Business Context and Reporting Period
Company: Tanger Factory Outlet Centers, Inc. (Tanger Inc.)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2002
Business Overview: A fully-integrated, self-administered, self-managed Real Estate Investment Trust (REIT) that develops, owns, and operates factory outlet centers. As of March 31, 2002, the Company owned 29 centers in 20 states totaling 5.33 million square feet with an occupancy rate of 95%.
Key Financial Metrics
| Metric (in thousands) | Q1 2002 | Q1 2001 |
|---|---|---|
| Total Revenues | $27,208 | $26,720 |
| Net Income | $1,445 | $795 |
| Net Income Available to Common Shareholders | $1,001 | $353 |
| Funds from Operations (FFO) | $8,927 | $8,232 |
| Net Cash Provided by Operating Activities | $6,116 | $8,582 |
| Total Debt | $359,571 | $358,195 |
| Cash and Cash Equivalents | $210 | $515 |
| Dividends Paid per Common Share | $0.61 | $0.61 |
Margins and Per Share Data:
- Basic Earnings Per Share (EPS): $0.13 (Q1 2002) vs. $0.04 (Q1 2001).
- Diluted EPS: $0.12 (Q1 2002) vs. $0.04 (Q1 2001).
- Total Expenses as a percentage of Total Revenues: 93.3% (Q1 2002) vs. 95.8% (Q1 2001).
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 1.8% to $27.2 million. Base rentals rose 1.7% ($18.6M) primarily due to the completion of the San Marcos, TX expansion. Percentage rentals increased 69.9% ($0.6M) driven by a 10% increase in same-space sales.
- Profitability: Net income increased 81.8% to $1.4 million. This significant jump is largely attributable to the absence of an extraordinary loss in 2002 compared to a $130,000 loss on early extinguishment of debt in Q1 2001.
- Interest Expense: Decreased 6.6% to $7.1 million due to lower average interest rates and the repurchase of $19.4 million of 7.875% senior notes, funded by lower-cost lines of credit.
- Cash Flow: Net cash provided by operating activities decreased 28.7% to $6.1 million, primarily due to a decrease in accounts payable compared to the prior year.
- Debt Structure: Total debt remained relatively flat, but the composition shifted toward unsecured borrowings (51% of long-term debt) as the Company retired higher-cost fixed-rate notes.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Development: Construction continues on the first phase (260,000 sq. ft.) of a new 400,000 sq. ft. center in Myrtle Beach, SC, via a joint venture (TWMB). Stores are expected to open in July 2002. 91% of the first phase is leased.
- Leasing: Approximately 33% of the lease portfolio expires in the next two years. As of March 31, 2002, 43% of 2002 expirations have been renewed at an average 5% rent increase. Re-tenanted vacant space saw a 9% rent increase.
- Liquidity: The Company maintains $75 million in unsecured revolving lines of credit maturing in June 2003. Management believes cash flow and credit facilities are sufficient to fund operations, debt service, and dividends.
- Dividends: On April 11, 2002, the Board declared a $0.6125 cash dividend per common share payable May 15, 2002.
Risks and Contingencies
- Market Risk: Exposure to interest rate fluctuations. The Company holds an interest rate swap agreement (notional $25 million) to hedge variable rate debt. A 1% decrease in LIBOR would increase the termination cost of the swap by $188,000.
- Lease Expirations: Failure to renew or re-lease significant space (935,000 sq. ft. in 2002) on favorable terms could materially adversely affect results.
- Joint Venture Guarantees: The Company provides joint and several guarantees for the $36.2 million construction loan held by the TWMB joint venture.
- Regulatory: Potential changes in tax laws applicable to REITs or new accounting standards (e.g., FAS 143, FAS 144) could impact financial reporting or tax treatment.
Investor Verification Checklist
- Debt Refinancing: Verify the terms and maturity dates of the $75 million unsecured lines of credit maturing in June 2003 and the strategy for refinancing the remaining senior notes.
- Myrtle Beach Project: Confirm the timeline for the July 2002 opening of the Myrtle Beach center and the status of the remaining 9% of unleased space in phase one.
- Lease Renewals: Monitor the renewal rate for the 935,000 square feet of space expiring in 2002, particularly the 20% located in the Riverhead, NY center.
- Interest Rate Sensitivity: Assess the impact of rising interest rates on the variable portion of the debt portfolio and the fair value of the interest rate swap liability ($682,000).
- Occupancy Trends: Review center-specific occupancy data, as the 95% portfolio average masks negative trends in some centers offset by gains in others.