SKT

Business Context and Reporting Period

Company: Tanger Factory Outlet Centers, Inc. (Tanger Inc.)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2002
Business Overview: A fully-integrated, self-administered REIT developing, owning, and operating factory outlet centers. As of June 30, 2002, the company owned 28 centers in 20 states totaling 5.17 million square feet, plus a 50% joint venture interest in a new center in Myrtle Beach, SC.

Key Financial Metrics

Occupancy Rate: 96% as of June 30, 2002 (up from 94% in the prior year).

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased slightly to $53.6 million for the six months ended June 30, 2002, compared to $53.0 million in 2001. Base rentals rose 2% due to the completion of the San Marcos, TX expansion. Percentage rentals increased 39% driven by a 6% rise in same-space sales.
• Profitability: Net income available to common shareholders more than doubled to $2.65 million (6 months 2002) from $1.31 million (6 months 2001). This was significantly aided by a $460,000 gain on the sale of a non-core property in Ft. Lauderdale, FL, classified as discontinued operations.
• Expense Management: Interest expense decreased by $1.0 million year-over-year due to lower average interest rates and the repurchase of $19.4 million of senior notes funded by lower-cost lines of credit. Property operating expenses decreased 1% due to efficiency improvements.
• Portfolio Changes: The company sold a 165,000 sq. ft. property in Ft. Lauderdale for net proceeds of approximately $16.8 million. Conversely, the company opened the first phase (260,000 sq. ft.) of the Myrtle Beach, SC center via a joint venture.

Outlook, Risks, and Management Commentary

• Leasing Outlook: Approximately 33% of the lease portfolio is scheduled to expire in 2002 and 2003. As of June 30, 2002, the company had renewed 57% of 2002 expirations at an average base rental rate 5% higher than expiring rates. Re-tenanted vacant space saw a 6% rate increase.
• Liquidity and Capital: The company maintains $75 million in unsecured revolving lines of credit. Management believes cash from operations and existing facilities are sufficient to fund planned capital expenditures and dividend requirements. A dividend of $0.6125 per common share was declared for payment in August 2002.
• Joint Venture Risks: The Myrtle Beach project involves a 50% joint venture with Rosen-Warren. The venture has a $36.2 million construction loan (balance $18.1 million at period end) guaranteed jointly by the partners. A "put/call" option for the sale of interests becomes available in October 2002.
• Market Risks: The company is exposed to interest rate fluctuations, though it utilizes interest rate swaps to hedge $25 million of variable debt. Economic conditions affecting tenant sales volumes could impact percentage rentals.
• Unusual Items: The filing includes a gain on the sale of real estate ($460k) and discontinued operations related to the Ft. Lauderdale property. There were no extraordinary items in 2002 (unlike 2001 which included a loss on debt extinguishment).

Investor Verification Checklist

• Debt Refinancing: Verify the status of the two $25 million lines of credit maturing June 30, 2003, which are currently under negotiation for extension.
• Lease Renewals: Monitor the renewal rate for the remaining 43% of leases expiring in 2002 and the 848,000 sq. ft. expiring in 2003 to ensure rent escalations are maintained.
• Joint Venture Exposure: Review the financial performance of the Myrtle Beach joint venture (TWMB) and the potential cash outflow implications if the "put/call" option is exercised in late 2002.
• Occupancy Trends: Confirm that the 96% occupancy rate is sustainable, noting that management may hold space off the market to maintain higher rental rates.
• Dividend Coverage: Assess whether the $1.22 per share dividend paid in the first half of 2002 is fully covered by the reported Funds from Operations ($18.3 million).