SKT

Business Context and Reporting Period

Company: Tanger Factory Outlet Centers, Inc. (Tanger)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: Tanger is a fully-integrated, self-administered, and self-managed Real Estate Investment Trust (REIT) focused exclusively on developing, acquiring, owning, operating, and managing factory outlet shopping centers in the United States. As of December 31, 2006, the Company owned 30 wholly-owned outlet centers totaling approximately 8.4 million square feet of Gross Leasable Area (GLA), with an occupancy rate of 98%. The portfolio includes over 1,800 stores representing approximately 380 store brands.

Key Financial Metrics

Note: Net income for 2006 includes a significant gain of $13.8 million from the sale of two properties classified as discontinued operations.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 6.5% to $211.7 million, driven by a 6% increase in base rentals and a 13% increase in percentage rentals due to higher tenant sales.
• Net Income Surge: Net income increased significantly from $5.1 million in 2005 to $37.3 million in 2006. This was primarily due to a $13.8 million gain on the sale of real estate (discontinued operations) and the elimination of a $24.0 million minority interest allocation from the COROC joint venture (which was fully acquired in late 2005).
• Operating Expenses: Property operating expenses increased 9% to $68.7 million. This included a $1.5 million charge for abandoned acquisition due diligence costs and incremental expenses from the new Charleston, SC center.
• Interest Expense: Total interest expense decreased 5% to $40.8 million. While actual borrowing costs increased due to higher debt levels, the decrease was driven by the absence of the $9.9 million prepayment penalty and deferred loan cost write-off incurred in 2005.
• Portfolio Changes: The Company opened a new 352,300 sq. ft. center in Charleston, SC, and a 50% owned joint venture center in Wisconsin Dells, WI. It disposed of two centers in Pigeon Forge, TN, and North Branch, MN.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Development Pipeline: The Company expects to deliver the first phase of a new center in Pittsburgh, PA (approx. 309,000 sq. ft.) in Q1 2008 and a Deer Park, NY joint venture center (approx. 800,000 sq. ft.) in Q1 2008.
• Expansions: Four existing centers (Barstow, CA; Branson, MO; Gonzales, LA; Tilton, NH) are scheduled for expansion totaling 140,000 sq. ft., with completion expected in Q4 2007.
• Leasing: Approximately 18% of the portfolio (1.55 million sq. ft.) is scheduled for lease renewal in 2007. Management notes strong renewal activity, with 83% of 2006 expiring leases renewed by existing tenants at an 8% average rent increase.
• Liquidity: The Company maintains $200 million in unsecured lines of credit with no outstanding balance as of year-end. Management believes cash from operations and existing facilities are sufficient to fund 2007 capital expenditures.

Risks and Contingencies

• REIT Status: The Company must distribute at least 90% of taxable income to maintain REIT tax status. Failure to qualify would subject earnings to corporate taxation.
• Tenant Dependency: Earnings are dependent on the financial health of retail tenants. While no single tenant accounts for more than 10% of revenue, tenant bankruptcies or lease defaults could impact cash flow.
• Development Risks: New developments face risks regarding construction delays, cost overruns, and zoning approvals.
• Market Conditions: High fuel prices may impact consumer travel to outlet centers, particularly those near tourist destinations.
• Debt Covenants: Debt agreements require maintenance of specific leverage and debt service coverage ratios. Default could allow lenders to accelerate debt maturity.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the sustainability of 2006 net income by excluding the $13.8 million one-time gain on property sales.
• Debt Maturities: Review the $272.7 million in debt maturing in 2008 (primarily the COROC portfolio mortgage) and the Company's refinancing strategy.
• Lease Renewals: Monitor the success of renewing the 1.55 million sq. ft. of space expiring in 2007 to maintain rental rate growth.
• Development Costs: Track capital expenditure requirements for the Pittsburgh and Deer Park projects against the projected $104.2 million cost for 2007.
• Joint Venture Guarantees: Assess the exposure related to joint and several guarantees on construction loans for the Wisconsin Dells and Deer Park joint ventures.