-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DDaM29/yZyw4truYKsXcHk63IlEB5dLoJYggoiQIalfNM+MAcUdm1ku3LykQ7zdY qGGTScG9pPz31bRx4dNxrA== 0000950168-99-000947.txt : 19990331 0000950168-99-000947.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950168-99-000947 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TANGER PROPERTIES LTD PARTNERSHIP /NC/ CENTRAL INDEX KEY: 0001004036 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 561822494 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-03526-01 FILM NUMBER: 99577866 BUSINESS ADDRESS: STREET 1: 1400 WEST NORTHWOOD STREET CITY: GREENSBORO STATE: NC ZIP: 27408 BUSINESS PHONE: 9102741666 MAIL ADDRESS: STREET 1: 1400 WEST NORTHWOOD ST CITY: GREENSBORO STATE: NC ZIP: 27408 10-K 1 FORM 10-K 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, 1998 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 NUMBERS: 33-99736-01 333-3526-01 333-39365-01 TANGER PROPERTIES LIMITED PARTNERSHIP (Exact name of Registrant as specified in its charter) NORTH CAROLINA 56-1822494 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1400 WEST NORTHWOOD STREET (336) 274-1666 GREENSBORO, NC 27408 (Registrant's telephone number) (Address of principal executive offices) Securities registered pursuant to Section 12(b) of the Act: None 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.[ ] DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates certain information by reference from the definitive proxy statement of Tanger Factory Outlet Centers, Inc. to be filed with respect to the Annual Meeting of Shareholders to be held May 7, 1999. PART I ITEM 1. BUSINESS THE OPERATING PARTNERSHIP Tanger Properties Limited Partnership, a North Carolina limited partnership (the "Operating Partnership"), focuses exclusively on developing, acquiring, owning and operating factory outlet centers, and provides all development, leasing and management services for its centers. The Operating Partnership is a majority owned subsidiary of Tanger Factory Outlet Centers, Inc. (the "Company"), a fully-integrated, self-administered and self-managed real estate investment trust ("REIT"). According to Value Retail News, an industry publication, the Operating Partnership is one of the largest owners and operators of factory outlet centers in the United States. As of December 31, 1998, the Operating Partnership owned and operated 31 factory outlet centers (the "Centers") with a total gross leasable area ("GLA") of approximately 5.1 million square feet. These centers were approximately 97% leased, contained over 1,180 stores and represented over 250 brand name companies as of such date. The Company is the sole managing general partner of the Operating Partnership and The Tanger Family Limited Partnership ("TFLP") is the sole limited partner. As of December 31, 1998, the ownership of units issued by the Operating Partnership consisted of 7,897,606 partnership units and 88,270 preferred partnership units (which are convertible into approximately 795,309 general partnership units) held by the Company and 3,033,305 partnership units held by the limited partner. The units held by the limited partner are exchangeable, subject to certain limitations to preserve the Company's status as a REIT, into common shares. See "Business-The Company". Each preferred partnership unit entitles the Company 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 into general 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 the Company. The Operating Partnership is a North Carolina limited partnership that was formed in May 1993. The executive offices are currently located at 1400 West Northwood Street, Greensboro, North Carolina, 27408 and the telephone number is (336) 274-1666. Management anticipates completing the move to a new office at a nearby facility in April 1999. The Operating Partnership's new address will be 3200 Northline Drive, Suite 360, Greensboro, North Carolina, 27408 and the new telephone number will be (336) 292-3010. RECENT DEVELOPMENTS During 1998, the Operating Partnership added a total of 569,086 square feet to its portfolio including: Dalton Factory Stores, a 173,430 square foot factory outlet center located in Dalton, GA, acquired in March 1998; Sanibel Factory Stores, a 186,070 square foot factory outlet center located in Fort Myers, FL, acquired in July 1998; 132,223 square feet of expansions which were under construction at the end of 1997; a 25,069 square foot expansion to its property in Branson, MO and 52,294 square feet out of a total of 243,674 square feet of expansion space which is currently under construction throughout six of its centers. The remaining 191,380 square feet is scheduled to open during the second half of 1999. Also during 1998, the Operating Partnership completed the sale of its 8,000 square foot, single tenant property in Manchester, VT for $1.85 million. The Operating Partnership also is in the process of developing plans for additional expansions and new centers for completion in 1999 and beyond. Currently, the Operating Partnership is in the preleasing stages for a future center in Bourne, Massachusetts and for further expansions of three existing Centers. However, these anticipated or planned developments or expansions may not be started or completed as scheduled, or may not result in accretive funds from operations. In addition, the Operating Partnership regularly evaluates acquisition or disposition proposals, engages from time to time in negotiations for acquisitions or dispositions and may from time to time 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 also may not be consummated, or if consummated, may not result in accretive funds from operations. During 1998, the Operating Partnership discontinued the development of its Concord, North Carolina; Romulus, Michigan and certain other projects as the economics of these transactions did not meet an adequate return on investment for the Operating Partnership. As a result, the Operating Partnership recorded a $2.7 million charge in the fourth quarter 2 to write-off the carrying amount of these projects, net of proceeds received from the sale of the Operating Partnership's interest in the Concord project to an unrelated third party. During 1998, the Operating Partnership terminated a $50 million secured line of credit and increased its unsecured lines of credit by $25 million. At December 31, 1998, approximately 76% of the outstanding long-term debt represented unsecured borrowings and approximately 79% of the Operating Partnership's real estate portfolio was unencumbered. The weighted average interest rate on debt outstanding on December 31, 1998 was 8.2%. During March 1999, the Operating Partnership refinanced its 8.92% notes which had a carrying amount of $47.4 million at December 31, 1998. The refinancing reduced the interest rate to 7.875%, increased the loan amount to $66.5 million and extended the maturity date to April 2009. The additional proceeds were used to reduce amounts outstanding under the revolving lines of credit. As a result of this refinance, management expects to realize a savings in interest cost of approximately $300,000 over the next twelve months. In addition, the Operating Partnership extended the maturity of one of its revolving lines of credit from June 2000 to June 2001. 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, and because factory outlet centers typically have lower operating costs than other retailing formats. 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. The Operating Partnership's factory outlet centers range in size from 11,000 to 699,644 square feet of GLA and are typically located at least 10 miles from downtown 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 the Operating Partnership's factory outlet centers are located near tourist destinations to attract tourists who consider shopping to be a recreational activity and are typically situated in close proximity to interstate highways to provide accessibility and visibility to potential customers. Management believes that factory outlet centers continue to present attractive opportunities for capital investment by the Operating Partnership, particularly with respect to strategic expansions of existing centers. Management believes that under present conditions such development or expansion costs, coupled with current market lease rates, permit attractive investment returns. Management further believes, based upon its 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. Thus, the Operating Partnership believes that its commitment to developing and expanding factory outlet centers is justified by the potential financial returns on such centers. With the decline in the real estate debt and equity markets, the Operating Partnership or its general partner may not, in the short term, be able to access these markets on favorable terms in order to maintain its historical rate of external growth. See "Business-Capital Strategy" below. THE OPERATING PARTNERSHIP'S FACTORY OUTLET CENTERS The Operating Partnership's factory outlet centers are designed to attract national brand name tenants. As one of the original participants in this industry, the Operating Partnership has developed long-standing relationships with many national and regional manufacturers. Because of its established relationships with many manufacturers, the Operating Partnership believes it is well positioned to capitalize on industry growth. As of December 31, 1998, the Operating Partnership had a diverse tenant base comprised of over 250 different well-known, upscale, national designer or brand name companies, such as Liz Claiborne, Reebok International, Ltd., Tommy Hilfiger, Polo Ralph Lauren, Off 5th- SAKS Fifth Avenue Outlet Store, The Gap, Nautica and Nike. A majority of the factory outlet stores leased by the Operating Partnership are directly operated by the respective manufacturer. 3 During 1998, the Operating Partnership added approximately 17 new national designers and brand name companies to its tenant base. No single tenant (including affiliates) accounted for 10% or more of combined base and percentage rental revenues during 1998, 1997 and 1996. As of March 1, 1999, the Operating Partnership's largest tenant accounted for approximately 6.6% of its GLA. Because the typical tenant of the Operating Partnership is a large, national manufacturer, the Operating Partnership has not experienced any material problems with respect to rent collections or lease defaults. Revenues from fixed rents and operating expense reimbursements accounted for approximately 92% of the Operating Partnership's total revenues in 1998. Revenues from contingent sources, such as percentage rents, which fluctuate depending on tenant's sales performance, accounted for approximately 6% of 1998 revenues. As a result, only a small portion of the Operating Partnership's revenues are dependent on contingent revenue sources. BUSINESS HISTORY Stanley K. Tanger, the founder, Chairman and Chief Executive Officer of the general partner, entered the factory outlet center business in 1981. Prior to founding the Operating Partnership, Stanley K. Tanger and his son, Steven B. Tanger, the President and Chief Operating Officer of the general partner, 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 Operating Partnership 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, the Operating Partnership's general partner completed its initial public offering ("IPO"), making Tanger Factory Outlet Centers, Inc. the first publicly traded outlet center company. Since the IPO, the Operating Partnership has developed nine Centers and acquired six Centers and, together with expansions of existing Centers, added approximately 3.5 million square feet of GLA to its portfolio, bringing its portfolio of properties as of December 31, 1998 to 31 Centers totaling approximately 5.1 million square feet of GLA. BUSINESS AND OPERATING STRATEGY The Operating Partnership intends to increase its cash flow and the value of its portfolio over the long-term by continuing to own, manage, acquire, develop, and expand factory outlet centers. The Operating Partnership's strategy is to increase revenues through new development, selective acquisitions and expansions of factory outlet centers while minimizing its operating expenses by designing low maintenance properties and achieving economies of scale. In connection with the ownership and management of its properties, the Operating Partnership places an emphasis on regular maintenance and intends to make periodic renovations as necessary. 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. As part of its strategy of aggressively managing its assets, the Operating Partnership is strengthening the tenant base in several of its centers by adding strong new anchor tenants, such as Nike, GAP and Nautica. To accomplish this goal, stores may remain vacant for a longer period of time in order to recapture enough space to meet the size requirement of these upscale, high volume tenants. Consequently, the Operating Partnership anticipates that its average occupancy level will remain strong, but may be more in line with the industry average. The Operating Partnership typically seeks locations for its new centers that have at least 3.5 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 a highway with a traffic count of at least 35,000 cars per day. The Operating Partnership will vary its minimum conditions based on the particular characteristics of a site, especially if the site is located near or at a tourist destination. The Operating Partnership's 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. Generally, the Operating Partnership will build such centers in phases, with the first phase containing 150,000 to 200,000 square feet of GLA. Future phases have historically been less expensive to build than the first phase because the Operating Partnership generally consummates land acquisition and 4 finishes most of the site work, including parking lots, utilities, zoning and other developmental work, in the first phase. The Operating Partnership generally preleases at least 50% of the space in each center prior to acquiring the site and beginning construction. Historically, the Operating Partnership has not begun construction until it has obtained a significant amount of signed leases. Typically, construction of a new factory outlet center has taken the Operating Partnership 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 The Operating Partnership's capital strategy is to maintain a strong and flexible financial position by: (1) maintaining a low level of leverage, (ii) extending and sequencing debt maturity dates, (iii) managing its floating interest rate exposure, (iv) maintaining its liquidity and (v) reinvesting a significant portion of its cash flow by maintaining a low distribution payout ratio (defined as annual distributions as a percent of funds from operations ("FFO" - See discussion of FFO below) for such year). FFO and EBITDA are widely accepted financial indicators 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 of properties, plus depreciation and amortization uniquely significant to real estate. EBITDA is generally defined as earnings before interest expense, income taxes, depreciation and amortization. The Operating Partnership cautions that the calculations of FFO and EBITDA may vary from entity to entity and as such the presentation of FFO and EBITDA by the Operating Partnership may not be comparable to other similarly titled measures of other reporting companies. Neither FFO nor EBITDA represent net income or cash flow from operations as defined by generally accepted accounting principles and neither should be considered an alternative to net income as an indication of operating performance or to cash from operations as a measure of liquidity. FFO and EBITDA are not necessarily indicative of cash flows available to fund distributions to unitholders and other cash needs. The Operating Partnership has successfully increased its distributions each of its first five years in existence. At the same time, the Operating Partnership continues to have one of the lowest payout ratios in the REIT industry. The distribution payout ratio for the year ended December 31, 1998 was 71%. As a result, the Operating Partnership retained approximately $11.6 million of its 1998 FFO. A low distribution payout ratio policy allows the Operating Partnership to retain capital to maintain the quality of its portfolio as well as to develop, acquire and expand properties. The Operating Partnership's ratio of EBITDA to Annual Service Charge (defined as the amount which is expensed or capitalized for interest on debt, excluding amortization of deferred finance charges) was a strong 2.8 for the year ended December 31, 1998. The Operating Partnership's ratio of debt to total market capitalization (defined as the value of the outstanding units plus debt) at December 31, 1998 was approximately 55% (assuming that each type of unit has the same value as the equivalent common shares of the general partner, which at December 31, 1998 had a market value of $21.1875 per share). The Operating Partnership intends to retain the ability to raise additional capital, including additional debt, to pursue attractive investment opportunities that may arise and to otherwise act in a manner that it believes to be in the best interest of the Operating Partnership and its unitholders. The Operating Partnership maintains revolving lines of credit which provide for unsecured borrowings up to $100 million, of which $20.3 million was available for additional borrowings at December 31, 1998. As a general matter, the Operating Partnership anticipates utilizing its lines of credit as an interim source of funds to acquire, develop and expand factory outlet centers and repaying the credit lines with longer-term debt or equity when management determines that market conditions are favorable. Under joint shelf registration, the general partner and the Operating Partnership could issue up to $100 million in additional equity securities and $100 million in additional debt securities. With the decline in the real estate debt and equity markets, the general partner and the Operating Partnership may not, in the short term, be able to access these markets on favorable terms. Management believes the decline is temporary and may utilize these funds as the markets improve to continue its external growth. In the interim, the Operating Partnership may consider the use of operational and developmental joint ventures and other related strategies to generate additional cash funding. Based on cash provided by operations, existing credit facilities, ongoing negotiations with certain financial institutions and funds available under the shelf registration, management believes that the Operating Partnership has access to the necessary financing to fund the planned capital expenditures during 1999. 5 THE COMPANY The Company is the sole managing general partner of the Operating Partnership. The Company is a fully integrated real estate company, focusing exclusively on factory outlet centers. Management of the Company beneficially owns approximately 27% 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 share and partnership unit options). The Company owned, as of March 1, 1999, approximately 74.1% of the Operating Partnership (assuming conversion of the preferred partnership units). Ownership of the Company's common and preferred shares are restricted to preserve the Company's 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 the Company's 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). The Company also operates in a manner intended to enable it to preserve its status as a REIT, including, among other things, making distributions with respect to its outstanding common and preferred shares equal to at least 95% of its taxable income each year. Dividends on preferred shares are included as distributions for this purpose. Historically, the Company's distributions have exceeded, and the Company expects that its distributions will continue to exceed, taxable income in each year. As a result, and because a portion of the distributions may constitute a return of capital, the consolidated net worth of the Company may decline. However, the Company does not believe that consolidated net worth is a meaningful reflection of net real estate values. The Company is a North Carolina corporation that was formed on March 3, 1993. The executive offices are currently located at 1400 West Northwood Street, Greensboro, North Carolina, 27408 and the telephone number is (336) 274-1666. Management of the Company anticipates completing the move to a new office at a nearby facility in April 1999. The Company's new address will be 3200 Northline Drive, Suite 360, Greensboro, North Carolina, 27408 and the new telephone number will be (336) 292-3010. COMPETITION The Operating Partnership carefully considers the degree of existing and planned competition in a proposed area before deciding to develop, acquire or expand a new center. The Operating Partnership's 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, management believes that the majority of the Operating Partnership's 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 to 20 miles from the nearest major department store or the tenants' own specialty stores. For this reason, the Operating Partnership's centers compete only to a very limited extent with traditional malls in or near metropolitan areas. Management believes that the Operating Partnership competes favorably with as many as three 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. The Operating Partnership believes that its centers have an attractive tenant mix, as a result of the Operating Partnership's decision to lease substantially all of its space to manufacturer operated stores rather than to off-price retailers, and also as a result of the strong brand identity of the Operating Partnership's major tenants. CORPORATE AND REGIONAL HEADQUARTERS The Operating Partnership currently owns a small office building in Greensboro, North Carolina in which its corporate headquarters is located. The Operating Partnership has outgrown this space and has entered into an agreement to lease a larger office space at a nearby facility in Greensboro, North Carolina to relocate its corporate headquarters in April 1999. The current office building in Greensboro will be offered for sale. In addition, the Operating Partnership rents a regional office in New York City, New York under a lease agreement and sublease agreement, respectively to better service its principal fashion-related tenants, many of whom are based in and around that area. 6 The Operating Partnership maintains offices and employee on-site managers at 26 Centers. The managers closely monitor the operation, marketing and local relationships at each of their centers. INSURANCE Management believes that the Centers are covered by adequate fire, flood and property insurance provided by reputable companies and with commercially reasonable deductibles and limits. EMPLOYEES As of March 1, 1999, the Operating Partnership had 125 full-time employees, located at the Operating Partnership's corporate headquarters in North Carolina, its regional office in New York and its 26 business offices. ITEM 2. BUSINESS AND PROPERTIES As of March 1, 1999, the Operating Partnership's portfolio consisted of 31 Centers located in 23 states. The Operating Partnership's Centers range in size from 11,000 to 699,644 square feet of GLA. These Centers are typically strip shopping centers which 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. The Operating Partnership believes that the Centers are well diversified geographically and by tenant and that it is not dependent upon any single property or tenant. The only Center that represents more than 10% of the Operating Partnership's total assets or gross revenues as of and for the year ended December 31, 1998 is the property in Riverhead, NY. See "Business and Properties - Significant Property". No other Center represented more than 10% of the Operating Partnership's total assets or gross revenues as of December 31, 1998. LOCATION OF CENTERS (AS OF MARCH 1, 1999)
Number of GLA % State Centers (sq. ft.) of GLA - ------------------------------------------------ ---------- ------------- --------- Georgia 4 886,794 17% New York 1 699,644 14 Texas 2 414,830 8 Tennessee 2 362,280 7 Missouri 1 280,142 5 Iowa 1 277,237 5 Louisiana 1 245,325 5 Pennsylvania 1 230,063 4 Oklahoma 1 197,878 4 Florida 1 186,072 4 Arizona 1 186,018 4 North Carolina 2 179,870 4 Indiana 1 141,051 3 Minnesota 1 134,480 3 Michigan 1 112,120 2 California 1 105,950 2 Oregon 1 97,749 2 Kansas 1 88,200 2 Maine 2 84,897 2 Alabama 1 80,730 1 New Hampshire 2 61,915 1 West Virginia 1 49,252 1 Massachusetts 1 23,417 --- - ------------------------------------------------ ---------- ------------- --------- Total 31 5,125,914 100% ================================================ ========== ============= =========
7 Management has 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" incorporated herein by reference for a discussion of the cost of such programs and the sources of financing thereof. Certain of the Operating Partnership's Centers serve as collateral for mortgage notes payable. Of the 31 Centers, the Operating Partnership owns the land underlying 28 and has ground leases on three. 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 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 the option of the Operating Partnership for up to seven additional terms of five years each. The land on which the Riverhead Center expansion is located, approximately 43 acres, is owned by the Operating Partnership. The term of the Operating Partnership's typical tenant lease ranges from five to ten 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. 8 The table set forth below summarizes certain information with respect to the Operating Partnership's existing centers as of March 1, 1999.
MORTGAGE GLA DEBT FEE OR (SQ. % OUTSTANDING GROUND DATE OPENED LOCATION FT.) LEASED (000'S) (4) LEASE - ---------------------------------------------------------------------------------------------------- Jun. 1986 Kittery I, ME 60,194 100% $5,878 Fee Mar. 1987 Clover, North Conway, NH 11,000 100 --- Fee Nov. 1987 Martinsburg, WV 49,252 69 --- Fee Apr. 1988 LL Bean, North Conway, Nh H 50,915 100 --- Fee Jul. 1988 Pigeon Forge, TN 94,750 94 --- Ground lease Aug. 1988 Boaz, AL 80,730 96 --- Fee Jun. 1989 Kittery II, ME 24,703 100 --- Fee Jul. 1989 Commerce, GA 185,750 97 9,805 Fee Oct. 1989 Bourne, MA 23,417 100 --- Fee Feb. 1991 West Branch, MI 112,120 88 6,732 Fee May 1991 Williamsburg, IA 277,237 (1) 99 16,686 Fee Feb. 1992 Casa Grande, AZ 186,018 83 --- Fee Aug. 1992 Stroud, OK 197,878 77 --- Fee Dec. 1992 North Branch, MN 134,480 91 --- Fee Feb. 1993 Gonzales, LA 245,325 94 --- Fee May 1993 San Marcos, TX 237,395 (2) 100 10,050 Fee Dec. 1993 Lawrence, KS 88,200 48 --- Fee Dec. 1993 McMinnville, OR 97,749 77 --- Fee Aug. 1994 Riverhead, NY 699,644 (6) 98 --- Ground lease (3) Aug. 1994 Terrell, TX 177,435 96 --- Fee Sep. 1994 Seymour, IN 141,051 86 8,059 Fee Oct. 1994 (5) Lancaster, PA 230,063 (6) 96 15,580 Fee Nov. 1994 Branson, MO 280,142 99 --- Fee Nov. 1994 Locust Grove, GA 248,854 93 --- Fee Jan. 1995 Barstow, CA 105,950 92 --- Fee Dec. 1995 Commerce II, GA 278,760 100 --- Fee Feb. 1997 (5) Sevierville, TN 267,530 (6) 100 --- Ground lease Sep. 1997 (5) Blowing Rock, NC 97,408 93 --- Fee Sep. 1997 (5) Nags Head, NC 82,462 100 --- Fee Mar. 1998 (5) Dalton, GA 173,430 97 -- Fee Jul. 1998 (5) Fort Myers, FL 186,072 97 -- Fee - ---------------------------------------------------------------------------------------------------- TOTAL 5,125,914 94% $72,790 ====================================================================================================
(1) GLA EXCLUDES 21,781 SQUARE FOOT LAND LEASE ON OUTPARCEL OCCUPIED BY PIZZA HUT. (2) GLA EXCLUDES 17,400 SQUARE FOOT LAND LEASE ON OUTPARCEL OCCUPIED BY WENDY'S. (3) THE ORIGINAL RIVERHEAD CENTER IS SUBJECT TO A GROUND LEASE WHICH MAY BE RENEWED AT THE OPTION OF THE OPERATING PARTNERSHIP FOR UP TO SEVEN ADDITIONAL TERMS OF FIVE YEARS EACH. THE LAND ON WHICH THE RIVERHEAD CENTER EXPANSION IS LOCATED IS OWNED BY THE OPERATING PARTNERSHIP. (4) AS OF DECEMBER 31, 1998. THE WEIGHTED AVERAGE INTEREST RATE FOR DEBT OUTSTANDING AT DECEMBER 31, 1998 WAS 8.2% AND THE WEIGHTED AVERAGE MATURITY DATE WAS APRIL 2002. (5) REPRESENTS DATE ACQUIRED BY THE OPERATING PARTNERSHIP. (6) GLA INCLUDES SQUARE FEET OF NEW SPACE NOT YET OPEN AS OF DECEMBER 31, 1998, WHICH TOTALED 114,554 SQUARE FEET (RIVERHEAD - 45,689; LANCASTER - 2,677; SEVIERVILLE - 66,188) - -------------------------------- 9 LEASE EXPIRATIONS The following table sets forth, as of March 1, 1999, 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 - ---------------------------------------------------------------------------------------- 1999 115 386,000 $ 13.06 $5,040 8% 2000 176 663,000 13.73 9,103 14 2001 181 652,000 13.84 9,025 14 2002 254 942,000 15.11 14,232 22 2003 207 889,000 14.23 12,652 20 2004 112 549,000 15.15 8,319 13 2005 22 123,000 13.00 1,599 2 2006 8 80,000 12.70 1,016 2 2007 8 62,000 14.23 882 1 2008 8 56,000 13.54 758 1 2009 & thereafter 28 254,000 8.26 2,097 3 - ---------------------------------------------------------------------------------------- Total 1,119 4,656,000 $ 13.90 $64,723 100% ========================================================================================
(1) EXCLUDES LEASES THAT HAVE BEEN ENTERED INTO BUT WHICH TENANT HAS NOT YET TAKEN POSSESSION, VACANT SUITES AND MONTH- TO-MONTH LEASES TOTALING APPROXIMATELY 470,000 SQUARE FEET. (2) BASE RENT IS DEFINED AS THE MINIMUM PAYMENTS DUE, EXCLUDING PERIODIC CONTRACTUAL FIXED INCREASES. RENTAL AND OCCUPANCY RATES The following table sets forth information regarding the expiring leases during each of the last five calendar years.
Renewed by Existing Re-leased to Total Expiring Tenants New Tenants ------------------------- ---------------------------- -------------------------- % of Total % of % of GLA Center GLA Expiring GLA Expiring Year (sq. ft) GLA (sq. ft.) GLA (sq. ft.) GLA - ---------- ------------- ----------- -------------- ------------- ------------ ------------- 1998 548,504 11% 407,837 74% 38,526 7% 1997 238,250 5 195,380 82 18,600 8 1996 149,689 4 134,639 90 15,050 10 1995 93,650 3 91,250 97 2,400 3 1994 115,697 3 105,697 91 10,000 9
10 The following table sets forth the average base rental rate increases per square foot upon re-leasing stores that were turned over or renewed during each of the last five calendar years.
Renewals of Existing Leases Stores Re-leased to New Tenants (1) ------------------------------------------- ----------------------------------------- Average Annualized Base Rents Average Annualized Base Rents ($ per sq. ft.) ($ per sq. ft.) ------------------------------- ------------------------------- GLA % GLA % Year (sq.ft.) Expiring New Increase (sq. ft.) Expiring New Change - --------- ---------- ---------- --------- --------- --------- ---------- --------- ---------- 1998 407,387 $13.83 $14.07 2% 220,890 $15.33 $13.87 (9)% 1997 195,380 14.21 14.41 1 171,421 14.59 13.42 (8) 1996 134,639 12.44 14.02 13 78,268 14.40 14.99 4 1995 91,250 11.54 13.03 13 59,445 13.64 14.80 9 1994 105,697 14.26 16.56 16 71,350 12.54 14.30 14 - ---------------------
(1) THE SQUARE FOOTAGE RELEASED TO NEW TENANTS FOR 1998, 1997, 1996, 1995 AND 1994 CONTAIN 38,526, 18,600, 15,050, 2,400, AND 10,000 SQUARE FEET, RESPECTIVELY, THAT WAS RELEASED TO NEW TENANTS UPON EXPIRATION OF AN EXISTING LEASE. THE REMAINING SPACE WAS RETENANTED PRIOR TO ANY LEASE EXPIRATION. The following table shows certain information on rents and occupancy rates for the Centers during each of the last five calendar years.
Average Aggregate Annualized GLA Open at Percentage % Base Rent per End of Each Number of Rents Year Leased sq.ft. (1) Year Centers (000's) - --------- -------------- --------------- -------------- -------------- ------------ 1998 97% $13.88 5,011,000 31 $3,087 1997 98% 14.04 4,458,000 30 2,637 1996 99% 13.89 3,739,000 27 2,017 1995 99% 13.92 3,507,000 27 2,068 1994 99% 13.43 3,115,000 25 1,658 - ---------------------
(1) REPRESENTS TOTAL BASE RENTAL REVENUE DIVIDED BY WEIGHTED AVERAGE GLA OF THE PORTFOLIO, WHICH AMOUNT DOES NOT TAKE INTO CONSIDERATION FLUCTUATIONS IN OCCUPANCY THROUGHOUT THE YEAR. OCCUPANCY COSTS The Operating Partnership believes that its 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 --------------------------- 1998 7.9% 1997 8.2 1996 8.7 1995 8.5 1994 7.4 11 TENANTS The following table sets forth certain information with respect to the Operating Partnership's ten largest tenants and their store concepts as of March 1, 1999.
Number GLA % of Total Tenant of Stores (sq. ft.) GLA open - ----------------------------------------------- ------------- -------------- ----------- PHILLIPS-VAN HEUSEN CORPORATION: Bass 22 146,053 2.8% Van Heusen 21 89,656 1.8 Geoffrey Beene Co. Store 13 51,640 1.0 Izod 17 39,617 0.8 Gant 4 10,500 0.2 ------------- -------------- ----------- 77 337,466 6.6 LIZ CLAIBORNE, INC.: Liz Claiborne 24 277,041 5.4 Liz Claiborne Shoes 1 2,000 --- Elizabeth 6 23,700 0.5 DKNY Jeans 2 5,820 0.1 ------------- -------------- ----------- 33 308,561 6.0 REEBOK INTERNATIONAL, LTD. 24 172,161 3.4 SARA LEE CORPORATION: L'eggs, Hanes, Bali 26 117,809 2.3 Champion 1 4,000 0.1 Coach 11 26,561 0.5 Socks Galore 7 8,680 0.2 ------------- -------------- ----------- 45 157,050 3.1 DRESS BARN INC. 16 107,878 2.1 AMERICAN COMMERCIAL, INC.: Mikasa Factory Store 13 105,500 2.0 BROWN GROUP RETAIL, INC.: Factory Brand Shoes 14 71,880 1.4 Naturalizer 8 20,240 0.4 Brown Shoes 2 10,500 0.2 ------------- -------------- ----------- 24 102,620 2.0 COUNTY SEAT STORES, INC. (1): County Seat 3 15,000 0.3 Levi's by County Seat 7 81,700 1.6 ------------- -------------- ----------- 10 96,700 1.9 CORNING REVERE 19 83,267 1.6 VF FACTORY OUTLET, INC. 3 78,697 1.5 ---------------------------------------- Total of all tenants listed in table 264 1,549,900 30.2% ========================================
(1) COUNTY SEAT STORES, INC. ("COUNTY SEAT") IS CURRENTLY IN BANKRUPTCY PROCEEDINGS. MANAGEMENT BELIEVES THAT THIS BANKRUPTCY WILL NOT HAVE A MATERIAL EFFECT ON THE OPERATING PARTNERSHIP'S RESULTS OF OPERATIONS OR FINANCIAL CONDITION. 12 SIGNIFICANT PROPERTY The Center in Riverhead, New York is the Operating Partnership's only Center which comprises more than 10% of total assets or total revenues. The Riverhead Center was originally constructed in 1994. Upon completion of expansions currently underway totaling approximately 68,000 square feet, the Riverhead Center will total 699,644 square feet. Tenants at the Riverhead Center principally conduct retail sales operations. The occupancy rate as of the end of 1998, 1997, and 1996, excluding expansions under construction, was 97%, 99%, and 100%. Average annualized base rental rates during 1998, 1997, and 1996 were $18.89, $18.65, and $17.73 per weighted average GLA. 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, 1998, the net federal tax basis of this Center was approximately $84,975,000. Real estate taxes assessed on this Center during 1998 amounted to $1,623,000. Real estate taxes for 1999 are estimated to be approximately $2.1 million. The following table sets forth, as of March 1, 1999, 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 - --------------------------------------------------------------------------------------- 1999 9 27,000 $21.96 $593 5% 2000 5 18,000 19.72 355 3 2001 8 48,000 19.23 923 8 2002 68 227,000 21.19 4,809 40 2003 21 86,000 18.90 1,625 14 2004 27 127,000 19.31 2,452 20 2005 1 2,000 17.50 35 --- 2006 --- --- -- --- --- 2007 3 21,000 16.76 352 3 2008 1 7,000 19.29 135 1 2009 & thereafter 5 73,000 9.95 726 6 - --------------------------------------------------------------------------------------- Total 148 636,000 $18.88 $12,005 100% =======================================================================================
(1) EXCLUDES LEASES THAT HAVE BEEN ENTERED INTO BUT WHICH TENANT HAS NOT TAKEN POSSESSION AND EXCLUDES MONTH-TO-MONTH LEASES. (2) BASE RENT IS DEFINED AS THE MINIMUM PAYMENTS DUE, EXCLUDING PERIODIC CONTRACTUAL FIXED INCREASES. ITEM 3. LEGAL PROCEEDINGS Except for claims arising in the ordinary course of business, which are covered by the Operating Partnership's liability insurance, the Operating Partnership is not presently involved in any litigation involving claims against the Operating Partnership, nor, to its knowledge, is any material litigation threatened against the Operating Partnership or its Centers which would have a material adverse effect on the Operating Partnership, its Centers or its operations. 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, 1998. 13 EXECUTIVE OFFICERS OF THE GENERAL PARTNER The Operating Partnership does not have any officers. The following table sets forth certain information concerning the executive officers of the general partner, Tanger Factory Outlet Centers, Inc.:
NAME AGE POSITION ---- --- -------- Stanley K. Tanger................ 75 Founder, Chairman of the Board of Directors and Chief Executive Officer Steven B. Tanger................. 50 Director, President and Chief Operating Officer Rochelle G. Simpson ............. 60 Secretary and Executive Vice President - Administration and Finance Willard A. Chafin, Jr............ 61 Executive Vice President - Leasing, Site Selection, Operations and Marketing Frank C. Marchisello, Jr......... 40 Senior Vice President - Chief Financial Officer Joseph H. Nehmen................. 50 Senior Vice President - Operations Virginia R. Summerell............ 40 Treasurer and Assistant Secretary C. Randy Warren, Jr.............. 34 Senior Vice President - Leasing Carrie A. Johnson-Warren......... 36 Vice President - Marketing Kevin M. Dillon.................. 40 Vice President - Construction
The following is a biographical summary of the experience of the executive officers of the general partner: 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. 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 14 was a partner of the firm in charge of various real estate clients. While at Gilliam, Coble & Moser, Mr. Marchisello worked directly with the Tangers since 1982. 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. 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 cash management and oversight of all project and corporate finance transactions. Ms. Summerell is a graduate of Davidson College and holds an MBA from the Babcock School at Wake Forest University. C. RANDY WARREN, JR. Mr. Warren was named Senior Vice President of Leasing in January 1999. He joined the Company in November 1995 as Vice President of Leasing. He was previously director of anchor leasing at Prime Retail, L.P., where he managed anchor tenant relations and negotiation on a national basis. Prior to that, he worked as a leasing executive for the company. Before entering the outlet industry, he was founder of Preston Partners, a development consulting firm in Baltimore, MD. Mr. Warren is a graduate of Towson State University and holds an MBA from Loyola College. Mr. Warren is the husband of Ms. Carrie Johnson-Warren. CARRIE A. JOHNSON-WARREN. Ms. Johnson-Warren was named Vice President - Marketing in September 1996. Previously, she held the position of Assistant Vice President - Marketing since joining the Company in December 1995. Prior to joining Tanger, Ms. Johnson-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. Johnson-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. Johnson-Warren is a graduate of East Carolina University and is the wife of Mr. C. Randy Warren, Jr.. KEVIN M. DILLON. Mr. Dillon was named Vice President - Construction in October 1997. Previously, he held the position of Director of Construction from September 1996 to October 1997 and Construction Manager since 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. 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDERS' MATTERS There is no established public trading market for the Operating Partnership's units. As of December 31, 1998, the ownership interests in the Operating Partnership consisted of 7,897,606 partnership units and 88,270 preferred partnership units (which are convertible into approximately 795,309 general partnership units) held by the general partner and 3,033,305 partnership units held by the limited partner. The Operating Partnership made distributions per partnership unit during 1998 and 1997 as follows: 1998 1997 ---------------------------------------------------------- First Quarter $ .55 $ .52 Second Quarter .60 .55 Third Quarter .60 .55 Fourth Quarter .60 .55 ---------------------------------------------------------- Year $2.35 $2.17 ---------------------------------------------------------- Certain of the Operating Partnership's debt agreements limit the payment of distributions such that distributions 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, the Operating Partnership intends to continue to pay regular quarterly distributions. 16 ITEM 6. SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994 - ---------------------------------------------- -------------- ---------------- --------------- --------------- ---------------- (In thousands, except per unit and center data) OPERATING DATA Total revenues $97,766 $85,271 $75,500 $68,604 $45,988 Income before extraordinary item 16,103 17,583 16,177 15,352 15,147 Net income 15,643 17,583 15,346 15,352 15,147 - ------------------------------------------------------------------------------------------------------------------------------- UNIT DATA Basic: Income before extraordinary item $1.30 $1.57 $1.46 $1.36 $1.32 Net income $1.26 $1.57 $1.37 $1.36 $1.32 Weighted average partnership units 10,919 10,061 9,435 9,128 8,211 Diluted: Income before extraordinary item $1.28 $1.55 $1.46 $1.36 $1.31 Net income $1.24 $1.55 $1.37 $1.36 $1.31 Weighted average partnership units 11,040 10,171 9,441 9,129 8,244 Distributions paid $2.35 $2.17 $2.06 $1.96 $1.80 - ------------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA Real estate assets, before depreciation $529,247 $454,708 $358,361 $325,881 $292,406 Total assets 471,568 415,578 331,954 314,947 294,643 Long-term debt 302,485 229,050 178,004 156,749 121,323 Partners' equity 149,363 160,525 136,256 142,397 147,462 - ------------------------------------------------------------------------------------------------------------------------------- OTHER DATA EBITDA (1) $60,285 $52,857 $46,633 $41,058 $26,089 Funds from operations (1) $39,748 $35,840 $32,313 $29,597 $23,189 Cash flows provided by (used in): Operating activities $35,791 $39,232 $38,031 $32,455 $21,274 Investing activities $(79,236) $(93,636) $(36,401) $(44,788) $(143,683) Financing activities $46,172 $55,444 $(4,176) $13,802 $80,661 Gross leasable area open at year end 5,011 4,458 3,739 3,507 3,115 Number of centers 31 30 27 27 25 - -----------------------
(1) EBITDA and Funds from Operations ("FFO") are widely accepted financial indicators used by certain investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA represents earnings before interest expense, income taxes, depreciation and amortization. Funds from operations is defined as net income (loss), computed in accordance with generally accepted accounting principles, before extraordinary items and gains (losses) on sale of properties, plus depreciation and amortization uniquely significant to real estate. The Operating Partnership cautions that the calculations of EBITDA and FFO may vary from entity to entity and as such the presentation of EBITDA and FFO by the Operating Partnership may not be comparable to other similarly titled measures of other reporting companies. EBITDA and FFO are not intended to represent cash flows for the period. EBITDA and FFO have not been presented as an alternative to operating income 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 financial statements appearing elsewhere in this report. Historical results and percentage relationships set forth in the statements of operations, including trends which might appear, are not necessarily indicative of future operations. The discussion of the Operating Partnership's results of operations reported in the statements of operations compares the years ended December 31, 1998 and 1997, as well as December 31, 1997 and 1996. 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 which 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. The Operating Partnership intends 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 general economic and local real estate conditions could change (for example, our tenant's business may change if the economy changes, which might effect (1) the amount of rent they pay us or their ability to pay rent to us, (2) their demand for new space, or (3) our ability to renew or re-lease a significant amount of available space on favorable terms; o the laws and regulations that apply to us could change (for instance, a change in the tax laws that apply to REITs could result in unfavorable tax treatment for us); o capital availability (for instance, financing opportunities may not be available to us, or may not be available to us on favorable terms); o our operating costs may increase or our costs to construct or acquire new properties or expand our existing properties may increase or exceed our original expectations. GENERAL OVERVIEW During 1998, the Operating Partnership added a total of 569,086 square feet to its portfolio including: Dalton Factory Stores, a 173,430 square foot factory outlet center located in Dalton, GA, acquired in March 1998; Sanibel Factory Stores, a 186,070 square foot factory outlet center located in Fort Myers, FL, acquired in July 1998; 132,223 square feet of expansions which were under construction at the end of 1997; a 25,069 square foot expansion to its property in Branson, MO and 52,294 square feet out of a total of 243,674 square feet of expansion space which is currently under construction throughout six of its centers. The remaining 191,380 square feet is scheduled to open during the second half of 1999. Also during 1998, the Operating Partnership completed the sale of its 8,000 square foot, single tenant property in Manchester, VT for $1.85 million. 18 A summary of the operating results for the years ended December 31, 1998, 1997 and 1996 is presented in the following table, expressed in amounts calculated on a weighted average GLA basis.
1998 1997 1996 - ----------------------------------------------------------------------------------------------- GLA open at end of period (000's) 5,011 4,458 3,739 Weighted average GLA (000's) (1) 4,768 4,046 3,642 Outlet centers in operation 31 30 27 New centers acquired 2 3 --- Centers sold 1 --- --- Centers expanded 1 5 6 States operated in at end of period 23 23 22 PER SQUARE FOOT Revenues Base rentals $13.88 $14.04 $13.89 Percentage rentals .65 .65 .55 Expense reimbursements 5.63 6.10 6.04 Other income .34 .29 .25 - ----------------------------------------------------------------------------------------------- Total revenues 20.50 21.08 20.73 - ----------------------------------------------------------------------------------------------- Expenses Property operating 6.10 6.49 6.47 General and administrative 1.40 1.52 1.50 Interest 4.62 4.16 3.84 Depreciation and amortization 4.65 4.56 4.52 - ----------------------------------------------------------------------------------------------- Total expenses 16.77 16.73 16.33 - ----------------------------------------------------------------------------------------------- Income before gain on sale of real estate and extraordinary item $3.73 $4.35 $4.40 ===============================================================================================
(1) GLA WEIGHTED BY MONTHS OF OPERATIONS. GLA IS NOT ADJUSTED FOR FLUCTUATIONS IN OCCUPANCY WHICH MAY OCCUR SUBSEQUENT TO THE ORIGINAL OPENING DATE. RESULTS OF OPERATIONS 1998 COMPARED TO 1997 Base rentals increased $9.4 million, or 17%, in 1998 when compared to the same period in 1997 primarily as a result of the 18% increase in weighted average GLA. The increase in weighted average GLA is due primarily to the acquisitions in October 1997 (180,000 square feet), March 1998 (173,000 square feet), and July 1998 (186,000 square feet), as well as expansions completed in the fourth quarter of 1997 and first quarter 1998. The decrease in base rentals per weighted average GLA of $.16 in 1998 compared to 1997 reflects (1) the impact of these acquisitions which collectively have a lower average base rental rate per square foot and (2) lower average occupancy rates in 1998 compared to 1997. Base rentals per weighted average GLA, excluding these acquisitions, during the 1998 period decreased $.08 per square foot to $13.96. Percentage rentals increased $450,000, or 17%, in 1998 compared to 1997 due to the acquisitions and expansions completed in 1997. Same store sales, defined as the weighted average sales per square foot reported for tenant stores open all of 1998 and 1997, decreased 2.7% to approximately $242 per square foot. Expense reimbursements, which represent the contractual recovery from tenants of certain common area maintenance, insurance, property tax, promotional and 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 from 94% in 1997 to 92% in 1998 primarily as a result of the decrease in occupancy. Property operating expenses increased by $2.8 million, or 11%, in 1998 as compared to 1997. On a weighted average GLA basis, property operating expenses decreased from $6.49 from $6.10 per square foot. Higher expenses for real estate taxes per square foot were offset by considerable decreases in advertising and promotion and common area maintenance expenses per square foot. The decrease in property operating expenses per square foot is also attributable 19 to the acquisitions which collectively have a lower average operating cost per square foot. Excluding the acquisitions, property operating expenses during 1998 were $6.19 per square foot. General and administrative expenses increased $524,000 in 1998 compared to 1997. As a percentage of revenues, general and administrative expenses decreased from 7.2% in 1997 to 6.8% in 1998. On a weighted average GLA basis, general and administrative expenses decreased $.12 per square foot to $1.40 in 1998, reflecting the absorption of the acquisitions in 1997 and 1998 without relative increases in general and administrative expenses. Interest expense increased $5.2 million during 1998 as compared to 1997 due to higher average borrowings outstanding during the period and due to less interest capitalized during 1998 as a result of a decrease in ongoing construction activity during 1998 compared to 1997. Average borrowings have increased principally to finance the acquisitions and expansions to existing centers (see "General Overview" above). Depreciation and amortization per weighted average GLA increased from $4.56 per square foot to $4.65 per square foot. The asset write-down of $2.7 million in 1998 represents the write-off of pre-development costs capitalized for certain projects, primarily the Romulus, MI project, which were discontinued and terminated during the year. The gain on sale of real estate for 1998 represents the sale of an 8,000 square foot, single tenant property in Manchester, VT for $1.85 million and the sale of three outparcels at other centers for sales prices aggregating $940,000. The extraordinary item in 1998 represents a write-off of unamortized deferred financing costs due to the termination of a $50 million secured line of credit. 1997 COMPARED TO 1996 Base rentals increased $6.2 million, or 12%, in 1997 when compared to the same period in 1996 primarily as a result of the 11% increase in weighted average GLA. Base rent increased approximately $1.5 million due to the effect of a full year's operation of expansions completed in 1996 and approximately $4.8 million for new or acquired leases added during 1997. Percentage rentals increased $620,000, or $.10 per square foot, in 1997 compared to 1996. The increase is primarily attributable to leases acquired during 1997, leases added in 1996 completing their first full year of operation in 1997 and due to increases in tenant sales. Same store sales, defined as weighed average sales per square foot reported for tenant stores open all of 1997 and 1996, increased approximately 2.3% to $241 per square foot. Expense reimbursements, which represent the contractual recovery from tenants of certain common area maintenance, insurance, property tax, promotional and 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, increased from 93% in the 1996 period to 94% in the 1997 period due primarily to a reduction in nonreimbursable property operating expenses. Property operating expenses increased by $2.7 million, or 11%, in 1997 as compared to the 1996 period. On a weighted average GLA basis, property operating expenses increased to $6.49 from $6.47 per square foot. Slightly lower promotional, real estate taxes, and insurance expenses per square foot incurred in the 1997 period compared to the 1996 period were offset by higher common area maintenance expenses per square foot due to additional customer service amenities, such as trolleys, customer service counters and security and as a result of expanding the Riverhead Center which has a cost per foot higher than the portfolio average. General and administrative expenses increased $678,000 in 1997 as compared to 1996. As a percentage of revenues, general and administrative expenses remained level at 7.2% in each year. On a weighted average GLA basis, general and administrative expenses increased $.02 to $1.52 in 1997. Interest expense increased $2.8 million during the 1997 period as compared to the 1996 period due to higher average borrowings outstanding during the period. Average borrowings increased principally to finance the first quarter acquisition of Five Oaks Factory Stores and expansions to existing centers until the Operating Partnership received the proceeds from the general partner's equity offering in September 1997. Depreciation and amortization per weighted average GLA increased from $4.52 per square foot to $4.56 per square foot. The increase reflects the effect of accelerating the recognition of depreciation expense on certain tenant finishing allowances related to vacant space. 20 The extraordinary item in the 1996 period represents a write-off of the unamortized deferred financing costs related to the lines of credit which were extinguished using the proceeds from the Operating Partnership's $75 million senior unsecured notes issued in March 1996. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $35.8, $39.2 and $38.0 million for the years ended December 31, 1998, 1997 and 1996, respectively. Net cash provided by operating activities during 1997 and 1996 increased primarily due to the incremental operating income associated with acquired or expanded centers. Net cash provided by operating activities decreased $3.4 million in 1998 compared to 1997 as decreases in accounts payable offset the increases from the incremental operating income associated with acquired or expanded centers. Net cash used in investing activities amounted to $79.2, $93.6 and $36.4 million during 1998, 1997 and 1996, respectively, and reflects the fluctuation in construction and acquisition activity during each year. Net cash used in investing activities also decreased in 1998 compared to 1997 due to approximately $2.6 million in net proceeds received from the sale of one factory outlet center and three parcels of land from other existing centers. Cash provided by (used in) financing activities of $46.2, $55.4 and $(4.2) million in 1998, 1997 and 1996, respectively, and has fluctuated consistently with the capital needed to fund the current development and acquisition activity. In 1998, net cash provided by financing activities was further reduced by the distributions paid on the additional 1.1 million units outstanding during all of 1998 which were issued to the general partner in exchange for the proceeds from the general partner's common share offering in September of 1997. During 1998, the Operating Partnership added a total of 569,086 square feet to its portfolio including: Dalton Factory Stores, a 173,430 square foot factory outlet center located in Dalton, GA, acquired in March 1998; Sanibel Factory Stores, a 186,070 square foot factory outlet center located in Fort Myers, FL, acquired in July 1998; 132,223 square feet of expansions which were under construction at the end of 1997; a 25,069 square foot expansion to its property in Branson, MO and 52,294 square feet out of a total of 243,674 square feet of expansion space which is currently under construction throughout six of its centers. The remaining 191,380 square feet is scheduled to open during the second half of 1999 (See "General Overview"). Commitments for construction of these projects (which represent only those costs contractually required to be paid by the Operating Partnership) amounted to $5.6 million at December 31, 1998. The Operating Partnership also is in the process of developing plans for additional expansions and new centers for completion in 1999 and beyond. Currently, the Operating Partnership is in the preleasing stages for a future center in Bourne, Massachusetts and for further expansions of three existing Centers. However, these anticipated or planned developments or expansions may not be started or completed as scheduled, or may not result in accretive funds from operations. In addition, the Operating Partnership regularly evaluates acquisition or disposition proposals, engages from time to time in negotiations for acquisitions or dispositions and may from time to time 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 also may not be consummated, or if consummated, may not result in accretive funds from operations. During 1998, the Operating Partnership discontinued the development of its Concord, North Carolina; Romulus, Michigan and certain other projects as the economics of these transactions did not meet an adequate return on investment for the Operating Partnership. As a result, the Operating Partnership recorded a $2.7 million charge in the fourth quarter to write-off the carrying amount of these projects, net of proceeds received from the sale of the Operating Partnership's interest in the Concord project to an unrelated third party. The Operating Partnership maintains revolving lines of credit which provide for unsecured borrowings up to $100 million, of which $20.3 million was available for additional borrowings at December 31, 1998. As a general matter, the Operating Partnership anticipates utilizing its lines of credit as an interim source of funds to acquire, develop and expand factory outlet centers and repaying the credit lines with longer-term debt or equity when management determines that market conditions are favorable. Under joint shelf registration, the general partner and the Operating Partnership could issue up to $100 million in additional equity securities and $100 million in additional debt securities. With the decline in the real estate debt and equity markets, the Operating Partnership or the general partner may not, in the short term, be able to access these markets on favorable terms. Management believes the decline is temporary and may utilize these funds as the markets improve to continue its external growth. In the interim, the Operating Partnership may consider the use of operational and developmental joint ventures and other related strategies to generate additional capital. Based on cash provided by operations, existing credit facilities, ongoing negotiations with certain financial institutions and funds available under the shelf registration, management believes that the Operating Partnership has access to the necessary financing to fund the planned capital expenditures during 1999. 21 During 1998, the Operating Partnership terminated a $50 million secured line of credit and increased its unsecured lines of credit by $25 million. At December 31, 1998, approximately 76% of the outstanding long-term debt represented unsecured borrowings and approximately 79% of the Operating Partnership's real estate portfolio was unencumbered. The weighted average interest rate on debt outstanding on December 31, 1998 was 8.2%. During March 1999, the Operating Partnership refinanced its 8.92% notes which had a carrying amount of $47.4 million at December 31, 1998. The refinancing reduced the interest rate to 7.875%, increased the loan amount to $66.5 million and extended the maturity date to April 2009. The additional proceeds were used to reduce amounts outstanding under the revolving lines of credit. As a result of this refinance, management expects to realize a savings in interest cost of approximately $300,000 over the next twelve months. In addition, the Operating Partnership extended the maturity of one of its revolving lines of credit from June 2000 to June 2001. The Operating Partnership anticipates that adequate cash will be available to fund its operating and administrative expenses, regular debt service obligations, and the payment of distributions in accordance with the general partner's REIT requirements in both the short and long term. Although the Operating Partnership receives most of its rental payments on a monthly basis, distributions to unitholders 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. Certain of the Operating Partnership's debt agreements limit the payment of distributions such that distributions will not exceed funds from operations ("FFO"), as defined in the agreements, for the prior fiscal year on an annual basis or 95% of FFO on a cumulative basis from the date of the agreement. MARKET RISK The Operating Partnership is 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. The Operating Partnership does not enter into derivatives or other financial instruments for trading or speculative purposes. The Operating Partnership enters into interest rate swap agreements to manage its 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, 1998, the Operating Partnership had an interest rate swap agreement effective through October 2001 with a notional amount of $20 million. Under this agreement, the Operating Partnership receives a floating interest rate based on the 30 day LIBOR index and pays a fixed interest rate of 5.47%. These swaps effectively change the Operating Partnership's payment of interest on $20 million of variable rate debt to fixed rate debt for the contract period. The fair value of the interest rate swap agreement represents the estimated receipts or payments that would be made to terminate the agreements. At December 31, 1998, the Operating Partnership would have paid $218,000 to terminate the agreements. A 1% decrease in the 30 day LIBOR index would increase the amount paid by approximately $491,000. The fair value is based on dealer quotes, considering current interest rates. 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 the Operating Partnership's total long-term debt at December 31, 1998 was $309.1 million. A 1% increase from prevailing interest rates at December 31, 1998 would result in a decrease in fair value of total long-term debt by approximately $4.2 million. Fair values were determined from quoted market prices, where available, using current interest rates considering credit ratings and the remaining terms to maturity. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS 131"). SFAS 131 requires public business enterprises to adopt its provisions for fiscal years beginning after December 15, 1997, and to report certain information about operating segments in complete sets of financial statements of the enterprise issued to unitholders. The Operating Partnership believes all of its centers have similar economic characteristics and provide similar products and services to similar types and classes of customers. In accordance with the provisions of SFAS 131, the Operating Partnership has aggregated the financial information of all of its centers into one reportable operating segment. 22 On June 15, 1998, the FASB issued Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS 133"). SFAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Management of the Operating Partnership anticipates that, due to its limited use of derivative instruments, the adoption of SFAS 133 will not have a significant effect on the Operating Partnership's results of operations or its financial position. FUNDS FROM OPERATIONS Management believes that for a clear understanding of the historical operating results of the Operating Partnership, FFO should be considered along with net income as presented in the audited 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 real estate investment trust ("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 of properties, plus depreciation and amortization uniquely significant to real estate. The Operating Partnership cautions that the calculation of FFO may vary from entity to entity and as such the presentation of FFO by the Operating Partnership 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 from operations as a measure of liquidity. FFO is not necessarily indicative of cash flows available to fund distributions to unitholders and other cash needs. Below is a calculation of funds from operations for the years ended December 31, 1998, 1997 and 1996 as well as actual cash flow and other data for those respective years (in thousands):
1998 1997 1996 - ------------------------------------------------------------------------------------------ FUNDS FROM OPERATIONS: Income before gain on sale of real estate and extraordinary item $15,109 $17,583 $16,018 Adjusted for: Depreciation and amortization uniquely significant to real estate 21,939 18,257 16,295 Asset write-down 2,700 -- -- - ------------------------------------------------------------------------------------------ Funds from operations $39,748 $35,840 $32,313 ========================================================================================== CASH FLOWS PROVIDED BY (USED IN): Operating activities $35,791 $39,232 $38,031 Investing activities $(79,236) $(93,636) $(36,401) Financing activities $46,172 $55,444 $(4,176) WEIGHTED AVERAGE UNITS OUTSTANDING (1) 11,844 11,000 10,601 ==========================================================================================
(1) ASSUMES THE PREFERRED PARTNERSHIP UNITS AND UNIT OPTIONS ARE ALL CONVERTED TO GENERAL PARTNERSHIP UNITS. ECONOMIC CONDITIONS AND OUTLOOK The majority of the Operating Partnership's leases contain provisions designed to mitigate the impact of inflation. Such provisions include clauses for the escalation of base rent and clauses enabling the Operating Partnership to receive percentage rentals based on tenants' gross sales (above predetermined levels, which the Operating Partnership believes 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. 23 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. As part of its strategy of aggressively managing its assets, the Operating Partnership is strengthening the tenant base in several of its centers by adding strong new anchor tenants, such as Nike, GAP and Nautica. To accomplish this goal, stores may remain vacant for a longer period of time in order to recapture enough space to meet the size requirement of these upscale, high volume tenants. Consequently, the Operating Partnership anticipates that its average occupancy level will remain strong, but may be more in line with the industry average. Approximately 29% of the Operating Partnership's lease portfolio is scheduled to expire during the next two years. Approximately 778,000 square feet of space is up for renewal during 1999 and approximately 663,000 square feet will come up for renewal in 2000. If the Operating Partnership 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. Existing tenants' sales have remained stable and renewals by existing tenants have remained strong. Approximately 323,000, or 41%, of the square feet scheduled to expire in 1999 has already been renewed. In addition, the Operating Partnership continues to attract and retain additional tenants. The Operating Partnership's 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, the Operating Partnership reduces its operating and leasing risks. No one tenant (including affiliates) accounts for more than 8% of the Operating Partnership's combined base and percentage rental revenues. Accordingly, management currently does not expect any material adverse impact on the Operating Partnership's results of operation and financial condition as a result of leases to be renewed or stores to be released. YEAR 2000 COMPLIANCE The year 2000 ("Y2K") issue refers generally to computer applications using only the last two digits to refer to a year rather than all four digits. As a result, these applications could fail or create erroneous results if they recognize "00" as the year 1900 rather than the year 2000. The Operating Partnership has taken Y2K initiatives in three general areas which represent the areas that could have an impact on the Operating Partnership-Information technology systems, non-information technology systems and third-party issues. The following is a summary of these initiatives: INFORMATION TECHNOLOGY SYSTEMS. The Operating Partnership has focused its efforts on the high-risk areas of the corporate office computer hardware, operating systems and software applications. The Operating Partnership's assessment and testing of existing equipment and software revealed that certain older desktop personal computers, the network operating system and the DOS-based accounting system were not Y2K compliant. The non-compliant personal computers have since been replaced. The Operating Partnership is currently in the process of installing and testing current upgrades for the DOS-based accounting and the network operating systems which will make these systems compliant with Y2K and expects to complete this process by June 30, 1999. NON-INFORMATION TECHNOLOGY SYSTEMS. Non-information technology consists mainly of facilities management systems such as telephone, utility and security systems for the corporate office and the outlet centers. The Operating Partnership is in the process of relocating its corporate office to a nearby facility. The Operating Partnership has reviewed the corporate facility management systems and made inquiry of the building owner/manager and concluded that the corporate office building systems including telephone, utilities, fire and security systems are Y2K compliant. The Operating Partnership is in the process of identifying date sensitive systems and equipment including HVAC units, telephones, security systems and alarms, fire warning systems and general office systems at its 31 outlet centers. Assessment and testing of these systems is about 84% complete and expected to be completed by June 30, 1999. Critical non-compliant systems will be replaced in early 1999. Based on preliminary assessment, the cost of replacement is not expected to be significant. THIRD PARTIES. The Operating Partnership has third-party relationships with approximately 260 tenants and over 8,000 suppliers and contractors. Many of these third parties are publicly-traded corporations and are subject to disclosure requirements. The Operating Partnership has begun assessment of major third parties' Y2K readiness including tenants, key suppliers of outsourced services including stock transfer, debt servicing, banking collection and disbursement, payroll and benefits, while simultaneously responding to their inquiries regarding the Operating 24 Partnership's readiness. The majority of the Operating Partnership's vendors are small suppliers that the Operating Partnership believes can manually execute their business and are readily replaceable. Management also believes there is no material risk of being unable to procure necessary supplies and services from third parties who have not already indicated that they are currently Y2K compliant. Third-party assessment is abut 50% complete and the Operating Partnership is diligently working to substantially complete this part of the project. The Operating Partnership also intends to monitor Y2K disclosures in SEC filings of publicly-owned third parties commencing with the current quarter filings. COSTS. The accounting software and network operating system upgrades are being executed under existing maintenance and support agreements with software vendors, and thus the Operating Partnership does not expect to incur additional costs to bring those systems in compliance . Approximately $220,000 has been spent to upgrade or replace equipment or systems specifically to bring them in compliance with Y2K. The total cost of Y2K compliance activities, expected to be less than $400,000, has not been, and is not expected to be material to the operating results or financial position of the Operating Partnership. The identification and remediation of systems at the outlet centers is being accomplished by in-house business systems personnel and outlet center general managers whose costs are recorded as normal operating expenses. The assessment of third-party readiness is also being conducted by in-house personnel whose costs are recorded as normal operating expenses. The Operating Partnership is not yet in a position to estimate the cost of third-party compliance issues, but has no reason to believe, based upon its evaluations to date, that such costs will exceed $100,000. RISKS. The principal risks to the Operating Partnership relating to the completion of its accounting software conversion is failure to correctly bill tenants by December 31, 1999 and to pay invoices when due. Management believes it has adequate resources, or could obtain the needed resources, to manually bill tenants and pay bills until the systems became operational. The principal risks to the Operating Partnership relating to non-information systems at the outlet centers are failure to identify time-sensitive systems and inability to find a suitable replacement system. The Operating Partnership believes that adequate replacement components or new systems are available at reasonable prices and are in good supply. The Operating Partnership also believes that adequate time and resources are available to remediate these areas as needed. The principal risks to the Operating Partnership in its relationships with third parties are the failure of third-party systems used to conduct business such as tenants being unable to stock stores with merchandise, use cash registers and pay invoices; banks being unable to process receipts and disbursements; vendors being unable to supply needed materials and services to the centers; and processing of outsourced employee payroll. Based on Y2K compliance work done to date, the Operating Partnership has no reason to believe that key tenants, banks and suppliers will not be Y2K compliant in all material respects or can not be replaced within an acceptable time frame. The Operating Partnership will attempt to obtain compliance certification from suppliers of key services as soon as such certifications are available. CONTINGENCY PLANS. The Operating Partnership intends to deal with contingency planning during the first half of 1999 after the results of the above assessments are known. The Operating Partnership description of its Y2K compliance issues are based upon information obtained by management through evaluations of internal business systems and from tenant and vendor compliance efforts. No assurance can be given that the Operating Partnership will be able to address the Y2K issues for all its systems in a timely manner or that it will not encounter unexpected difficulties or significant expenses relating to adequately addressing the Y2K issue. If the Operating Partnership or the major tenants or vendors with whom the Operating Partnership does business fail to address their major Y2K issues, the Operating Partnership's operating results or financial position could be materially adversely affected. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is set forth at the pages indicated in Item 14(a) below. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 25 PART III Certain information required by Part III is omitted from this Report in that the registrant's sole general partner, Tanger Factory Outlet Centers, Inc., will file a definitive proxy statement pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this Report, and certain information included therein is incorporated herein by reference. Only those sections of the Proxy Statement which specifically address the items set forth herein are incorporated by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Operating Partnership does not have any directors or officers. The information concerning the general partner's directors required by this Item is incorporated by reference to the general partner's Proxy Statement. The information concerning the executive officers of the general partner required by this Item is incorporated by reference herein to the section in Part I, Item 4, entitled "Executive Officers of the General Partner". The information regarding compliance with Section 16 of the Securities and Exchange Act of 1934 is to be set forth in the general partner's Proxy Statement and is hereby incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the general partner's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the general partner's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to the general partner's Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS A PART OF THIS REPORT: 1. Financial Statements Report of Independent Accountants F-1 Balance Sheets-December 31, 1998 and 1997 F-2 Statements of Operations- Years Ended December 31, 1998, 1997 and 1996 F-3 Statements of Partners' Equity- For the Years Ended December 31, 1998, 1997 and 1996 F-4 Statements of Cash Flows- Years Ended December 31, 1998, 1997 and 1996 F-5 Notes to Financial Statements F-6 to F-13 2. Financial Statement Schedule Schedule III Report of Independent Accountants F-14 Real Estate and Accumulated Depreciation F-15 to F-16 All other schedules have been omitted because of the absence of conditions under which they are required or because the required information is given in the above-listed financial statements or notes thereto.
26 3. Exhibits Exhibit No. Description - ----------- ----------- 3.3 Amended and Restated Agreement of Limited Partnership for the Operating Partnership. (Note 1) 10.1 Amended and Restated Unit Option Plan. (Note 8) 10.4 Form of Unit Option Agreement between the Operating Partnership and certain employees. (Note 3) 10.5 Amended and Restated Employment Agreement for Stanley K. Tanger, as of January 1, 1998. (Note 8) 10.6 Amended and Restated Employment Agreement for Steven B. Tanger, as of January 1, 1998. (Note 8) 10.7 Amended and Restated Employment Agreement for Willard Albea Chafin, Jr., as of January 1, 1999. (Note 8) 10.8 Amended and Restated Employment Agreement for Rochelle Simpson, as of January 1, 1999. (Note 8) 10.9 Amended and Restated Employment Agreement for Joseph Nehmen, as of January 1, 1999. (Note 8) 10.10 Registration Rights Agreement among the Company, the Tanger Family Limited Partnership and Stanley K. Tanger. (Note 2) 10.10A Amendment to Registration Rights Agreement among the Company, the Tanger Family Limited Partnership and Stanley K. Tanger. (Note 5) 10.11 Agreement Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. (Note 2) 10.12 Assignment and Assumption Agreement among Stanley K. Tanger, Stanley K. Tanger & Company, the Tanger Family Limited Partnership, the Operating Partnership and the Company. (Note 2) 10.13 Promissory Notes by and between the Operating Partnership and John Hancock Mutual Life Insurance Company aggregating $50,000,000, dated as of December 13, 1994. (Note 4) 10.14 Form of Senior Indenture. (Note 6) 10.15 Form of First Supplemental Indenture (to Senior Indenture). (Note 6) 10.15A Form of Second Supplemental Indenture (to Senior Indenture) dated October 24, 1997 among Tanger Properties Limited Partnership, Tanger Factory Outlet Centers, Inc. and State Street Bank & Trust Company. (Note 7) 21.1 List of Subsidiaries. (Note 2) 23.1 Consent of PricewaterhouseCoopers LLP. Notes to Exhibits: 1. Incorporated by reference to the exhibits to the Tanger Factory Outlet Centers, Inc.'s Registration Statement on Form S-11 filed October 6, 1993, as amended. 2. Incorporated by reference to the exhibits to the Tanger Factory Outlet Centers, Inc.'s Registration Statement on Form S-11 filed May 27, 1993, as amended. 3. Incorporated by reference to the exhibits to the Tanger Factory Outlet Centers, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1993. 4. Incorporated by reference to the exhibits to the Tanger Factory Outlet Centers, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1994. 27 5. Incorporated by reference to the exhibits to the Tanger Factory Outlet Centers, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995. 6. Incorporated by reference to the exhibits to the Tanger Factory Outlet Centers, Inc.'s Current Report on Form 8-K dated March 6, 1996. 7. Incorporated by reference to the exhibits to the Tanger Factory Outlet Centers, Inc.'s Current Report on Form 8-K dated October 24, 1997. 8. Incorporated by reference to the exhibits to the Tanger Factory Outlet Centers, Inc.'s Current Report on Form 10-K for the year ended December 31, 1998. (B) REPORTS ON FORM 8-K - none. 28 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TANGER PROPERTIES LIMITED PARTNERSHIP By: Tanger Factory Outlet Centers, Inc., its general partner By: /s/ Stanley K. Tanger --------------------------------- Stanley K. Tanger Chairman of the Board and Chief Executive Officer March 26, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities as officers or directors of the general partner and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ Stanley K. Tanger Chairman of the Board and March 26, 1999 Stanley K. Tanger Chief Executive Officer (Principal Executive Officer) /s/ Steven B. Tanger Director, President and March 26, 1999 Steven B. Tanger Chief Operating Officer /s/ Frank C. Marchisello, Jr. Senior Vice President and March 26, 1999 Frank C. Marchisello, Jr. Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Jack Africk Director March 26, 1999 Jack Africk /s/ William G. Benton Director March 26, 1999 William G. Benton /s/ Thomas E. Robinson Director March 26, 1999 Thomas E. Robinson
29 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of TANGER PROPERTIES LIMITED PARTNERSHIP: We have audited the accompanying balance sheets of Tanger Properties Limited Partnership as of December 31, 1998 and 1997, and the related statements of operations, partners' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Operating Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tanger Properties Limited Partnership as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. PricewaterhouseCoopers LLP Greensboro, NC January 18, 1999 F-1 TANGER PROPERTIES LIMITED PARTNERSHIP BALANCE SHEETS (In thousands)
December 31, 1998 1997 ---------------------------------------------------------------------------------------------- ASSETS Rental property Land $53,869 $48,059 Buildings, improvements and fixtures 458,546 379,842 Developments under construction 16,832 26,807 ---------------------------------------------------------------------------------------------- 529,247 454,708 Accumulated depreciation (84,685) (64,177) ---------------------------------------------------------------------------------------------- Rental property, net 444,562 390,531 Cash and cash equivalents 6,334 3,607 Deferred charges, net 8,218 8,651 Other assets 12,454 12,789 ---------------------------------------------------------------------------------------------- TOTAL ASSETS $471,568 $415,578 ============================================================================================== LIABILITIES AND PARTNERS' EQUITY LIABILITIES Long-term debt Senior, unsecured notes $150,000 $150,000 Mortgages payable 72,790 74,050 Lines of credit 79,695 5,000 ---------------------------------------------------------------------------------------------- 302,485 229,050 Construction trade payables 9,224 12,913 Accounts payable and accrued expenses 10,496 13,090 ---------------------------------------------------------------------------------------------- TOTAL LIABILITIES 322,205 255,053 ---------------------------------------------------------------------------------------------- Commitments PARTNERS' EQUITY General partner 128,746 136,649 Limited partner 20,617 23,876 ---------------------------------------------------------------------------------------------- Total partners' equity 149,363 160,525 ---------------------------------------------------------------------------------------------- Total liabilities and partners' equity $471,568 $415,578 ==============================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-2 TANGER PROPERTIES LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS (In thousands, except per unit data)
Year Ended December 31, 1998 1997 1996 - ----------------------------------------------------------------------------------------------- REVENUES Base rentals $66,187 $56,807 $50,596 Percentage rentals 3,087 2,637 2,017 Expense reimbursements 26,852 24,665 21,991 Other income 1,640 1,162 896 - ----------------------------------------------------------------------------------------------- Total revenues 97,766 85,271 75,500 - ----------------------------------------------------------------------------------------------- EXPENSES Property operating 29,106 26,269 23,559 General and administrative 6,669 6,145 5,467 Interest 22,028 16,835 13,998 Depreciation and amortization 22,154 18,439 16,458 Asset write-down 2,700 --- --- - ----------------------------------------------------------------------------------------------- Total expenses 82,657 67,688 59,482 - ----------------------------------------------------------------------------------------------- Income before gain on sale of real estate and extraordinary item 15,109 17,583 16,018 Gain on sale of real estate 994 --- 159 - ----------------------------------------------------------------------------------------------- INCOME BEFORE EXTRAORDINARY ITEM 16,103 17,583 16,177 Extraordinary item - Loss on early extinguishment of debt (460) --- (831) - ----------------------------------------------------------------------------------------------- Net income 15,643 17,583 15,346 Less preferred unit distributions (1,911) (1,808) (2,399) - ----------------------------------------------------------------------------------------------- Income available to partners 13,732 15,775 12,947 Income allocated to the limited partner (3,816) (4,756) (4,155) - ----------------------------------------------------------------------------------------------- Income allocated to the general partner $9,916 $11,019 $8,792 =============================================================================================== BASIC EARNINGS PER UNIT: Income before extraordinary item $ 1.30 $ 1.57 $ 1.46 Extraordinary item (.04) --- (.09) - ----------------------------------------------------------------------------------------------- Net income $ 1.26 $ 1.57 $ 1.37 =============================================================================================== DILUTED EARNINGS PER UNIT: Income before extraordinary item $ 1.28 $ 1.55 $ 1.46 Extraordinary item (.04) --- (.09) - ----------------------------------------------------------------------------------------------- Net income $ 1.24 $ 1.55 $ 1.37 ===============================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-3 TANGER PROPERTIES LIMITED PARTNERSHIP STATEMENTS OF PARTNERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 (In thousands, except unit data)
Total General Limited Partners' Partner Partner Equity - ---------------------------------------------------------------------------------------------------- Balance, December 31, 1995 $114,813 $27,584 $142,397 Conversion of 35,065 preferred units into 315,929 partnership units -- -- -- Compensation under Unit Option Plan 229 109 338 Net income 11,191 4,155 15,346 Preferred distributions ($18.56 per unit) (2,416) -- (2,416) Distributions to partners ($2.06 per unit) (13,160) (6,249) (19,409) - ---------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1996 110,657 25,599 136,256 Conversion of 15,730 preferred units into 141,726 partnership units -- -- -- Issuance of 29,700 units upon exercise of unit options 703 -- 703 Issuance of 1,080,000 units to general partner in exchange for proceeds from a common share offering 29,241 -- 29,241 Compensation under Unit Option Plan 234 104 338 Net income 12,827 4,756 17,583 Preferred distributions ($19.55 per unit) (1,789) -- (1,789) Distributions to partners ($2.17 per unit) (15,224) (6,583) (21,807) - ---------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1997 136,649 23,876 160,525 Conversion of 2,419 preferred units into 21,790 partnership units -- -- -- Issuance of 31,880 units upon exercise of share and unit options 762 -- 762 Repurchase and retirement of 10,000 partnership units (216) -- (216) Compensation under Unit Option Plan 142 53 195 Net income 11,827 3,816 15,643 Preferred distributions ($21.17 per unit) (1,894) -- (1,894) Distributions to partners ($2.35 per unit) (18,524) (7,128) (25,652) - ---------------------------------------------------------------------------------------------------- $128,746 $20,617 $149,363 ====================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-4 TANGER PROPERTIES LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS (In thousands)
YEAR ENDED DECEMBER 31, 1998 1997 1996 -------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 15,643 $ 17,583 $ 15,346 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 22,154 18,439 16,458 Amortization of deferred financing costs 1,076 1,094 953 Loss on early extinguishment of debt 460 -- 831 Asset write-down 2,700 -- -- Gain on sale of real estate (994) -- (159) Straight-line base rent adjustment (688) (347) (1,192) Compensation under Unit Option Plan 195 338 338 Increase (decrease) due to changes in: Other assets (2,161) (1,591) 578 Accounts payable and accrued expenses (2,594) 3,716 4,878 -------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 35,791 39,232 38,031 -------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Acquisition of real estate (44,650) (37,500) -- Additions to rental properties (35,252) (54,795) (35,408) Additions to deferred lease costs (1,895) (1,341) (1,167) Proceeds from sale of real estate 2,561 -- 174 -------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (79,236) (93,636) (36,401) -------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Contributions from the general partner -- 29,241 -- Repurchase of partnership units (216) -- -- Cash distributions paid (27,546) (23,596) (21,825) Proceeds from notes payable -- 75,000 75,000 Repayments on mortgages payable (1,260) (1,154) (1,019) Proceeds from revolving lines of credit 152,760 118,450 70,301 Repayments on revolving lines of credit (78,065) (141,250) (123,027) Additions to deferred financing costs (263) (1,950) (3,606) Proceeds from exercise of share and unit options 762 703 -- -------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 46,172 55,444 (4,176) -------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 2,727 1,040 (2,546) Cash and cash equivalents, beginning of period 3,607 2,567 5,113 -------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 6,334 $ 3,607 $ 2,567 ==========================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-5 NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND FORMATION OF THE OPERATING PARTNERSHIP Tanger Properties Limited Partnership, a North Carolina limited partnership (the "Operating Partnership"), develops, owns and operates factory outlet centers. The Operating Partnership is a majority owned subsidiary of Tanger Factory Outlet Centers, Inc. (the "Company"), a fully integrated, self-administered, self-managed real estate investment trust ("REIT"). Recognized as one of the largest owners and operators of factory outlet centers in the United States, the Operating Partnership owned and operated 31 factory outlet centers located in 23 states with a total gross leasable area of approximately 5.1 million square feet at the end of 1998. The Operating Partnership provides all development, leasing and management services for its centers. The Company is the sole general partner of the Operating Partnership and the Tanger Family Limited Partnership ("TFLP") is the sole limited partner. Stanley K. Tanger, the Company's Chairman of the Board and Chief Executive Officer, is the general partner of TFLP. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION - Allocation of income to the general and limited partners is based on each partner's respective ownership of units issued by the Operating Partnership. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. OPERATING SEGMENTS - The Operating Partnership aggregates the financial information of all its centers into one reportable operating segment because the centers all have similar economic characteristics and provide similar products and services to similar types and classes of customers. RENTAL PROPERTIES - Rental properties are recorded at cost less accumulated depreciation. Costs incurred for the acquisition, construction, and development of properties are capitalized. Depreciation is computed on the straight-line basis over the estimated useful lives of the assets. The Operating Partnership generally uses estimated lives ranging from 25 to 33 years for buildings, 15 years for land improvements and seven years for equipment. Expenditures for ordinary maintenance and repairs are charged to operations as incurred while significant renovations and improvements, including tenant finishing allowances, that improve and/or extend the useful life of the asset are capitalized and depreciated over their estimated useful life. Buildings, improvements and fixtures consist primarily of permanent buildings and improvements made to land such as landscaping and infrastructure and costs incurred in providing rental space to tenants. Interest costs capitalized during 1998, 1997 and 1996 amounted to $762,000, $1,877,000 and $1,044,000, and development costs capitalized amounted to $1,903,000, $1,637,000 and $1,321,000, respectively. Depreciation expense for each of the years ended December 31, 1998, 1997 and 1996 was $20,873,000, $17,327,000 and $15,449,000, respectively. The pre-construction stage of project development involves certain costs to secure land control and zoning and complete other initial tasks essential to the development of the project. These costs are transferred from other assets to developments under construction when the pre-construction tasks are completed. Costs of potentially unsuccessful pre-construction efforts are charged to operations. CASH AND CASH EQUIVALENTS - All highly liquid investments with an original maturity of three months or less at the date of purchase are considered to be cash and cash equivalents. Cash balances at a limited number of banks may periodically exceed insurable amounts. The Operating Partnership believes that it mitigates its risk by investing in or through major financial institutions. Recoverability of investments is dependent upon the performance of the issuer. DEFERRED CHARGES - Deferred lease costs consist of fees and costs incurred to initiate operating leases and are amortized over the average minimum lease term. Deferred financing costs include fees and costs incurred to obtain long-term financing and are being amortized over the terms of the respective loans. Unamortized deferred financing costs are charged to expense when debt is retired before the maturity date. F-6 NOTES TO FINANCIAL STATEMENTS IMPAIRMENT OF LONG-LIVED ASSETS - The Operating Partnership has adopted Statement of Financial Accounting Standards No. 121, ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF. This statement requires that long-lived assets and certain intangibles to be held and used by an entity be 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, the Operating Partnership compares the estimated future undiscounted cash flows associated with the asset to the asset's carrying amount, and if less, recognizes an impairment loss in an amount by which the carrying amount exceeds its fair value. The Operating Partnership believes that no material impairment existed at December 31, 1998. DERIVATIVES - The Operating Partnership selectively enters into interest rate protection agreements to mitigate changes in interest rates on its variable rate borrowings. The notional amounts of such agreements are used to measure the interest to be paid or received and do not represent the amount of exposure to loss. None of these agreements are used for speculative or trading purposes. The cost of these agreements are included in deferred financing costs and are being amortized on a straight-line basis over the life of the agreements. REVENUE RECOGNITION - Minimum rental income is 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. INCOME TAXES - As a partnership, the allocated share of income or loss for the year is included in the income tax returns of the partners; accordingly, no provision has been made for Federal income taxes in the accompanying financial statements. CONCENTRATION OF CREDIT RISK - The Operating Partnership's management performs ongoing credit evaluations of their tenants. Although the tenants operate principally in the retail industry, the properties are geographically diverse. No single tenant accounted for 10% or more of combined base and percentage rental income during 1998, 1997 and 1996. SUPPLEMENTAL CASH FLOW INFORMATION - The Operating Partnership purchases capital equipment and incurs costs relating to construction of new facilities, including tenant finishing allowances. Expenditures included in construction trade payables as of December 31, 1998, 1997 and 1996 amounted to $9,224,000, $12,913,000 and $8,320,000 respectively. Interest paid, net of interest capitalized, in 1998, 1997 and 1996 was $20,690,000, $12,337,000 and $10,637,000, respectively. 3. DEFERRED CHARGES Deferred charges as of December 31, 1998 and 1997 consist of the following (in thousands):
1998 1997 -------------------------------------------------------------------------- Deferred lease costs $9,551 $7,658 Deferred financing costs 5,691 6,607 -------------------------------------------------------------------------- 15,242 14,265 Accumulated amortization 7,024 5,614 -------------------------------------------------------------------------- $8,218 $8,651 ==========================================================================
Amortization of deferred lease costs for the years ended December 31, 1998, 1997 and 1996 was $1,019,000, $873,000 and $799,000, respectively. Amortization of deferred financing costs, included in interest expense in the accompanying statements of operations, for the years ended December 31, 1998, 1997 and 1996 was $1,076,000, $1,094,000 and $953,000 respectively. During 1998 and 1996, the Operating Partnership expensed the remaining unamortized financing costs totaling $460,000 and $831,000 related to debt extinguished prior to its respective maturity date. Such amounts are shown as extraordinary items in the accompanying statements of operations. F-7 NOTES TO FINANCIAL STATEMENTS 4. ASSET WRITE-DOWN During 1998, the Operating Partnership discontinued the development of its Concord, North Carolina, Romulus, Michigan and certain other projects as the economics of these transactions did not meet an adequate return on investment for the Operating Partnership. As a result, the Operating Partnership recorded a $2.7 million charge in the fourth quarter to write-off the carrying amount of these projects, net of proceeds received from the sale of the Operating Partnership's interest in the Concord project to an unrelated third party. 5. LONG-TERM DEBT Long-term debt at December 31, 1998 and 1997 consists of the following (in thousands):
1998 1997 ----------------------------------------------------------------------------------------------------------------- 8.75% Senior, unsecured notes, maturing March 2001 $75,000 $75,000 7.875% Senior, unsecured notes, maturing October 2004 75,000 75,000 Mortgage notes with fixed interest at: 8.92%, maturing January 2002 47,405 48,142 8.625%, maturing September 2000 9,805 10,121 9.77%, maturing April 2005 15,580 15,787 Revolving lines of credit with variable interest rates ranging from either prime less .25% to prime or from LIBOR plus 1.55% to LIBOR plus 1.60% 79,695 5,000 ----------------------------------------------------------------------------------------------------------------- $302,485 $229,050 =================================================================================================================
The Operating Partnership maintains revolving lines of credit which provide for borrowing up to $100 million. The agreements expire at various times through the year 2001. Interest is payable based on alternative interest rate bases at the Operating Partnership's option. Amounts available under these facilities at December 31, 1998 totaled $20.3 million. Certain of the Operating Partnership's properties, which had a net book value of approximately $85.1 million at December 31, 1998, serve as collateral for the fixed rate mortgages. Thecredit agreements require the maintenance of certain ratios, including debt service coverage and leverage, and limit the payment of distributions such that 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. All three existing fixed rate mortgage notes are with insurance companies and contain prepayment penalty clauses. During March 1999, the Operating Partnership refinanced its 8.92% notes. The refinancing reduced the interest rate to 7.875%, increased the loan amount to $66.5 million and extended the maturity date to April 2009. The additional proceeds were used to reduce amounts outstanding under the revolving lines of credit. In addition, the Operating Partnership extended the maturity of one of its revolving lines of credit from June 2000 to June 2001. Maturities of the existing long-term debt, after giving consideration to the refinance and extension as described above, are as follows (in thousands): Year Amount % -------------------------------------------- 1999 $1,461 --- 2000 15,273 5 2001 132,316 44 2002 1,403 --- 2003 1,521 1 Thereafter 150,511 50 -------------------------------------------- $302,485 100 ============================================ F-8 NOTES TO FINANCIAL STATEMENTS 6. DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS In October 1998, the Operating Partnership entered into an interest rate swap agreement effective through October 2001 with a notional amount of $20 million which fixed the 30 day LIBOR index at 5.47%. A similar agreement with a notional amount of $10 million at a fixed 30 day LIBOR index of 5.99% expired during 1998. The impact of these agreements had an insignificant effect on interest expense during 1998, 1997 and 1996. In anticipation of offering the senior, unsecured notes due 2004, the Operating Partnership entered into an interest rate protection agreement on October 3, 1997 which fixed the index on the 10 year US Treasury rate at 5.995% for 30 days on a notional amount of $70 million. The transaction settled on October 21, 1997, the trade date of the $75 million offering, and, as a result of an increase in the US Treasury rate, the Operating Partnership received proceeds of $714,000. Such amount is being amortized as a reduction to interest expense over the life of the notes and results in an overall effective interest rate on the notes of 7.75%. The carrying amount of cash equivalents approximates fair value due to the short-term maturities of these financial instruments. The fair value of long-term debt at December 31, 1998, which is estimated as the present value of future cash flows, discounted at interest rates available at the reporting date for new debt of similar type and remaining maturity, was approximately $309.1 million. The estimated fair value of the interest rate swap agreement at December 31, 1998, as determined by the issuing financial institution, was an unrealized loss of approximately $218,000. On June 15, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS 133"). SFAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Management of the Operating Partnership anticipates that, due to its limited use of derivative instruments, the adoption of SFAS 133 will not have a significant effect on the Operating Partnership's results of operations or its financial position. 7. PARTNERSHIP EQUITY During 1997, the general partner completed an additional public offering of 1,080,000 common shares at a price of $29.0625 per share, receiving net proceeds of approximately $29.2 million. The net proceeds, which were contributed to the Operating Partnership in exchange for 1,080,000 partnership units, were used to acquire, expand and develop factory outlet centers and for general corporate purposes. Series A Cumulative Convertible Redeemable Preferred Shares (the "Preferred Shares") were sold to the public by the general partner during 1993 in the form of Depositary Shares, each representing 1/10 of a Preferred Share. Proceeds from this offering, net of underwriters discount and estimated offering expenses, were contributed to the Operating Partnership in return for preferred partnership units. Preferred partnership units issued by the Operating Partnership have the same characteristics, with respect to liquidation rights, distribution and conversion, as the Preferred Shares. The Preferred Shares have a liquidation preference equivalent to $25 per Depositary Share and dividends accumulate per Depositary Share equal to the greater of (i) $1.575 per year or (ii) the dividends on the common shares or portion thereof, into which a depositary share is convertible. The Preferred Shares rank senior to the common shares with respect to dividend and liquidation rights. The Preferred Shares are convertible at the option of the holder at any time into common shares of the general partner at a rate equivalent to .901 common shares for each Depositary Share. Preferred partnership units are automatically converted into general partnership units to the extent of any conversion of the general partner's Series A Preferred Shares into the general partner's common shares. At December 31, 1998, 795,309 common shares were reserved for the conversion of Depositary Shares. The Preferred Shares and Depositary Shares may be redeemed at the option of the general partner, in whole or in part, at a redemption price of $25 per Depositary Share, plus accrued and unpaid dividends. F-9 NOTES TO FINANCIAL STATEMENTS At December 31, 1998 and 1997, the ownership interests of the Operating Partnership consisted of the following: 1998 1997 ------------------------------------------------------------------------- Preferred Units, held by the general partner 88,270 90,689 ========================================================================= Partnership Units: General partner 7,897,606 7,853,936 Limited partner 3,033,305 3,033,305 ------------------------------------------------------------------------- Total 10,930,911 10,887,241 ========================================================================= Preferred partnership units outstanding at December 31, 1998 were convertible into approximately 795,309 general partnership units. The limited partner's units are exchangeable, subject to certain limitations to preserve the general partner's status as a REIT, on a one-for-one basis for common shares of the general partner. On October 13, 1998, the general partner's Board of Directors authorized the repurchase and retirement of up to $5 million of the general partner's common shares. The Operating Partnership will fund the proceeds necessary for the general partner to purchase the common shares and will retire a number of units held by the general partner equivalent to the common shares purchased. The timing and amount of purchases will be at the discretion of management. As of December 31, 1998, the Operating Partnership had paid to the general partner $216,000 for the repurchase and retirement of 10,000 common shares and corresponding partnership units, leaving a balance of $4,784,000 authorized for future repurchases. 8. EARNINGS PER SHARE A reconciliation of the numerators and denominators in computing earnings per unit in accordance with Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE, for the years ended December 31, 1998, 1997 and 1996 is set forth as follows (in thousands, except per unit amounts):
1998 1997 1996 ------------------------------------------------------------------------------------------------------------------ Numerator: Income before extraordinary item $16,103 $17,583 $16,177 Less preferred unit distributions (1,911) (1,808) (2,399) ------------------------------------------------------------------------------------------------------------------ Income available to the general and limited partners- numerator for basic and diluted earnings per unit $14,192 $15,775 $13,778 ------------------------------------------------------------------------------------------------------------------ Denominator: Basic weighted average partnership units 10,919 10,061 9,435 Effect of outstanding unit options 121 110 6 ------------------------------------------------------------------------------------------------------------------ Diluted weighted average partnership units 11,040 10,171 9,441 ------------------------------------------------------------------------------------------------------------------ Basic earnings per unit before extraordinary item $ 1.30 $ 1.57 $ 1.46 ------------------------------------------------------------------------------------------------------------------ Diluted earnings per unit before extraordinary item $ 1.28 $ 1.55 $ 1.46 ==================================================================================================================
Options to purchase units excluded from the computation of diluted earnings per unit during 1998 and 1996 because the exercise price was greater than the average market price of the general partner's common shares totaled 244,775 and 130,172 units. During 1997, all options had exercise prices less than the average market price. The assumed conversion of the preferred units as of the beginning of each year would have been anti-dilutive. F-10 NOTES TO FINANCIAL STATEMENTS 9. EMPLOYEE BENEFIT PLANS The general partner has a non-qualified and incentive stock option plan ("The 1993 Share Option Plan") and the Operating Partnership has a non-qualified unit option plan ("The 1993 Unit Option Plan"). Units received upon exercise of unit options are exchangeable for common shares of the general partner. The Operating Partnership accounts for these plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for these plans been determined for options granted since January 1, 1995 consistent with Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS 123), the Operating Partnership's net income and earnings per unit would have been reduced to the following pro forma amounts (in thousands, except per unit amounts): 1998 1997 1996 -------------------------------------------------------------------- Net income: As reported $ 15,643 $17,583 $15,346 Pro forma $ 15,409 $17,403 $15,243 Basic EPS: As reported $ 1.26 $ 1.57 $ 1.37 Pro forma $ 1.24 $ 1.55 $ 1.36 Diluted EPS: As reported $ 1.24 $ 1.55 $ 1.37 Pro forma $ 1.23 $ 1.54 $ 1.36 Because the SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1998 and 1996, respectively: expected distribution yields ranging from 8% to 10%; expected lives ranging from 5 years to 7 years; expected volatility 20%; and risk-free interest rates ranging from 5.42% to 6.75%. The general partner and the Operating Partnership may issue up to a combined 1,750,000 shares and units under the general partner's 1993 Share Option Plan and the Operating Partnership's 1993 Unit Option Plan. The general partner and the Operating Partnership have granted 1,131,240 options, net of options forfeited, through December 31, 1998. Under both plans, the option exercise price is determined by the Share and Unit Option Committee of the Board of Directors. Non-qualified share and unit options granted expire 10 years from the date of grant and become exercisable in five equal installments commencing one year from the date of grant. Options outstanding at December 31, 1998 have exercise prices between $22.50 and $30.50, with a weighted average exercise price of $25.16 and a weighted average remaining contractual life of 6.6 years. On January 8, 1999, the Operating Partnership granted to its employees options to purchase an additional 229,300 units in the Operating Partnership (which are exchangeable for 229,300 common shares of the general partner). The exercise price per unit was set at the previous day's market closing price of $22.125. Unamortized stock compensation, which relates to options that were granted at an exercise price below the fair market value at the time of grant, was fully amortized in 1998 and was $195,000 and $533,000 at December 31, 1997 and 1996. Compensation expense recognized during 1998, 1997 and 1996 was $195,000, $338,000 and $338,000, respectively. F-11 NOTES TO FINANCIAL STATEMENTS A summary of the status of the Operating Partnership's plan at December 31, 1998, 1997 and 1996 and changes during the years then ended is presented in the table and narrative below:
1998 1997 1996 ------------------ ------------------- ------------------- Wtd Avg Wtd Avg Wtd Avg Shares Ex Price Shares Ex Price Shares Ex Price - ---------------------------------------------------------------------------------------------------- Outstanding at beginning of year 847,230 $23.67 888,950 $23.69 656,650 $23.47 Granted 262,600 30.15 --- --- 234,700 24.27 Exercised (28,280) 23.94 (29,700) 23.68 --- --- Forfeited (50,890) 26.94 (12,020) 24.41 (2,400) 23.59 - ---------------------------------------------------------------------------------------------------- Outstanding at end of year 1,030,660 $25.16 847,230 $23.67 888,950 $23.69 ==================================================================================================== Exercisable at end of year 592,320 $23.41 456,350 $23.37 310,210 $23.23 Weighted average fair value of options granted $1.60 --- $2.71
The Operating Partnership has a qualified retirement plan, with a salary deferral feature designed to qualify under Section 401 of the Code (the "401(k) Plan"), which covers substantially all officers and employees of the Operating Partnership. The 401(k) Plan permits employees of the Operating Partnership, in accordance with the provisions of Section 401(k) of the Code, to defer up to 20% of their eligible compensation on a pre-tax basis subject to certain maximum amounts. Employee contributions are fully vested and are matched by the Operating Partnership at a rate of compensation deferred to be determined annually at the Operating Partnership's discretion. The matching contribution is subject to vesting under a schedule providing for 20% annual vesting starting with the third year of employment and 100% vesting after seven years of employment. 10. SUPPLEMENTARY INCOME STATEMENT INFORMATION The following amounts are included in property operating expenses for the years ended December 31, 1998, 1997 and 1996 (in thousands):
1998 1997 1996 ---------------------------------------------------------------------------- Advertising and promotion $ 9,069 $ 8,452 $ 7,691 Common area maintenance 11,929 11,113 9,497 Real estate taxes 6,202 5,004 4,699 Other operating expenses 1,906 1,700 1,672 ---------------------------------------------------------------------------- $ 29,106 26,269 23,559 ============================================================================
11. LEASE AGREEMENTS The Operating Partnership is the lessor of a total of 1,182 stores in 31 factory outlet centers, under operating leases with initial terms that expire from 1999 to 2017. Most leases are renewable for five years at the lessee's option. Future minimum lease receipts under noncancellable operating leases as of December 31, 1998 are as follows (in thousands): 1999 $63,145 2000 54,895 2001 46,451 2002 36,508 2003 20,956 Thereafter 35,479 ----------------------------------- $257,434 =================================== F-12 NOTES TO FINANCIAL STATEMENTS 12. COMMITMENTS At December 31, 1998, commitments for construction of new developments and additions to existing properties amounted to $5.6 million. Commitments for construction represent only those costs contractually required to be paid by the Operating Partnership. The Operating Partnership purchased the rights to lease land on which two of the outlet centers are situated for $1,520,000. These leasehold rights are being amortized on a straight-line basis over 30 and 40 year periods. Accumulated amortization was $517,000 and $468,000 at December 31, 1998 and 1997, respectively. These land leases and other land and equipment noncancellable operating leases, with initial terms in excess of one year, have terms that expire from 2000 to 2085. Annual rental payments for these leases aggregated $1,090,000, $778,000, and $315,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Minimum lease payments for the next five years and thereafter are as follows (in thousands): 1999 $1,522 2000 1,777 2001 1,715 2002 1,669 2003 1,550 Thereafter 56,604 --------------------------------- $64,837 ================================= 13. ACQUISITIONS During 1998, the Operating Partnership completed the acquisitions of two factory outlet centers containing approximately 359,000 square feet of gross leasable area for purchase prices which aggregated $44.7 million. During 1997, the Operating Partnership completed the acquisitions of three factory outlet centers containing approximately 303,000 square feet for purchase prices which aggregated $37.5 million. The acquisitions were accounted for using the purchase method whereby the purchase price was allocated to assets acquired based on their fair values. The results of operations of the acquired properties have been included in the results of operations since the applicable acquisition date. The pro forma information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the acquisitions occurred at the beginning of each period presented, nor does it purport to represent the results of operations for future periods. The following unaudited summarized pro forma results of operations reflect adjustments to present the historical information as if the all of the acquisitions had occurred as of the January 1, 1997 (unaudited and in thousands, except per unit data).
1998 1997 ---------------------------------------------------------------------------- Total revenues $ 100,840 $ 93,988 Income before extraordinary item 16,366 17,859 Net income 15,906 17,859 Basic net income per unit: Income before extraordinary item 1.32 1.60 Net income 1.28 1.60 Diluted net income per unit: Income before extraordinary item 1.31 1.58 Net income 1.27 1.58 ============================================================================
F-13 REPORT OF INDEPENDENT ACCOUNTANTS Our report on the financial statements of Tanger Properties Limited Partnership is included on page F-1 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 26 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. PricewaterhouseCoopers LLP Greensboro, North Carolina January 18, 1999 F-14 TANGER PROPERTIES LIMITED PARTNERSHIP SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION FOR THE YEAR ENDED DECEMBER 31, 1998 (In thousands)
Costs Capitalized Subsequent to Acquisition Description Initial Cost to Company (Improvements) - ------------------------------------------- --------------------------- -------------------------- Buildings, Buildings, Outlet Center Improvements Improvements Name Location Encumbrances Land & Fixtures Land & Fixtures - -------------------- ------------------------------------------------------------------------------------------------ Barstow Barstow, CA $ --- $ 3,941 $ 12,533 $ --- $ 1,034 Blowing Rock Blowing Rock, NC --- 1,963 9,424 --- 138 Boaz Boaz, AL --- 616 2,195 --- 1,153 Bourne Bourne, MA --- 899 1,361 --- 303 Branch N. Branch, MN --- 329 5,644 249 2,349 Branson Branson, MO --- 4,557 25,040 --- 6,055 Casa Grande Casa Grande, AZ --- 753 9,091 --- 1,196 Clover North Conway, NH --- 393 672 --- 246 Commerce I Commerce, GA 9,805 755 3,511 492 5,647 Commerce II Commerce, GA --- 1,299 14,046 541 11,614 Dalton Dalton, GA --- 1,641 15,596 --- --- Gonzales Gonzales, LA --- 947 15,895 17 3,447 Kittery-I Kittery, ME 5,878 1,242 2,961 229 1,193 Kittery-II Kittery, ME --- 921 1,835 530 233 Lancaster Lancaster, PA 15,580 3,691 19,907 --- 6,074 Lawrence Lawrence, KS --- 1,013 5,542 429 443 LL Bean North Conway, NH --- 1,894 3,351 --- 552 Locust Grove Locust Grove, GA --- 2,609 11,801 --- 7,065 Martinsburg Martinsburg, WV --- 800 2,812 --- 1,259 McMinnville McMinnville, OR --- 1,071 8,162 5 756 Nags Head Nags Head, NC --- 1,853 6,679 --- 564 Pigeon Forge Pigeon Forge, TN --- 299 2,508 --- 1,334 Riverhead Riverhead, NY --- --- 36,374 6,152 63,049 San Marcos San Marcos, TX 10,050 1,953 9,440 17 9,988 Sanibel Sanibel, FL 4,916 23,196 --- --- Sevierville Sevierville, TN --- --- 18,495 --- 13,143 Seymour Seymour, IN 8,059 1,710 13,249 --- 248 Stroud Stroud, OK --- 446 7,048 --- 4,840 Terrell Terrell, TX --- 805 13,432 --- 3,906 West Branch West Branch, MI 6,732 350 3,428 120 4,323 Williamsburg Williamsburg, IA 16,686 706 6,781 716 11,217 - --------------------------------------------------------------------------------------------------------------------- Totals $72,789 $44,372 $312,009 $9,497 $163,369 ===================================================================================================================== Gross Amount Carried at Close of Period Description 12/31/98 (1) Life Used to - -------------------- -------------------------------------------- Compute Buildings, Depreciation Outlet Center Improvements Accumulated Date of in Income Name Land & Fixtures Total Depreciation Construction Statement - -------------------- ------------------------------------------------------------------------------------- Barstow $3,941 $13,567 $17,508 $2,793 1995 (2) Blowing Rock 1,963 9,562 11,525 402 1997(3) (2) Boaz 616 3,348 3,964 1,414 1988 (2) Bourne 899 1,664 2,563 690 1989 (2) Branch 578 7,993 8,571 2,598 1992 (2) Branson 4,557 31,095 35,652 6,057 1994 (2) Casa Grande 753 10,287 11,040 3,650 1992 (2) Clover 393 918 1,311 361 1987 (2) Commerce I 1,247 9,158 10,405 3,419 1989 (2) Commerce II 1,840 25,660 27,500 3,034 1995 (2) Dalton 1,641 15,596 17,237 398 1998 (3) (2) Gonzales 964 19,342 20,306 5,542 1992 (2) Kittery-I 1,471 4,154 5,625 1,977 1986 (2) Kittery-II 1,451 2,068 3,519 830 1989 (2) Lancaster 3,691 25,981 29,672 4,558 1994 (3) (2) Lawrence 1,442 5,985 7,427 1,584 1993 (2) LL Bean 1,894 3,903 5,797 1,572 1988 (2) Locust Grove 2,609 18,866 21,475 3,516 1994 (2) Martinsburg 800 4,071 4,871 1,685 1987 (2) McMinnville 1,076 8,918 9,994 2,549 1993 (2) Nags Head 1,853 7,243 9,096 342 1997 (3) (2) Pigeon Forge 299 3,842 4,141 1,541 1988 (2) Riverhead 6,152 99,423 105,575 9,889 1993 (2) San Marcos 1,970 19,428 21,398 3,918 1993 (2) Sanibel 4,916 23,196 28,112 315 1998 (3) (2) Sevierville --- 31,638 31,638 1,321 1997 (3) (2) Seymour 1,710 13,497 15,207 3,123 1994 (2) Stroud 446 11,888 12,334 4,007 1992 (2) Terrell 805 17,338 18,143 3,795 1994 (2) West Branch 470 7,751 8,221 2,277 1991 (2) Williamsburg 1,422 17,998 19,420 5,528 1991 (2) - ---------------------------------------------------------------------------------------------------------- Totals $53,869 $475,378 $529,247 $84,685 ==========================================================================================================
(1) AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS APPROXIMATELY $527,122,000. (2) THE OPERATING PARTNERSHIP GENERALLY USES ESTIMATED LIVES RANGING FROM 25 TO 33 YEARS FOR BUILDINGS AND 15 YEARS FOR LAND IMPROVEMENTS. TENANT FINISHING ALLOWANCES ARE DEPRECIATED OVER THE INITIAL LEASE TERM. (3) REPRESENTS YEAR ACQUIRED. F-15 TANGER PROPERTIES LIMITED PARTNERSHIP SCHEDULE III - (CONTINUED) REAL ESTATE AND ACCUMULATED DEPRECIATION FOR THE YEAR ENDED DECEMBER 31, 1998 (In thousands) The changes in total real estate for the three years ended December 31, 1998 are as follows: 1998 1997 1996 -------- -------- -------- Balance, beginning of year $454,708 $358,361 $325,881 Acquisition of real estate 44,650 37,500 -- Improvements 31,599 59,519 32,511 Dispositions and other (1,710) (672) (31) -------- -------- -------- Balance, end of year $529,247 $454,708 $358,361 ======== ======== ======== The changes in accumulated depreciation for the three years ended December 31, 1998 are as follows: 1998 1997 1996 ------- ------- ------- Balance, beginning of year $64,177 46,907 $31,458 Depreciation for the period 20,873 17,327 15,449 Dispositions and other (365) (57) -- ------- ------- ------- Balance, end of year $84,685 $64,177 $46,907 ======= ======= ======= EX-23.1 2 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Tanger Properties Limited Partnership on Form S-3 (File Nos. 33-99736-01, 333-3526-01 and 333-39365-01) of our reports dated January 18, 1999 on our audits of the financial statements and financial statement schedule of Tanger Properties Limited Partnership as of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997 and 1996, which report is included in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Greensboro, North Carolina March 26, 1999 EX-27 3 FDS
5 This schedule contains summary financial information extracted from the financial statements as of and for the year ended December 31, 1998 included herein and is qualified in its entirety by reference to such financial statements. 0001004036 Tanger Properties Ltd. Partnership Year DEC-31-1998 DEC-31-1998 6,334 0 0 0 0 0 529,247 84,685 471,568 0 302,485 0 0 0 149,363 471,568 0 97,766 0 29,106 24,854 0 22,028 16,103 0 16,103 0 (460) 0 15,643 1.26 1.24
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