Business Context and Reporting Period
Company: Tanger Factory Outlet Centers, Inc. (Tanger)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 31, 2001
Business Overview: Tanger is a fully-integrated, self-administered, and self-managed Real Estate Investment Trust (REIT) focused exclusively on developing, acquiring, owning, and operating factory outlet centers. As of December 31, 2001, the Company owned and operated 29 centers in 20 states with approximately 5.3 million square feet of gross leasable area (GLA). The portfolio was approximately 96% occupied, housing over 1,150 stores representing more than 250 brand names.
Key Financial Metrics
| Metric | 2001 | 2000 |
|---|---|---|
| Total Revenues | $111.1 million | $108.8 million |
| Net Income | $7.1 million | $4.3 million |
| Funds From Operations (FFO) | $37.8 million | $38.2 million |
| EBITDA | $68.2 million | $67.8 million |
| Cash Flow from Operations | $44.6 million | $38.4 million |
| Total Debt | $358.2 million | $346.8 million |
| Shareholders' Equity | $76.4 million | $90.9 million |
| Dividends Paid (Common) | $2.44 per share | $2.43 per share |
| Occupancy Rate | 96% | 96% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 2% to $111.1 million, driven primarily by a 5% increase in base rentals due to the completion of the San Marcos, TX expansion and full-year effects of 2000 expansions. This was partially offset by the loss of rent from centers sold in 2000.
- Net Income Increase: Net income rose to $7.1 million from $4.3 million. This improvement occurred despite higher interest expenses ($30.1 million vs. $27.6 million) and depreciation ($28.6 million vs. $26.2 million). The 2000 period included a $1.8 million asset write-down and a $6.0 million loss on the sale of real estate, which were not present in 2001.
- FFO Decline: Funds From Operations decreased slightly to $37.8 million from $38.2 million, reflecting the impact of higher interest costs and operating expenses relative to the prior year's gains on land sales.
- Debt Structure: Total debt increased to $358.2 million. The Company issued $100 million in 9.125% senior unsecured notes in February 2001 to refinance maturing debt and repay term loans. The average interest rate on outstanding debt was 8.79%.
- Portfolio Expansion: GLA increased to 5.33 million square feet from 5.18 million, primarily due to the San Marcos expansion. The Company also initiated construction on a new joint venture project in Myrtle Beach, SC.
Guidance, Outlook, and Risks
- Development Pipeline: Construction began in September 2001 on the first phase of a 400,000 sq. ft. center in Myrtle Beach, SC, via a 50% joint venture (TWMB Associates). Stores are tentatively expected to open in July 2002.
- Lease Expirations: Approximately 33% of the lease portfolio is scheduled to expire in the next two years (927,000 sq. ft. in 2002 and 848,000 sq. ft. in 2003). Management notes that 37% of 2002 expirations had already been renewed as of March 1, 2002.
- Capital Strategy: The Company maintains a low distribution payout ratio (75% of FFO in 2001) to retain capital for development and debt reduction. It has a shelf registration to issue up to $200 million in debt and $200 million in equity.
- Risks and Contingencies:
- Interest Rate Risk: The Company is exposed to interest rate fluctuations on variable-rate debt, though it utilizes interest rate swaps to mitigate this risk.
- Leasing Risk: Failure to renew or re-lease significant space 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 associated with the Myrtle Beach project.
- REIT Status: The Company must distribute at least 90% of taxable income to maintain REIT status; it distributed approximately $19.3 million in 2001, well above the required $3.0 million.
Investor Verification Checklist
- Verify the occupancy rates and rental rate increases for the 927,000 sq. ft. of space expiring in 2002, particularly in the Riverhead, NY center which represents 20% of total assets.
- Confirm the progress and funding status of the Myrtle Beach, SC joint venture and the associated $36.2 million construction loan guarantee.
- Review the impact of the 8.79% average interest rate on future cash flows, given the Company's strategy to replace variable debt with fixed-rate instruments.
- Assess the sustainability of the 75% FFO payout ratio and the Company's ability to fund future capital expenditures without diluting equity or increasing leverage significantly.
- Monitor the status of the option to purchase the Bourne Bridge Rotary site in Cape Cod, MA, as regulatory approvals remain a challenge.