TANGER INC. - Quarter Report: 2016 September (Form 10-Q)
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2016
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________ to _________
Commission file number 1-11986 (Tanger Factory Outlet Centers, Inc.)
Commission file number 333-3526-01 (Tanger Properties Limited Partnership)
TANGER FACTORY OUTLET CENTERS, INC.
TANGER PROPERTIES LIMITED PARTNERSHIP
(Exact name of Registrant as specified in its charter)
North Carolina (Tanger Factory Outlet Centers, Inc.) | 56-1815473 |
North Carolina (Tanger Properties Limited Partnership) | 56-1822494 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
3200 Northline Avenue, Suite 360, Greensboro, NC 27408 | |
(Address of principal executive offices) | |
(336) 292-3010 | |
(Registrant's telephone number, including area code) |
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.
Tanger Factory Outlet Centers, Inc. | Yes x No o |
Tanger Properties Limited Partnership | Yes x No o |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Tanger Factory Outlet Centers, Inc. | Yes x No o |
Tanger Properties Limited Partnership | Yes x No o |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer: and “smaller reporting company” (as defined in Rule 12b-2 of the Securities and Exchange Act of 1934).
Tanger Factory Outlet Centers, Inc. | ||||||
x Large accelerated filer | o Accelerated filer | o Non-accelerated filer | o Smaller reporting company |
Tanger Properties Limited Partnership | ||||||
o Large accelerated filer | o Accelerated filer | x Non-accelerated filer | o Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act).
Tanger Factory Outlet Centers, Inc. | Yes o No x |
Tanger Properties Limited Partnership | Yes o No x |
As of October 25, 2016, there were 96,069,262 common shares of Tanger Factory Outlet Centers, Inc. outstanding, $.01 par value.
EXPLANATORY NOTE
This report combines the unaudited quarterly reports on Form 10-Q for the quarter ended September 30, 2016 of Tanger Factory Outlet Centers, Inc. and Tanger Properties Limited Partnership. Unless the context indicates otherwise, the term "Company", refers to Tanger Factory Outlet Centers, Inc. and subsidiaries and the term "Operating Partnership" refers to Tanger Properties Limited Partnership and subsidiaries. The terms “we”, “our” and “us” refer to the Company or the Company and the Operating Partnership together, as the text requires.
Tanger Factory Outlet Centers, Inc. and subsidiaries is one of the largest owners and operators of outlet centers in the United States and Canada. The Company is a fully-integrated, self-administered and self-managed real estate investment trust ("REIT") which, through its controlling interest in the Operating Partnership, focuses exclusively on developing, acquiring, owning, operating and managing outlet shopping centers. The outlet centers and other assets are held by, and all of the operations are conducted by, the Operating Partnership and its subsidiaries. Accordingly, the descriptions of the business, employees and properties of the Company are also descriptions of the business, employees and properties of the Operating Partnership. As the Operating Partnership is the issuer of our registered debt securities, we are required to present a separate set of financial statements for this entity.
The Company owns the majority of the units of partnership interest issued by the Operating Partnership through its two wholly-owned subsidiaries, Tanger GP Trust and Tanger LP Trust. Tanger GP Trust controls the Operating Partnership as its sole general partner. Tanger LP Trust holds a limited partnership interest. As of September 30, 2016, the Company, through its ownership of Tanger GP Trust and Tanger LP Trust, owned 96,069,262 units of the Operating Partnership and other limited partners (the "Non-Company LPs") collectively owned 5,052,743 Class A common limited partnership units. Each Class A common limited partnership unit held by the Non-Company LPs is exchangeable for one of the Company's common shares, subject to certain limitations to preserve the Company's status as a REIT. Class B common limited partnership units, which are held by Tanger LP Trust, are not exchangeable for common shares of the Company.
Management operates the Company and the Operating Partnership as one enterprise. The management of the Company consists of the same members as the management of the Operating Partnership. These individuals are officers of the Company and employees of the Operating Partnership. The individuals that comprise the Company's Board of Directors are also the same individuals that make up Tanger GP Trust's Board of Trustees.
We believe combining the quarterly reports on Form 10-Q of the Company and the Operating Partnership into this single report results in the following benefits:
• | enhancing investors' understanding of the Company and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business; |
• | eliminating duplicative disclosure and providing a more streamlined and readable presentation since a substantial portion of the disclosure applies to both the Company and the Operating Partnership; and |
• | creating time and cost efficiencies through the preparation of one combined report instead of two separate reports. |
2
There are only a few differences between the Company and the Operating Partnership, which are reflected in the disclosure in this report. We believe it is important, however to understand these differences between the Company and the Operating Partnership in the context of how the Company and the Operating Partnership operate as an interrelated consolidated company.
As stated above, the Company is a REIT, whose only material asset is its ownership of partnership interests of the Operating Partnership through its wholly-owned subsidiaries, the Tanger GP Trust and Tanger LP Trust. As a result, the Company does not conduct business itself, other than issuing public equity from time to time and incurring expenses required to operate as a public company. However, all operating expenses incurred by the Company are reimbursed by the Operating Partnership, thus the only material item on the Company's income statement is its equity in the earnings of the Operating Partnership. Therefore, the assets and liabilities and the revenues and expenses of the Company and the Operating Partnership are the same on their respective financial statements, except for immaterial differences related to cash, other assets and accrued liabilities that arise from public company expenses paid by the Company. The Company itself does not hold any indebtedness but does guarantee certain debt of the Operating Partnership, as disclosed in this report.
The Operating Partnership holds all of the outlet centers and other assets, including the ownership interests in consolidated and unconsolidated joint ventures. The Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for net proceeds from public equity issuances by the Company, which are contributed to the Operating Partnership in exchange for partnership units, the Operating Partnership generates the capital required through its operations, its incurrence of indebtedness or through the issuance of partnership units.
Noncontrolling interests, shareholder's equity and partner's capital are the main areas of difference between the consolidated financial statements of the Company and those of the Operating Partnership. The limited partnership interests in the Operating Partnership held by the Non-Company LPs are accounted for as partner's capital in the Operating Partnership's financial statements and as noncontrolling interests in the Company's financial statements.
To help investors understand the significant differences between the Company and the Operating Partnership, this report presents the following separate sections, as applicable, for each of the Company and the Operating Partnership:
•Consolidated financial statements;
•The following notes to the consolidated financial statements:
• | Debt of the Company and the Operating Partnership; |
• | Shareholders' Equity, if applicable, and Partners' Equity; |
• | Earnings Per Share and Earnings Per Unit; |
• | Accumulated Other Comprehensive Income of the Company and the Operating Partnership; |
• | Liquidity and Capital Resources in the Management's Discussion and Analysis of Financial Condition and Results of Operations. |
This report also includes separate Item 4. Controls and Procedures sections and separate Exhibit 31 and 32 certifications for each of the Company and the Operating Partnership in order to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that the Company and Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934 and 18 U.S.C. §1350.
The separate sections in this report for the Company and the Operating Partnership specifically refer to the Company and the Operating Partnership. In the sections that combine disclosure of the Company and the Operating Partnership, this report refers to actions or holdings as being actions or holdings of the Company. Although the Operating Partnership is generally the entity that enters into contracts and joint ventures and holds assets and debt, reference to the Company is appropriate because the business is one enterprise and the Company operates the business through the Operating Partnership.
3
The Company currently consolidates the Operating Partnership because it has (1) the power to direct the activities of the Operating Partnership that most significantly impact the Operating Partnership’s economic performance and (2) the obligation to absorb losses and the right to receive the residual returns of the Operating Partnership that could be potentially significant. The separate discussions of the Company and the Operating Partnership in this report should be read in conjunction with each other to understand the results of the Company on a consolidated basis and how management operates the Company.
4
TANGER FACTORY OUTLET CENTERS, INC. AND TANGER PROPERTIES LIMITED PARTNERSHIP
Index
Page Number | |
Part I. Financial Information | |
Item 1. | |
FINANCIAL STATEMENTS OF TANGER FACTORY OUTLET CENTERS, INC. (Unaudited) | |
Consolidated Balance Sheets - as of September 30, 2016 and December 31, 2015 | |
Consolidated Statements of Operations - for the three and nine months ended September 30, 2016 and 2015 | |
Consolidated Statements of Comprehensive Income - for the three and nine months ended September 30, 2016 and 2015 | |
Consolidated Statements of Shareholders' Equity - for the nine months ended September 30, 2016 and 2015 | |
Consolidated Statements of Cash Flows - for the nine months ended September 30, 2016 and 2015 | |
FINANCIAL STATEMENTS OF TANGER PROPERTIES LIMITED PARTNERSHIP (Unaudited) | |
Consolidated Balance Sheets - as of September 30, 2016 and December 31, 2015 | |
Consolidated Statements of Operations - for the three and nine months ended September 30, 2016 and 2015 | |
Consolidated Statements of Comprehensive Income - for the three and nine months ended September 30, 2016 and 2015 | |
Consolidated Statements of Equity - for the nine months ended September 30, 2016 and 2015 | |
Consolidated Statements of Cash Flows - for the nine months ended September 30, 2016 and 2015 | |
Condensed Notes to Consolidated Financial Statements of Tanger Factory Outlet Centers, Inc. and Tanger Properties Limited Partnership | |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3. Quantitative and Qualitative Disclosures about Market Risk | |
Item 4. Controls and Procedures (Tanger Factory Outlet Centers, Inc. and Tanger Properties Limited Partnership) | |
Part II. Other Information | |
Item 1. Legal Proceedings | |
Item 1A. Risk Factors | |
Item 4. Mine Safety Disclosure | |
Item 6. Exhibits | |
Signatures |
5
PART I. - FINANCIAL INFORMATION
Item 1 - Financial Statements of Tanger Factory Outlet Centers, Inc.
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data, unaudited)
September 30, 2016 | December 31, 2015 | |||||||
Assets | ||||||||
Rental property | ||||||||
Land | $ | 262,240 | $ | 240,267 | ||||
Buildings, improvements and fixtures | 2,553,564 | 2,249,417 | ||||||
Construction in progress | 92,937 | 23,533 | ||||||
2,908,741 | 2,513,217 | |||||||
Accumulated depreciation | (792,272 | ) | (748,341 | ) | ||||
Total rental property, net | 2,116,469 | 1,764,876 | ||||||
Cash and cash equivalents | 25,902 | 21,558 | ||||||
Restricted cash | 2,936 | 121,306 | ||||||
Investments in unconsolidated joint ventures | 170,855 | 201,083 | ||||||
Deferred lease costs and other intangibles, net | 156,496 | 127,089 | ||||||
Prepaids and other assets | 88,261 | 78,913 | ||||||
Total assets | $ | 2,560,919 | $ | 2,314,825 | ||||
Liabilities and Equity | ||||||||
Liabilities | ||||||||
Debt | ||||||||
Senior, unsecured notes, net | $ | 1,037,073 | $ | 789,285 | ||||
Unsecured term loans, net | 322,195 | 265,832 | ||||||
Mortgages payable, net | 172,647 | 310,587 | ||||||
Unsecured lines of credit, net | 192,731 | 186,220 | ||||||
Total debt | 1,724,646 | 1,551,924 | ||||||
Accounts payable and accrued expenses | 78,542 | 97,396 | ||||||
Deferred financing obligation | — | 28,388 | ||||||
Other liabilities | 52,079 | 31,085 | ||||||
Total liabilities | 1,855,267 | 1,708,793 | ||||||
Commitments and contingencies | — | — | ||||||
Equity | ||||||||
Tanger Factory Outlet Centers, Inc. | ||||||||
Common shares, $.01 par value, 300,000,000 shares authorized, 96,069,262 and 95,880,825 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively | 961 | 959 | ||||||
Paid in capital | 816,464 | 806,379 | ||||||
Accumulated distributions in excess of net income | (115,565 | ) | (195,486 | ) | ||||
Accumulated other comprehensive loss | (31,618 | ) | (36,715 | ) | ||||
Equity attributable to Tanger Factory Outlet Centers, Inc. | 670,242 | 575,137 | ||||||
Equity attributable to noncontrolling interests | ||||||||
Noncontrolling interests in Operating Partnership | 35,250 | 30,309 | ||||||
Noncontrolling interests in other consolidated partnerships | 160 | 586 | ||||||
Total equity | 705,652 | 606,032 | ||||||
Total liabilities and equity | $ | 2,560,919 | $ | 2,314,825 |
The accompanying notes are an integral part of these consolidated financial statements.
6
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data, unaudited)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Revenues | ||||||||||||||||
Base rentals | $ | 79,569 | $ | 75,841 | $ | 227,195 | $ | 215,799 | ||||||||
Percentage rentals | 2,995 | 2,625 | 7,471 | 6,896 | ||||||||||||
Expense reimbursements | 33,125 | 30,542 | 97,121 | 93,815 | ||||||||||||
Management, leasing and other services | 806 | 1,253 | 3,259 | 4,263 | ||||||||||||
Other income | 2,642 | 2,645 | 6,229 | 5,795 | ||||||||||||
Total revenues | 119,137 | 112,906 | 341,275 | 326,568 | ||||||||||||
Expenses | ||||||||||||||||
Property operating | 37,442 | 36,231 | 110,328 | 108,921 | ||||||||||||
General and administrative | 12,128 | 11,514 | 35,368 | 34,431 | ||||||||||||
Acquisition costs | 487 | — | 487 | — | ||||||||||||
Depreciation and amortization | 29,205 | 28,785 | 82,078 | 77,046 | ||||||||||||
Total expenses | 79,262 | 76,530 | 228,261 | 220,398 | ||||||||||||
Operating income | 39,875 | 36,376 | 113,014 | 106,170 | ||||||||||||
Other income (expense) | ||||||||||||||||
Interest expense | (15,516 | ) | (13,933 | ) | (44,200 | ) | (40,110 | ) | ||||||||
Gain on sale of assets and interests in unconsolidated joint ventures | 1,418 | 20,215 | 6,305 | 33,941 | ||||||||||||
Gain on previously held interests in acquired joint ventures | 46,258 | — | 95,516 | — | ||||||||||||
Other nonoperating income (expense) | 24 | 89 | 378 | (98 | ) | |||||||||||
Income before equity in earnings of unconsolidated joint ventures | 72,059 | 42,747 | 171,013 | 99,903 | ||||||||||||
Equity in earnings of unconsolidated joint ventures | 715 | 3,713 | 7,680 | 8,302 | ||||||||||||
Net income | 72,774 | 46,460 | 178,693 | 108,205 | ||||||||||||
Noncontrolling interests in Operating Partnership | (3,668 | ) | (2,364 | ) | (9,009 | ) | (5,532 | ) | ||||||||
Noncontrolling interests in other consolidated partnerships | (2 | ) | (21 | ) | (13 | ) | 395 | |||||||||
Net income attributable to Tanger Factory Outlet Centers, Inc. | $ | 69,104 | $ | 44,075 | $ | 169,671 | $ | 103,068 | ||||||||
Basic earnings per common share | ||||||||||||||||
Net income | $ | 0.72 | $ | 0.46 | $ | 1.77 | $ | 1.08 | ||||||||
Diluted earnings per common share | ||||||||||||||||
Net income | $ | 0.72 | $ | 0.46 | $ | 1.76 | $ | 1.08 | ||||||||
Dividends declared per common share | $ | 0.325 | $ | 0.285 | $ | 0.935 | $ | 0.810 |
The accompanying notes are an integral part of these consolidated financial statements.
7
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, unaudited)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Net income | $ | 72,774 | $ | 46,460 | $ | 178,693 | $ | 108,205 | ||||||||
Other comprehensive income (loss) | ||||||||||||||||
Foreign currency translation adjustments | (1,731 | ) | (10,932 | ) | 6,970 | (18,945 | ) | |||||||||
Change in fair value of cash flow hedges | 2,228 | (1,156 | ) | (1,601 | ) | (2,045 | ) | |||||||||
Other comprehensive income (loss) | 497 | (12,088 | ) | 5,369 | (20,990 | ) | ||||||||||
Comprehensive income | 73,271 | 34,372 | 184,062 | 87,215 | ||||||||||||
Comprehensive income attributable to noncontrolling interests | (3,695 | ) | (1,770 | ) | (9,294 | ) | (4,067 | ) | ||||||||
Comprehensive income attributable to Tanger Factory Outlet Centers, Inc. | $ | 69,576 | $ | 32,602 | $ | 174,768 | $ | 83,148 |
The accompanying notes are an integral part of these consolidated financial statements.
8
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share and per share data, unaudited)
Common shares | Paid in capital | Accumulated distributions in excess of earnings | Accumulated other comprehensive loss | Total Tanger Factory Outlet Centers, Inc. equity | Noncontrolling interests in Operating Partnership | Noncontrolling interests in other consolidated partnerships | Total equity | ||||||||||||||||||
Balance, December 31, 2014 | $ | 955 | $ | 791,566 | $ | (281,679 | ) | $ | (14,023 | ) | $ | 496,819 | $ | 26,417 | $ | 650 | $ | 523,886 | |||||||
Net income | — | — | 103,068 | — | 103,068 | 5,532 | (395 | ) | 108,205 | ||||||||||||||||
Other comprehensive loss | — | — | — | (19,920 | ) | (19,920 | ) | (1,070 | ) | — | (20,990 | ) | |||||||||||||
Compensation under Incentive Award Plan | — | 12,180 | — | — | 12,180 | — | — | 12,180 | |||||||||||||||||
Issuance of 16,400 common shares upon exercise of options | — | 448 | — | — | 448 | — | — | 448 | |||||||||||||||||
Grant of 348,844 restricted common share awards | 3 | (3 | ) | — | — | — | — | — | — | ||||||||||||||||
Withholding of 31,532 common shares for employee income taxes | — | (1,115 | ) | — | — | (1,115 | ) | — | — | (1,115 | ) | ||||||||||||||
Contributions from noncontrolling interests | — | — | — | — | — | — | 461 | 461 | |||||||||||||||||
Adjustment for noncontrolling interests in Operating Partnership | — | (442 | ) | — | — | (442 | ) | 442 | — | — | |||||||||||||||
Adjustment for noncontrolling interests in other consolidated partnerships | — | 4 | — | — | 4 | — | (4 | ) | — | ||||||||||||||||
Common dividends ($0.810 per share) | — | — | (77,569 | ) | — | (77,569 | ) | — | — | (77,569 | ) | ||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | (4,114 | ) | (116 | ) | (4,230 | ) | ||||||||||||||
Balance, September 30, 2015 | $ | 958 | $ | 802,638 | $ | (256,180 | ) | $ | (33,943 | ) | $ | 513,473 | $ | 27,207 | $ | 596 | $ | 541,276 | |||||||
The accompanying notes are an integral part of these consolidated financial statements. | |||||||||||||||||||||||||
9
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands, except share and per share data, unaudited) | |||||||||||||||||||||||||
Common shares | Paid in capital | Accumulated distributions in excess of earnings | Accumulated other comprehensive loss | Total Tanger Factory Outlet Centers, Inc. equity | Noncontrolling interests in Operating Partnership | Noncontrolling interests in other consolidated partnerships | Total equity | ||||||||||||||||||
Balance, December 31, 2015 | $ | 959 | $ | 806,379 | $ | (195,486 | ) | $ | (36,715 | ) | $ | 575,137 | $ | 30,309 | $ | 586 | $ | 606,032 | |||||||
Net income | — | — | 169,671 | — | 169,671 | 9,009 | 13 | 178,693 | |||||||||||||||||
Other comprehensive income | — | — | — | 5,097 | 5,097 | 272 | — | 5,369 | |||||||||||||||||
Compensation under Incentive Award Plan | — | 12,556 | — | — | 12,556 | — | — | 12,556 | |||||||||||||||||
Issuance of 57,700 common shares upon exercise of options | — | 1,693 | — | — | 1,693 | — | — | 1,693 | |||||||||||||||||
Grant of 173,124 restricted common share awards, net of forfeitures | 2 | (2 | ) | — | — | — | — | — | — | ||||||||||||||||
Issuance of 24,040 deferred shares | — | — | — | — | — | — | — | — | |||||||||||||||||
Withholding of 66,427 common shares for employee income taxes | — | (2,164 | ) | — | — | (2,164 | ) | — | — | (2,164 | ) | ||||||||||||||
Contributions from noncontrolling interests | — | — | — | — | — | — | 35 | 35 | |||||||||||||||||
Adjustment for noncontrolling interests in Operating Partnership | — | (385 | ) | — | — | (385 | ) | 385 | — | — | |||||||||||||||
Adjustment for noncontrolling interests in other consolidated partnerships | — | 4 | — | — | 4 | — | (4 | ) | — | ||||||||||||||||
Acquisition of noncontrolling interest in other consolidated partnership | — | (1,617 | ) | — | — | (1,617 | ) | — | (325 | ) | (1,942 | ) | |||||||||||||
Common dividends ($.935 per share) | — | — | (89,750 | ) | — | (89,750 | ) | — | — | (89,750 | ) | ||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | (4,725 | ) | (145 | ) | (4,870 | ) | ||||||||||||||
Balance, September 30, 2016 | $ | 961 | $ | 816,464 | $ | (115,565 | ) | $ | (31,618 | ) | $ | 670,242 | $ | 35,250 | $ | 160 | $ | 705,652 |
The accompanying notes are an integral part of these consolidated financial statements.
10
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
Nine months ended September 30, | ||||||||
2016 | 2015 | |||||||
OPERATING ACTIVITIES | ||||||||
Net income | $ | 178,693 | $ | 108,205 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 82,078 | 77,046 | ||||||
Amortization of deferred financing costs | 2,350 | 1,896 | ||||||
Gain on sale of assets and interests in unconsolidated entities | (6,305 | ) | (33,941 | ) | ||||
Gain on previously held interests in acquired joint ventures | (95,516 | ) | — | |||||
Equity in earnings of unconsolidated joint ventures | (7,680 | ) | (8,302 | ) | ||||
Share-based compensation expense | 11,815 | 11,560 | ||||||
Amortization of debt (premiums) and discounts, net | 1,160 | 65 | ||||||
Amortization (accretion) of market rent rate adjustments, net | 2,087 | 2,124 | ||||||
Straight-line rent adjustments | (5,092 | ) | (4,742 | ) | ||||
Distributions of cumulative earnings from unconsolidated joint ventures | 10,571 | 8,803 | ||||||
Changes in other assets and liabilities: | ||||||||
Other assets | 1,093 | 2,197 | ||||||
Accounts payable and accrued expenses | 2,512 | 10,117 | ||||||
Net cash provided by operating activities | 177,766 | 175,028 | ||||||
INVESTING ACTIVITIES | ||||||||
Additions to rental property | (112,213 | ) | (181,127 | ) | ||||
Acquisitions of interests in unconsolidated joint ventures, net of cash acquired | (45,219 | ) | — | |||||
Acquisition of noncontrolling interest in other consolidated partnership | (1,942 | ) | — | |||||
Additions to investments in unconsolidated joint ventures | (27,851 | ) | (31,517 | ) | ||||
Net proceeds on sale of assets and interests in unconsolidated entities | 28,706 | 58,799 | ||||||
Change in restricted cash | 118,370 | (42,904 | ) | |||||
Proceeds from insurance reimbursements | 721 | 253 | ||||||
Additions to non-real estate assets | (8,982 | ) | (691 | ) | ||||
Distributions in excess of cumulative earnings from unconsolidated joint ventures | 14,193 | 19,325 | ||||||
Additions to deferred lease costs | (5,273 | ) | (5,592 | ) | ||||
Net cash used in investing activities | (39,490 | ) | (183,454 | ) | ||||
FINANCING ACTIVITIES | ||||||||
Cash dividends paid | (109,879 | ) | (77,569 | ) | ||||
Distributions to noncontrolling interests in Operating Partnership | (5,786 | ) | (4,114 | ) | ||||
Proceeds from revolving credit facility | 733,450 | 409,400 | ||||||
Repayments of revolving credit facility | (727,750 | ) | (324,600 | ) | ||||
Proceeds from notes, mortgages and loans | 338,270 | 60,263 | ||||||
Repayments of notes, mortgages and loans | (329,603 | ) | (49,098 | ) | ||||
Repayment of deferred financing obligation | (28,388 | ) | — | |||||
Employee income taxes paid related to shares withheld upon vesting of equity awards | (2,164 | ) | (1,115 | ) | ||||
Distributions to noncontrolling interests in other consolidated partnerships | (99 | ) | (116 | ) | ||||
Additions to deferred financing costs | (4,243 | ) | (758 | ) | ||||
Proceeds from exercise of options | 1,693 | 448 | ||||||
Contributions from noncontrolling interests in other consolidated partnerships | 35 | 259 | ||||||
Net cash provided by (used in) financing activities | (134,464 | ) | 13,000 | |||||
Effect of foreign currency rate changes on cash and cash equivalents | 532 | (788 | ) | |||||
Net increase in cash and cash equivalents | 4,344 | 3,786 | ||||||
Cash and cash equivalents, beginning of period | 21,558 | 16,875 | ||||||
Cash and cash equivalents, end of period | $ | 25,902 | $ | 20,661 |
The accompanying notes are an integral part of these consolidated financial statements.
11
Item 1 - Financial Statements of Tanger Properties Limited Partnership
TANGER PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except unit data, unaudited)
September 30, 2016 | December 31, 2015 | |||||||
Assets | ||||||||
Rental property | ||||||||
Land | $ | 262,240 | $ | 240,267 | ||||
Buildings, improvements and fixtures | 2,553,564 | 2,249,417 | ||||||
Construction in progress | 92,937 | 23,533 | ||||||
2,908,741 | 2,513,217 | |||||||
Accumulated depreciation | (792,272 | ) | (748,341 | ) | ||||
Total rental property, net | 2,116,469 | 1,764,876 | ||||||
Cash and cash equivalents | 25,853 | 21,552 | ||||||
Restricted cash | 2,936 | 121,306 | ||||||
Investments in unconsolidated joint ventures | 170,855 | 201,083 | ||||||
Deferred lease costs and other intangibles, net | 156,496 | 127,089 | ||||||
Prepaids and other assets | 87,909 | 78,248 | ||||||
Total assets | $ | 2,560,518 | $ | 2,314,154 | ||||
Liabilities and Equity | ||||||||
Liabilities | ||||||||
Debt | ||||||||
Senior, unsecured notes, net | $ | 1,037,073 | $ | 789,285 | ||||
Unsecured term loans, net | 322,195 | 265,832 | ||||||
Mortgages payable, net | 172,647 | 310,587 | ||||||
Unsecured lines of credit, net | 192,731 | 186,220 | ||||||
Total debt | 1,724,646 | 1,551,924 | ||||||
Accounts payable and accrued expenses | 78,141 | 96,725 | ||||||
Deferred financing obligation | — | 28,388 | ||||||
Other liabilities | 52,079 | 31,085 | ||||||
Total liabilities | 1,854,866 | 1,708,122 | ||||||
Commitments and contingencies | — | — | ||||||
Equity | ||||||||
Partners' Equity | ||||||||
General partner, 1,000,000 units outstanding at September 30, 2016 and December 31, 2015 | 6,559 | 5,726 | ||||||
Limited partners, 5,052,743 Class A common units, and 95,069,262 and 94,880,825 Class B common units outstanding at September 30, 2016 and December 31, 2015, respectively | 732,266 | 638,422 | ||||||
Accumulated other comprehensive loss | (33,333 | ) | (38,702 | ) | ||||
Total partners' equity | 705,492 | 605,446 | ||||||
Noncontrolling interests in consolidated partnerships | 160 | 586 | ||||||
Total equity | 705,652 | 606,032 | ||||||
Total liabilities and equity | $ | 2,560,518 | $ | 2,314,154 |
The accompanying notes are an integral part of these consolidated financial statements.
12
TANGER PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per unit data, unaudited)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Revenues | ||||||||||||||||
Base rentals | $ | 79,569 | $ | 75,841 | $ | 227,195 | $ | 215,799 | ||||||||
Percentage rentals | 2,995 | 2,625 | 7,471 | 6,896 | ||||||||||||
Expense reimbursements | 33,125 | 30,542 | 97,121 | 93,815 | ||||||||||||
Management, leasing and other services | 806 | 1,253 | 3,259 | 4,263 | ||||||||||||
Other income | 2,642 | 2,645 | 6,229 | 5,795 | ||||||||||||
Total revenues | 119,137 | 112,906 | 341,275 | 326,568 | ||||||||||||
Expenses | ||||||||||||||||
Property operating | 37,442 | 36,231 | 110,328 | 108,921 | ||||||||||||
General and administrative | 12,128 | 11,514 | 35,368 | 34,431 | ||||||||||||
Acquisition costs | 487 | — | 487 | — | ||||||||||||
Depreciation and amortization | 29,205 | 28,785 | 82,078 | 77,046 | ||||||||||||
Total expenses | 79,262 | 76,530 | 228,261 | 220,398 | ||||||||||||
Operating income | 39,875 | 36,376 | 113,014 | 106,170 | ||||||||||||
Other income (expense) | ||||||||||||||||
Interest expense | (15,516 | ) | (13,933 | ) | (44,200 | ) | (40,110 | ) | ||||||||
Gain on sale of assets and interests in unconsolidated joint ventures | 1,418 | 20,215 | 6,305 | 33,941 | ||||||||||||
Gain on previously held interests in acquired joint ventures | 46,258 | — | 95,516 | — | ||||||||||||
Other nonoperating income (expense) | 24 | 89 | 378 | (98 | ) | |||||||||||
Income before equity in earnings of unconsolidated joint ventures | 72,059 | 42,747 | 171,013 | 99,903 | ||||||||||||
Equity in earnings of unconsolidated joint ventures | 715 | 3,713 | 7,680 | 8,302 | ||||||||||||
Net income | 72,774 | 46,460 | 178,693 | 108,205 | ||||||||||||
Noncontrolling interests in consolidated partnerships | (2 | ) | (21 | ) | (13 | ) | 395 | |||||||||
Net income available to partners | 72,772 | 46,439 | 178,680 | 108,600 | ||||||||||||
Net income available to limited partners | 72,052 | 45,979 | 176,912 | 107,525 | ||||||||||||
Net income available to general partner | $ | 720 | $ | 460 | $ | 1,768 | $ | 1,075 | ||||||||
Basic earnings per common unit | ||||||||||||||||
Net income | $ | 0.72 | $ | 0.46 | $ | 1.77 | $ | 1.08 | ||||||||
Diluted earnings per common unit | ||||||||||||||||
Net income | $ | 0.72 | $ | 0.46 | $ | 1.76 | $ | 1.08 | ||||||||
Distribution declared per common unit | $ | 0.325 | $ | 0.285 | $ | 0.935 | $ | 0.810 |
The accompanying notes are an integral part of these consolidated financial statements.
13
TANGER PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, unaudited)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Net income | $ | 72,774 | $ | 46,460 | $ | 178,693 | $ | 108,205 | ||||||||
Other comprehensive income (loss) | ||||||||||||||||
Foreign currency translation adjustments | (1,731 | ) | (10,932 | ) | 6,970 | (18,945 | ) | |||||||||
Changes in fair value of cash flow hedges | 2,228 | (1,156 | ) | (1,601 | ) | (2,045 | ) | |||||||||
Other comprehensive income (loss) | 497 | (12,088 | ) | 5,369 | (20,990 | ) | ||||||||||
Comprehensive income | 73,271 | 34,372 | 184,062 | 87,215 | ||||||||||||
Comprehensive income attributable to noncontrolling interests in consolidated partnerships | (2 | ) | (21 | ) | (13 | ) | 395 | |||||||||
Comprehensive income attributable to the Operating Partnership | $ | 73,269 | $ | 34,351 | $ | 184,049 | $ | 87,610 |
The accompanying notes are an integral part of these consolidated financial statements.
14
TANGER PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except unit and per unit data, unaudited)
General partner | Limited partners | Accumulated other comprehensive loss | Total partners' equity | Noncontrolling interests in consolidated partnerships | Total equity | ||||||||||||||
Balance, December 31, 2014 | $ | 4,828 | $ | 533,199 | $ | (14,791 | ) | $ | 523,236 | $ | 650 | $ | 523,886 | ||||||
Net income | 1,075 | 107,525 | — | 108,600 | (395 | ) | 108,205 | ||||||||||||
Other comprehensive loss | — | — | (20,990 | ) | (20,990 | ) | — | (20,990 | ) | ||||||||||
Compensation under Incentive Award Plan | — | 12,180 | — | 12,180 | — | 12,180 | |||||||||||||
Issuance of 16,400 common units upon exercise of options | — | 448 | — | 448 | — | 448 | |||||||||||||
Grant of 348,844 restricted common share awards by the Company | — | — | — | — | — | — | |||||||||||||
Withholding of 31,532 common units for employee income taxes | — | (1,115 | ) | — | (1,115 | ) | — | (1,115 | ) | ||||||||||
Contributions from noncontrolling interests | — | — | — | — | 461 | 461 | |||||||||||||
Adjustments for noncontrolling interests in consolidated partnerships | — | 4 | — | 4 | (4 | ) | — | ||||||||||||
Common distributions ($.810 per common unit) | (810 | ) | (80,873 | ) | — | (81,683 | ) | — | (81,683 | ) | |||||||||
Distributions to noncontrolling interests | — | — | — | — | (116 | ) | (116 | ) | |||||||||||
Balance, September 30, 2015 | $ | 5,093 | $ | 571,368 | $ | (35,781 | ) | $ | 540,680 | $ | 596 | $ | 541,276 | ||||||
General partner | Limited partners | Accumulated other comprehensive loss | Total partners' equity | Noncontrolling interests in consolidated partnerships | Total equity | ||||||||||||||
Balance, December 31, 2015 | $ | 5,726 | $ | 638,422 | $ | (38,702 | ) | $ | 605,446 | $ | 586 | $ | 606,032 | ||||||
Net income | 1,768 | 176,912 | — | 178,680 | 13 | 178,693 | |||||||||||||
Other comprehensive income | — | — | 5,369 | 5,369 | — | 5,369 | |||||||||||||
Compensation under Incentive Award Plan | — | 12,556 | — | 12,556 | — | 12,556 | |||||||||||||
Issuance of 57,700 common units upon exercise of options | — | 1,693 | — | 1,693 | — | 1,693 | |||||||||||||
Grant of 173,124 restricted common share awards by the Company, net of forfeitures | — | — | — | — | — | — | |||||||||||||
Issuance of 24,040 deferred units | — | — | — | — | — | — | |||||||||||||
Withholding of 66,427 common units for employee income taxes | — | (2,164 | ) | — | (2,164 | ) | — | (2,164 | ) | ||||||||||
Contributions from noncontrolling interests | — | — | — | — | 35 | 35 | |||||||||||||
Adjustment for noncontrolling interests in consolidated partnerships | — | 4 | — | 4 | (4 | ) | — | ||||||||||||
Acquisition of noncontrolling interest in other consolidated partnership | — | (1,617 | ) | — | (1,617 | ) | (325 | ) | (1,942 | ) | |||||||||
Common distributions ($.935 per common unit) | (935 | ) | (93,540 | ) | — | (94,475 | ) | — | (94,475 | ) | |||||||||
Distributions to noncontrolling interests | — | — | — | — | (145 | ) | (145 | ) | |||||||||||
Balance, September 30, 2016 | $ | 6,559 | $ | 732,266 | $ | (33,333 | ) | $ | 705,492 | $ | 160 | $ | 705,652 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
15
TANGER PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
The accompanying notes are an integral part of these consolidated financial statements.
Nine months ended September 30, | ||||||||
2016 | 2015 | |||||||
OPERATING ACTIVITIES | ||||||||
Net income | $ | 178,693 | $ | 108,205 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 82,078 | 77,046 | ||||||
Amortization of deferred financing costs | 2,350 | 1,896 | ||||||
Gain on sale of assets and interests in unconsolidated entities | (6,305 | ) | (33,941 | ) | ||||
Gain on previously held interests in acquired joint ventures | (95,516 | ) | — | |||||
Equity in earnings of unconsolidated joint ventures | (7,680 | ) | (8,302 | ) | ||||
Equity-based compensation expense | 11,815 | 11,560 | ||||||
Amortization of debt (premiums) and discounts, net | 1,160 | 65 | ||||||
Amortization (accretion) of market rent rate adjustments, net | 2,087 | 2,124 | ||||||
Straight-line rent adjustments | (5,092 | ) | (4,742 | ) | ||||
Distributions of cumulative earnings from unconsolidated joint ventures | 10,571 | 8,803 | ||||||
Changes in other assets and liabilities: | ||||||||
Other assets | 780 | 2,397 | ||||||
Accounts payable and accrued expenses | 2,782 | 10,965 | ||||||
Net cash provided by operating activities | 177,723 | 176,076 | ||||||
INVESTING ACTIVITIES | ||||||||
Additions to rental property | (112,213 | ) | (181,127 | ) | ||||
Acquisitions of interests in unconsolidated joint ventures, net of cash acquired | (45,219 | ) | — | |||||
Acquisition of noncontrolling interest in other consolidated partnership | (1,942 | ) | — | |||||
Additions to investments in unconsolidated joint ventures | (27,851 | ) | (31,517 | ) | ||||
Net proceeds on sale of assets and interests in unconsolidated entities | 28,706 | 58,799 | ||||||
Change in restricted cash | 118,370 | (42,904 | ) | |||||
Proceeds from insurance reimbursements | 721 | 253 | ||||||
Additions to non-real estate assets | (8,982 | ) | (691 | ) | ||||
Distributions in excess of cumulative earnings from unconsolidated joint ventures | 14,193 | 19,325 | ||||||
Additions to deferred lease costs | (5,273 | ) | (5,592 | ) | ||||
Net cash used in investing activities | (39,490 | ) | (183,454 | ) | ||||
FINANCING ACTIVITIES | ||||||||
Cash distributions paid | (115,665 | ) | (81,683 | ) | ||||
Proceeds from revolving credit facility | 733,450 | 409,400 | ||||||
Repayments of revolving credit facility | (727,750 | ) | (324,600 | ) | ||||
Proceeds from notes, mortgages and loans | 338,270 | 60,263 | ||||||
Repayments of notes, mortgages and loans | (329,603 | ) | (49,098 | ) | ||||
Repayment of deferred financing obligation | (28,388 | ) | — | |||||
Employee income taxes paid related to shares withheld upon vesting of equity awards | (2,164 | ) | (1,115 | ) | ||||
Distributions to noncontrolling interests in consolidated partnerships | (99 | ) | (116 | ) | ||||
Additions to deferred financing costs | (4,243 | ) | (758 | ) | ||||
Proceeds from exercise of options | 1,693 | 448 | ||||||
Contributions from noncontrolling interests in other consolidated partnerships | 35 | 259 | ||||||
Net cash provided by (used in) financing activities | (134,464 | ) | 13,000 | |||||
Effect of foreign currency on cash and cash equivalents | 532 | (788 | ) | |||||
Net increase in cash and cash equivalents | 4,301 | 4,834 | ||||||
Cash and cash equivalents, beginning of period | 21,552 | 15,806 | ||||||
Cash and cash equivalents, end of period | $ | 25,853 | $ | 20,640 |
16
TANGER FACTORY OUTLET CENTERS, INC. AND SUBSIDIARIES
TANGER PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business
Tanger Factory Outlet Centers, Inc. and subsidiaries is one of the largest owners and operators of outlet centers in the United States and Canada. We are a fully-integrated, self-administered and self-managed real estate investment trust ("REIT") which, through our controlling interest in the Operating Partnership, focuses exclusively on developing, acquiring, owning, operating and managing outlet shopping centers. As of September 30, 2016, we owned and operated 35 consolidated outlet centers, with a total gross leasable area of approximately 12.4 million square feet. We also had partial ownership interests in 8 unconsolidated outlet centers totaling approximately 2.3 million square feet, including 4 outlet centers in Canada.
Our outlet centers and other assets are held by, and all of our operations are conducted by, Tanger Properties Limited Partnership and subsidiaries. Accordingly, the descriptions of our business, employees and properties are also descriptions of the business, employees and properties of the Operating Partnership. Unless the context indicates otherwise, the term, "Company", refers to Tanger Factory Outlet Centers, Inc. and subsidiaries and the term, "Operating Partnership", refers to Tanger Properties Limited Partnership and subsidiaries. The terms "we", "our" and "us" refer to the Company or the Company and the Operating Partnership together, as the text requires.
The Company owns the majority of the units of partnership interest issued by the Operating Partnership through its two wholly-owned subsidiaries, Tanger GP Trust and Tanger LP Trust. Tanger GP Trust controls the Operating Partnership as its sole general partner. Tanger LP Trust holds a limited partnership interest. As of September 30, 2016, the Company, through its ownership of Tanger GP Trust and Tanger LP Trust, owned 96,069,262 units of the Operating Partnership and other limited partners (the "Non-Company LPs") collectively owned 5,052,743 Class A common limited partnership units. Each Class A common limited partnership unit held by the Non-Company LPs is exchangeable for one of the Company's common shares, subject to certain limitations to preserve the Company's REIT status. Class B common limited partnership units, which are held by Tanger LP Trust, are not exchangeable for common shares of the Company.
2. Basis of Presentation
The unaudited consolidated financial statements included herein have been prepared pursuant to accounting principles generally accepted in the United States of America and should be read in conjunction with the consolidated financial statements and notes thereto of the Company's and the Operating Partnership's combined Annual Report on Form 10-K for the year ended December 31, 2015. The December 31, 2015 balance sheet data in this Form 10-Q was derived from audited financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the SEC's rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial statements for the interim periods have been made. The results of interim periods are not necessarily indicative of the results for a full year.
The Company currently consolidates the Operating Partnership because it has (1) the power to direct the activities of the Operating Partnership that most significantly impact the Operating Partnership’s economic performance and (2) the obligation to absorb losses and the right to receive the residual returns of the Operating Partnership that could be potentially significant.
17
We consolidate properties that are wholly owned or properties where we own less than 100% but we control. Control is determined using an evaluation based on accounting standards related to the consolidation of voting interest entities and variable interest entities ("VIE"). For joint ventures that are determined to be a VIE, we consolidate the entity where we are deemed to be the primary beneficiary. Determination of the primary beneficiary is based on whether an entity has (1) the power to direct the activities of the VIE that most significantly impact the entity's economic performance, and (2) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. Our determination of the primary beneficiary considers all relationships between us and the VIE, including management agreements and other contractual arrangements.
Investments in real estate joint ventures that we do not control but may exercise significant influence are accounted for using the equity method of accounting. These investments are recorded initially at cost and subsequently adjusted for our equity in the joint venture's net income or loss, cash contributions, distributions and other adjustments required under the equity method of accounting.
For certain of these investments, we record our equity in the venture's net income or loss under the hypothetical liquidation at book value (“HLBV”) method of accounting due to the structures and the preferences we receive on the distributions from our joint ventures pursuant to the respective joint venture agreements for those joint ventures. Under this method, we recognize income and loss in each period based on the change in liquidation proceeds we would receive from a hypothetical liquidation of our investment based on depreciated book value. Therefore, income or loss may be allocated disproportionately as compared to the ownership percentages due to specified preferred return rate thresholds and may be more or less than actual cash distributions received and more or less than what we may receive in the event of an actual liquidation. In the event a basis difference is created between our underlying interest in the venture's net assets and our initial investment, we amortize such amount over the estimated life of the venture as a component of equity in earnings of unconsolidated joint ventures.
We separately report investments in joint ventures for which accumulated distributions have exceeded investments in and our share of net income or loss of the joint ventures within other liabilities in the consolidated balance sheets. The carrying amount of our investments in the Charlotte and Galveston/Houston joint ventures are less than zero because of financing or operating distributions that were greater than net income, as net income includes non-cash charges for depreciation and amortization.
We had previously concluded that our Savannah joint venture, which owned the Outlet center in Pooler, Georgia, was considered a VIE and we were not the primary beneficiary. On August 12, 2016, the joint venture acquired our venture partner's interest. The Savannah joint venture is now wholly-owned by us and is consolidated in our financial results as of the acquisition date.
On June 30, 2016, we completed the purchase of our partners' interest in the Westgate joint venture, which owned the outlet center in Glendale, Arizona using special purpose entities owned by qualified intermediaries to facilitate a potential Section 1031 reverse exchange under the Internal Revenue Code. We have determined that the Westgate joint venture is a variable interest entity of which we are the primary beneficiary and is consolidated in our financial results as of the acquisition date. At September 30, 2016, total assets of this venture were $176.0 million and total liabilities were $14.9 million. The primary classification of the assets on the consolidated balance sheets are total rental property, net, $158.5 million; cash, $3.9 million and other assets, $13.6 million (including deferred lease costs and other intangibles) and the primary classification of the liabilities include accounts payable and accrued expenses, $906,000 and other liabilities, $14.0 million (including below market lease value).
We have concluded that our Southaven joint venture is considered a VIE because our voting rights are disproportionate to our economic interests and substantially all of each venture's activities either involve us or are conducted on our behalf. The management agreement and other contractual arrangements for the Southaven joint venture give us, but not necessarily our joint venture partner, significant participating rights over activities that most significantly impact the economic performance of the ventures, thus we have concluded that we are the primary beneficiary and have consolidated the venture's balance sheet and results of operations. At September 30, 2016, total assets of this venture were $85.5 million and total liabilities were $60.8 million. The primary classification of the assets on the consolidated balance sheets are total rental property, net, $79.7 million; cash, $3.5 million and other assets, $2.3 million (including deferred lease costs and other intangibles) and the primary classification of the liabilities include accounts payable and accrued expenses, $1.7 million and mortgages payable net of debt origination costs, $58.2 million. These assets include only those assets that can be used to settle obligations of the VIE. The liabilities include third party liabilities and exclude intercompany balances that are eliminated in consolidation.
18
"Noncontrolling interests in the Operating Partnership" reflects the Non-Company LP's percentage ownership of the Operating Partnership's units. "Noncontrolling interests in other consolidated partnerships" consist of outside equity interests in partnerships or joint ventures not wholly owned by the Company or the Operating Partnership that are consolidated with the financial results of the Company and Operating Partnership because the Operating Partnership exercises control over the entities that own the properties. Noncontrolling interests are initially recorded in the consolidated balance sheets at fair value based upon purchase price allocations. Income is allocated to the noncontrolling interests based on the allocation provisions within the partnership or joint venture agreements.
As a result of the adoption of Financial Accounting Standards Board ("FASB") Accounting Standards Update (ASU) No. 2015-03 Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, our deferred debt origination costs and related accumulated amortization previously recorded in the line item “deferred debt origination costs, net” have been reclassified from assets to the respective debt line items within the liabilities section in the consolidated balance sheet as of December 31, 2015. The reclassification decreased previously reported total assets and total liabilities by $11.9 million.
In February 2015, FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. ASU 2015-02 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. During the first quarter of 2016, we adopted ASU No. 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis" and this adoption did not have a material impact on our financial position, results of operations or cash flows.
3. Acquisition of Rental Property
Savannah
On August 12, 2016, the Savannah joint venture, which owned the Outlet center in Pooler, Georgia distributed all outparcels along with $15.0 million in cash consideration to the other partner in exchange for the partner's ownership interest. We contributed the $15.0 million in cash consideration to the joint venture, which we funded with borrowings under our unsecured lines of credit. At the time of acquisition, the property was subject to a $96.9 million construction loan, with an interest rate of LIBOR + 1.65% that would have matured in May 2017. In September 2016, we repaid the mortgage loan with borrowings under our unsecured lines of credit.
The joint venture is now wholly-owned by us and is consolidated in our financial results as of the acquisition date. Prior to this transaction, we owned a 50% legal interest in the joint venture since its formation and accounted for it under the equity method of accounting. However, due to preferred equity contributions we made to the joint venture, and the returns earned on those contributions, our estimated economic interest in the book value of the assets was approximately 98%.Therefore, substantially all of the earnings of the joint venture were previously recognized by us as equity in earnings of unconsolidated joint ventures.
There was no contingent consideration associated with this acquisition. The joint venture incurred approximately $260,000 in third-party acquisition related costs for the acquisition of the venture partner's interest that were expensed as incurred. As a result of acquiring the remaining interest in the Savannah joint venture, we recorded a gain of $46.3 million which represented the difference between the carrying book value and the fair value of our previously held equity method investment in the joint venture.
Non-cash investing activities related to the purchase of our partners' interest in the Savannah joint venture, include the assumption of debt totaling $96.9 million. In addition, rental property and lease related intangible assets and liabilities increased by a net of $46.3 million related to the fair value of our previously held interest in excess of our carrying amount; prepaids and other assets increased $250,000 and accounts payable and accrued expenses increased $2.1 million from the assumption of current assets and liabilities.
19
Westgate
On June 30, 2016, we completed the purchase of our partners' interest in the Westgate joint venture, which owned the outlet center in Glendale, Arizona, for a total cash price of approximately $40.9 million. Prior to the transaction, we owned a 58% interest in the Westgate joint venture since its formation in 2012 and accounted for it under the equity method of accounting. The joint venture is now wholly-owned and is consolidated in our financial results as of June 30, 2016.
The total cash price included $39.0 million to acquire the 40% ownership interest held by the equity partner in the joint venture. We also purchased the remaining 2% noncontrolling ownership interests in the Westgate outlet center held in a consolidated partnership for a purchase price of $1.9 million. The acquisition of the noncontrolling ownership interest was recorded as an equity transaction and, as a result, the carrying balances of the noncontrolling interest were eliminated and the remaining difference between the purchase price and carrying balance was recorded as a reduction in additional-paid-in-capital. We funded the total purchase price with borrowings under our unsecured lines of credit. At the time of the acquisition, the property was subject to a $62.0 million mortgage loan, with an interest rate of LIBOR + 1.75% and a maturity in June 2017. In August 2016, we repaid the mortgage loan in full with proceeds from the public offering of $250.0 million in senior notes due 2026.
There was no contingent consideration associated with this acquisition. We incurred approximately $127,000 in third-party acquisition related costs for the acquisition of our partners' interest in the Westgate joint venture that were expensed as incurred. As a result of acquiring the remaining interest in the Westgate joint venture, we recorded a gain of $49.3 million which represented the difference between the carrying book value and the fair value of our previously held equity method investment in the joint venture.
Non-cash investing activities related to the purchase of our partners' interest in the Westgate joint venture, include the assumption of debt totaling $62.0 million. In addition, rental property and lease related intangible assets and liabilities increased by a net of $49.3 million related to the fair value of our previously held interest in excess of our carrying amount; prepaids and other assets increased 227,000 and accounts payable and accrued expenses increased $5.0 million from the assumption of current assets and liabilities.
The following table illustrates the fair value of the aggregate consideration transferred to acquire the equity interests of the Savannah and Westgate properties at the acquisition date for the nine months ended September 30, 2016 (in thousands):
Cash transferred for equity interests | $ | 54,000 | |
Fair value of our previously held interests | 145,581 | ||
Fair value of net assets | $ | 199,581 |
20
The following table illustrates the aggregate fair value of the amounts of the identifiable assets acquired and liabilities assumed and recognized at the acquisition date for the Savannah and Westgate properties acquired during the nine months ended September 30, 2016:
Fair Value (in thousands) | Weighted-Average Amortization Period (in years) | |||||
Cash | $ | 8,781 | ||||
Land | 27,593 | |||||
Buildings, improvements and fixtures | 308,117 | |||||
Deferred lease costs and other intangibles | ||||||
Above market lease value | 15,882 | 7.2 | ||||
Lease in place value | 13,972 | 5.9 | ||||
Lease and legal costs | 10,264 | 6.4 | ||||
Total deferred lease costs and other intangibles | 40,118 | |||||
Prepaids and other assets | 477 | |||||
Debt | (158,994 | ) | ||||
Accounts payable and accrued expenses | (7,183 | ) | ||||
Other liabilities (Below market lease value) | (19,328 | ) | 12.0 | |||
Total fair value of net assets | $ | 199,581 |
The fair values were determined based on an income approach, using a rental growth rate of 3.0%, a discount rate between 7.50% and 8.25%, and a terminal cap rate between 5.75% and 7.0%. The estimated fair values were determined to have primarily relied upon Level 3 inputs, as defined in Note 11.
The fair values are based upon our best available information at the time of the preparation of our financial statements. However, the business acquisition accounting for the Savannah and Westgate outlet centers are not complete and accordingly, such estimates of the value of acquired assets and liabilities are provisional until the valuation is finalized. Therefore, the provisional measurements of fair value reflected are subject to change and such changes could be significant. The Company expects to finalize the valuation and complete the purchase price allocation by the end of 2016.
During the third quarter of 2016, we adjusted the Westgate purchase price allocation based upon information that was received subsequent to the acquisition date that related to conditions that existed as of that date. This adjustment increased above market lease value by $1.6 million, and decreased buildings, improvements and fixtures by $5.6 million, below market lease value by $4.8 million, lease in place value by $628,000 and land by $150,000.
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4. Disposition of Properties
Fort Myers
In January 2016, we sold our outlet center in Fort Myers, Florida located near Sanibel Island for net proceeds of approximately $25.8 million. The proceeds from the sale of this unencumbered asset were used to pay down balances outstanding under our unsecured lines of credit.
Myrtle Beach Hwy 501
In September 2016, we sold an outparcel at our outlet center in Myrtle Beach, South Carolina located near Highway 501 for net proceeds of approximately $2.9 million. The net proceeds are recorded as restricted cash as of September 30, 2016 because they are being held by a qualified intermediary under Section 1031 of the Internal Revenue Code of 1986, as amended.
The following table sets forth certain summarized information regarding the properties sold during the nine months ended September 30, 2016:
Properties | Locations | Date Sold | Square Feet (in 000's) | Net Sales Price (in 000's) | Gain on Sale(in 000's) | ||||||||||
Operating Properties: | |||||||||||||||
Sanibel Center | Fort Myers, Florida | January 2016 | 199 | $ | 25,785 | $ | 4,887 | ||||||||
Nonoperating properties: | |||||||||||||||
Outparcel | Myrtle Beach, South Carolina | September 2016 | — | $ | 2,921 | $ | 1,418 | ||||||||
Total | 199 | $ | 28,706 | $ | 6,305 |
The rental property sold did not meet the criteria for reporting discontinued operations, thus its results of operations have remained in continuing operations.
22
5. Developments of Consolidated Outlet Centers
The table below sets forth our consolidated outlet centers under development as of September 30, 2016:
Project | Approximate square feet (in 000's) | Costs Incurred to Date (in millions) | Borrowed to date (in millions) | Projected Opening | |||||
New development | |||||||||
Daytona Beach | 352 | $ | 67.4 | $ | — | November 2016 | |||
Fort Worth | 352 | 13.9 | — | Holiday 2017 | |||||
Expansion | |||||||||
Lancaster | 123 | 10.2 | — | Q3 2017 | |||||
Total | 827 | $ | 91.5 | $ | — |
Daytona Beach
In November 2015, we purchased land for approximately $9.9 million and commenced construction on the development of a wholly-owned outlet center in Daytona Beach, Florida.
Fort Worth
In September 2016, we purchased land in the greater Fort Worth, Texas area for approximately $11.2 million and began construction immediately on the development of a wholly-owned outlet center. The outlet center will be located within the 279-acre Champions Circle mixed-use development adjacent to Texas Motor Speedway.
Lancaster Expansion
In July 2016, we commenced construction on a 123,000 square foot expansion of our outlet center in Lancaster, Pennsylvania.
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6. Investments in Unconsolidated Real Estate Joint Ventures
The equity method of accounting is used to account for each of the individual joint ventures. We have an ownership interest in the following unconsolidated real estate joint ventures:
As of September 30, 2016 | ||||||||||||||||
Joint Venture | Outlet Center Location | Ownership % | Square Feet (in 000's) | Carrying Value of Investment (in millions) | Total Joint Venture Debt, Net (in millions)(1) | |||||||||||
Columbus | Columbus, OH | 50.0 | % | 355 | $ | 44.3 | $ | — | ||||||||
National Harbor | National Harbor, MD | 50.0 | % | 341 | 4.7 | 86.0 | ||||||||||
RioCan Canada | Various | 50.0 | % | 901 | 121.9 | 11.5 | ||||||||||
$ | 170.9 | $ | 97.5 | |||||||||||||
Charlotte(3) | Charlotte, NC | 50.0 | % | 398 | $ | (2.2 | ) | $ | 89.7 | |||||||
Galveston/Houston (3) | Texas City, TX | 50.0 | % | 353 | (3.3 | ) | 64.8 | |||||||||
$ | (5.5 | ) | $ | 154.5 |
As of December 31, 2015 | ||||||||||||||||
Joint Venture | Outlet Center Location | Ownership % | Square Feet (in 000's) | Carrying Value of Investment (in millions) | Total Joint Venture Debt, Net (in millions)(1) | |||||||||||
Columbus | Columbus, OH | 50.0 | % | — | $ | 21.1 | $ | — | ||||||||
National Harbor | National Harbor, MD | 50.0 | % | 339 | 6.1 | 85.8 | ||||||||||
RioCan Canada | Various | 50.0 | % | 870 | 117.2 | 11.3 | ||||||||||
Savannah (2) | Savannah, GA | 50.0 | % | 377 | 44.4 | 87.6 | ||||||||||
Westgate | Glendale, AZ | 58.0 | % | 411 | 12.3 | 61.9 | ||||||||||
$ | 201.1 | $ | 246.6 | |||||||||||||
Charlotte(3) | Charlotte, NC | 50.0 | % | 398 | $ | (1.1 | ) | $ | 89.6 | |||||||
Galveston/Houston(3) | Texas City, TX | 50.0 | % | 353 | (1.5 | ) | 64.7 | |||||||||
$ | (2.6 | ) | $ | 154.3 |
(1) | Net of debt origination costs and including premiums of $912,000 and $3.3 million as of September 30, 2016 and December 31, 2015, respectively. |
(2) | Based on capital contribution and distribution provisions in the joint venture agreement, our economic interest in the venture's cash flow was greater than indicated in the Ownership column, which states our legal interest in this venture. As of December 31, 2015, based upon the liquidation proceeds we would receive from a hypothetical liquidation of our investment based on depreciated book value, our estimated economic interest in the venture was approximately 98%. Our economic interest may fluctuate based on a number of factors, including mortgage financing, partnership capital contributions and distributions, and proceeds from gains or losses of asset sales. |
(3) | The negative carrying value is due to the distributions of proceeds from mortgage loans and quarterly distributions of excess cash flow exceeding the original contributions from the partners. |
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Fees we received for various services provided to our unconsolidated joint ventures were recognized in management, leasing and other services as follows (in thousands):
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Fee: | ||||||||||||||||
Development and leasing | $ | 65 | $ | 325 | $ | 611 | $ | 1,632 | ||||||||
Loan guarantee | 85 | 182 | 449 | 564 | ||||||||||||
Management and marketing | 656 | 746 | 2,199 | 2,067 | ||||||||||||
Total Fees | $ | 806 | $ | 1,253 | $ | 3,259 | $ | 4,263 |
Our investments in real estate joint ventures are reduced by the percentage of the profits earned for leasing and development services associated with our ownership interest in each joint venture. Our carrying value of investments in unconsolidated joint ventures differs from our share of the assets reported in the "Summary Balance Sheets - Unconsolidated Joint Ventures" shown below due to adjustments to the book basis, including intercompany profits on sales of services that are capitalized by the unconsolidated joint ventures. The differences in basis (totaling $3.7 million and $3.9 million as of September 30, 2016 and December 31, 2015, respectively) are amortized over the various useful lives of the related assets.
Columbus
In June 2016, we opened an approximately 355,000 square foot outlet center in Columbus, Ohio. As of September 30, 2016, we and our partner had each contributed $40.5 million to fund development activities. We are providing property management, marketing and leasing services to the joint venture. During construction, our partner provided development services to the joint venture and we, along with our partner, provided joint leasing services.
Savannah
In May 2016, we expanded our outlet center in Savannah by approximately 42,000 square feet, bringing the outlet center's total gross leasable area to approximately 419,000 square feet.
As described in Note 3, we acquired our partners' interest in the Savannah joint venture in August 2016 and have consolidated the property for financial reporting purposes since the acquisition date.
Westgate
As described in Note 3, we acquired our partners' interest in the Westgate joint venture in June 2016 and have consolidated the property for financial reporting purposes since the acquisition date.
RioCan Canada
Rental property held and used by our RioCan joint venture is 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 estimated future undiscounted cash flows associated with the asset is compared to the asset's carrying amount, and if less, recognize an impairment loss in an amount by which the carrying amount exceeds its fair value.
During the third quarter 2016, the joint venture determined for its Bromont, Quebec outlet center that the estimated future undiscounted cash flows of that property did not exceed the property's carrying value based on deteriorating amounts of net operating income. Therefore, the joint venture recorded a $5.8 million non-cash impairment charge in its statement of operations, which equaled the excess of the property's carrying value over its fair value. The fair value was determined using a market approach considering the prevailing market income capitalization rates and sales data for transactions involving similar assets. Our share of this impairment charge, $2.9 million, was recorded in equity in earnings of unconsolidated joint ventures in our consolidated statement of operations.
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Condensed combined summary financial information of unconsolidated joint ventures accounted for using the equity method is as follows (in thousands):
Condensed Combined Balance Sheets - Unconsolidated Joint Ventures | September 30, 2016 | December 31, 2015 | ||||||
Assets | ||||||||
Land | $ | 89,036 | $ | 103,046 | ||||
Buildings, improvements and fixtures | 497,892 | 615,662 | ||||||
Construction in progress, including land | 14,933 | 62,308 | ||||||
601,861 | 781,016 | |||||||
Accumulated depreciation | (61,890 | ) | (60,629 | ) | ||||
Total rental property, net | 539,971 | 720,387 | ||||||
Cash and cash equivalents | 28,649 | 28,723 | ||||||
Deferred lease costs, net | 14,408 | 18,399 | ||||||
Prepaids and other assets | 12,794 | 14,455 | ||||||
Total assets | $ | 595,822 | $ | 781,964 | ||||
Liabilities and Owners' Equity | ||||||||
Mortgages payable, net | $ | 252,019 | $ | 400,935 | ||||
Accounts payable and other liabilities | 24,979 | 31,805 | ||||||
Total liabilities | 276,998 | 432,740 | ||||||
Owners' equity | 318,824 | 349,224 | ||||||
Total liabilities and owners' equity | $ | 595,822 | $ | 781,964 |
Three months ended | Nine months ended | |||||||||||||||
Condensed Combined Statements of Operations | September 30, | September 30, | ||||||||||||||
- Unconsolidated Joint Ventures | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Revenues | $ | 25,654 | $ | 27,495 | $ | 82,693 | $ | 77,648 | ||||||||
Expenses | ||||||||||||||||
Property operating | 9,103 | 9,601 | 30,499 | 29,912 | ||||||||||||
General and administrative | 95 | 92 | 390 | 400 | ||||||||||||
Asset impairment | 5,838 | — | 5,838 | — | ||||||||||||
Depreciation and amortization | 8,001 | 9,003 | 26,208 | 25,381 | ||||||||||||
Total expenses | 23,037 | 18,696 | 62,935 | 55,693 | ||||||||||||
Operating income | 2,617 | 8,799 | 19,758 | 21,955 | ||||||||||||
Interest expense | (1,925 | ) | (2,324 | ) | (7,161 | ) | (6,304 | ) | ||||||||
Other nonoperating income | 2 | 4 | 5 | 17 | ||||||||||||
Net income | $ | 694 | $ | 6,479 | $ | 12,602 | $ | 15,668 | ||||||||
The Company and Operating Partnership's share of: | ||||||||||||||||
Net income | $ | 715 | $ | 3,713 | $ | 7,680 | $ | 8,302 | ||||||||
Depreciation expense (real estate related) | $ | 4,325 | $ | 5,411 | $ | 15,472 | $ | 14,525 |
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7. Debt of the Company
All of the Company's debt is held by the Operating Partnership and its consolidated subsidiaries.
The Company guarantees the Operating Partnership's obligations with respect to its unsecured lines of credit which have a total borrowing capacity of $520.0 million. The Company also guarantees the Operating Partnership's unsecured term loan.
The Operating Partnership had the following principal amounts outstanding on the debt guaranteed by the Company (in thousands):
September 30, 2016 | December 31, 2015 | |||||||
Unsecured lines of credit | $ | 196,000 | $ | 190,300 | ||||
Unsecured term loan | $ | 325,000 | $ | 250,000 |
8. Debt of the Operating Partnership
The debt of the Operating Partnership consisted of the following (in thousands):
As of | As of | |||||||||||||||||||||
September 30, 2016 | December 31, 2015 | |||||||||||||||||||||
Stated Interest Rate(s) | Maturity Date | Principal | Book Value(1) | Principal | Book Value(1) | |||||||||||||||||
Senior, unsecured notes: | ||||||||||||||||||||||
Senior notes | 6.125 | % | June 2020 | $ | 300,000 | $ | 298,103 | $ | 300,000 | $ | 297,739 | |||||||||||
Senior notes | 3.875 | % | December 2023 | 250,000 | 245,275 | 250,000 | 244,829 | |||||||||||||||
Senior notes | 3.750 | % | December 2024 | 250,000 | 246,971 | 250,000 | 246,717 | |||||||||||||||
Senior notes | 3.125 | % | September 2026 | 250,000 | 246,724 | — | — | |||||||||||||||
Mortgages payable: | ||||||||||||||||||||||
Atlantic City (2) | 5.14%-7.65% | November 2021- December 2026 | 41,196 | 44,110 | 43,312 | 46,605 | ||||||||||||||||
Deer Park | LIBOR + 1.50% | — | — | — | 150,000 | 149,145 | ||||||||||||||||
Foxwoods | LIBOR + 1.65% | December 2017 | 70,250 | 69,825 | 70,250 | 69,564 | ||||||||||||||||
Southaven | LIBOR + 1.75% | April 2018 | 59,090 | 58,712 | 45,824 | 45,273 | ||||||||||||||||
Unsecured note payable (2) | 1.50 | % | June 2016 | — | — | 10,000 | 9,919 | |||||||||||||||
Unsecured term loan | LIBOR + 0.95% | April 2021 | 325,000 | 322,195 | 250,000 | 248,443 | ||||||||||||||||
Unsecured term note | LIBOR + 1.30% | — | — | — | 7,500 | 7,470 | ||||||||||||||||
Unsecured lines of credit | LIBOR + .90% | October 2019 | 196,000 | 192,731 | 190,300 | 186,220 | ||||||||||||||||
$ | 1,741,536 | $ | 1,724,646 | $ | 1,567,186 | $ | 1,551,924 |
(1) | Including premiums and net of debt discount and debt origination costs. |
(2) | The effective interest rates assigned during the purchase price allocation to the assumed mortgage and note payable during acquisitions in 2011 were as follows: Atlantic City 5.05% and unsecured note payable 3.15%. |
Certain of our properties, which had a net book value of approximately $331.7 million at September 30, 2016 and $622.8 million at December 31, 2015, serve as collateral for mortgages payable. We maintain unsecured lines of credit that provide for borrowings of up to $520.0 million. The unsecured lines of credit include a $20.0 million liquidity line and a $500.0 million syndicated line. The syndicated line may be increased to $1.0 billion through an accordion feature in certain circumstances.
We provide guarantees to lenders for our joint ventures which include standard non-recourse carve out indemnifications for losses arising from items such as but not limited to fraud, physical waste, payment of taxes, environmental indemnities, misapplication of insurance proceeds or security deposits and failure to maintain required insurance. For construction and term loans, we may include a guaranty of completion as well as a principal guaranty ranging from 5% to 100% of principal.
27
The principal guarantees include terms for release or reduction based upon satisfactory completion of construction and performance targets including occupancy thresholds and minimum debt service coverage tests.
The unsecured lines of credit and senior unsecured notes include covenants that require the maintenance of certain ratios, including debt service coverage and leverage, and limit the payment of dividends such that dividends and 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. As of September 30, 2016, we were in compliance with all of our debt covenants.
Deer Park Debt Repayment
In January 2016, we repaid our $150.0 million floating rate mortgage loan, which had an original maturity date in August 2018 and related to our 749,000 square foot Deer Park outlet center.
Unsecured Term Note Repayment
In February 2016, we repaid our $7.5 million unsecured term note, which had an original maturity date in August 2017.
Unsecured Term Loan
In April 2016, we amended our unsecured term loan to increase the size of the loan from $250.0 million to $325.0 million, extend the maturity date from February 23, 2019 to April 13, 2021, reduce the interest rate spread over LIBOR from 1.05% to 0.95%, and increase the incremental loan availability through an accordion feature from $150.0 million to $175.0 million.
Unsecured Note Payable Repayment
In June 2016, our $10.0 million unsecured note payable became due and was repaid on June 23, 2016.
$250.0 Million Unsecured Senior Notes due 2026
In August 2016, we completed a public offering of $250.0 million in senior notes due 2026 in an underwritten public offering. The notes were priced at 99.605% of the principal amount to yield 3.171% to maturity. The notes will pay interest semi-annually at a rate of 3.125% per annum and mature on September 1, 2026. The net proceeds from the offering, after deducting the underwriting discount and offering expenses, were approximately $246.7 million. We used the net proceeds from the sale of the notes to repay a $62.0 million floating rate mortgage loan related to our outlet center in Glendale (Westgate), Arizona, repay borrowings under our unsecured lines of credit, and for general corporate purposes.
Savannah Debt Repayment
At the time of acquisition, the Savannah outlet center was subject to a $96.9 million mortgage loan, with an interest rate of LIBOR + 1.65% that matured in May 2017. In September 2016, we repaid the mortgage loan with borrowings under our unsecured lines of credit.
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Debt Maturities
Maturities of the existing long-term debt as of September 30, 2016 for the next five years and thereafter are as follows (in thousands):
Calendar Year | Amount | |||
2016 | $ | 727 | ||
2017 | 73,258 | |||
2018 | 62,273 | |||
2019 | 199,369 | |||
2020 | 303,566 | |||
Thereafter | 1,102,343 | |||
Subtotal | 1,741,536 | |||
Net discount and debt origination costs | (16,890 | ) | ||
Total | $ | 1,724,646 |
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9. Deferred Financing Obligation
In September 2015, the noncontrolling interest in our outlet center in Deer Park, New York exercised its right to require us to acquire their ownership interest in the property for $28.4 million. We closed on the transaction in January 2016 and repaid the deferred financing obligation, which was recorded in the other liabilities section of our consolidated balance sheet as of December 31, 2015.
10. Derivative Financial Instruments
The following table summarizes the terms and fair values of our derivative financial instruments, recorded in other liabilities within the consolidated balance sheets (in thousands):
Fair Value | |||||||||||||||||||
Effective Date | Maturity Date | Notional Amount | Bank Pay Rate | Company Fixed Pay Rate | September 30, 2016 | December 31, 2015 | |||||||||||||
Assets (Liabilities): | |||||||||||||||||||
November 14, 2013 | August 14, 2018 | $ | 50,000 | 1 month LIBOR | 1.3075 | % | $ | (502 | ) | $ | (212 | ) | |||||||
November 14, 2013 | August 14, 2018 | 50,000 | 1 month LIBOR | 1.2970 | % | (492 | ) | (198 | ) | ||||||||||
November 14, 2013 | August 14, 2018 | 50,000 | 1 month LIBOR | 1.3025 | % | (497 | ) | (206 | ) | ||||||||||
April 13, 2016 | January 1, 2021 | 50,000 | 1 month LIBOR | 1.0390 | % | (221 | ) | — | |||||||||||
April 13, 2016 | January 1, 2021 | 50,000 | 1 month LIBOR | 1.0395 | % | (222 | ) | — | |||||||||||
April 13, 2016 | January 1, 2021 | 50,000 | 1 month LIBOR | 1.0400 | % | (223 | ) | — | |||||||||||
April 13, 2016 | January 1, 2021 | 25,000 | 1 month LIBOR | 0.9915 | % | (60 | ) | — | |||||||||||
Total | $ | 325,000 | $ | (2,217 | ) | $ | (616 | ) |
In April 2016, we entered into four separate interest rate swap agreements, effective April 13, 2016 that fix the base LIBOR rate at an average of 1.03% on notional amounts totaling $175.0 million through January 1, 2021.
The derivative financial instruments are comprised of interest rate swaps, which are designated and qualify as cash flow hedges, each with a separate counterparty. We do not use derivatives for trading or speculative purposes and currently do not have any derivatives that are not designated as hedges.
The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated other comprehensive loss and subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivative, if significant, is recognized directly in earnings. For the three and nine months ended September 30, 2016, the ineffective portion was not significant.
The following table represents the effect of the derivative financial instruments on the accompanying consolidated financial statements (in thousands):
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Interest Rate Swaps (Effective Portion): | ||||||||||||||||
Change in fair value of cash flow hedges | $ | 2,228 | $ | (1,156 | ) | $ | (1,601 | ) | $ | (2,045 | ) |
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11. Fair Value Measurements
Fair value guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers are defined as follows:
Tier | Description | |
Level 1 | Observable inputs such as quoted prices in active markets | |
Level 2 | Inputs other than quoted prices in active markets that are either directly or indirectly observable | |
Level 3 | Unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions |
The following table sets forth our assets and liabilities that are measured at fair value within the fair value hierarchy (in thousands):
Level 1 | Level 2 | Level 3 | ||||||||||||||
Quoted Prices in Active Markets for Identical Assets or Liabilities | Significant Observable Inputs | Significant Unobservable Inputs | ||||||||||||||
Total | ||||||||||||||||
Fair value as of September 30, 2016 | ||||||||||||||||
Liabilities: | ||||||||||||||||
Interest rate swaps (other liabilities) | $ | (2,217 | ) | $ | — | $ | (2,217 | ) | $ | — | ||||||
Total liabilities | $ | (2,217 | ) | $ | — | $ | (2,217 | ) | $ | — |
Level 1 | Level 2 | Level 3 | ||||||||||||||
Quoted Prices in Active Markets for Identical Assets or Liabilities | Significant Observable Inputs | Significant Unobservable Inputs | ||||||||||||||
Total | ||||||||||||||||
Fair value as of December 31, 2015: | ||||||||||||||||
Liabilities: | ||||||||||||||||
Interest rate swaps (other liabilities) | $ | (616 | ) | $ | — | $ | (616 | ) | $ | — | ||||||
Total liabilities | $ | (616 | ) | $ | — | $ | (616 | ) | $ | — |
Fair values of interest rate swaps are approximated using Level 2 inputs based on current market data received from financial sources that trade such instruments and are based on prevailing market data and derived from third party proprietary models based on well recognized financial principles including counterparty risks, credit spreads and interest rate projections, as well as reasonable estimates about relevant future market conditions.
31
The estimated fair value within the fair value hierarchy and recorded value of our debt consisting of senior unsecured notes, unsecured term loans, secured mortgages and unsecured lines of credit were as follows (in thousands):
September 30, 2016 | December 31, 2015 | |||||||
Level 1 Quoted Prices in Active Markets for Identical Assets or Liabilities | $ | 521,000 | $ | 447,800 | ||||
Level 2 Significant Observable Inputs | 1,178,198 | 901,958 | ||||||
Level 3 Significant Unobservable Inputs | 129,340 | 266,075 | ||||||
Total fair value of debt | $ | 1,828,538 | $ | 1,615,833 | ||||
Recorded value of debt | $ | 1,724,646 | $ | 1,551,924 |
With the exception of the unsecured term loan and unsecured lines of credit, that have variable rates and considered at market value, fair values of the senior notes and mortgage loans are determined using discounted cash flow analysis with an interest rate or credit spread similar to that of current market borrowing arrangements. Because the Company's senior unsecured notes are publicly traded with limited trading volume, these instruments are classified as Level 2 in the hierarchy. In contrast, mortgage loans are classified as Level 3 given the unobservable inputs utilized in the valuation. Considerable judgment is necessary to develop estimated fair values of financial instruments. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on the disposition of the financial instruments.
The carrying values of cash and cash equivalents, receivables, accounts payable, accrued expenses and other assets and liabilities are reasonable estimates of their fair values because of the short maturities of these instruments.
12. Partners' Equity of the Operating Partnership
All units of partnership interest issued by the Operating Partnership have equal rights with respect to earnings, dividends and net assets. When the Company issues common shares upon the exercise of options, the grant of restricted common share awards, or the exchange of Class A common limited partnership units, the Operating Partnership issues a corresponding Class B common limited partnership unit to Tanger LP trust, a wholly owned subsidiary of the Company.
32
The following table sets forth the changes in outstanding partnership units for the nine months ended September 30, 2016 and September 30, 2015.
Limited Partnership Units | ||||||||||||
General Partnership Units | Class A | Class B | Total | |||||||||
Balance December 31, 2014 | 1,000,000 | 5,078,406 | 94,509,781 | 99,588,187 | ||||||||
Grant of restricted common share awards by the Company | — | — | 348,844 | 348,844 | ||||||||
Units issued upon exercise of options | — | — | 16,400 | 16,400 | ||||||||
Units withheld for employee income taxes | — | — | (31,532 | ) | (31,532 | ) | ||||||
Balance September 30, 2015 | 1,000,000 | 5,078,406 | 94,843,493 | 99,921,899 | ||||||||
Balance December 31, 2015 | 1,000,000 | 5,052,743 | 94,880,825 | 99,933,568 | ||||||||
Grant of restricted common share awards by the Company, net of of forfeitures | — | — | 173,124 | 173,124 | ||||||||
Issuance of deferred units | — | — | 24,040 | 24,040 | ||||||||
Units issued upon exercise of options | — | — | 57,700 | 57,700 | ||||||||
Units withheld for employee income taxes | — | — | (66,427 | ) | (66,427 | ) | ||||||
Balance September 30, 2016 | 1,000,000 | 5,052,743 | 95,069,262 | 100,122,005 |
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13. Earnings Per Share of the Company
The following table sets forth a reconciliation of the numerators and denominators in computing the Company's earnings per share (in thousands, except per share amounts):
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Numerator | ||||||||||||||||
Net income attributable to Tanger Factory Outlet Centers, Inc. | $ | 69,104 | $ | 44,075 | $ | 169,671 | $ | 103,068 | ||||||||
Less allocation of earnings to participating securities | (627 | ) | (494 | ) | (1,649 | ) | (1,210 | ) | ||||||||
Net income available to common shareholders of Tanger Factory Outlet Centers, Inc. | $ | 68,477 | $ | 43,581 | $ | 168,022 | $ | 101,858 | ||||||||
Denominator | ||||||||||||||||
Basic weighted average common shares | 95,156 | 94,746 | 95,075 | 94,675 | ||||||||||||
Effect of notional units | 426 | — | 393 | — | ||||||||||||
Effect of outstanding options and certain restricted common shares | 90 | 53 | 69 | 62 | ||||||||||||
Diluted weighted average common shares | 95,672 | 94,799 | 95,537 | 94,737 | ||||||||||||
Basic earnings per common share: | ||||||||||||||||
Net income | $ | 0.72 | $ | 0.46 | $ | 1.77 | $ | 1.08 | ||||||||
Diluted earnings per common share: | ||||||||||||||||
Net income | $ | 0.72 | $ | 0.46 | $ | 1.76 | $ | 1.08 |
We determine diluted earnings per share based on the weighted average number of common shares outstanding combined with the incremental weighted average shares that would have been outstanding assuming all potentially dilutive securities were converted into common shares at the earliest date possible.
The notional units are considered contingently issuable common shares and are included in earnings per share if the effect is dilutive using the treasury stock method and the common shares would be issuable if the end of the reporting period were the end of the contingency period. For the three and nine months ended September 30, 2016, 531,746 and 564,849 units were excluded from the computation, respectively, and for both the three and nine months ended September 30, 2015, 951,450 units were excluded from the computation, because these units would not have been issuable if the end of the reporting period were the end of the contingency period.
The effect of dilutive common shares is determined using the treasury stock method, whereby outstanding options are assumed exercised at the beginning of the reporting period and the exercise proceeds from such options and the average measured but unrecognized compensation cost during the period are assumed to be used to repurchase our common shares at the average market price during the period. For the three months ended September 30, 2016, there were no options excluded from the computation. For the nine months ended September 30, 2016 there were 145,300 options excluded from the computation and for the three and nine months ended September 30, 2015, 250,400 and 250,500 options were excluded from the computation, as they were anti-dilutive. The assumed exchange of the partnership units held by the Non-Company LPs as of the beginning of the year, which would result in the elimination of earnings allocated to the noncontrolling interest in the Operating Partnership, would have no impact on earnings per share since the allocation of earnings to a common limited partnership unit, as if exchanged, is equivalent to earnings allocated to a common share.
Certain of the Company's unvested restricted common share awards contain non-forfeitable rights to dividends or dividend equivalents. The impact of these unvested restricted common share awards on earnings per share has been calculated using the two-class method whereby earnings are allocated to the unvested restricted common share awards based on dividends declared and the unvested restricted common shares' participation rights in undistributed earnings. Unvested restricted common shares that do not contain non-forfeitable rights to dividends or dividend equivalents are included in the diluted earnings per share computation if the effect is dilutive, using the treasury stock method.
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14. Earnings Per Unit of the Operating Partnership
The following table sets forth a reconciliation of the numerators and denominators in computing earnings per unit (in thousands, except per unit amounts):
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Numerator | ||||||||||||||||
Net income attributable to partners of the Operating Partnership | $ | 72,772 | $ | 46,439 | $ | 178,680 | $ | 108,600 | ||||||||
Less allocation of earnings to participating securities | (629 | ) | (495 | ) | (1,651 | ) | (1,211 | ) | ||||||||
Net income available to common unitholders of the Operating Partnership | $ | 72,143 | $ | 45,944 | $ | 177,029 | $ | 107,389 | ||||||||
Denominator | ||||||||||||||||
Basic weighted average common units | 100,209 | 99,824 | 100,127 | 99,753 | ||||||||||||
Effect of notional units | 426 | — | 393 | — | ||||||||||||
Effect of outstanding options and certain restricted common units | 90 | 53 | 69 | 62 | ||||||||||||
Diluted weighted average common units | 100,725 | 99,877 | 100,589 | 99,815 | ||||||||||||
Basic earnings per common unit: | ||||||||||||||||
Net income | $ | 0.72 | $ | 0.46 | $ | 1.77 | $ | 1.08 | ||||||||
Diluted earnings per common unit: | ||||||||||||||||
Net income | $ | 0.72 | $ | 0.46 | $ | 1.76 | $ | 1.08 |
We determine diluted earnings per unit based on the weighted average number of common units outstanding combined with the incremental weighted average units that would have been outstanding assuming all potentially dilutive securities were converted into common units at the earliest date possible.
The notional units are considered contingently issuable common units and are included in earnings per unit if the effect is dilutive using the treasury stock method and the common shares would be issuable if the end of the reporting period were the end of the contingency period. For the three and nine months ended September 30, 2016, 531,746 and 564,849 units were excluded from the computation, and for both the three and nine months ended September 30, 2015, 951,450 units were excluded from the computation, because these units would not have been issuable if the end of the reporting period were the end of the contingency period.
The effect of dilutive common units is determined using the treasury stock method, whereby outstanding options are assumed exercised at the beginning of the reporting period and the exercise proceeds from such options and the average measured but unrecognized compensation cost during the period are assumed to be used to repurchase our common units at the average market price during the period. The market price of a common unit is considered to be equivalent to the market price of a Company common share. For the three months ended September 30, 2016, there were no options excluded from the computation. For the nine months ended September 30, 2016 there were 145,300 options excluded from the computation and for the three and nine months ended September 30, 2015, 250,400 and 250,500 options were excluded from the computation, as they were anti-dilutive.
Certain of the Company's unvested restricted common share awards contain non-forfeitable rights to distributions or distribution equivalents. The impact of the corresponding unvested restricted unit awards on earnings per unit has been calculated using the two-class method whereby earnings are allocated to the unvested restricted unit awards based on distributions declared and the unvested restricted units' participation rights in undistributed earnings. Unvested restricted common units that do not contain non-forfeitable rights to dividends or dividend equivalents are included in the diluted earnings per unit computation if the effect is dilutive, using the treasury stock method.
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15. Equity Based Compensation of the Company
We have a shareholder approved equity-based compensation plan, the Incentive Award Plan of Tanger Factory Outlet Centers, Inc. and Tanger Properties Limited Partnership (Amended and Restated as of April 4, 2014) (the "Plan"), which covers our independent directors, officers, employees and consultants. For each common share issued by the Company, the Operating Partnership issues one corresponding unit of partnership interest to the Company's wholly owned subsidiaries. Therefore, when the Company grants an equity based award, the Operating Partnership treats each award as having been granted by the Operating Partnership. In the discussion below, the term "we" refers to the Company and the Operating Partnership together and the term "shares" is meant to also include corresponding units of the Operating Partnership.
We recorded equity-based compensation expense in general and administrative expenses in our consolidated statements of operations as follows (in thousands):
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Restricted common shares | $ | 3,020 | $ | 2,865 | $ | 8,527 | $ | 8,362 | ||||||||
Notional unit performance awards | 1,057 | 1,012 | 2,967 | 2,853 | ||||||||||||
Options | 83 | 117 | 321 | 345 | ||||||||||||
Total equity-based compensation | $ | 4,160 | $ | 3,994 | $ | 11,815 | $ | 11,560 |
Equity-based compensation expense capitalized as a part of rental property and deferred lease costs were as follows (in thousands):
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Equity-based compensation expense capitalized | $ | 244 | $ | 217 | $ | 741 | $ | 620 |
Restricted Common Share Awards
During February 2016, the Company granted 286,524 restricted common shares to the Company's independent directors and the Company's senior executive officers. The grant date fair value of the awards ranged from $26.48 to $31.15 per share. The independent directors' restricted common shares vest ratably over a three year period and the senior executive officers' restricted shares vest ratably over a four or five year period. For the restricted shares issued to our chief executive officer, the restricted share agreement requires him to hold the shares for a minimum of three years following each vesting date. Compensation expense related to the amortization of the deferred compensation is being recognized in accordance with the vesting schedule of the restricted shares.
For certain shares that vest during the period, we withhold shares with value equivalent to the employees' minimum statutory obligation for the applicable income and other employment taxes, and remit cash to the appropriate taxing authorities. The total number of shares withheld upon vesting was 6,045 and 66,427 for the three and nine months ended September 30, 2016, respectively, and was 954 and 31,532 for the three and nine months ended September 30, 2015 respectively. The total number of shares withheld was based on the value of the restricted common shares on the vesting date as determined by our closing share price on the day prior to the vesting date. Total amounts paid for the employees' tax obligation to taxing authorities was $244,460 and $2.2 million for the three and nine months ended September 30, 2016, respectively. Total amounts paid for the employees' tax obligation to taxing authorities was $1.1 million for the nine months ended September 30, 2015. These amounts are reflected as financing activities within the consolidated statements of cash flows.
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2016 Outperformance Plan
In February 2016, the Compensation Committee of Tanger Factory Outlet Centers, Inc. approved the terms of the Tanger Factory Outlet Centers, Inc. 2016 Outperformance Plan (the “2016 OPP"), a long-term incentive compensation plan. Under the 2016 OPP, the Company granted to award recipients an aggregate of 321,900 performance share units with a grant date fair value of $15.10 per unit, which may convert, subject to the achievement of the goals described below, into a maximum of 321,900 restricted common shares of the Company based on the Company’s absolute share price appreciation and its share price appreciation relative to its peer group, over the three-year measurement period from February 10, 2016 through February 9, 2019.
The maximum number of shares will be earned under this plan if the Company both (a) achieves 35% or higher share price appreciation, inclusive of all dividends paid, over the three-year measurement period and (b) is in the 70th or greater percentile of its peer group for total shareholder return over the three-year measurement period. The Company expects that the value of the awards, if the Company achieves a 35% share price appreciation and is in the 70th or greater percentile of its peer group for total shareholder return over the three-year measurement period, will equal approximately $12.8 million.
Any shares earned on February 9, 2019 are also subject to a time based vesting schedule, which provides that, subject to continued employment with the Company, 50% of the shares will vest on February 15, 2019 and the remaining 50% will vest on February 15, 2020.
With respect to 50% of the performance share units (representing a right to receive up to 160,950 restricted shares), 20% of this portion of the award (representing a right to receive 32,190 restricted shares) will be earned if the Company’s aggregate share price appreciation, inclusive of all dividends paid during this period, equals 18% over the three-year measurement period, 60% of this portion of the award (representing a right to receive 96,750 restricted shares) will be earned if the Company’s aggregate share price appreciation, inclusive of all dividends paid during this period equals 26.5%, and 100% of this portion of the award (representing a right to receive 160,950 restricted shares) will be earned if the Company’s aggregate share price appreciation, inclusive of all dividends paid during this period, equals 35% or higher.
With respect to the other 50% of the performance share units (representing a right to receive up to 160,950 restricted shares), 20% of this portion of the award (representing a right to receive up to 32,190 restricted shares) will be earned if the Company's share price appreciation inclusive of all dividends paid is in the 40th percentile of its peer group over the three-year measurement period, 60% of this portion of the award (representing a right to receive up to 96,750 restricted shares) will be earned if the Company's share price appreciation inclusive of all dividends paid is in the 55th percentile of its peer group during this period, and 100% of this portion of the award (representing a right to receive 160,950 restricted shares) will be earned if the Company's share price appreciation inclusive of all dividends paid is in the 70th percentile of its peer group or greater during this period. The peer group is based on companies included in the SNL Equity REIT index.
The number of restricted shares received in respect of the performance share units will be determined on a pro-rata basis by linear interpolation between share price appreciation thresholds, both for absolute share price appreciation and for relative share price appreciation amongst the Company's peer group. The share price targets will be reduced on a dollar-for-dollar basis with respect to any dividend payments made during the measurement period.
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16. Accumulated Other Comprehensive Loss of the Company
The following table presents changes in the balances of each component of accumulated comprehensive loss for the three and nine months ended September 30, 2016 (in thousands):
Tanger Factory Outlet Centers, Inc. Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interest in Operating Partnership Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||||||
Foreign Currency | Cash flow hedges | Total | Foreign Currency | Cash flow hedges | Total | |||||||||||||||||||
Balance June 30, 2016 | $ | (27,869 | ) | $ | (4,221 | ) | $ | (32,090 | ) | $ | (1,516 | ) | $ | (224 | ) | $ | (1,740 | ) | ||||||
Unrealized loss on foreign currency translation adjustments | (1,644 | ) | — | (1,644 | ) | (87 | ) | — | (87 | ) | ||||||||||||||
Change in fair value of cash flow hedges | — | 2,116 | 2,116 | — | 112 | 112 | ||||||||||||||||||
Balance September 30, 2016 | $ | (29,513 | ) | $ | (2,105 | ) | $ | (31,618 | ) | $ | (1,603 | ) | $ | (112 | ) | $ | (1,715 | ) | ||||||
Tanger Factory Outlet Centers, Inc. Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interest in Operating Partnership Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||||||
Foreign Currency | Cash flow hedges | Total | Foreign Currency | Cash flow hedges | Total | |||||||||||||||||||
Balance December 31, 2015 | $ | (36,130 | ) | $ | (585 | ) | $ | (36,715 | ) | $ | (1,956 | ) | $ | (31 | ) | $ | (1,987 | ) | ||||||
Unrealized gain on foreign currency translation adjustments | 6,617 | — | 6,617 | 353 | — | 353 | ||||||||||||||||||
Change in fair value of cash flow hedges | — | (1,520 | ) | (1,520 | ) | — | (81 | ) | (81 | ) | ||||||||||||||
Balance September 30, 2016 | $ | (29,513 | ) | $ | (2,105 | ) | $ | (31,618 | ) | $ | (1,603 | ) | $ | (112 | ) | $ | (1,715 | ) |
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The following table presents changes in the balances of each component of accumulated comprehensive loss for the three and nine months ended September 30, 2015 (in thousands):
Tanger Factory Outlet Centers, Inc. Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interest in Operating Partnership Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||||||
Foreign Currency | Cash flow hedges | Total | Foreign Currency | Cash flow hedges | Total | |||||||||||||||||||
Balance June 30, 2015 | $ | (21,716 | ) | $ | (754 | ) | $ | (22,470 | ) | $ | (1,183 | ) | $ | (40 | ) | $ | (1,223 | ) | ||||||
Unrealized loss on foreign currency translation adjustments | (10,376 | ) | — | (10,376 | ) | (556 | ) | — | (556 | ) | ||||||||||||||
Change in fair value of cash flow hedges | — | (1,097 | ) | (1,097 | ) | — | (59 | ) | (59 | ) | ||||||||||||||
Balance September 30, 2015 | $ | (32,092 | ) | $ | (1,851 | ) | $ | (33,943 | ) | $ | (1,739 | ) | $ | (99 | ) | $ | (1,838 | ) | ||||||
Tanger Factory Outlet Centers, Inc. Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interest in Operating Partnership Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||||||
Foreign Currency | Cash flow hedges | Total | Foreign Currency | Cash flow hedges | Total | |||||||||||||||||||
Balance December 31, 2014 | $ | (14,113 | ) | $ | 90 | $ | (14,023 | ) | $ | (773 | ) | $ | 5 | $ | (768 | ) | ||||||||
Unrealized loss on foreign currency translation adjustments | (17,979 | ) | — | (17,979 | ) | (966 | ) | — | (966 | ) | ||||||||||||||
Change in fair value of cash flow hedges | — | (1,941 | ) | (1,941 | ) | — | (104 | ) | (104 | ) | ||||||||||||||
Balance September 30, 2015 | $ | (32,092 | ) | $ | (1,851 | ) | $ | (33,943 | ) | $ | (1,739 | ) | $ | (99 | ) | $ | (1,838 | ) |
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17. Accumulated Other Comprehensive Loss of the Operating Partnership
The following table presents changes in the balances of each component of accumulated comprehensive loss for the three and nine months ended September 30, 2016 (in thousands):
Foreign Currency | Cash flow hedges | Accumulated Other Comprehensive Income (Loss) | ||||||||||
Balance June 30, 2016 | $ | (29,385 | ) | $ | (4,445 | ) | $ | (33,830 | ) | |||
Unrealized loss on foreign currency translation adjustments | (1,731 | ) | — | (1,731 | ) | |||||||
Change in fair value of cash flow hedges | — | 2,228 | 2,228 | |||||||||
Balance September 30, 2016 | $ | (31,116 | ) | $ | (2,217 | ) | $ | (33,333 | ) | |||
Foreign Currency | Cash flow hedges | Accumulated Other Comprehensive Income (Loss) | ||||||||||
Balance December 31, 2015 | $ | (38,086 | ) | $ | (616 | ) | $ | (38,702 | ) | |||
Unrealized gain on foreign currency translation adjustments | 6,970 | — | 6,970 | |||||||||
Change in fair value of cash flow hedges | — | (1,601 | ) | (1,601 | ) | |||||||
Balance September 30, 2016 | $ | (31,116 | ) | $ | (2,217 | ) | $ | (33,333 | ) |
The following table presents changes in the balances of each component of accumulated comprehensive loss for the three and nine months ended September 30, 2015 (in thousands):
Foreign Currency | Cash flow hedges | Accumulated Other Comprehensive Income (Loss) | ||||||||||
Balance June 30, 2015 | $ | (22,899 | ) | $ | (794 | ) | $ | (23,693 | ) | |||
Unrealized loss on foreign currency translation adjustments | (10,932 | ) | — | (10,932 | ) | |||||||
Change in fair value of cash flow hedges | — | (1,156 | ) | (1,156 | ) | |||||||
Balance September 30, 2015 | $ | (33,831 | ) | $ | (1,950 | ) | $ | (35,781 | ) | |||
Foreign Currency | Cash flow hedges | Accumulated Other Comprehensive Income (Loss) | ||||||||||
Balance December 31, 2014 | $ | (14,886 | ) | $ | 95 | $ | (14,791 | ) | ||||
Unrealized loss on foreign currency translation adjustments | (18,945 | ) | — | (18,945 | ) | |||||||
Change in fair value of cash flow hedges | — | (2,045 | ) | (2,045 | ) | |||||||
Balance September 30, 2015 | $ | (33,831 | ) | $ | (1,950 | ) | $ | (35,781 | ) |
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18. Non-Cash Activities
We purchase capital equipment and incur costs relating to construction of facilities, including tenant finishing allowances. Expenditures included in accounts payable and accrued expenses were as follows (in thousands):
September 30, 2016 | September 30, 2015 | |||||||
Costs relating to construction included in accounts payable and accrued expenses | $ | 20,340 | $ | 33,622 |
19. New Accounting Pronouncements
In August 2016, the FASB issued ASU No. 2016-15, the Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force), which finalizes Proposed ASU No. EITF-15F of the same name, and addresses stakeholders’ concerns regarding diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. This ASU is effective for fiscal years beginning after December 15, 2017 and for interim periods within those fiscal years, with early adoption permitted. The ASU should be adopted using a retrospective transition approach. We are currently evaluating the impact of adopting the new guidance, but we do not expect the adoption to have a material impact on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected versus incurred credit losses for financial assets held. This ASU will be applied on a prospective basis for fiscal years and interim periods beginning after December 15, 2019, with early adoption permitted for fiscal years beginning and interim periods beginning after December 15, 2018. We are currently evaluating the impact of adopting the new guidance, but we do not expect the adoption to have a material impact on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016 including interim periods within that reporting period and may be applied on a modified retrospective basis as a cumulative-effect adjustment to retained earnings as of the date of adoption. Early adoption is permitted. We are currently evaluating the new guidance to determine the impact it may have on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting, this standard eliminates the requirement that when an existing cost method investment qualifies for use of the equity method, an investor must restate its historical financial statements, as if the equity method had been used during all previous periods. Under the new guidance, at the point an investment qualifies for the equity method, any unrealized gain or loss in accumulated other comprehensive income/(loss) ("AOCI") will be recognized through earnings. The standard is effective for interim and annual reporting periods beginning after December 15, 2016, although early adoption is permitted. The adoption of the guidance will be applied prospectively to increases in the level of ownership interest or degree of influence occurring after the new standards effective date. Additional transition disclosures are not required upon adoption. We do not expect that the adoption of this standard will have a material impact on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-06, Derivatives and Hedging (Topic 815) – Contingent Put and Call Options in Debt Instruments (“ASU 2016-06”), which will reduce diversity of practice in identifying embedded derivatives in debt instruments. ASU 2016-06 clarifies that the nature of an exercise contingency is not subject to the “clearly and closely” criteria for purposes of assessing whether the call or put option must be separated from the debt instrument and accounted for separately as a derivative. ASU No. 2016-06 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2016. Entities are required to apply the guidance to existing debt instruments using a modified retrospective transition method as of the period of adoption. We are currently evaluating the new guidance to determine the impact it may have on our consolidated financial statements.
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In February 2016, the FASB issued ASU No. 2016-02, Leases. ASU 2016-02, codified in ASC 842, amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 will be effective beginning in the first quarter of 2019. Early adoption of ASU 2016-02 as of its issuance is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. We are currently evaluating the new guidance to determine the impact it may have on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We are required to adopt the new pronouncement in the first quarter of fiscal 2018 using one of two retrospective application methods. In March, April and May 2016 the FASB issued the following amendments to clarify the implementation guidance: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing and ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606)—Narrow-Scope Improvements and Practical Expedients. We are currently evaluating the new guidance to determine the impact it may have on our consolidated financial statements.
20. Subsequent Events
In October 2016, the Company's Board of Directors declared a $0.325 cash dividend per common share payable on November 15, 2016 to each shareholder of record on October 31, 2016, and the Trustees of Tanger GP Trust declared a $0.325 cash distribution per Operating Partnership unit to the Operating Partnership's unitholders.
In October 2016, we completed a public offering to sell an additional $100.0 million of our 3.125% senior notes due 2026 in an underwritten public offering. The notes priced at 98.962% of the principal amount to yield 3.248% to maturity. The new notes constitute an additional issuance of, and form a single series with, the $250.0 million aggregate principal amount of 3.125% senior notes due 2026 issued on August 8, 2016. The aggregate principal amount outstanding of the 3.125% senior notes due 2026 is $350.0 million. All outstanding notes pay interest semi-annually at a rate of 3.125% per annum and mature on September 1, 2026. The net proceeds from this offering, after deducting the underwriting discount and offering expenses, were approximately $97.8 million. The net proceeds were used to repay borrowings under the Operating Partnership's unsecured lines of credit, and for general corporate purposes.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The discussion of our results of operations reported in the unaudited, consolidated statements of operations compares the three and nine months ended September 30, 2016 with the three and nine months ended September 30, 2015. The results of operations discussion is combined for Tanger Factory Outlet Centers, Inc. and Tanger Properties Limited Partnership because the results are virtually the same for both entities. The following discussion should be read in conjunction with the unaudited consolidated financial statements appearing elsewhere in this report. Historical results and percentage relationships set forth in the unaudited, consolidated statements of operations, including trends which might appear, are not necessarily indicative of future operations. Unless the context indicates otherwise, the term, "Company", refers to Tanger Factory Outlet Centers, Inc. and subsidiaries and the term, "Operating Partnership", refers to Tanger Properties Limited Partnership and subsidiaries. The terms "we", "our" and "us" refer to the Company or the Company and the Operating Partnership together, as the text requires.
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. We intend for 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 have 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, beliefs and expectations, are generally identifiable by use of the words "believe", "expect", "intend", "anticipate", "estimate", "project", or similar expressions. Such forward-looking statements include, but are not limited to, statements regarding our: future issuances of equity and debt and the expected use of proceeds from such issuances; potential sales or purchases of outlet centers; anticipated results of operations, liquidity and working capital; new outlet center developments, expansions and renovations; and real estate joint ventures. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other important factors which are, in some cases, beyond our control and which could materially affect our actual results, performance or achievements. Important factors which may cause actual results to differ materially from current expectations include, but are not limited to; our inability to develop new outlet centers or expand existing outlet centers successfully; risks related to the economic performance and market value of our outlet centers; the relative illiquidity of real property investments; impairment charges affecting our properties; our dispositions of assets may not achieve anticipated results; competition for the acquisition and development of outlet centers, and our inability to complete outlet centers we have identified; environmental regulations affecting our business; risk associated with a possible terrorist activity or other acts or threats of violence and threats to public safety; our dependence on rental income from real property; our dependence on the results of operations of our retailers; the fact that certain of our properties are subject to ownership interests held by third parties, whose interests may conflict with ours; risks related to uninsured losses; the risk that consumer, travel, shopping and spending habits may change; risks associated with our Canadian investments; risks associated with attracting and retaining key personnel; risks associated with debt financing; risk associated with our guarantees of debt for, or other support we may provide to, joint venture properties; our potential failure to qualify as a REIT; our legal obligation to make distributions to our shareholders; our dependence on distributions from the Operating Partnership to meet our financial obligations, including dividends; the risk of a cyber-attack or an act of cyber-terrorism; and those factors set forth under Item 1A - "Risk Factors" in the Company's and the Operating Partnership's Annual Report on Form 10-K for the year ended December 31, 2015.
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General Overview
As of September 30, 2016, we had 35 consolidated outlet centers in 21 states totaling 12.4 million square feet. We also had 8 unconsolidated outlet centers in 6 states or provinces totaling 2.3 million square feet. The table below details our new developments, expansions and dispositions of consolidated and unconsolidated outlet centers that significantly impacted our results of operations and liquidity from January 1, 2015 to September 30, 2016 (square feet in thousands):
Consolidated Outlet Centers | Unconsolidated Joint Venture Outlet Centers | |||||||||||||
Outlet Center | Quarter Acquired/Opened/Disposed | Square Feet | Outlet Centers | Square Feet | Outlet Centers | |||||||||
As of January 1, 2015 | 11,346 | 36 | 2,606 | 9 | ||||||||||
New Developments: | ||||||||||||||
Foxwoods | Second Quarter | 312 | 1 | — | — | |||||||||
Savannah | Second Quarter | — | — | 377 | 1 | |||||||||
Grand Rapids | Third Quarter | 352 | 1 | — | — | |||||||||
Southaven | Fourth Quarter | 320 | 1 | — | — | |||||||||
Expansion: | ||||||||||||||
Westgate | First Quarter | — | — | 28 | — | |||||||||
San Marcos | Fourth Quarter | 24 | — | — | — | |||||||||
Disposition: | ||||||||||||||
Wisconsin Dells | First Quarter | — | — | (265 | ) | (1 | ) | |||||||
Kittery I | Third Quarter | (52 | ) | (1 | ) | — | — | |||||||
Kittery II | Third Quarter | (25 | ) | (1 | ) | — | — | |||||||
Tuscola | Third Quarter | (250 | ) | (1 | ) | — | — | |||||||
West Branch | Third Quarter | (113 | ) | (1 | ) | — | — | |||||||
Barstow | Fourth Quarter | (171 | ) | (1 | ) | — | — | |||||||
Other | 3 | — | 1 | — | ||||||||||
As of December 31, 2015 | 11,746 | 34 | 2,747 | 9 | ||||||||||
New Developments: | ||||||||||||||
Columbus | Second Quarter | — | — | 355 | 1 | |||||||||
Acquisition: | ||||||||||||||
Westgate | Second Quarter | 411 | 1 | (411 | ) | (1 | ) | |||||||
Savannah | Third Quarter | 419 | 1 | (419 | ) | (1 | ) | |||||||
Expansion: | ||||||||||||||
Ottawa | First Quarter | — | — | 32 | — | |||||||||
Savannah | Second Quarter | — | — | 42 | — | |||||||||
Dispositions: | ||||||||||||||
Fort Myers | First Quarter | (199 | ) | (1 | ) | — | — | |||||||
Other | (16 | ) | — | 2 | — | |||||||||
As of September 30, 2016 | 12,361 | 35 | 2,348 | 8 |
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The following table summarizes certain information for our existing outlet centers in which we have an ownership interest as of September 30, 2016. Except as noted, all properties are fee owned.
Consolidated Outlet Centers | Legal | Square | % | |||||
Location | Ownership % | Feet | Occupied | |||||
Deer Park, New York | 100 | 749,074 | 97 | |||||
Riverhead, New York (1) | 100 | 729,706 | 99 | |||||
Foley, Alabama | 100 | 556,984 | 97 | |||||
Rehoboth Beach, Delaware (1) | 100 | 556,405 | 99 | |||||
Atlantic City, New Jersey (1) (4) | 99 | 489,706 | 90 | |||||
San Marcos, Texas | 100 | 471,756 | 97 | |||||
Sevierville, Tennessee (1) | 100 | 448,335 | 100 | |||||
Myrtle Beach Hwy 501, South Carolina | 100 | 425,247 | 97 | |||||
Savannah, Georgia | 100 | 419,197 | 99 | |||||
Jeffersonville, Ohio | 100 | 411,776 | 96 | |||||
Glendale, Arizona (Westgate) | 100 | 410,673 | 99 | |||||
Myrtle Beach Hwy 17, South Carolina (1) | 100 | 402,800 | 99 | |||||
Charleston, South Carolina | 100 | 382,117 | 98 | |||||
Pittsburgh, Pennsylvania | 100 | 372,958 | 100 | |||||
Commerce, Georgia | 100 | 371,408 | 99 | |||||
Grand Rapids, Michigan | 100 | 357,080 | 96 | |||||
Branson, Missouri | 100 | 329,861 | 99 | |||||
Locust Grove, Georgia | 100 | 321,070 | 100 | |||||
Southaven, Mississippi (2) (4) | 50 | 320,337 | 96 | |||||
Park City, Utah | 100 | 319,661 | 98 | |||||
Mebane, North Carolina | 100 | 318,910 | 100 | |||||
Gonzales, Louisiana | 100 | 318,666 | 99 | |||||
Howell, Michigan | 100 | 314,459 | 92 | |||||
Mashantucket, Connecticut (Foxwoods) (1) (2) (4) | 67 | 311,614 | 96 | |||||
Westbrook, Connecticut | 100 | 289,898 | 87 | |||||
Williamsburg, Iowa | 100 | 276,331 | 99 | |||||
Hershey, Pennsylvania | 100 | 247,500 | 100 | |||||
Tilton, New Hampshire | 100 | 245,698 | 100 | |||||
Lancaster, Pennsylvania | 100 | 241,002 | 96 | |||||
Hilton Head II, South Carolina | 100 | 206,544 | 98 | |||||
Ocean City, Maryland (1) | 100 | 198,840 | 77 | |||||
Hilton Head I, South Carolina | 100 | 181,670 | 100 | |||||
Terrell, Texas | 100 | 177,800 | 98 | |||||
Blowing Rock, North Carolina | 100 | 104,052 | 98 | |||||
Nags Head, North Carolina | 100 | 82,161 | 100 | |||||
Totals | 12,361,296 | 97 | (3) |
(1) | These properties or a portion thereof are subject to a ground lease. |
(2) | Based on capital contribution and distribution provisions in the joint venture agreement, we expect our economic interest in the venture's cash flow to be greater than our legal ownership percentage. We currently receive substantially all the economic interest of the property. |
(3) | Excludes the occupancy rate at our Foxwoods and Southaven centers which opened during the second and fourth quarters of 2015, respectively, and have not yet stabilized. |
(4) | Property encumbered by mortgage. See notes 7 and 8 to the consolidated financial statements for further details of our debt obligations. |
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Unconsolidated joint venture properties | Legal | Square | % | ||||||
Location | Ownership % | Feet | Occupied | ||||||
Charlotte, North Carolina (1) | 50 | 397,839 | 97 | ||||||
Columbus, Ohio | 50 | 355,220 | 96 | ||||||
Texas City, Texas (Galveston/Houston) (1) | 50 | 352,705 | 99 | ||||||
National Harbor, Maryland (1) | 50 | 341,156 | 99 | ||||||
Ottawa, Ontario | 50 | 316,494 | 98 | ||||||
Cookstown, Ontario | 50 | 307,585 | 99 | ||||||
Bromont, Quebec | 50 | 161,307 | 72 | ||||||
Saint-Sauveur, Quebec (1) | 50 | 115,771 | 94 | ||||||
Total | 2,348,077 | 96 | (2 | ) |
(1) | Property encumbered by mortgage. See note 6, to the consolidated financial statements for further details of our debt obligations. |
(2) | Excludes the occupancy rate at our Columbus center which opened during the second quarter of 2016 and has not yet stabilized. |
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Leasing Activity
The following table provides information for our consolidated outlet centers regarding space re-leased or renewed:
Nine months ended September 30, 2016 (1) | |||||||||||||||
# of Leases | Square Feet (in 000's) | Average Annual Straight-line Rent (psf) | Average Tenant Allowance (psf) | Average Initial Term (in years) | Net Average Annual Straight-line Rent (psf) (2) | ||||||||||
Re-tenant | 118 | 368 | $ | 32.69 | $ | 35.08 | 8.71 | $ | 28.66 | ||||||
Renewal | 226 | 1,056 | $ | 25.99 | $ | 0.52 | 4.74 | $ | 25.88 | ||||||
Nine months ended September 30, 2015 (3) | |||||||||||||||
# of Leases | Square Feet (in 000's) | Average Annual Straight-line Rent (psf) | Average Tenant Allowance (psf) | Average Initial Term (in years) | Net Average Annual Straight-line Rent (psf) (2) | ||||||||||
Re-tenant | 114 | 428 | $ | 31.70 | $ | 27.63 | 9.26 | $ | 28.72 | ||||||
Renewal | 242 | 1,131 | $ | 26.54 | $ | 0.13 | 5.33 | $ | 26.52 |
(1) | Excludes Fort Myers outlet center, which was sold in January 2016 and includes the Westgate and Savannah outlet centers, which are both consolidated as of September 30, 2016 due to the acquisition of the venture partners' interests during June 2016 and August 2016, respectively. |
(2) | Net average straight-line rent is calculated by dividing the average tenant allowance costs per square foot by the average initial term and subtracting this calculated number from the average straight-line rent per year amount. The average annual straight-line rent disclosed in the table above includes all concessions, abatements and reimbursements of rent to tenants. The average tenant allowance disclosed in the table above includes landlord costs. |
(3) | Excludes Kittery I & II, Tuscola, West Branch and Barstow outlet centers which were sold in 2015. |
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RESULTS OF OPERATIONS
Comparison of the three months ended September 30, 2016 to the three months ended September 30, 2015
NET INCOME
Net income increased $26.3 million in the 2016 period to $72.8 million as compared to $46.5 million for the 2015 period. The majority of this increase was due to the $46.3 million gain on the acquisition of our partner's equity interests in the Savannah joint venture in the 2016 period and $1.4 million gain on the sale an outparcel at our outlet center in Myrtle Beach, South Carolina located on Highway 501. This increase was partially offset by lower gains on sales of assets and interest in unconsolidated joint ventures in the 2016 period compared to the 2015 period, as in the third quarter of 2015, we sold our Kittery, Tuscola, and West Branch outlet centers for a total gain of $20.2 million.
In the tables below, information set forth for new developments includes our Grand Rapids and Southaven outlet centers, which opened in July 2015 and November 2015, respectively. Acquisitions include our Westgate and Savannah centers, which were previously held in unconsolidated joint ventures prior to acquiring our partners' interest in each venture in June 2016 and August 2016, respectively. Properties disposed includes the Kittery I & II, Tuscola, and West Branch outlet centers sold in September 2015, the Barstow outlet center sold in October 2015 and the Fort Myers outlet center sold in January 2016.
BASE RENTALS
Base rentals increased $3.7 million, or 5%, in the 2016 period compared to the 2015 period. The following table sets forth the changes in various components of base rentals (in thousands):
2016 | 2015 | Increase/(Decrease) | ||||||||||
Base rentals from existing properties | $ | 70,990 | $ | 69,641 | $ | 1,349 | ||||||
Base rentals from new developments | 3,667 | 1,436 | 2,231 | |||||||||
Base rentals from acquisitions | 4,131 | — | 4,131 | |||||||||
Base rentals from properties disposed | — | 3,890 | (3,890 | ) | ||||||||
Termination fees | 1,450 | 1,585 | (135 | ) | ||||||||
Amortization of above and below market rent adjustments, net | (669 | ) | (711 | ) | 42 | |||||||
$ | 79,569 | $ | 75,841 | $ | 3,728 |
Base rental income generated from existing properties in our portfolio increased due to increases in rental rates on lease renewals and incremental rents from re-tenanting vacant spaces.
At September 30, 2016, the combined net value representing the amount of unamortized above market lease assets and below market lease liability values, recorded as a part of the purchase price of acquired properties, was a net above market lease asset which totaled approximately $698,000. If a tenant terminates its lease prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balance of the related above or below market lease value would be written off and could materially impact our net income positively or negatively.
PERCENTAGE RENTALS
Percentage rentals increased $370,000, or 14%, in the 2016 period compared to the 2015 period. Percentage rentals represents revenues based on a percentage of tenants' sales volume above predetermined levels (contractual breakpoints") (in thousands):
2016 | 2015 | Increase/(Decrease) | ||||||||||
Percentage rentals from existing properties | $ | 2,438 | $ | 2,258 | $ | 180 | ||||||
Percentage rentals from new development | 272 | — | 272 | |||||||||
Percentage rentals from acquisitions | 285 | — | 285 | |||||||||
Percentage rentals from properties disposed | — | 367 | (367 | ) | ||||||||
$ | 2,995 | $ | 2,625 | $ | 370 |
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EXPENSE REIMBURSEMENTS
Expense reimbursements increased $2.6 million, or 8%, in the 2016 period compared to the 2015 period. The following table sets forth the changes in various components of expense reimbursements (in thousands):
2016 | 2015 | Increase/(Decrease) | ||||||||||
Expense reimbursements from existing properties | $ | 29,432 | $ | 28,079 | $ | 1,353 | ||||||
Expense reimbursements from new development | 1,741 | 824 | 917 | |||||||||
Expense reimbursements from acquisitions | 1,952 | — | 1,952 | |||||||||
Expense reimbursements from properties disposed | — | 1,639 | (1,639 | ) | ||||||||
$ | 33,125 | $ | 30,542 | $ | 2,583 |
Expense reimbursements, which represent the contractual recovery from tenants of certain common area maintenance, insurance, property tax, promotional, advertising and management expenses, generally fluctuate consistently with the reimbursable property operating expenses to which they relate. See "Property Operating Expenses" below for a discussion of the increase in operating expenses from our existing properties.
MANAGEMENT, LEASING AND OTHER SERVICES
Management, leasing and other services decreased $447,000, or 36%, in the 2016 period compared to the 2015 period. The following table sets forth the changes in various components of management, leasing and other services (in thousands):
2016 | 2015 | Increase/(Decrease) | ||||||||||
Development and leasing | $ | 65 | $ | 325 | $ | (260 | ) | |||||
Loan guarantee | 85 | 182 | (97 | ) | ||||||||
Management and marketing | 656 | 746 | (90 | ) | ||||||||
$ | 806 | $ | 1,253 | $ | (447 | ) |
PROPERTY OPERATING EXPENSES
Property operating expenses increased $1.2 million, or 3% in the 2016 period as compared to the 2015 period. The following table sets forth the changes in various components of property operating expenses (in thousands):
2016 | 2015 | Increase/(Decrease) | ||||||||||
Property operating expenses from existing properties | $ | 33,761 | $ | 32,910 | $ | 851 | ||||||
Property operating expenses from new developments | 2,015 | 1,364 | 651 | |||||||||
Property operating expenses from acquisitions | 1,666 | — | 1,666 | |||||||||
Property operating expenses from properties disposed | — | 1,957 | (1,957 | ) | ||||||||
$ | 37,442 | $ | 36,231 | $ | 1,211 |
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DEPRECIATION AND AMORTIZATION
Depreciation and amortization costs increased $420,000, or 1%, in the 2016 period compared to the 2015 period. The following table sets forth the changes in various components of depreciation and amortization costs from the 2016 period to the 2015 period (in thousands):
2016 | 2015 | Increase/(Decrease) | ||||||||||
Depreciation and amortization from existing properties | $ | 24,658 | $ | 25,664 | $ | (1,006 | ) | |||||
Depreciation and amortization from new developments | 2,207 | 833 | 1,374 | |||||||||
Depreciation and amortization expenses from acquisitions | 2,340 | — | 2,340 | |||||||||
Depreciation and amortization from properties disposed | — | 2,288 | (2,288 | ) | ||||||||
$ | 29,205 | $ | 28,785 | $ | 420 |
Depreciation and amortization costs decreased at existing properties as certain construction and development related assets, as well as lease related intangibles recorded as part of the acquisition price of acquired properties, which are amortized over shorter lives, became fully depreciated during the reporting periods.
INTEREST EXPENSE
Interest expense increased $1.6 million, or 11%, in the 2016 period compared to the 2015 period, due to (1) the April 2016 expansion of our term loan and entry into derivative transactions that effectively fixed the interest rate at higher levels than the floating interest rate in place during 2015, (2) the 30-day LIBOR, which impacts the interest rate we pay on our floating rate debt, increased relative to its level in the 2015 period, (3) our issuance in August 2016 of $250 million 3.125% bonds, which repaid amounts outstanding under unsecured lines of credit that had an approximate rate of 1.40%, and (4) the additional debt assumed from the Westgate and Savannah acquisitions.
GAIN ON SALE OF ASSETS AND INTEREST IN UNCONSOLIDATED ENTITIES
The gain on sale of assets and interest in unconsolidated entities decreased approximately $18.8 million or 93% in the 2016 period compared to the 2015 period. In September 2016, we sold an outparcel at our outlet center in Myrtle Beach, South Carolina located on Highway 501 for net proceeds of approximately $2.9 million and recognized a gain of approximately $1.4 million. In the third quarter of 2015, we sold our Kittery, Tuscola, and West Branch outlet centers for approximately $43.3 million, which resulted in a gain of $20.2 million.
GAIN ON PREVIOUSLY HELD INTEREST IN ACQUIRED JOINT VENTURE
On August 12, 2016, the Savannah joint venture, which owned the Outlet center in Pooler, Georgia distributed all outparcels along with $15.0 million in cash consideration to the other partner in exchange for the partner's ownership interest. We contributed the $15.0 million in cash consideration to the joint venture, which we funded with borrowings under our unsecured lines of credit. The joint venture is now wholly-owned by us and has been consolidated in our financial results since the acquisition date. As a result of acquiring the remaining interest in the Savannah joint venture, we recorded a gain of $46.3 million, which represented the difference between the carrying book value and the fair value of our previously held equity method investment in the Savannah joint venture, as a result of the significant appreciation in the property's value since the completion of its original development and opening in April 2015.
EQUITY IN EARNINGS OF UNCONSOLIDATED JOINT VENTURES
Equity in earnings of unconsolidated joint ventures decreased approximately $3.0 million or 81% in the 2016 period compared to the 2015 period. The following table sets forth the changes in various components of equity in earnings of unconsolidated joint ventures (in thousands):
2016 | 2015 | Increase/(Decrease) | ||||||||||
Equity in earnings from existing properties | $ | (594 | ) | $ | 2,414 | $ | (3,008 | ) | ||||
Equity in earnings from new developments | 591 | — | $ | 591 | ||||||||
Equity in earnings from properties acquired or disposed | 718 | 1,299 | (581 | ) | ||||||||
$ | 715 | $ | 3,713 | $ | (2,998 | ) |
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Equity in earnings from existing properties for the 2016 period includes a $2.9 million asset impairment loss representing our share of the impairment loss recorded by the joint venture that owns the Bromont outlet center in Canada. The increase in equity in earnings of unconsolidated joint ventures from new developments is due to the incremental earnings from the the Columbus outlet center, which opened in June 2016. The equity in earnings from properties acquired or disposed includes our Westgate and Savannah joint ventures due to the acquisition of the venture partners' interest in June 2016 and August 2016, respectively.
Comparison of the nine months ended September 30, 2016 to the nine months ended September 30, 2015
NET INCOME
Net income increased $70.5 million in the 2016 period to $178.7 million as compared to $108.2 million for the 2015 period. The majority of this increase was due to the $95.5 million gain on the acquisition of our venture partners' equity interests in the Westgate and Savannah joint ventures in the 2016 period, $4.9 million gain on the sale of our outlet center in Fort Myers, Florida located near Sanibel Island, and $1.4 million gain on the sale an outparcel at our outlet center in Myrtle Beach, South Carolina located on Highway 501 in the 2016 period. These increases were partially offset by lower gains on sales of assets and interest in unconsolidated joint ventures were lower in the 2016 period compared to the 2015 period. We recognized a $33.9 million gain on the sale of our equity interest in the Wisconsin Dells joint venture and our the sale of our Kittery, Tuscola, and West Branch outlet centers in the 2015 period.
In the tables below, information set forth for new developments includes our Foxwoods, Grand Rapids, and Southaven outlet centers, which opened in May 2015, July 2015, and November 2015, respectively. Acquisitions include our Westgate and Savannah centers, which were previously held in unconsolidated joint ventures prior to our acquisition of our venture partners' interest in each venture in June 2016 and August 2016, respectively. Properties disposed includes the Kittery I & II, Tuscola, and West Branch outlet centers sold in September 2015, the Barstow outlet center sold in October 2015 and the Fort Myers outlet center sold in January 2016.
BASE RENTALS
Base rentals increased $11.4 million, or 5%, in the 2016 period compared to the 2015 period. The following table sets forth the changes in various components of base rentals (in thousands):
2016 | 2015 | Change | ||||||||||
Base rentals from existing properties | $ | 200,602 | $ | 196,242 | $ | 4,360 | ||||||
Base rentals from new developments | 20,650 | 5,797 | 14,853 | |||||||||
Base rentals from acquisitions | 4,131 | — | 4,131 | |||||||||
Base rentals from properties disposed | 66 | 11,122 | (11,056 | ) | ||||||||
Termination fees | 3,492 | 4,421 | (929 | ) | ||||||||
Amortization of above and below market rent adjustments, net | (1,746 | ) | (1,783 | ) | 37 | |||||||
$ | 227,195 | $ | 215,799 | $ | 11,396 |
Base rental income generated from existing properties in our portfolio increased due to increases in rental rates on lease renewals and incremental rents from re-tenanting vacant spaces.
Fees received from the early termination of leases, which are generally based on the lease term remaining at the time of termination, decreased as a result of fewer store closures throughout the portfolio in the 2016 period compared to the 2015 period.
At September 30, 2016, the combined net value representing the amount of unamortized above market lease assets and below market lease liability values, recorded as a part of the purchase price of acquired properties, was a net below market lease asset which totaled approximately $698,000. If a tenant terminates its lease prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balance of the related above or below market lease value would be written off and could materially impact our net income positively or negatively.
51
PERCENTAGE RENTALS
Percentage rentals increased $575,000, or 8%, in the 2016 period compared to the 2015 period. Percentage rentals represents revenues based on a percentage of tenants' sales volume above predetermined levels ("contractual breakpoints") (in thousands):
2016 | 2015 | Increase/(Decrease) | ||||||||||
Percentage rentals from existing properties | $ | 6,284 | $ | 5,964 | $ | 320 | ||||||
Percentage rentals from new development | 712 | — | 712 | |||||||||
Percentage rentals from acquisitions | 285 | — | 285 | |||||||||
Percentage rentals from properties disposed | 190 | 932 | (742 | ) | ||||||||
$ | 7,471 | $ | 6,896 | $ | 575 |
EXPENSE REIMBURSEMENTS
Expense reimbursements increased $3.3 million, or 4%, in the 2016 period compared to the 2015 period. The following table sets forth the changes in various components of expense reimbursements (in thousands):
2016 | 2015 | Change | ||||||||||
Expense reimbursements from existing properties | $ | 88,503 | $ | 86,845 | $ | 1,658 | ||||||
Expense reimbursements from new developments | 6,526 | 2,151 | 4,375 | |||||||||
Expense reimbursements from acquisitions | 1,952 | — | 1,952 | |||||||||
Expense reimbursements from properties disposed | 140 | 4,819 | (4,679 | ) | ||||||||
$ | 97,121 | $ | 93,815 | $ | 3,306 |
Expense reimbursements, which represent the contractual recovery from tenants of certain common area maintenance, insurance, property tax, promotional, advertising and management expenses, generally fluctuate consistently with the reimbursable property operating expenses to which they relate. See "Property Operating Expenses" below for a discussion of the increase in operating expenses from our existing properties.
Most, but not all, leases contain provisions requiring tenants to pay a share of our operating expenses as additional rent. However, substantially all of the leases for our new Foxwoods outlet center, which opened in May 2015, require tenants to pay a single minimum contractual gross rent and, in certain cases, percentage rent; thus, all minimum rents received for the Foxwoods outlet center are recorded as base rent and none are recorded to expense reimbursements.
MANAGEMENT, LEASING AND OTHER SERVICES
Management, leasing and other services decreased $1.0 million, or 24%, in the 2016 period compared to the 2015 period. The following table sets forth the changes in various components of management, leasing and other services (in thousands):
2016 | 2015 | Change | ||||||||||
Development and leasing | $ | 611 | $ | 1,632 | $ | (1,021 | ) | |||||
Loan guarantee | 449 | 564 | (115 | ) | ||||||||
Management and marketing | 2,199 | 2,067 | 132 | |||||||||
$ | 3,259 | $ | 4,263 | $ | (1,004 | ) |
Income from development and leasing services decreased primarily due to the 2015 period including services provided to the Savannah joint venture, which opened in April 2015. This decrease was partially offset by development and leasing fees earned from services provided to the Columbus joint venture which opened in the 2016 period.
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PROPERTY OPERATING EXPENSES
The following table sets forth the changes in various components of property operating expenses (in thousands):
2016 | 2015 | Change | ||||||||||
Property operating expenses from existing properties | $ | 98,282 | $ | 98,110 | $ | 172 | ||||||
Property operating expenses from new developments | 10,310 | 4,766 | 5,544 | |||||||||
Property operating expenses from acquisitions | 1,682 | — | 1,682 | |||||||||
Property operating expenses from properties disposed | 54 | 6,045 | (5,991 | ) | ||||||||
$ | 110,328 | $ | 108,921 | $ | 1,407 |
DEPRECIATION AND AMORTIZATION
Depreciation and amortization costs increased $5.0 million, or 7%, in the 2016 period compared to the 2015 period.The following table sets forth the changes in various components of depreciation and amortization costs from the 2016 period to the 2015 period (in thousands):
2016 | 2015 | Change | ||||||||||
Depreciation and amortization expenses from existing properties | $ | 68,808 | $ | 71,215 | $ | (2,407 | ) | |||||
Depreciation and amortization expenses from new developments | 10,930 | 2,864 | 8,066 | |||||||||
Depreciation and amortization expenses from acquisitions | 2,340 | — | 2,340 | |||||||||
Depreciation and amortization from property disposed | — | 2,967 | (2,967 | ) | ||||||||
$ | 82,078 | $ | 77,046 | $ | 5,032 |
Depreciation and amortization costs decreased at existing properties as certain construction and development related assets, as well as lease related intangibles recorded as part of the acquisition price of acquired properties, which are amortized over shorter lives, became fully depreciated during the reporting periods.
INTEREST EXPENSE
Interest expense increased $4.1 million, or 10%, in the 2016 period compared to the 2015 period, due to (1) our 2015 period included several construction projects for which interest incurred on incremental borrowings was capitalized during the construction period and was expensed during the 2016 period, (2) the April 2016 expansion of our term loan and entry into derivative transactions that effectively fixed the interest rate at higher levels than the floating interest rate in place during 2015, (3) placing mortgages on the Foxwoods and Southaven outlet centers which have a higher interest rate than our lines of credit which are generally used to fund development, (4) the 30-day LIBOR, which impacts the interest rate we pay on our floating rate debt, increasing relative to its level in the 2015 period, and (5) the additional debt assumed from the Westgate and Savannah acquisitions.
GAIN ON SALE OF ASSETS AND INTEREST IN UNCONSOLIDATED ENTITIES
The gain on sale of assets and interest in unconsolidated entities decreased approximately $27.6 million or 81% in the 2016 period compared to the 2015 period. In September 2016, we sold an outparcel at our outlet center in Myrtle Beach, South Carolina located on Highway 501 for net proceeds of approximately $2.9 million and recognized a gain of approximately $1.4 million. Also, in the first quarter of 2016, we sold our Fort Myers outlet center for approximately $25.8 million, which resulted in a gain of $4.9 million. In February 2015, we sold our equity interest in the joint venture that owned the Wisconsin Dells outlet center for approximately $15.6 million, representing our share of the sales price totaling $27.7 million less our share of the outstanding debt totaling $12.1 million. As a result of this transaction, we recorded a gain of approximately $13.7 million in the first quarter of 2015, representing the difference between the carrying value of our equity method investment and the net proceeds received. In the third quarter of 2015, we sold our Kittery, Tuscola, and West Branch outlet centers for approximately $43.3 million, which resulted in a gain of $20.2 million in the 2015 period.
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GAIN ON PREVIOUSLY HELD INTEREST IN ACQUIRED JOINT VENTURE
On June 30, 2016, we completed the purchase of our venture partner's interest in the Westgate joint venture, which owned the outlet center in Glendale, Arizona, for a total cash price of approximately $40.9 million. The purchase was funded with borrowings under our unsecured lines of credit. Prior to the transaction, we owned a 58% interest in the Westgate joint venture since its formation in 2012 and accounted for it under the equity method of accounting. The joint venture is now wholly-owned and is consolidated in our financial results as of June 30, 2016. As a result of acquiring the remaining interest in the Westgate joint venture, we recorded a gain of $49.3 million, which represented the difference between the carrying book value and the fair value of our previously held equity method investment in the joint venture, as a result of the significant appreciation in the property's value since the completion of its original development and opening.
On August 12, 2016, the Savannah joint venture, which owned the Outlet center in Pooler, Georgia distributed all outparcels along with $15.0 million in cash consideration to the other partner in exchange for the partner's ownership interest. We contributed the $15.0 million in cash consideration to the joint venture, which we funded with borrowings under our unsecured lines of credit. The joint venture is now wholly-owned by us and has been consolidated in our financial results since the acquisition date. As a result of acquiring the remaining interest in the Savannah joint venture, we recorded a gain of $46.3 million, which represented the difference between the carrying book value and the fair value of our previously held equity method investment in the Savannah joint venture, as a result of the significant appreciation in the property's value since the completion of its original development and opening in April 2015.
EQUITY IN EARNINGS OF UNCONSOLIDATED JOINT VENTURES
Equity in earnings of unconsolidated joint ventures decreased approximately $622,000 or 7% in the 2016 period compared to the 2015 period. The following table sets forth the changes in various components of equity in earnings of unconsolidated joint ventures (in thousands):
2016 | 2015 | Change | ||||||||||
Equity in earnings from existing properties | $ | 3,671 | $ | 6,212 | $ | (2,541 | ) | |||||
Equity in earnings from new developments | 366 | — | 366 | |||||||||
Equity in earnings from properties acquired or disposed | 3,643 | 2,090 | 1,553 | |||||||||
$ | 7,680 | $ | 8,302 | $ | (622 | ) |
Equity in earnings from existing properties for the 2016 period includes a $2.9 million asset impairment loss representing our share of the impairment loss recorded by the joint venture that owns the Bromont outlet center in Canada. The increase in equity in earnings of unconsolidated joint ventures from new developments is due to the incremental earnings from the the Columbus outlet center, which opened in June 2016. The equity in earnings from properties acquired or disposed includes our Westgate and Savannah joint ventures due to the acquisition of the venture partners' interest in June 2016 and August 2016, respectively. Equity in earnings from properties acquired or disposed in the 2015 period includes the Wisconsin Dells joint venture, which we sold in February 2015.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
In this "Liquidity and Capital Resources of the Company" section, the term, "the Company," refers only to Tanger Factory Outlet Centers, Inc. on an unconsolidated basis, excluding the Operating Partnership.
The Company's business is operated primarily through the Operating Partnership. The Company issues public equity from time to time, but does not otherwise generate any capital itself or conduct any business itself, other than incurring certain expenses in operating as a public company, which are fully reimbursed by the Operating Partnership. The Company does not hold any indebtedness, and its only material asset is its ownership of partnership interests of the Operating Partnership. The Company's principal funding requirement is the payment of dividends on its common shares. The Company's principal source of funding for its dividend payments is distributions it receives from the Operating Partnership.
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Through its ownership of the sole general partner of the Operating Partnership, the Company has the full, exclusive and complete responsibility for the Operating Partnership's day-to-day management and control. The Company causes the Operating Partnership to distribute all, or such portion as the Company may in its discretion determine, of its available cash in the manner provided in the Operating Partnership's partnership agreement. The Company receives proceeds from equity issuances from time to time, but is required by the Operating Partnership's partnership agreement to contribute the proceeds from its equity issuances to the Operating Partnership in exchange for partnership units of the Operating Partnership.
The Company is a well-known seasoned issuer with a shelf registration that expires in June 2018 that allows the Company to register unspecified various classes of equity securities and the Operating Partnership to register unspecified, various classes of debt securities. As circumstances warrant, the Company may issue equity from time to time on an opportunistic basis, dependent upon market conditions and available pricing. The Operating Partnership may use the proceeds to repay debt, including borrowings under its lines of credit, develop new or existing properties, to make acquisitions of properties or portfolios of properties, to invest in existing or newly created joint ventures or for general corporate purposes.
The liquidity of the Company is dependent on the Operating Partnership's ability to make sufficient distributions to the Company. The Company also guarantees some of the Operating Partnership's debt. If the Operating Partnership fails to fulfill its debt requirements, which trigger the Company's guarantee obligations, then the Company may be required to fulfill its cash payment commitments under such guarantees. However, the Company's only material asset is its investment in the Operating Partnership.
The Company believes the Operating Partnership's sources of working capital, specifically its cash flow from operations, and borrowings available under its unsecured lines of credit, are adequate for it to make its distribution payments to the Company and, in turn, for the Company to make its dividend payments to its shareholders. However, there can be no assurance that the Operating Partnership's sources of capital will continue to be available at all or in amounts sufficient to meet its needs, including its ability to make distribution payments to the Company. The unavailability of capital could adversely affect the Operating Partnership's ability to pay its distributions to the Company which will, in turn, adversely affect the Company's ability to pay cash dividends to its shareholders.
For the Company to maintain its qualification as a REIT, it must pay dividends to its shareholders aggregating annually at least 90% of its taxable income (excluding capital gains). While historically the Company has satisfied this distribution requirement by making cash distributions to its shareholders, it may choose to satisfy this requirement by making distributions of cash or other property, including, in limited circumstances, the Company's own shares.
As a result of this distribution requirement, the Operating Partnership cannot rely on retained earnings to fund its on-going operations to the same extent that other companies whose parent companies are not real estate investment trusts can. The Company may need to continue to raise capital in the equity markets to fund the Operating Partnership's working capital needs, as well as potential new developments, expansions and renovations of existing properties, acquisitions, or investments in existing or newly created joint ventures.
The Company currently consolidates the Operating Partnership because it has (1) the power to direct the activities of the Operating Partnership that most significantly impact the Operating Partnership’s economic performance and (2) the obligation to absorb losses and the right to receive the residual returns of the Operating Partnership that could be potentially significant. The Company does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities and the revenues and expenses of the Company and the Operating Partnership are the same on their respective financial statements, except for immaterial differences related to cash, other assets and accrued liabilities that arise from public company expenses paid by the Company. However, all debt is held directly or indirectly at the Operating Partnership level, and the Company has guaranteed some of the Operating Partnership's unsecured debt as discussed below. Because the Company consolidates the Operating Partnership, the section entitled "Liquidity and Capital Resources of the Operating Partnership" should be read in conjunction with this section to understand the liquidity and capital resources of the Company on a consolidated basis and how the Company is operated as a whole.
In October 2016, the Company's Board of Directors declared a $0.325 cash dividend per common share payable on November 15, 2016 to each shareholder of record on October 31, 2016, and the Trustees of Tanger GP Trust declared a $0.325 cash distribution per Operating Partnership unit to the Operating Partnership's unitholders.
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LIQUIDITY AND CAPITAL RESOURCES OF THE OPERATING PARTNERSHIP
General Overview
In this "Liquidity and Capital Resources of the Operating Partnership" section, the terms "we", "our" and "us" refer to the Operating Partnership or the Operating Partnership and the Company together, as the text requires.
Property rental income represents our primary source to pay property operating expenses, debt service, distributions and capital expenditures needed to maintain our properties. To the extent that our cash flow from operating activities is insufficient to cover our capital needs, including new developments, expansions of existing outlet centers, acquisitions and investments in unconsolidated joint ventures, we finance such activities from borrowings under our unsecured lines of credit or from the proceeds from the Operating Partnership's debt offerings and the Company's equity offerings.
We believe we achieve a strong and flexible financial position by attempting to: (1) maintain a conservative leverage position relative to our portfolio when pursuing new development, expansion and acquisition opportunities, (2) extend and sequence debt maturities, (3) manage our interest rate risk through a proper mix of fixed and variable rate debt, (4) maintain access to liquidity by using our unsecured lines of credit in a conservative manner and (5) preserve internally generated sources of capital by strategically divesting of underperforming assets and maintaining a conservative distribution payout ratio. We manage our capital structure to reflect a long term investment approach and utilize multiple sources of capital to meet our requirements.
The following table sets forth our changes in cash flows (in thousands):
Nine months ended September 30, | ||||||||||||
2016 | 2015 | Change | ||||||||||
Net cash provided by operating activities | $ | 177,723 | $ | 176,076 | $ | 1,647 | ||||||
Net cash used in investing activities | (39,490 | ) | (183,454 | ) | 143,964 | |||||||
Net cash (used in) provided by financing activities | (134,464 | ) | 13,000 | (147,464 | ) | |||||||
Effect of foreign currency rate changes on cash and equivalents | 532 | (788 | ) | 1,320 | ||||||||
Net increase in cash and cash equivalents | $ | 4,301 | $ | 4,834 | $ | (533 | ) |
Operating Activities
In 2016, our cash provided by operating activities was positively impacted by a number of factors, including an increase in operating income as a result of the net growth in leasable square feet in our portfolio of outlet centers and an increase in distributions from our unconsolidated joint ventures.
Investing Activities
The decrease in net cash used in investing activities is primarily associated with the following:
• | We used restricted cash of $121.3 million in 2016 to repay a portion of our $150.0 million floating rate mortgage loan, which had an original maturity date in August 2018, and our $28.4 million deferred financing obligation, both of which related to the Deer Park outlet center. |
• | Cash provided from asset sales decreased in 2016 compared to 2015, as proceeds from the sales of our Fort Myers outlet center and an outparcel at our outlet center in Myrtle Beach, South Carolina located on Highway 501 were lower than the proceeds from the sale of our equity interest in the Wisconsin Dells outlet center in 2015. |
• | Cash used for additions to rental property decreased in 2016 due to lower new outlet center construction in 2016 as compared to 2015. The 2015 period included additions for our Foxwoods, Grand Rapids, and Southaven outlet centers, all of which opened during 2015, while the 2016 period primarily included construction at our Daytona Beach outlet center. |
• | Partially offsetting the above items was the acquisition of our venture partners' interest in our Westgate joint venture and Savannah joint venture, and fewer contributions in the 2016 period to our unconsolidated joint ventures as a result of less development activity in the 2016 period compared to the 2015 period. |
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Financing Activities
The increase in net cash used in financing activities is primarily associated with the following:
• | Increase in cash distributions paid due to a special dividend that was paid in January 2016 and an increase in quarterly dividends paid to common shareholders in 2016. |
• | Increase in cash used for debt repayments, which included the repayments of the Deer Park $150.0 million floating rate mortgage loan, the $10.0 million unsecured note payable, the $7.5 million unsecured term note, the Westgate $62.0 million floating rate mortgage and our Savannah $98.0 million floating rate mortgage. |
• | Cash used for the payment of a deferred financing obligation to a former partner at Deer Park, which increased our legal ownership to 100%. |
• | Partially offsetting the above items was an increase in borrowings including the public offering of $250 million of 3.125% unsecured senior notes due September 2026, priced at 99.605% of par to yield 3.171% to maturity and netting proceeds of approximately $246.7 million and an additional $75.0 million in proceeds received from an amendment to our unsecured term loan to increase the size of the loan from $250.0 million to $325.0 million. In 2015, new borrowings for notes, mortgages, loans totaled $60.3 million and was primarily related to construction draws at related to the Southaven and Foxwoods mortgages. In 2015, we also repaid the mortgages at our Hershey and Ocean City outlet centers, which totaled $46.6 million. |
Capital Expenditures
The following table details our capital expenditures (in thousands):
Nine months ended September 30, | ||||||||||||
2016 | 2015 | Change | ||||||||||
Capital expenditures analysis: | ||||||||||||
New center developments | $ | 74,441 | $ | 174,551 | $ | (100,110 | ) | |||||
Major center renovations | 13,908 | 1,513 | 12,395 | |||||||||
Second generation tenant allowances | 6,963 | 6,512 | 451 | |||||||||
Other capital expenditures | 8,576 | 9,140 | (564 | ) | ||||||||
103,888 | 191,716 | (87,828 | ) | |||||||||
Conversion from accrual to cash basis | 8,325 | (10,589 | ) | 18,914 | ||||||||
Additions to rental property-cash basis | $ | 112,213 | $ | 181,127 | $ | (68,914 | ) |
• | New center development expenditures, which include first generation tenant allowances, relate to construction expenditures for our Daytona Beach, Fort Worth, Southaven, and San Marcos outlet centers in the 2016 period. The 2015 period included new center development expenditures for our Grand Rapids, Southaven, and Foxwoods outlet centers. |
• | Major center renovations in both the 2016 and 2015 periods included construction activities at our Riverhead and our Rehoboth Beach outlet centers. The 2016 period also includes renovations at our Howell outlet center. We expect to spend approximately $10.6 million for the remainder of 2016 on the renovation of these three outlet centers. |
Current Developments
We intend to continue to grow our portfolio by developing, expanding or acquiring additional outlet centers. In the section below, we describe the new developments that are either currently planned, underway or recently completed. However, you should note that any developments or expansions that we, or a joint venture that we have an ownership interest in, have planned or anticipated may not be started or completed as scheduled, or may not result in accretive net income or funds from operations ("FFO"). See the section "Non-GAAP Supplemental Earnings Measures" - "Funds From Operations" below for further discussion of FFO.
In addition, we regularly evaluate acquisition or disposition proposals and engage from time to time in negotiations for acquisitions or dispositions of properties. We may also enter into letters of intent for the purchase or sale of properties.
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Any prospective acquisition or disposition that is being evaluated or which is subject to a letter of intent may not be consummated, or if consummated, may not result in an increase in earnings or liquidity.
New Development of Consolidated Outlet Centers
The following table summarizes our projects under development as of September 30, 2016:
Project | Approximate square feet (in 000's) | Projected Total Net Cost per Square Foot (in dollars) | Projected Total Net Cost (in millions) | Costs Incurred to Date (in millions) | Projected Opening | |||||||
New development | ||||||||||||
Daytona Beach | 352 | $ | 256 | $ | 90.0 | $ | 67.4 | November 2016 | ||||
Fort Worth | 352 | 256 | 90.2 | 13.9 | Holiday 2017 | |||||||
Expansion | ||||||||||||
Lancaster | 123 | 389 | 47.8 | 10.2 | Q3 2017 | |||||||
Total | 827 | $ | 901 | $ | 228.0 | $ | 91.5 |
Daytona Beach
In November 2015, we purchased land for approximately $9.9 million and commenced construction on the development of a wholly-owned outlet center in Daytona Beach, Florida.
Fort Worth
In September 2016, we purchased land in the greater Fort Worth, Texas area for approximately $11.2 million and began construction immediately on the development of a wholly-owned outlet center. The outlet center will be located within the 279-acre Champions Circle mixed-use development adjacent to Texas Motor Speedway.
Lancaster Expansion
In July 2016, we commenced construction on a 123,000 square foot expansion of our outlet center in Lancaster, Pennsylvania.
See “Off-Balance Sheet Arrangements” for a discussion of unconsolidated joint venture development activities.
Other Potential Future Developments
As of the date of this filing, we are in the initial study period for potential new developments. We may also use joint venture arrangements to develop other potential sites. There can be no assurance, however, that these potential future projects will ultimately be developed.
In the case of projects to be wholly-owned by us, we expect to fund these projects from amounts available under our unsecured lines of credit, but may also fund them with capital from additional public debt and equity offerings. For projects to be developed through joint venture arrangements, we may use collateralized construction loans to fund a portion of the project, with our share of the equity requirements funded from sources described above.
Dispositions of Rental Property
In January 2016, we sold our outlet center in Fort Myers, Florida located near Sanibel Island for net proceeds of approximately $25.8 million for a gain of $4.9 million. The proceeds from the sale of this unencumbered asset were used to pay down balances outstanding under our unsecured lines of credit.
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In September 2016, we sold an outparcel at our outlet center in Myrtle Beach, South Carolina located near Highway 501 for net proceeds of approximately $2.9 million and recognized a gain of approximately $1.4 million. The net proceeds are recorded as restricted cash as of September 30, 2016 because they are being held by a qualified intermediary under Section 1031 of the Internal Revenue Code of 1986, as amended.
Financing Arrangements
As of September 30, 2016, unsecured borrowings represented 90% of our outstanding debt and 88% of the gross book value of our real estate portfolio was unencumbered. We maintain unsecured lines of credit that provide for borrowings of up to $520.0 million. The unsecured lines of credit include a $20.0 million liquidity line and a $500.0 million syndicated line. Our unsecured lines of credit bear interest at a rate of LIBOR + 0.90% and the syndicated line may be increased to $1.0 billion through an accordion feature in certain circumstances. The Company guarantees the Operating Partnership's obligations under these lines. As of September 30, 2016, we had $324.0 million available under our unsecured lines of credit.
In January 2016, we used restricted cash and unsecured lines of credit to repay our $150.0 million floating rate mortgage loan, which had an original maturity date in August 2018, and our $28.4 million deferred financing obligation, both of which are related to our 749,000 square foot outlet center in Deer Park, NY. These transactions allowed us to unencumber the Deer Park asset while simultaneously deferring a significant portion of the gains related to the assets sold in 2015 for tax purposes.
In February 2016, we repaid our $7.5 million unsecured term note, which had an original maturity date in August 2017.
In April 2016, we amended our unsecured term loan to increase the size of the loan from $250.0 million to $325.0 million, extend the maturity date from February 23, 2019 to April 13, 2021, reduce the interest rate spread over LIBOR from 1.05% to 0.95% and increase the incremental loan availability through an accordion feature from $150.0 million to $175.0 million.
Also in April 2016, we entered into four separate interest rate swap agreements, effective April 13, 2016 that fixed the base LIBOR rate at an average of 1.03% on notional amounts totaling $175.0 million through January 1, 2021.
In June 2016, our $10.0 million unsecured note payable became due and was repaid on June 23, 2016.
In August 2016, we completed a public offering of $250.0 million in senior notes due 2026 in an underwritten public offering. The notes were priced at 99.605% of the principal amount to yield 3.171% to maturity. The notes will pay interest semi-annually at a rate of 3.125% per annum and mature on September 1, 2026. The net proceeds from the offering, after deducting the underwriting discount and offering expenses, were approximately $246.7 million. We used the net proceeds from the sale of the notes to repay a $62.0 million floating rate mortgage loan related to our outlet center in Glendale (Westgate), Arizona, repay borrowings under our unsecured lines of credit, and for general corporate purposes.
In October 2016, we completed a public offering to sell an additional $100.0 million of our 3.125%senior notes due 2026 in an underwritten public offering. The notes priced at 98.962% of the principal amount to yield 3.248% to maturity. The new notes constitute an additional issuance of, and form a single series with, the $250.0 million aggregate principal amount of 3.125%senior notes due 2026 issued on August 8, 2016. The aggregate principal amount outstanding of the 3.125% senior notes due 2026 is $350.0 million. All outstanding notes pay interest semi-annually at a rate of 3.125% per annum and mature on September 1, 2026. The net proceeds from this offering, after deducting the underwriting discount and offering expenses, were approximately $97.8 million. The net proceeds were used to repay borrowings under the Operating Partnership's unsecured lines of credit, and for general corporate purposes.
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We intend to retain the ability to raise additional capital, including public debt or equity, to pursue attractive investment opportunities that may arise and to otherwise act in a manner that we believe to be in the best interests of our shareholders and unitholders. The Company is a well-known seasoned issuer with a joint shelf registration with the Operating Partnership, expiring in June 2018, that allows us to register unspecified amounts of different classes of securities on Form S-3. To generate capital to reinvest into other attractive investment opportunities, we may also consider the use of additional operational and developmental joint ventures, the sale or lease of outparcels on our existing properties and the sale of certain properties that do not meet our long-term investment criteria. Based on cash provided by operations, existing lines of credit, ongoing relationships with certain financial institutions and our ability to sell debt or issue equity subject to market conditions, we believe that we have access to the necessary financing to fund the planned capital expenditures through the end of 2017.
We anticipate that adequate cash will be available to fund our operating and administrative expenses, regular debt service obligations, and the payment of dividends in accordance with REIT requirements in both the short and long-term. Although we receive most of our rental payments on a monthly basis, distributions to shareholders and 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 our existing unsecured lines of credit or invested in short-term money market or other suitable instruments.
We believe our current balance sheet position is financially sound; however, due to the uncertainty and unpredictability of the capital and credit markets, we can give no assurance that affordable access to capital will exist between now and 2020 when our next significant debt maturities occur, assuming extension options are exercised.
The Operating Partnership's debt agreements require the maintenance of certain ratios, including debt service coverage and leverage, and limit the payment of dividends such that dividends and distributions will not exceed funds from operations, as defined in the agreements, for the prior fiscal year on an annual basis or 95% on a cumulative basis. We have historically been and currently are in compliance with all of our debt covenants. We expect to remain in compliance with all of our existing debt covenants; however, should circumstances arise that would cause us to be in default, the various lenders would have the ability to accelerate the maturity on our outstanding debt.
We believe our most restrictive covenants are contained in our senior, unsecured notes. Key financial covenants and their covenant levels, which are calculated based on contractual terms, include the following:
Senior unsecured notes financial covenants | Required | Actual | |
Total consolidated debt to adjusted total assets | <60% | 51 | % |
Total secured debt to adjusted total assets | <40% | 5 | % |
Total unencumbered assets to unsecured debt | >150% | 184 | % |
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OFF-BALANCE SHEET ARRANGEMENTS
The following table details certain information as of September 30, 2016 about various unconsolidated real estate joint ventures in which we have an ownership interest:
Joint Venture | Outlet Center Location | Ownership % | Square Feet (in 000's) | Carrying Value of Investment (in millions) | ||||||||
Columbus | Columbus, OH | 50.0 | % | 355 | $ | 44.3 | ||||||
National Harbor | National Harbor, MD | 50.0 | % | 341 | 4.7 | |||||||
RioCan Canada | Various | 50.0 | % | 901 | 121.9 | |||||||
$ | 170.9 | |||||||||||
Charlotte(1) | Charlotte, NC | 50.0 | % | 398 | $ | (2.2 | ) | |||||
Galveston/Houston (1) | Texas City, TX | 50.0 | % | 353 | (3.3 | ) | ||||||
$ | (5.5 | ) |
(1) | The negative carrying value is due to the distributions of proceeds from mortgage loans, and quarterly distributions of excess cash flow exceeding the original contributions from the partners. |
Our joint ventures are generally subject to buy-sell provisions which are customary for joint venture agreements in the real estate industry. Either partner may initiate these provisions (subject to any applicable lock up period), which could result in either the sale of our interest or the use of available cash or additional borrowings to acquire the other party's interest. Under these provisions, one partner sets a price for the property, then the other partner has the option to either (1) purchase their partner's interest based on that price or (2) sell its interest to the other partner based on that price. Since the partner other than the partner who triggers the provision has the option to be the buyer or seller, we don't consider this arrangement to be a mandatory redeemable obligation.
We provide guarantees to lenders for our joint ventures which include standard non-recourse carve out indemnifications for losses arising from items such as but not limited to fraud, physical waste, payment of taxes, environmental indemnities, misapplication of insurance proceeds or security deposits and failure to maintain required insurance. For construction and term loans, we may include a guaranty of completion as well as a principal guaranty ranging from 5% to 100% of principal. The principal guarantees include terms for release based upon satisfactory completion of construction and performance targets including occupancy thresholds and minimum debt service coverage tests. Our joint ventures may contain make whole provisions in the event that demands are made on any existing guarantees.
Savannah
In May 2016, we expanded our outlet center in Savannah by approximately 42,000 square feet, bringing the outlet center's total gross leasable area to approximately 419,000 square feet.
We acquired our partners' interest in the Savannah joint venture in August 2016 and have consolidated the property for financial reporting purposes since the acquisition date.
Columbus
In June 2016, we opened an approximately 355,000 square foot outlet center in Columbus, Ohio. As of September 30, 2016, we and our partner had each contributed $40.5 million to fund development activities. The total projected net costs are expected to be approximately $94.9 million. We are providing property management, marketing and leasing services to the joint venture. During construction, our partner provided development services to the joint venture and we, along with our partner, provided joint leasing services.
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Debt of unconsolidated joint ventures
The following table details information regarding the outstanding debt of the unconsolidated joint ventures and principal guarantees of such debt provided by us as of September 30, 2016 (dollars in millions):
Joint Venture | Total Joint Venture Debt | Maturity Date | Interest Rate | Percent Guaranteed by the Company | Maximum Guaranteed Amount by the Company | ||||||||||
Charlotte | $ | 90.0 | November 2018 | LIBOR + 1.45% | 5.0 | % | $ | 4.5 | |||||||
Galveston/Houston | 65.0 | July 2017 | LIBOR + 1.50% | 5.0 | % | 3.3 | |||||||||
National Harbor(1) | 87.0 | November 2019 | LIBOR + 1.65% | 10.0 | % | 8.7 | |||||||||
RioCan Canada (2) | 11.5 | May 2020 | 5.75% | 26.1 | % | 3.0 | |||||||||
Debt origination costs | (1.5 | ) | |||||||||||||
$ | 252.0 | $ | 19.5 |
(1) | 100% completion guaranty; 10% principal guaranty. |
(2) | The joint venture debt amount includes premium of approximately $529,000. |
Fees from unconsolidated joint ventures
Fees we received for various services provided to our unconsolidated joint ventures were recognized in other income as follows (in thousands):
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Fee: | ||||||||||||||||
Development and leasing | $ | 65 | $ | 325 | $ | 611 | $ | 1,632 | ||||||||
Loan Guarantee | 85 | 182 | 449 | 564 | ||||||||||||
Management and marketing | 656 | 746 | 2,199 | 2,067 | ||||||||||||
Total Fees | $ | 806 | $ | 1,253 | $ | 3,259 | $ | 4,263 |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Refer to our 2015 Annual Report on Form 10-K of the Company and the Operating Partnership for a discussion of our critical accounting policies which include principles of consolidation, acquisition of real estate, cost capitalization, impairment of long-lived assets and revenue recognition. There have been no material changes to these policies in 2016.
NON-GAAP SUPPLEMENTAL MEASURES
Funds From Operations
Funds From Operations ("FFO") is a widely used measure of the operating performance for real estate companies that supplements net income (loss) determined in accordance with GAAP. We determine FFO based on the definition set forth by the National Association of Real Estate Investment Trusts ("NAREIT"), of which we are a member. FFO represents net income (loss) (computed in accordance with GAAP) before extraordinary items and gains (losses) on sale or disposal of depreciable operating properties, plus depreciation and amortization of real estate assets, impairment losses on depreciable real estate of consolidated real estate and after adjustments for unconsolidated partnerships and joint ventures, including depreciation and amortization, and impairment losses on investments in unconsolidated joint ventures driven by a measurable decrease in the fair value of depreciable real estate held by the unconsolidated joint ventures.
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FFO is intended to exclude historical cost depreciation of real estate as required by GAAP which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO excludes depreciation and amortization of real estate assets, gains and losses from property dispositions and extraordinary items, it provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities and interest costs, providing perspective not immediately apparent from net income.
We present FFO because we consider it an important supplemental measure of our operating performance. In addition, a portion of cash bonus compensation to certain members of management is based on our FFO or Adjusted Funds From Operations ("AFFO"), which is described in the section below. We believe it is useful for investors to have enhanced transparency into how we evaluate our performance and that of our management. In addition, FFO is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. FFO is also widely used by us and others in our industry to evaluate and price potential acquisition candidates. NAREIT has encouraged its member companies to report their FFO as a supplemental, industry-wide standard measure of REIT operating performance.
FFO has significant limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
• | FFO does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; |
• | FFO does not reflect changes in, or cash requirements for, our working capital needs; |
• | Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and FFO does not reflect any cash requirements for such replacements; |
• | FFO, which includes discontinued operations, may not be indicative of our ongoing operations; and |
• | Other companies in our industry may calculate FFO differently than we do, limiting its usefulness as a comparative measure. |
Because of these limitations, FFO should not be considered as a measure of discretionary cash available to us to invest in the growth of our business or our dividend paying capacity. We compensate for these limitations by relying primarily on our GAAP results and using FFO only as a supplemental measure.
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Adjusted Funds From Operations
We present AFFO, as a supplemental measure of our performance. We define AFFO as FFO further adjusted to eliminate the impact of certain items that we do not consider indicative of our ongoing operating performance. These further adjustments are itemized in the table below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating AFFO you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of AFFO should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
We present AFFO because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we believe it is useful for investors to have enhanced transparency into how we evaluate management’s performance and the effectiveness of our business strategies. We use AFFO when certain material, unplanned transactions occur as a factor in evaluating management's performance and to evaluate the effectiveness of our business strategies, and may use AFFO when determining incentive compensation.
AFFO has limitations as an analytical tool. Some of these limitations are:
• | AFFO does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; |
• | AFFO does not reflect changes in, or cash requirements for, our working capital needs; |
• | Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and AFFO does not reflect any cash requirements for such replacements; |
• | AFFO does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; and |
• | Other companies in our industry may calculate AFFO differently than we do, limiting its usefulness as a comparative measure. |
Because of these limitations, AFFO should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using AFFO only as a supplemental measure.
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Below is a reconciliation of net income to FFO available to common shareholders and AFFO available to common shareholders (in thousands, except per share amounts): (1)
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Net income | $ | 72,774 | $ | 46,460 | $ | 178,693 | $ | 108,205 | ||||||||
Adjusted for: | ||||||||||||||||
Depreciation and amortization of real estate assets - consolidated | 28,850 | 28,428 | 80,992 | 75,984 | ||||||||||||
Depreciation and amortization of real estate assets - unconsolidated joint ventures | 4,325 | 5,411 | 15,472 | 14,525 | ||||||||||||
Impairment charges - unconsolidated joint ventures | 2,919 | — | 2,919 | — | ||||||||||||
Gain on sale of assets and interests in unconsolidated entities | — | (20,215 | ) | (4,887 | ) | (33,941 | ) | |||||||||
Gain on previously held interests in acquired joint ventures | (46,258 | ) | — | (95,516 | ) | — | ||||||||||
FFO | 62,610 | 60,084 | 177,673 | 164,773 | ||||||||||||
FFO attributable to noncontrolling interests in other consolidated partnerships | (3 | ) | (45 | ) | (62 | ) | 325 | |||||||||
Allocation of earnings to participating securities | (539 | ) | (640 | ) | (1,675 | ) | (1,783 | ) | ||||||||
FFO available to common shareholders (1) | $ | 62,068 | $ | 59,399 | $ | 175,936 | $ | 163,315 | ||||||||
As further adjusted for: | ||||||||||||||||
Compensation related to director and executive officer terminations (2) | 887 | — | 1,180 | — | ||||||||||||
Acquisition costs | 487 | — | 487 | — | ||||||||||||
Demolition costs | 259 | — | 441 | — | ||||||||||||
Gain on sale of outparcel | (1,418 | ) | — | (1,418 | ) | — | ||||||||||
Write-off of debt discount due to repayment of debt prior to maturity (3) | — | — | 882 | — | ||||||||||||
Impact of above adjustments to the allocation of earnings to participating securities | (2 | ) | — | (15 | ) | — | ||||||||||
AFFO available to common shareholders (1) | $ | 62,281 | $ | 59,399 | $ | 177,493 | $ | 163,315 | ||||||||
FFO available to common shareholders per share - diluted (1) | $ | 0.62 | $ | 0.59 | $ | 1.75 | $ | 1.64 | ||||||||
AFFO available to common shareholders per share - diluted (1) | $ | 0.62 | $ | 0.59 | $ | 1.76 | $ | 1.64 | ||||||||
Weighted Average Shares | ||||||||||||||||
Basic weighted average common shares | 95,156 | 94,746 | 95,075 | 94,675 | ||||||||||||
Effect of notional units | 426 | — | 393 | — | ||||||||||||
Effect of outstanding options and restricted common shares | 90 | 53 | 68 | 62 | ||||||||||||
Diluted weighted average common shares (for earnings per share computations) | 95,672 | 94,799 | 95,536 | 94,737 | ||||||||||||
Exchangeable operating partnership units | 5,053 | 5,078 | 5,053 | 5,078 | ||||||||||||
Diluted weighted average common shares (for FFO and AFFO per share computations) (1) | 100,725 | 99,877 | 100,589 | 99,815 |
(1) | Assumes the Class A common limited partnership units of the Operating Partnership held by the noncontrolling interests are exchanged for common shares of the Company. Each Class A common limited partnership unit is exchangeable for one of the Company's common shares, subject to certain limitations to preserve the Company's REIT status. |
(2) | Represents cash severance and accelerated vesting of restricted shares associated with the termination of an executive officer in August 2016 and the accelerated vesting of restricted shares due to the death of a director in February 2016. |
(3) | Due to the January 28, 2016 early repayment of the $150.0 million mortgage secured by the Deer Park property, which was scheduled to mature August 30, 2018. |
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Portfolio Net Operating Income and Same Center NOI
We present portfolio net operating income ("Portfolio NOI") and Same Center NOI as supplemental measures of our operating performance. Portfolio NOI represents our property level net operating income which is defined as total operating revenues less property operating expenses and excludes termination fees and non-cash adjustments including straight-line rent, net above and below market rent amortization and gains or losses on the sale of outparcels recognized during the periods presented. We define Same Center NOI as Portfolio NOI for the properties that were operational for the entire portion of both comparable reporting periods and which were not acquired or subject to a material expansion or non-recurring event, such as a natural disaster, during the comparable reporting periods.
We believe Portfolio NOI and Same Center NOI are non-GAAP metrics used by industry analysts, investors and management to measure the operating performance of our properties because they provide performance measures directly related to the revenues and expenses involved in owning and operating real estate assets and provide a perspective not immediately apparent from net income, FFO or AFFO. Because Same Center NOI excludes properties developed, redeveloped, acquired and sold; as well as non-cash adjustments, gains or losses on the sale of outparcels and termination rents; it highlights operating trends such as occupancy levels, rental rates and operating costs on properties that were operational for both comparable periods. Other REITs may use different methodologies for calculating Portfolio NOI and Same Center NOI, and accordingly, our Portfolio NOI and Same Center NOI may not be comparable to other REITs.
Portfolio NOI and Same Center NOI should not be considered alternatives to net income (loss) or as an indicator of our financial performance since they do not reflect the entire operations of our portfolio, nor do they reflect the impact of general and administrative expenses, acquisition-related expenses, interest expense, depreciation and amortization costs, other non-property income and losses, the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, or trends in development and construction activities which are significant economic costs and activities that could materially impact our results from operations. Because of these limitations, Portfolio NOI and Same Center NOI should not be viewed in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using Portfolio NOI and Same Center NOI only as supplemental measures.
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Below is a reconciliation of net income to Portfolio NOI and Same Center NOI for the consolidated portfolio (in thousands):
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Net income | $ | 72,774 | $ | 46,460 | $ | 178,693 | $ | 108,205 | ||||||||
Adjusted to exclude: | ||||||||||||||||
Equity in earnings of unconsolidated joint ventures | (715 | ) | (3,713 | ) | (7,680 | ) | (8,302 | ) | ||||||||
Interest expense | 15,516 | 13,933 | 44,200 | 40,110 | ||||||||||||
Gain on sale of assets and interests in unconsolidated entities | (1,418 | ) | (20,215 | ) | (6,305 | ) | (33,941 | ) | ||||||||
Gain on previously held interests in acquired joint ventures | (46,258 | ) | — | (95,516 | ) | — | ||||||||||
Other nonoperating (income) expense | (24 | ) | (89 | ) | (378 | ) | 98 | |||||||||
Depreciation and amortization | 29,205 | 28,785 | 82,078 | 77,046 | ||||||||||||
Other non-property (income) expenses | (188 | ) | 22 | (698 | ) | (998 | ) | |||||||||
Acquisition costs | 487 | — | 487 | — | ||||||||||||
Demolition Costs | 259 | — | 441 | — | ||||||||||||
Corporate general and administrative expenses | 12,035 | 11,458 | 34,948 | 34,079 | ||||||||||||
Non-cash adjustments (1) | (967 | ) | (1,077 | ) | (2,938 | ) | (2,548 | ) | ||||||||
Termination rents | (1,450 | ) | (1,585 | ) | (3,491 | ) | (4,421 | ) | ||||||||
Portfolio NOI | 79,256 | 73,979 | 223,841 | 209,328 | ||||||||||||
Non-same center NOI (2) | (9,868 | ) | (6,332 | ) | (21,181 | ) | (13,660 | ) | ||||||||
Same Center NOI | $ | 69,388 | $ | 67,647 | $ | 202,660 | $ | 195,668 |
(1) | Non-cash items include straight-line rent, net above and below market rent amortization and gains or losses on outparcel sales, as applicable. |
(2) | Excluded from Same Center NOI: Foxwoods outlet center, which opened in May of 2015; Grand Rapids outlet center, which opened in July of 2015; Southaven outlet center, which opened in November 2015; Kittery I & II, Tuscola and West Branch outlet centers, which were sold in September 2015; Barstow outlet center, which was sold in October 2015; Fort Myers outlet center, which was sold in January 2016; and Glendale outlet center (Westgate), which was acquired in June 2016; and Savannah outlet center, which was acquired in August 2016. |
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ECONOMIC CONDITIONS AND OUTLOOK
The majority of our leases contain provisions designed to mitigate the impact of inflation. Such provisions include clauses for the escalation of base rent and clauses enabling us to receive percentage rentals based on tenants' gross sales (above predetermined levels) 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.
While we believe outlet stores will continue to be a profitable and fundamental distribution channel for many 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.
Due to the relatively short-term nature of our tenants' leases, a significant portion of the leases in our portfolio come up for renewal each year. As of January 1, 2016, we had approximately 1.4 million square feet, or 12% of our consolidated portfolio at that time, coming up for renewal during 2016. During the first nine months of 2016, we renewed approximately 1.1 million square feet of this space at a 17% increase in the average base rental rate compared to the expiring rate. We also re-tenanted approximately 368,000 square feet at a 28% increase in the average base rental rate. In addition, we continue to attract and retain additional tenants. However, there can be no assurance that we can achieve similar increases in base rental rates. In addition, if we 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.
Our outlet centers typically include well-known, national, brand name companies. By maintaining a broad base of well-known tenants and a geographically diverse portfolio of properties located across the United States, we believe we reduce our operating and leasing risks. No one tenant (including affiliates) accounts for more than 8% of our square feet or 7% of our combined base and percentage rental revenues. Accordingly, although we can give no assurance, we do not expect any material adverse impact on our results of operations and financial condition as a result of leases to be renewed or stores to be released. Occupancy at our consolidated centers was 97% as of both September 30, 2016 and 2015.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
We are 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. We may periodically enter into certain interest rate protection and interest rate swap agreements to effectively convert existing floating rate debt to a fixed rate basis. We do not enter into derivatives or other financial instruments for trading or speculative purposes. We are also exposed to foreign currency risk on investments in outlet centers that are located in Canada. Our currency exposure is concentrated in the Canadian Dollar. When current development activities were ongoing, we typically held distributions of net cash flow from our Canadian joint ventures in Canadian Dollars in order to efficiently reinvest such amounts as needed to fund future Canadian development activities. Cash held in Canadian Dollars has neither typically been held for long periods of time, nor has it been significant. We believe this strategy has mitigated some of the risk of our initial investment and our exposure to changes in foreign currencies. Presently, we do not intend to maintain a substantial amount of cash in Canadian Dollars. However, any funds we hold in Canadian Dollars which are neither reinvested in additional Canadian development or exchanged for US Dollars subject us to the risk of currency fluctuations, as we generally do not hedge currency translation exposures.
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In October 2013, we entered into interest rate swap agreements with notional amounts totaling $150.0 million to reduce our floating rate debt exposure. The interest rate swap agreements fix the base LIBOR rate at an average of 1.30% and mature in August 2018. Also, in April 2016, we entered into four separate interest rate swap agreements, effective April 13, 2016, that fixed the base LIBOR rate at an average of 1.03% on notional amounts totaling $175.0 million through January 1, 2021. The fair value of the interest rate swap agreements represents the estimated receipts or payments that would be made to terminate the agreement.
As of September 30, 2016, the fair value of these contracts is a liability of $2.2 million which is recorded in other liabilities on the consolidated balance sheets. The fair value is based on dealer quotes, considering current interest rates, remaining term to maturity and our credit standing.
As of September 30, 2016, approximately 19% of our outstanding debt had variable rates, excluding variable rate debt with interest rate protection agreements in place, and therefore were subject to market fluctuations. An increase in the LIBOR rate of 100 basis points would result in an increase of approximately $3.3 million in interest expense on an annual basis. The information presented herein is merely an estimate and has limited predictive value. As a result, the ultimate effect upon our operating results of interest rate fluctuations will depend on the interest rate exposures that arise during the period, our hedging strategies at that time and future changes in the level of interest rates.
The estimated fair value and recorded value of our debt consisting of senior unsecured notes, unsecured term loans, secured mortgages and unsecured lines of credit were as follows (in thousands):
September 30, 2016 | December 31, 2015 | |||||||
Fair value of debt | $ | 1,828,538 | $ | 1,615,833 | ||||
Recorded value of debt | $ | 1,724,646 | $ | 1,551,924 |
A 100 basis point increase from prevailing interest rates at September 30, 2016 and December 31, 2015 would result in a decrease in fair value of total debt of approximately $70.0 million and $50.3 million, respectively. With the exception of the unsecured term loan and unsecured lines of credit, that have variable rates and considered at market value, fair values of the senior notes and mortgage loans are determined using discounted cash flow analysis with an interest rate or credit spread similar to that of current market borrowing arrangements. Because the Company's senior unsecured notes are publicly traded with limited trading volume, these instruments are classified as Level 2 in the hierarchy. In contrast, mortgage loans are classified as Level 3 given the unobservable inputs utilized in the valuation. Considerable judgment is necessary to develop estimated fair values of financial instruments. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on the disposition of the financial instruments.
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Item 4. Controls and Procedures
Tanger Factory Outlet Centers, Inc. Controls and Procedures
The Company's management carried out an evaluation, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2016. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer, have concluded the Company's disclosure controls and procedures were effective as of September 30, 2016. There were no changes to the Company's internal controls over financial reporting during the quarter ended September 30, 2016, that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Tanger Properties Limited Partnership Controls and Procedures
The management of the Operating Partnership's general partner carried out an evaluation, with the participation of the Chief Executive Officer and the Vice-President and Treasurer (Principal Financial and Accounting Officer) of the Operating Partnership's general partner, of the effectiveness of the Operating Partnership's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2016. Based on this evaluation, the Chief Executive Officer of the Operating Partnership's general partner, and the Vice-President and Treasurer of the Operating Partnership's general partner, have concluded the Operating Partnership's disclosure controls and procedures were effective as of September 30, 2016. There were no changes to the Operating Partnership's internal controls over financial reporting during the quarter ended September 30, 2016, that materially affected, or are reasonably likely to materially affect, the Operating Partnership's internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and the Operating Partnership are, from time to time, engaged in a variety of legal proceedings arising in the normal course of business. Although the results of these legal proceedings cannot be predicted with certainty, management believes that the final outcome of such proceedings will not have a material adverse effect on our results of operations or financial condition.
On July 14, 2016, a lawsuit was filed by a local business owner in the Superior Court of New Jersey alleging that agreements that establish the property tax liability of certain of our subsidiaries violate the New Jersey Constitution and are unauthorized by New Jersey law. We believe our agreements are valid and authorized. We intend to defend vigorously against these allegations. Nevertheless, we cannot assure you as to the outcome of this action, or any similar future lawsuit, including the costs associated with defending these claims or any other liabilities that may be incurred in connection with the litigation or settlement of these claims.
Item 1A. Risk Factors
There have been no material changes from the risk factors disclosed in the "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2015.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Share Repurchases
For certain restricted common shares that vested during the three months ended September 30, 2016 and 2015 we withheld shares with value equivalent to the employees' minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total number of shares withheld upon vesting was 6,045 and 954 for the three months ended September 30, 2016 and 2015, respectively. The total number of shares withheld was based on the value of the restricted common shares on the vesting date as determined by our closing share price on the day prior to the vesting date.
Item 4.Mine Safety Disclosures
Not applicable
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Item 6. Exhibits
Exhibit Number | Exhibit Descriptions | ||
4.1 | Tenth Supplemental Indenture (Supplement to Indenture dated as of March 1, 1996) dated August 8, 2016. (Incorporated by reference to Exhibit 4.1 filed with the Company's and Operating Partnership's Report on Form 8-K dated August 8, 2016). | ||
4.2 | First Amendment to Tenth Supplemental Indenture dated October 13, 2016. (Incorporated by reference to Exhibit 4.1 filed with the Company's and Operating Partnership's Report on Form 8-K dated October 13, 2016). | ||
12.1* | Company's Ratio of Earnings to Fixed Charges. | ||
12.2* | Operating Partnership's Ratio of Earnings to Fixed Charges. | ||
31.1* | Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 for Tanger Factory Outlet Centers, Inc. | ||
31.2* | Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 for Tanger Factory Outlet Centers, Inc. | ||
31.3* | Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 for Tanger Properties Limited Partnership. | ||
31.4* | Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 for Tanger Properties Limited Partnership. | ||
32.1** | Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002 for Tanger Factory Outlet Centers, Inc. | ||
32.2** | Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002 for Tanger Factory Outlet Centers, Inc. | ||
32.3** | Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002 for Tanger Properties Limited Partnership. | ||
32.4** | Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002 for Tanger Properties Limited Partnership. | ||
101* | The following financial statements from Tanger Factory Outlet Centers, Inc. and Tanger Properties Limited Partnership's dual Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, formatted in XBRL: (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Operations (unaudited), (iii) Consolidated Statements of Other Comprehensive Income (unaudited), (iv) Consolidated Statements of Equity (unaudited), (v) Consolidated Statements of Cash Flows (unaudited), and (vi) Notes to Consolidated Financial Statements (unaudited). | ||
* Filed herewith. | |||
** Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
DATE: October 28, 2016
TANGER FACTORY OUTLET CENTERS, INC. | |
By: | /s/ James F. Williams |
James F. Williams | |
Senior Vice President and Chief Financial Officer | |
TANGER PROPERTIES LIMITED PARTNERSHIP | |
By: TANGER GP TRUST, its sole general partner | |
By: | /s/ James F. Williams |
James F. Williams | |
Vice President and Treasurer (Principal Financial and Accounting Officer) |
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Exhibit Index
Exhibit Number | Exhibit Descriptions | ||
4.1 | Tenth Supplemental Indenture (Supplement to Indenture dated as of March 1, 1996) dated August 8, 2016. (Incorporated by reference to Exhibit 4.1 filed with the Company's and Operating Partnership's Report on Form 8-K dated August 8, 2016). | ||
4.2 | First Amendment to Tenth Supplemental Indenture dated October 13, 2016. (Incorporated by reference to Exhibit 4.1 filed with the Company's and Operating Partnership's Report on Form 8-K dated October 13, 2016). | ||
12.1* | Company's Ratio of Earnings to Fixed Charges. | ||
12.2* | Operating Partnership's Ratio of Earnings to Fixed Charges. | ||
31.1* | Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 for Tanger Factory Outlet Centers, Inc. | ||
31.2* | Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 for Tanger Factory Outlet Centers, Inc. | ||
31.3* | Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 for Tanger Properties Limited Partnership. | ||
31.4* | Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 for Tanger Properties Limited Partnership. | ||
32.1** | Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002 for Tanger Factory Outlet Centers, Inc. | ||
32.2** | Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002 for Tanger Factory Outlet Centers, Inc. | ||
32.3** | Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002 for Tanger Properties Limited Partnership. | ||
32.4** | Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002 for Tanger Properties Limited Partnership. | ||
101* | The following financial statements from Tanger Factory Outlet Centers, Inc. and Tanger Properties Limited Partnership's dual Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, formatted in XBRL: (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Operations (unaudited), (iii) Consolidated Statements of Other Comprehensive income (unaudited), (iv) Consolidated Statements of Equity (unaudited), (v) Consolidated Statements of Cash Flows (unaudited), and (vi) Notes to Consolidated Financial Statements (unaudited). | ||
* Filed herewith. | |||
** Furnished herewith. |
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