57 21.18 21.54
- ----------------------------------------- ---------- -------------- ------------
Expenses
Property operating 6.88 6.65 6.70
General and administrative 1.76 1.61 1.50
Interest 5.43 5.90 5.60
Depreciation and amortization 5.48 5.51 5.24
Asset write-down --- --- .37
- ----------------------------------------- ---------- -------------- ------------
Total expenses 19.55 19.67 19.41
- ----------------------------------------- ---------- -------------- ------------
- ----------------------------------------- ---------- -------------- ------------
Income before equity in earnings of
unconsolidated joint ventures,
minority interest,discontinued
operations,loss on sale or disposal
of real estate and extraordinary item $ 2.02 $ 1.51 $ 2.13
- ----------------------------------------- ---------- -------------- ------------
(1) Includes one center totaling 260,033 square feet of which we own a 50%
interest through a joint venture arrangement.
(2) Represents GLA of wholly-owned operating properties weighted by months of
operation. GLA is not adjusted for fluctuations in occupancy that may occur
subsequent to the original opening date. Excludes GLA of properties for
which their results are included in discontinued operations.
2002 Compared to 2001
Base rentals increased $2.5 million, or 3%, in the 2002 period when compared to
the same period in 2001. The increase is primarily due to the full nine months
effect of an expansion at our San Marcos, TX center which we completed during
the fourth quarter of 2001 and the acquisition of our Howell, Michigan center in
September 2002. Base rent per weighted average GLA increased by $.11 per square
foot from $14.33 per square foot in the 2001 period compared to $14.44 per
square foot in the 2002 period. The increase is the result of the addition of
the San Marcos expansion to the portfolio which had a higher average base rent
per square foot compared to the portfolio average and an increase of 2% in
average base rent per square foot on approximately 1.0 million square feet
renewed or re-tenanted during 2002. While the overall portfolio occupancy at
December 31, 2002 increased 2% from 96% to 98% compared with the prior year end,
two centers experienced negative occupancy trends which were offset by positive
occupancy gains in other centers.
20
Percentage rentals, which represent revenues based on a percentage of tenants'
sales volume above predetermined levels (the "breakpoint"), increased $823,000
or 30%, and on a weighted average GLA basis, increased $.14 per square foot in
2002 compared to 2001. Reported same-space sales per square foot for the twelve
months ended December 31, 2002 were $294 per square foot, a 1.4% increase over
the prior year ended December 31, 2001. 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. Reported tenant sales for 2002 for all Tanger
Outlet Centers reached a record level of $1.5 billion. Reported same-store sales
for the year ended 2002, defined as the weighted average sales per square foot
reported by tenants for stores open since January 1, 2001 were down 0.8%
compared to 2001.
Expense reimbursements, which represent the contractual recovery from tenants of
certain common area maintenance, insurance, property tax, promotional,
advertising and management expenses generally fluctuates consistently with the
reimbursable property operating expenses to which it relates. Expense
reimbursements, expressed as a percentage of property operating expenses,
decreased to 85% in 2002 from 87% in 2001 primarily as a result of higher real
estate taxes due to revaluations, increases in property insurance premiums and
increases in other non-reimbursable expenses.
Other income increased $534,000, or 19%, in 2002 compared to 2001 primarily due
to gains on sales of outparcels of land in 2002 included in other income,
increases in vending and other miscellaneous income and the recognition of
management, leasing and development fee revenue from our TWMB Associates, LLC
("TWMB") joint venture.
Property operating expenses increased by $2.1 million, or 6%, in the 2002 period
as compared to the 2001 period and, on a weighted average GLA basis, increased
$.23 per square foot from $6.65 to $6.88. The increase is the result of
increased costs in marketing, common area maintenance, real estate taxes,
property insurance, and other non-reimbursable expenses.
General and administrative expenses increased $1.0 million, or 12%, in the 2002
period as compared to the 2001 period. The increase is primarily due to
increases in performance based bonus accruals, travel, legal and other
professional fees. Also, as a percentage of total revenues, general and
administrative expenses were 8% in both the 2002 and 2001 periods and, on a
weighted average GLA basis increased $.15 per square foot from $1.61 per square
foot in the 2001 period to $1.76 per square foot in the 2002 period.
Interest expense decreased $1.7 million during 2002 as compared to 2001 due
primarily to lower average interest rates during 2002 and a decrease in the
overall debt level due to the use of a portion of the proceeds from our equity
offering during the year to reduce outstanding debt. Also, beginning in the
fourth quarter of 2001 and continuing through 2002, we purchased, primarily at
par, approximately $24.9 million of our outstanding 7.875% senior, unsecured
public notes that mature in October 2004. The purchases were funded by amounts
available under our unsecured lines of credit. The replacement of the 2004 bonds
with funding through lines of credit provided us with a significant interest
expense reduction as the lines of credit had a lower interest rate.
Depreciation and amortization per weighted average GLA decreased slightly from
$5.51 per square foot in the 2001 period to $5.48 per square foot in the 2002
period due to a lower mix of tenant finishing allowances included in buildings
and improvements which are depreciated over shorter lives (i.e. over lives
generally ranging from 3 to 10 years as opposed to other construction costs
which are depreciated over lives ranging from 15 to 33 years).
Income from unconsolidated joint ventures increased $392,000 in the 2002 period
compared to the 2001 period due to the opening of the Myrtle Beach, South
Carolina outlet center by TWMB in June of 2002.
The increase in discontinued operations is due to the gains on sales of our Ft.
Lauderdale, Florida and Bourne, Massachusetts centers and the leased outparcels
of land in Seymour, Indiana and Casa Grande, Arizona, all of which were sold in
the 2002 period.
21
2001 Compared to 2000
Base rentals increased $3.9 million, or 6%, in the 2001 period when compared to
the same period in 2000. The increase is primarily due to the effect of the
expansion completed in 2001 at our San Marcos, Texas center and the full year
effect of expansions completed in the fourth quarter of 2000, offset by the loss
of rent from the sales of the centers in Lawrence, Kansas and McMinnville,
Oregon in June 2000. As noted above, FAS 144 applies only to properties sold
subsequent to December 31, 2001. Therefore, the results of operations and
resulting loss on sale of real estate from the Lawrence, Kansas and McMinnville,
Oregon properties are not included in discontinued operations. The loss from
these property sales is included in loss on sale or disposal of real estate in
the Consolidated Statement of Operations. Base rent per weighted average GLA
increased by $.25 per square foot, or 2%, as a result of the expansions which
had a higher average base rent per square foot compared to the portfolio average
and the sales of the centers in Lawrence, Kansas and McMinnville, Oregon which
had a lower average base rent per square foot compared to the portfolio average.
Percentage rentals, which represent revenues based on a percentage of tenants'
sales volume above predetermined levels, decreased by $518,000, or 16%, and on a
weighted average GLA basis, decreased $.12 per square foot in 2001 compared to
2000. Same-space sales for the year ended December 31, 2001, defined as the
weighted average sales per square foot reported in space open for the full
duration of each comparison period, increased 5% to $294 per square foot due to
our efforts to re-merchandise selected centers by replacing low volume tenants
with high volume tenants. However, for the year ended December 31, 2001,
reported same-store sales, defined as the weighted average sales per square foot
reported by tenants for stores open since January 1, 2000, decreased by 2%
compared with the previous year.
Expense reimbursements, which represent the contractual recovery from tenants of
certain common area maintenance, insurance, property tax, promotional,
advertising and management expenses generally fluctuates consistently with the
reimbursable property operating expenses to which it relates. Expense
reimbursements, expressed as a percentage of property operating expenses,
decreased to 87% in 2001 from 89% in 2000 primarily as a result of higher real
estate taxes due to revaluations, increases in property insurance premiums and
increases in other non-reimbursable expenses.
Other income decreased $1.3 million in 2001 as compared to 2000. The 2000 period
included gains on sales of land outparcels totaling $908,000 and the recognition
of business interruption insurance proceeds relating to the Stroud, Oklahoma
center, which was destroyed by a tornado in May 1999, totaling $985,000. These
items were offset in part by increases in vending and interest income in the
2001 period.
Property operating expenses increased by $1.0 million, or 3%, in 2001 as
compared to 2000. On a weighted average GLA basis, property operating expenses
decreased from $6.70 to $6.65 per square foot. The decrease per square foot is
the result of a company-wide effort to improve operating efficiencies and reduce
costs in common area maintenance and marketing partially offset by increases in
real estate taxes, property insurance and other non-reimbursable expenses.
General and administrative expenses increased $862,000, or 12%, in 2001 as
compared to 2000 primarily due to increases in professional fees and provisions
for bad debts. As a percentage of revenues, general and administrative expenses
were approximately 8% of revenues in 2001 and 7% in 2000. On a weighted average
GLA basis, general and administrative expenses increased $.11 per square foot
from $1.50 in 2000 to $1.61 in 2001.
Interest expense increased $2.6 million during 2001 as compared to 2000 due
primarily to our increased debt levels attributable to development completed in
2001 and the full year effect of expansions completed in the fourth quarter of
2000. Our strategy to replace short-term, variable rate debt with long-term,
fixed rate debt and extend our average debt maturities has resulted in an
overall higher interest rate on outstanding debt. Also, $295,200 paid to
terminate certain interest rate swap agreements during the first quarter of 2001
contributed to the increase in interest expense.
Depreciation and amortization per weighted average GLA increased 5% from $5.24
per square foot in the 2000 period to $5.51 per square foot in the 2001 period
due to a higher mix of tenant finishing allowances included in buildings and
improvements which are depreciated over shorter lives (i.e. over lives generally
ranging from 3 to 10 years as opposed to other construction costs which are
depreciated over lives ranging from 15 to 33 years).
22
The asset write-down recognized in 2000 represents the write off of all
development costs associated with our site in Ft. Lauderdale, Florida, as well
as additional costs associated with various other non-recurring development
activities at other sites, which were discontinued. The costs associated with
the Ft. Lauderdale site were written off because we terminated our contract to
purchase twelve acres of land in Dania Beach/Ft. Lauderdale, Florida.
The loss on sale of real estate during 2000 represents the loss recognized on
the sale of our centers in Lawrence, Kansas and McMinnville, Oregon and the land
and the remaining site improvements in Stroud, Oklahoma. Net proceeds received
from the sale of the centers totaled $7.1 million. The combined net operating
income of these two centers represented approximately 1% of the total
portfolio's operating income. We sold the Stroud land and site improvements in
December 2000 and received net proceeds of approximately $723,500 in January
2001. As noted above, FAS 144 applies only to properties sold subsequent to
December 31, 2001. Therefore, the results of operations and resulting losses on
sales of real estate from the properties which were sold in 2000 are not
included in discontinued operations. The losses from these property sales,
totaling $5.0 million, net of minority interest of $1.9 million, are included in
loss on sale or disposal of real estate in the Consolidated Statements of
Operations.
The extraordinary losses recognized in 2001 represent the write-off of
unamortized deferred financing costs related to debt that was extinguished prior
to its scheduled maturity.
Liquidity and Capital Resources
Net cash provided by operating activities was $39.2, $44.6 and $38.4 million for
the years ended December 31, 2002, 2001 and 2000, respectively. The decreases
and increases in cash provided by operating activities in 2002 compared to 2001
and 2001 compared to 2000 are primarily due to changes in other assets and
accounts payable and accrued expenses for those respective years. Net cash used
in investing activities amounted to $26.4, $23.3 and $25.8 million during 2002,
2001 and 2000, respectively, and reflects the acquisitions, expansions and
dispositions of real estate during each year. Cash used in financing activities
of $12.2, $21.5 and $12.5 in 2002, 2001 and 2000, respectively, has fluctuated
consistently with the capital needed to fund the current development and
acquisition activity and reflects increases in dividends paid during 2002, 2001
and 2000. The decrease in cash used in financing activities in 2002 compared to
2001 also reflects the net proceeds of $28.0 million from the issuance of one
million common shares and $2.8 million from the exercise of share and unit
options in 2002.
Acquisitions and Dispositions
In September 2002, we completed the acquisition of Kensington Valley Factory
Shops, a factory outlet center in Howell, Michigan containing approximately
325,000 square feet, for an aggregate purchase price of $37.5 million. The
acquisition was funded with $16.8 million of net proceeds from the sale of our
non-core property in Fort Lauderdale, Florida in June 2002 and a portion of the
proceeds from the common share offering in September 2002.
In November 2002, we completed the disposition of our non-core center in Bourne,
Massachusetts which totaled approximately 23,000 square feet. The net proceeds
from this sale were $3.1 million.
During 2002 we also sold five outparcels of land at various centers (Barstow,
California, Gonzales, Louisiana, North Branch, Minnesota, Seymour, Indiana and
Casa Grande, Arizona), the last two of which had associated leases with
identifiable cash flows. These five outparcel sales generated approximately $1.5
million in net proceeds.
Joint Ventures
In 2000, we formed a joint venture with C. Randy Warren Jr., former Senior Vice
President of Leasing of the Company. The new entity, Tanger-Warren Development,
LLC ("Tanger-Warren"), was formed to identify, acquire and develop sites
exclusively for us. We agreed to be co-managers of Tanger-Warren, each with 50%
ownership interest in the joint venture and any entities formed with respect to
a specific project. Our investment in Tanger-Warren amounted to approximately
$6,500 and $9,000 as of December 31, 2002 and 2001, respectively, and the impact
of this joint venture on our results of operations has been insignificant.
23
In September 2001, we established the TWMB joint venture with respect to our
Myrtle Beach, South Carolina project with Rosen-Warren Myrtle Beach LLC
("Rosen-Warren"). We and Rosen-Warren, each as 50% owners, contributed $4.3
million in cash for a total initial equity in TWMB of $8.6 million. In September
of 2001, TWMB began construction on its first phase of a new 400,000 square foot
Tanger Outlet Center in Myrtle Beach, South Carolina. The first phase opened
100% leased on June 28, 2002 at a cost of approximately $35.4 million with
approximately 260,000 square feet and 60 brand name outlet tenants. In November
2002, we began construction on a 64,000 square foot second phase which is
estimated to cost $6.5 million. We and Rosen-Warren have each contributed
approximately $1.1 million toward this second phase, with the majority of the
contribution being made in the first quarter of 2003.
In conjunction with the construction of the center, TWMB closed on a variable
rate, construction loan in the amount of $36.2 million with Bank of America, NA
(Agent) and SouthTrust Bank. As of December 31, 2002 the construction loan had a
balance of $25.5 million. In August of 2002, TWMB entered into an interest rate
swap agreement with Bank of America, NA effective through August 2004 with a
notional amount of $19 million. Under this agreement, TWMB receives a floating
interest rate based on the 30 day LIBOR index and pays a fixed interest rate of
2.49%. This swap effectively changes the payment of interest on $19 million of
variable rate debt to fixed rate debt for the contract period at a rate of
4.49%. All debt incurred by this unconsolidated joint venture is collateralized
by its property as well as joint and several guarantees by Rosen-Warren and us.
Either partner in TWMB has the right to initiate the sale or purchase of the
other party's interest. If such action is initiated, one partner 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 partners'
roles in this transaction would be determined by the tossing of a coin, commonly
known as a Russian roulette provision. If either Rosen-Warren or we enact this
provision and depending on our role in the transaction as either seller or
purchaser, we can potentially incur a cash outflow for the purchase of
Rosen-Warren'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 area.
Other Developments
On July 1, 2002, our option to purchase the retail portion of a site at the
Bourne Bridge Rotary in Cape Cod, Massachusetts was terminated due to the
seller's inability to obtain the proper approvals for the Bourne project from
the local authorities by such date. As a result of the termination, the net
carrying amount of assets remaining on this project includes a $150,000 note
receivable at 5% annual interest that becomes due from the seller and is payable
with accrued interest on July 1, 2003. At this time we believe that this note
receivable is fully collectible.
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.
Financing Arrangements
During 2002, we purchased primarily at par, $10.4 million of our outstanding
7.875% senior, unsecured public notes that mature in October 2004. The purchases
were funded by amounts available under our unsecured lines of credit. During
2001, we purchased $14.5 million of these notes at par. In total, $24.9 million
of the October 2004 notes were purchased in 2001 and 2002. We currently have
authority from our Board of Directors to purchase an additional $25 million of
our outstanding 7.875% senior, unsecured public notes and may, from time to
time, do so at management's discretion.
24
At December 31, 2002, approximately 49% of our outstanding long-term debt
represented unsecured borrowings and approximately 61% of the gross book value
of our real estate portfolio was unencumbered. The average interest rate,
including loan cost amortization, on average debt outstanding for the years
ended December 31, 2002 and 2001 was 8.1% and 8.8%, respectively.
We intend to retain the ability to raise additional capital, including public
debt or equity, to pursue attractive investment opportunities that may arise and
to otherwise act in a manner that we believe to be in our shareholders' best
interests. During the second quarter of 2001, we amended our shelf registration
for the ability to issue up to $400 million, ($200 million in debt and $200
million in equity securities). In July 2002, we again amended the shelf
registration to allow us to issue the $400 million in either all debt or all
equity or any combination thereof up to $400 million. On September 4, 2002, we
completed a public offering of 1,000,000 common shares at a price of $29.25 per
share, receiving net proceeds of approximately $28.0 million. We used the net
proceeds, together with other available funds, to acquire one outlet center in
Howell, Michigan, to reduce the outstanding balance on our lines of credit and
for general corporate purposes. To generate capital to reinvest into other
attractive investment opportunities, we may also consider the use of operational
and developmental joint ventures, selling certain properties that do not meet
our long-term investment criteria as well as outparcels on existing properties.
We maintain unsecured, revolving lines of credit that provided for unsecured
borrowings up to $85 million at December 31, 2002, an increase of $10 million in
capacity from December 31, 2001. During 2002, we extended the maturity of all
lines of credit to June 30, 2004. Based on cash provided by operations, existing
credit facilities, ongoing negotiations with certain financial institutions and
our ability to sell debt or equity subject to market conditions, we believe that
we have access to the necessary financing to fund the planned capital
expenditures during 2003.
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 Real Estate Investment Trust ("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, 2002 (in thousands):
Contractual Obligations 2003 2004 2005 2006 2007 Thereafter
--------- --------- ---- ---- ---- ---- ----------
Debt $2,519 $73,324 $23,100 $55,668 $2,349 $188,045
Operating leases 2,551 2,547 2,478 2,441 2,378 73,860
- ------------------------- ----------- ---------- ----------- ---------- ----------- ------------
$5,070 $75,871 $25,578 $58,109 $4,727 $261,905
- ------------------------- ----------- ---------- ----------- ---------- ----------- ------------
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% of funds
from operations 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 operate in a manner intended to enable us to qualify as a REIT under the
Internal Revenue Code (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 2002 taxable income to
shareholders, we were required to distribute approximately $5,054,000 in order
to maintain our REIT status as described above. We distributed approximately
$20,187,000 to common shareholders based on our current dividend level, 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.
25
The following table details our commercial commitments as of December 31, 2002
(in thousands):
Commercial Commitments 2004
--------------
Lines of credit $ 64,525
Joint venture guarantees 36,200
- --------------------------------------- --------------
$ 100,725
- --------------------------------------- --------------
We currently maintain four unsecured, revolving credit facilities with major
national banking institutions, totaling $85 million. As of December 31, 2002
amounts outstanding under these credit facilities totaled $20.5 million. All
four credit facilities expire in June 2004.
We are party to a joint and several guarantee with respect to the $36.2 million
construction loan obtained by TWMB. See "Joint Ventures" section above for
further discussion of the guarantee.
Related Party Transactions
During 2002, Stanley K. Tanger, our Chairman of the Board and Chief Executive
Officer, completed the early repayment of a $2.5 million demand note receivable
to the Company through accelerated payments. In 2001, also through accelerated
payments, Steven B. Tanger, our President and Chief Operating Officer, completed
the early repayment of a $845,000 demand note receivable to the Company.
As noted above in "Joint Ventures", we are a 50% owner of the TWMB joint
venture. TWMB pays us management, leasing and development fees for services
provided to the joint venture. During 2002, we recognized approximately $74,000
in management fees, $259,000 in leasing fees and $76,000 in development fees in
other income.
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 do not enter into derivatives or other
financial instruments for trading or speculative purposes.
We negotiate long-term fixed rate debt instruments and enter into interest rate
swap agreements to manage our exposure to interest rate changes. The swaps
involve the exchange of fixed and variable interest rate payments based on a
contractual principal amount and time period. Payments or receipts on the
agreements are recorded as adjustments to interest expense. At December 31,
2002, we had an interest rate swap agreement effective through January 2003 with
a notional amount of $25 million. Under this agreement, we receive a floating
interest rate based on the 30 day LIBOR index and pay a fixed interest rate of
5.97%. This swap effectively changes our payment of interest on $25 million of
variable rate debt to fixed rate debt for the contract period at a rate of
7.72%.
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, 2002, we would have paid approximately $98,000 to terminate the agreement.
The fair value is based on dealer quotes, considering current interest rates and
remaining term to maturity.
The fair market value of long-term fixed interest rate debt is subject to
interest rate 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, 2002 was $349.7
million while the recorded value was $345.0 million, respectively. A 1% increase
from prevailing interest rates at December 31, 2002 would result in a decrease
in fair value of total long-term debt by approximately $10.6 million. Fair
values were determined from quoted market prices, where available, using current
interest rates considering credit ratings and the remaining terms to maturity.
26
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.
Cost Capitalization
We capitalize all 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 average minimum lease term.
We capitalize all costs incurred for the construction and development of
properties, including certain general and overhead 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.
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. We believe that no impairment existed at December 31, 2002.
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 when the applicable space is
released, or, otherwise are amortized over the remaining lease term.
Funds from Operations
We believe that for a clear understanding of our consolidated historical
operating results, FFO should be considered along with net income as presented
in the audited consolidated financial statements included elsewhere in this
report. FFO is presented because it is a widely accepted financial indicator
used by certain investors and analysts to analyze and compare one equity REIT
with another on the basis of operating performance. FFO is generally defined as
net income (loss), computed in accordance with generally accepted accounting
principles, before extraordinary items and gains (losses) on sale or disposal of
depreciable operating properties, plus depreciation and amortization uniquely
significant to real estate and after adjustments for unconsolidated partnerships
and joint ventures. We caution that the calculation of FFO may vary from entity
to entity and as such the presentation of FFO by us 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 flows 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.
27
Below is a calculation of FFO for the years ended December 31, 2002, 2001 and
2000 as well as actual cash flow and other data for those respective periods (in
thousands):
2002 2001 2000
- -------------------------------------------------------------- ------------ -------------- ------------
Funds from Operations:
Net income $ 11,007 $ 7,112 $ 4,312
Adjusted for:
Extraordinary item-loss on early extinguishment of debt --- 244 ---
Minority interest 2,406 1,665 2,433
Minority interest, depreciation and amortization
attributable to discontinued operations 1,102 898 880
Depreciation and amortization uniquely significant
to real estate - wholly owned 28,460 27,849 25,531
Depreciation and amortization uniquely significant
to real estate - unconsolidated joint ventures 422 --- ---
(Gain) loss on sale or disposal of real estate (1,702) --- 5,047
-------------------------------------------------------------- ------------ -------------- ------------
Funds from operations before minority interest (1) $ 41,695 $ 37,768 $ 38,203
Cash flow provided by (used in):
Operating activities $ 39,167 $ 44,626 $ 38,420
Investing activities $(26,363) $(23,269) $(25,815)
Financing activities $(12,247) $(21,476) $(12,474)
Weighted average shares outstanding (2) 12,271 11,707 11,706
- -------------------------------------------------------------- ------------ -------------- ------------
(1) For the years ended December 31, 2002 and 2000, includes $728 and $908 in
gains on sales of outparcels of land.
(2) Assumes our preferred shares, share and unit options and partnership units
of the Operating Partnership held by the minority interest are all
converted to our common shares.
New Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board (FASB or the "Board")
issued FASB Statement No. 145 (FAS 145), "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". In
rescinding FASB Statement No. 4 (FAS 4), "Reporting Gains and Losses from
Extinguishment of Debt", and FASB Statement No. 64 (FAS 64), "Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements", FAS 145 eliminates the
requirement that gains and losses from the extinguishment of debt be aggregated
and, if material, classified as an extraordinary item, net of the related income
tax effect. Generally, FAS 145 is effective for transactions occurring after
December 31, 2002. We adopted this statement effective January 1, 2003, the
effects of which will be the reclassification of a loss on early extinguishments
of debt for the year ended 2001, thereby decreasing income from continuing
operations for the year ended December 31, 2001 by $244,000.
In October 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)" and realigns
liability recognition in accordance with FASB Concepts Statement No. 6,
"Elements of Financial Statements". The provisions of this Statement are
effective for exit or disposal activities that are initiated after December 31,
2002. The adoption of this pronouncement will not have a material impact on our
results of operations or financial position.
28
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment of FASB Statement No.
123", which is effective for fiscal years ending after December 15, 2002. This
Statement amends SFAS 123 "Accounting for Stock-Based Compensation", to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. We are currently evaluating the effects of this
statement and at this time do not believe that it will have a material effect on
our results of operations or financial position.
In January of 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). FIN 46 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 46 will be immediately effective for all variable interests in variable
interest entities created after January 31, 2003, and the Company will need to
apply its provisions to any existing variable interests in variable interest
entities by no later than June 30, 2003. We are currently evaluating the effects
of this statement and at this time do not believe that it will have a material
effect on our results of operations or financial position.
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 2003, we have approximately 1,070,000 square feet or 19% 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 88% of the 935,000 square feet that came up for renewal in 2002 with
the existing tenants at an average base rental rate approximately 1% higher than
the expiring rate. We also re-tenanted 229,000 square feet during 2002 at a 4%
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
529,000, or 49%, of the square feet scheduled to expire in 2003 as of March 1,
2003. 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