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, 2017
with the three and
nine months
ended
September 30, 2016
. 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, market and industry trends and consumer behavior; renewal and re
-
lease of leased space; 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; legislative or regulatory actions that could adversely affect 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 other important 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,
2016
.
General Overview
As of
September 30, 2017
, we had
35
consolidated outlet centers in
22
states totaling
12.6 million
square feet. We also had
8
unconsolidated outlet centers in
6
states or provinces totaling
2.4 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,
2016
to
September 30, 2017
(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, 2016
|
|
|
|
11,746
|
|
|
34
|
|
|
2,747
|
|
|
9
|
|
New Developments:
|
|
|
|
|
|
|
|
|
|
|
Columbus
|
|
Second Quarter
|
|
—
|
|
|
—
|
|
|
355
|
|
|
1
|
|
Daytona Beach
|
|
Fourth Quarter
|
|
349
|
|
|
1
|
|
|
—
|
|
|
—
|
|
Acquisitions:
|
|
|
|
|
|
|
|
|
|
|
Westgate
|
|
Second Quarter
|
|
408
|
|
|
1
|
|
|
(408
|
)
|
|
(1
|
)
|
Savannah
|
|
Third Quarter
|
|
419
|
|
|
1
|
|
|
(419
|
)
|
|
(1
|
)
|
Expansions:
|
|
|
|
|
|
|
|
|
|
|
Ottawa
|
|
First Quarter
|
|
—
|
|
|
—
|
|
|
32
|
|
|
—
|
|
Savannah
|
|
Second Quarter
|
|
—
|
|
|
—
|
|
|
42
|
|
|
—
|
|
Dispositions:
|
|
|
|
|
|
|
|
|
|
|
Fort Myers
|
|
First Quarter
|
|
(199
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
Demolition:
|
|
|
|
|
|
|
|
|
|
|
Lancaster
|
|
Various
|
|
(25
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
|
|
|
12
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
As of December 31, 2016
|
|
|
|
12,710
|
|
|
36
|
|
|
2,348
|
|
|
8
|
|
Expansion:
|
|
|
|
|
|
|
|
|
|
|
Ottawa
|
|
Second Quarter
|
|
—
|
|
|
—
|
|
|
39
|
|
|
—
|
|
Lancaster
|
|
Third Quarter
|
|
148
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Dispositions:
|
|
|
|
|
|
|
|
|
|
|
Westbrook
|
|
Second Quarter
|
|
(290
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
Other
|
|
|
|
7
|
|
|
—
|
|
|
(16
|
)
|
|
—
|
|
As of September 30, 2017
|
|
|
|
12,575
|
|
|
35
|
|
|
2,371
|
|
|
8
|
|
Our Westgate and Savannah outlet centers were previously held in unconsolidated joint ventures prior to acquiring our partners' interest in each venture in June 2016 and August 2016, respectively.
The following table summarizes certain information for our existing outlet centers in which we have an ownership interest as of
September 30, 2017
. Except as noted, all properties are fee owned.
|
|
|
|
|
|
|
|
|
|
Consolidated Outlet Centers
|
|
Legal
|
|
Square
|
|
%
|
Location
|
|
Ownership %
|
|
Feet
|
|
Occupied
|
Deer Park, New York
|
|
100
|
|
749,074
|
|
|
95
|
|
Riverhead, New York
(1)
|
|
100
|
|
729,706
|
|
|
98
|
|
Rehoboth Beach, Delaware
(1)
|
|
100
|
|
557,404
|
|
|
99
|
|
Foley, Alabama
|
|
100
|
|
556,677
|
|
|
99
|
|
Atlantic City, New Jersey
(1) (4)
|
|
99
|
|
489,706
|
|
|
87
|
|
San Marcos, Texas
|
|
100
|
|
471,816
|
|
|
97
|
|
Sevierville, Tennessee
(1)
|
|
100
|
|
448,355
|
|
|
100
|
|
Savannah, Georgia
|
|
100
|
|
429,089
|
|
|
97
|
|
Myrtle Beach Hwy 501, South Carolina
|
|
100
|
|
425,334
|
|
|
94
|
|
Jeffersonville, Ohio
|
|
100
|
|
411,849
|
|
|
95
|
|
Glendale, Arizona (Westgate)
|
|
100
|
|
407,673
|
|
|
97
|
|
Myrtle Beach Hwy 17, South Carolina
(1)
|
|
100
|
|
403,339
|
|
|
100
|
|
Charleston, South Carolina
|
|
100
|
|
382,117
|
|
|
97
|
|
Lancaster, Pennsylvania
|
|
100
|
|
377,299
|
|
|
93
|
|
Pittsburgh, Pennsylvania
|
|
100
|
|
372,958
|
|
|
100
|
|
Commerce, Georgia
|
|
100
|
|
371,408
|
|
|
97
|
|
Grand Rapids, Michigan
|
|
100
|
|
357,080
|
|
|
97
|
|
Daytona Beach, Florida
|
|
100
|
|
351,704
|
|
|
97
|
|
Branson, Missouri
|
|
100
|
|
329,861
|
|
|
100
|
|
Locust Grove, Georgia
|
|
100
|
|
321,070
|
|
|
97
|
|
Gonzales, Louisiana
|
|
100
|
|
321,066
|
|
|
99
|
|
Southaven, Mississippi
(2) (4)
|
|
50
|
|
320,341
|
|
|
97
|
|
Park City, Utah
|
|
100
|
|
319,661
|
|
|
97
|
|
Mebane, North Carolina
|
|
100
|
|
318,910
|
|
|
100
|
|
Howell, Michigan
|
|
100
|
|
314,459
|
|
|
98
|
|
Mashantucket, Connecticut (Foxwoods)
(1) (2) (4)
|
|
67
|
|
311,614
|
|
|
94
|
|
Williamsburg, Iowa
|
|
100
|
|
276,331
|
|
|
97
|
|
Tilton, New Hampshire
|
|
100
|
|
250,107
|
|
|
93
|
|
Hershey, Pennsylvania
|
|
100
|
|
247,500
|
|
|
100
|
|
Hilton Head II, South Carolina
|
|
100
|
|
206,564
|
|
|
96
|
|
Ocean City, Maryland
(1)
|
|
100
|
|
198,800
|
|
|
98
|
|
Hilton Head I, South Carolina
|
|
100
|
|
181,670
|
|
|
99
|
|
Terrell, Texas
|
|
100
|
|
177,800
|
|
|
96
|
|
Blowing Rock, North Carolina
|
|
100
|
|
104,009
|
|
|
98
|
|
Nags Head, North Carolina
|
|
100
|
|
82,161
|
|
|
100
|
|
Totals
|
|
|
|
12,574,512
|
|
|
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 Daytona Beach outlet center which opened during the fourth quarter of 2016 and has not yet stabilized.
|
|
|
(4)
|
Property encumbered by mortgage. See notes
6
and
7
to the consolidated financial statements for further details of our debt obligations.
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated joint venture properties
|
|
Legal
|
|
Square
|
|
%
|
|
Location
|
|
Ownership %
|
|
Feet
|
|
Occupied
|
|
Charlotte, North Carolina
(1)
|
|
50
|
|
397,844
|
|
|
99
|
|
Ottawa, Ontario
|
|
50
|
|
355,497
|
|
|
93
|
|
Columbus, Ohio
(1)
|
|
50
|
|
355,220
|
|
|
96
|
|
Texas City, Texas (Galveston/Houston)
(1)
|
|
50
|
|
352,705
|
|
|
99
|
|
National Harbor, Maryland
(1)
|
|
50
|
|
341,156
|
|
|
98
|
|
Cookstown, Ontario
|
|
50
|
|
307,779
|
|
|
98
|
|
Bromont, Quebec
|
|
50
|
|
161,307
|
|
|
72
|
|
Saint-Sauveur, Quebec
(1)
|
|
50
|
|
99,405
|
|
|
96
|
|
Total
|
|
|
|
2,370,913
|
|
|
95
|
(2)
|
|
|
(1)
|
Property encumbered by mortgage. See note
5
to the consolidated financial statements for further details of our debt obligations.
|
|
|
(2)
|
Excludes the occupancy rate at our Columbus outlet center which opened during the second quarter of 2016 and has not yet stabilized.
|
Leasing Activity
The following table provides information for our consolidated outlet centers regarding space re-leased or renewed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trailing twelve months ended September 30, 2017
(1)
|
|
# of Leases
|
Square Feet
(in 000's)
|
Average
Annual
Straight-line Rent (psf)
(2)
|
Average
Tenant
Allowance (psf)
|
Average Initial Term
(in years)
|
Net Average
Annual
Straight-line Rent (psf)
(3)
|
Re-tenant
|
87
|
|
380
|
|
$
|
34.76
|
|
$
|
55.47
|
|
8.94
|
|
$
|
28.56
|
|
Renewal
|
253
|
|
1,126
|
|
$
|
32.56
|
|
$
|
0.24
|
|
4.50
|
|
$
|
32.51
|
|
|
|
|
|
|
|
|
|
Trailing twelve months ended September 30, 2016
(1)
|
|
# of Leases
|
Square Feet
(in 000's)
|
Average
Annual
Straight-line Rent (psf)
(2)
|
Average
Tenant
Allowance (psf)
|
Average Initial Term
(in years)
|
Net Average
Annual
Straight-line Rent (psf)
(3)
|
Re-tenant
|
103
|
|
401
|
|
$
|
41.47
|
|
$
|
57.04
|
|
8.54
|
|
$
|
34.79
|
|
Renewal
|
290
|
|
1,337
|
|
$
|
32.22
|
|
$
|
0.41
|
|
4.71
|
|
$
|
32.13
|
|
|
|
(1)
|
Includes information for consolidated portfolio outlet centers owned as of period end date.
|
|
|
(2)
|
Includes both minimum base rent and common area maintenance rents.
|
|
|
(3)
|
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.
|
RESULTS OF OPERATIONS
Comparison of the
three months ended
September 30, 2017
to the
three months ended
September 30, 2016
NET INCOME (LOSS)
Net income (loss) decreased
$88.8 million
in the
2017
period to a loss of
$16.0 million
as compared to income of
$72.8 million
for the
2016
period. The majority of this decrease was due to a loss on the early extinguishment of debt of
$35.6 million
in the 2017 period and a
$46.3 million
gain on the acquisition of our partners' equity interests in the Savannah joint venture in the 2016 period. This decrease was partially offset by improved operating income.
In the tables below, information set forth for new development represents our Daytona Beach outlet center, which opened in November 2016. Acquisitions include our Westgate and Savannah outlet 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 include our Westbrook and Fort Myers outlet centers sold in May 2017 and January 2016, respectively.
BASE RENTALS
Base rentals increased
$780,000
, or
1%
, in the 2017 period compared to the
2016
period. The following table sets forth the changes in various components of base rentals (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Increase/(Decrease)
|
Base rentals from existing properties
|
|
$
|
73,217
|
|
|
$
|
73,523
|
|
|
$
|
(306
|
)
|
Base rentals from new development
|
|
1,978
|
|
|
—
|
|
|
1,978
|
|
Base rentals from acquisitions
|
|
5,294
|
|
|
4,131
|
|
|
1,163
|
|
Base rentals from property disposed
|
|
—
|
|
|
1,134
|
|
|
(1,134
|
)
|
Termination fees
|
|
162
|
|
|
1,450
|
|
|
(1,288
|
)
|
Amortization of above and below market rent adjustments, net
|
|
(302
|
)
|
|
(669
|
)
|
|
367
|
|
|
|
$
|
80,349
|
|
|
$
|
79,569
|
|
|
$
|
780
|
|
Base rentals from existing properties decreased due primarily to a slight decrease in average portfolio occupancy.
PERCENTAGE RENTALS
Percentage rentals increased
$143,000
, or
5%
, in the 2017 period compared to the
2016
period. Percentage rentals represents revenues based on a percentage of tenants' sales volume above predetermined levels (contractual breakpoints") (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Increase/(Decrease)
|
Percentage rentals from existing properties
|
|
$
|
2,738
|
|
|
$
|
2,698
|
|
|
$
|
40
|
|
Percentage rentals from new development
|
|
99
|
|
|
—
|
|
|
99
|
|
Percentage rentals from acquisitions
|
|
301
|
|
|
285
|
|
|
16
|
|
Percentage rentals from property disposed
|
|
—
|
|
|
12
|
|
|
(12
|
)
|
|
|
$
|
3,138
|
|
|
$
|
2,995
|
|
|
$
|
143
|
|
EXPENSE REIMBURSEMENTS
Expense reimbursements increased
$1.1 million
, or
3%
, in the
2017
period compared to the
2016
period. The following table sets forth the changes in various components of expense reimbursements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Increase/(Decrease)
|
Expense reimbursements from existing properties
|
|
$
|
30,504
|
|
|
$
|
30,538
|
|
|
$
|
(34
|
)
|
Expense reimbursements from new development
|
|
825
|
|
|
49
|
|
|
776
|
|
Expense reimbursements from acquisitions
|
|
2,851
|
|
|
1,952
|
|
|
899
|
|
Expense reimbursements from property disposed
|
|
—
|
|
|
586
|
|
|
(586
|
)
|
|
|
$
|
34,180
|
|
|
$
|
33,125
|
|
|
$
|
1,055
|
|
Expense reimbursements represent the contractual recovery from tenants of certain common area maintenance ("CAM"), insurance, property tax, promotional, advertising and management expenses. Certain expense reimbursements are based on the tenant's proportionate share of the allocable operating expenses for the property. and thus generally fluctuate consistently with the related expenses. Other expense reimbursements, such as promotional, advertising and certain CAM payments, represent contractual fixed rents and may escalate each year. See "Property Operating Expenses" below for a discussion of the decrease in operating expenses from our existing properties.
MANAGEMENT, LEASING AND OTHER SERVICES
Management, leasing and other services decreased
$218,000
, or
27%
, in the
2017
period compared to the
2016
period. The following table sets forth the changes in various components of management, leasing and other services (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Increase/(Decrease)
|
Management and marketing
|
|
$
|
564
|
|
|
$
|
656
|
|
|
$
|
(92
|
)
|
Development and leasing
|
|
20
|
|
|
65
|
|
|
(45
|
)
|
Loan guarantee
|
|
4
|
|
|
85
|
|
|
(81
|
)
|
|
|
$
|
588
|
|
|
$
|
806
|
|
|
$
|
(218
|
)
|
The decrease in management, leasing and other services is primarily due to having one fewer outlet center in our unconsolidated joint ventures in the 2017 period compared to the 2016 period. During August 2016, we acquired our venture partners' equity interests in the Savannah outlet center and received no fees subsequent to the acquisition date.
OTHER INCOME
Other income decreased
$132,000
, or
5%
in the
2017
period as compared to the
2016
period. The following table sets forth the changes in various components of property operating expenses (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Change
|
Other income from existing properties
|
|
$
|
2,283
|
|
|
$
|
2,434
|
|
|
$
|
(151
|
)
|
Other income from new developments
|
|
34
|
|
|
62
|
|
|
(28
|
)
|
Other income from acquisitions
|
|
193
|
|
|
146
|
|
|
47
|
|
|
|
$
|
2,510
|
|
|
$
|
2,642
|
|
|
$
|
(132
|
)
|
PROPERTY OPERATING EXPENSES
The following table sets forth the changes in various components of property operating expenses (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Increase/(Decrease)
|
Property operating expenses from existing properties
|
|
$
|
34,315
|
|
|
$
|
34,932
|
|
|
$
|
(617
|
)
|
Property operating expenses from new development
|
|
846
|
|
|
55
|
|
|
791
|
|
Property operating expenses from acquisitions
|
|
2,410
|
|
|
1,673
|
|
|
737
|
|
Property operating expenses from property disposed
|
|
—
|
|
|
782
|
|
|
(782
|
)
|
|
|
$
|
37,571
|
|
|
$
|
37,442
|
|
|
$
|
129
|
|
The decrease in property operating expenses from existing properties was due to lower spending in the 2017 period for certain CAM and marketing expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased
$1.2 million
, or
10%
in the
2017
period compared to the
2016
period, due primarily due to the 2016 period including executive severance.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization costs increased
$1.8 million
, or
6%
, in the
2017
period compared to the
2016
period. The following table sets forth the changes in various components of depreciation and amortization costs from the
2017
period to the
2016
period (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Increase/(Decrease)
|
Depreciation and amortization from existing properties
|
|
$
|
25,912
|
|
|
$
|
26,514
|
|
|
$
|
(602
|
)
|
Depreciation and amortization from new development
|
|
1,236
|
|
|
—
|
|
|
1,236
|
|
Depreciation and amortization from acquisitions
|
|
3,828
|
|
|
2,340
|
|
|
1,488
|
|
Depreciation and amortization from properties disposed
|
|
—
|
|
|
351
|
|
|
(351
|
)
|
|
|
$
|
30,976
|
|
|
$
|
29,205
|
|
|
$
|
1,771
|
|
INTEREST EXPENSE AND LOSS ON EARLY EXTINGUISHMENT OF DEBT
In July 2017, we completed an underwritten public offering of
$300.0 million
of
3.875%
senior notes due 2027 (the "2027 Notes"). In August 2017, we used the net proceeds from the sale of the 2027 Notes, together with borrowings under our unsecured lines of credit, to redeem all of our
6.125%
senior notes due 2020 (the "2020 Notes") (approximately
$300.0 million
in aggregate principal amount outstanding). The 2020 Notes were redeemed at par plus a make-whole premium of approximately
$34.1 million
. The loss on early extinguishment of debt includes the make-whole premium and approximately $1.5 million of costs written off related to a debt discount and the remaining net book value of deferred 2020 Notes origination costs.
Interest expense increased
$1.0 million
, or
6%
, in the
2017
period compared to the
2016
period, due primarily to the completed public offerings in August 2016 and October 2016, of an aggregate $350.0 million of 3.125% notes, the net proceeds of which were used to repay amounts outstanding under our unsecured lines of credit that had an approximate interest rate of 1.20%. Interest expense also increased due to the 30-day LIBOR interest rate, which impacts the interest rate associated with our floating rate debt, increasing in the 2017 period compared with the 2016 period and due to incremental interest paid during the redemption notice period when both the 2020 Notes and the 2027 Notes were outstanding. The overall increase was partially offset by a decrease in interest expense related to the July 2017 bond refinancing, which effectively lowered the interest rate from
6.125%
to
3.875%
on
$300.0 million
of senior notes.
GAIN ON PREVIOUSLY HELD INTEREST IN ACQUIRED JOINT VENTURE
In August 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 (LOSSES) OF UNCONSOLIDATED JOINT VENTURES
Equity in earnings (losses) of unconsolidated joint ventures decreased approximately
$6.6 million
or
924%
in the
2017
period compared to the
2016
period. The following table sets forth the changes in various components of equity in earnings (losses) of unconsolidated joint ventures (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Increase/(Decrease)
|
Equity in earnings (losses) from existing properties
|
|
$
|
(5,893
|
)
|
|
$
|
(3
|
)
|
|
$
|
(5,890
|
)
|
Equity in earnings from properties previously held in unconsolidated joint ventures
|
|
—
|
|
|
718
|
|
|
(718
|
)
|
|
|
$
|
(5,893
|
)
|
|
$
|
715
|
|
|
$
|
(6,608
|
)
|
Equity in earnings (losses) from existing properties includes our share of impairment charges totaling $9.0 million in the 2017 period related to the Bromont and Saint-Sauveur outlet centers in Canada, and totaling $2.9 million in the 2016 period related to the Bromont outlet center. The decrease in equity in earnings from properties previously held in unconsolidated joint ventures in 2016 is related to the Savannah joint venture. We acquired our venture partner's interest in the joint venture in August 2016 and have consolidated the results of operations of the center since the acquisition date.
Comparison of the
nine months ended
September 30, 2017
to the
nine months ended
September 30, 2016
NET INCOME
Net income decreased
$140.3 million
in the
2017
period to
$38.4 million
as compared to
$178.7 million
for the
2016
period. The majority of this decrease was due to a loss on the early extinguishment of debt of
$35.6 million
in the 2017 period, a
$95.5 million
gain on the acquisition of our partners' equity interests in the Westgate and Savannah joint ventures in the 2016 period.
In the tables below, information set forth for new development represents our Daytona Beach outlet center, which opened in November 2016. Acquisitions include our Westgate and Savannah outlet 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 include our Westbrook outlet center and Fort Myers outlet center sold in May 2017 and January 2016, respectively.
BASE RENTALS
Base rentals increased
$14.3 million
, or
6%
, in the
2017
period compared to the
2016
period. The following table sets forth the changes in various components of base rentals (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Change
|
Base rentals from existing properties
|
|
$
|
216,954
|
|
|
$
|
217,861
|
|
|
$
|
(907
|
)
|
Base rentals from new development
|
|
5,836
|
|
|
—
|
|
|
5,836
|
|
Base rentals from acquisitions
|
|
16,042
|
|
|
4,131
|
|
|
11,911
|
|
Base rentals from properties disposed
|
|
1,605
|
|
|
3,457
|
|
|
(1,852
|
)
|
Termination fees
|
|
2,796
|
|
|
3,492
|
|
|
(696
|
)
|
Amortization of above and below market rent adjustments, net
|
|
(1,766
|
)
|
|
(1,746
|
)
|
|
(20
|
)
|
|
|
$
|
241,467
|
|
|
$
|
227,195
|
|
|
$
|
14,272
|
|
Base rentals from existing properties decreased primarily due to a slight decrease in average portfolio occupancy.
PERCENTAGE RENTALS
Percentage rentals decreased
$673,000
, or
9%
, in the
2017
period compared to the
2016
period. Percentage rentals represents revenues based on a percentage of tenants' sales volume above predetermined levels ("contractual breakpoints") (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Increase/(Decrease)
|
Percentage rentals from existing properties
|
|
$
|
5,998
|
|
|
$
|
7,129
|
|
|
$
|
(1,131
|
)
|
Percentage rentals from new development
|
|
106
|
|
|
—
|
|
|
106
|
|
Percentage rentals from acquisitions
|
|
629
|
|
|
285
|
|
|
344
|
|
Percentage rentals from properties disposed
|
|
65
|
|
|
57
|
|
|
8
|
|
|
|
$
|
6,798
|
|
|
$
|
7,471
|
|
|
$
|
(673
|
)
|
Decrease in percentage rentals is primarily due to a decrease in average sales per square foot for certain tenants for the rolling twelve months ended September 30, 2017, compared to the rolling twelve months ended September 30, 2016 and due to annual increases in contractual breakpoints in certain leases.
EXPENSE REIMBURSEMENTS
Expense reimbursements increased
$7.7 million
, or
8%
, in the
2017
period compared to the
2016
period. The following table sets forth the changes in various components of expense reimbursements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Change
|
Expense reimbursements from existing properties
|
|
$
|
93,141
|
|
|
$
|
93,296
|
|
|
$
|
(155
|
)
|
Expense reimbursements from new development
|
|
2,856
|
|
|
156
|
|
|
2,700
|
|
Expense reimbursements from acquisitions
|
|
8,052
|
|
|
1,952
|
|
|
6,100
|
|
Expense reimbursements from properties disposed
|
|
752
|
|
|
1,717
|
|
|
(965
|
)
|
|
|
$
|
104,801
|
|
|
$
|
97,121
|
|
|
$
|
7,680
|
|
Expense reimbursements represent the contractual recovery from tenants of certain common area maintenance, insurance, property tax, promotional, advertising and management expenses. Certain expense reimbursements are based on the tenant's proportionate share of the allocable operating expenses for the property, and thus generally fluctuate consistently with the related expenses. Other expense reimbursements, such as promotional, advertising and certain CAM payments, represent contractual fixed rents and may escalate each year. See "Property Operating Expenses" below for a discussion of the decrease in operating expenses from our existing properties.
MANAGEMENT, LEASING AND OTHER SERVICES
Management, leasing and other services decreased
$1.5 million
, or
46%
, in the
2017
period compared to the
2016
period. The following table sets forth the changes in various components of management, leasing and other services (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Change
|
Management and marketing
|
|
$
|
1,676
|
|
|
$
|
2,199
|
|
|
$
|
(523
|
)
|
Development and leasing
|
|
87
|
|
|
611
|
|
|
(524
|
)
|
Loan guarantee
|
|
13
|
|
|
449
|
|
|
(436
|
)
|
|
|
$
|
1,776
|
|
|
$
|
3,259
|
|
|
$
|
(1,483
|
)
|
The decrease in management, leasing and other services is primarily due to having two fewer outlet centers in our unconsolidated joint ventures in the 2017 period compared to the 2016 period. During 2016, we acquired our venture partners' equity interests in the Westgate and Savannah outlet centers and received no fees subsequent to the acquisition dates. Offsetting the impact of the acquisitions was the addition of one new center in an unconsolidated joint venture, the Columbus outlet center, which opened in June 2016.
OTHER INCOME
Other income increased
676,000
, or
11%
in the
2017
period as compared to the
2016
period. The following table sets forth the changes in various components of other income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Change
|
Other income from existing properties
|
|
$
|
6,043
|
|
|
$
|
6,004
|
|
|
$
|
39
|
|
Other income from new development
|
|
148
|
|
|
—
|
|
|
148
|
|
Other income from acquisitions
|
|
613
|
|
|
162
|
|
|
451
|
|
Other income from properties disposed
|
|
101
|
|
|
63
|
|
|
38
|
|
|
|
$
|
6,905
|
|
|
$
|
6,229
|
|
|
$
|
676
|
|
PROPERTY OPERATING EXPENSES
Property operating expenses increased
$4.7 million
, or
4%
in the
2017
period as compared to the
2016
period. The following table sets forth the changes in various components of property operating expenses (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Change
|
Property operating expenses from existing properties
|
|
$
|
104,135
|
|
|
$
|
106,147
|
|
|
$
|
(2,012
|
)
|
Property operating expenses from new development
|
|
3,139
|
|
|
163
|
|
|
2,976
|
|
Property operating expenses from acquisitions
|
|
6,801
|
|
|
1,689
|
|
|
5,112
|
|
Property operating expenses from properties disposed
|
|
999
|
|
|
2,329
|
|
|
(1,330
|
)
|
|
|
$
|
115,074
|
|
|
$
|
110,328
|
|
|
$
|
4,746
|
|
The decrease in property operating expenses from existing properties was due to lower spending in the 2017 period for certain CAM and marketing expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased
$1.5 million
, or
4%
, in the
2017
period compared to the
2016
period, due primarily due to the 2016 period including executive severance.
ABANDONED PRE-DEVELOPMENT COSTS
During the 2017 period, we decided to terminate a purchase option for a pre-development stage project near Detroit, Michigan and as a result, recorded a
$528,000
charge, representing the cumulative related pre-development costs.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization costs increased
$13.1 million
, or
16%
, in the
2017
period compared to the
2016
period. The following table sets forth the changes in various components of depreciation and amortization costs from the
2017
period to the
2016
period (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Change
|
Depreciation and amortization expenses from existing properties
|
|
$
|
79,537
|
|
|
$
|
78,690
|
|
|
$
|
847
|
|
Depreciation and amortization expenses from new development
|
|
3,524
|
|
|
—
|
|
|
3,524
|
|
Depreciation and amortization expenses from acquisitions
|
|
11,437
|
|
|
2,340
|
|
|
9,097
|
|
Depreciation and amortization from properties disposed
|
|
677
|
|
|
1,048
|
|
|
(371
|
)
|
|
|
$
|
95,175
|
|
|
$
|
82,078
|
|
|
$
|
13,097
|
|
Depreciation and amortization increased at our existing properties due to the accelerated amortization of lease related intangibles upon store closures and demolition activities at one of our centers.
INTEREST EXPENSE AND LOSS ON EARLY EXTINGUISHMENT OF DEBT
In July 2017, we completed an underwritten public offering of
$300.0 million
of
3.875%
senior notes due 2027 (the "2027 Notes"). In August 2017, we used the net proceeds from the sale of the 2027 Notes, together with borrowings under our unsecured lines of credit, to redeem all of our
6.125%
senior notes due 2020 (the "2020 Notes") (approximately
$300.0 million
in aggregate principal amount outstanding). The 2020 Notes were redeemed at par plus a make-whole premium of approximately
$34.1 million
. The loss on early extinguishment of debt includes the make-whole premium and approximately $1.5 million of costs written off related to a debt discount and the remaining net book value of deferred 2020 Notes origination costs.
Interest expense increased
$5.3 million
, or
12%
, in the
2017
period compared to the
2016
period, primarily due to (1) the impact of converting throughout 2016 $525.0 million of debt with floating interest rates to higher fixed interest rates, (2) the 30-day LIBOR, which impacts the interest rate associated with our floating rate debt, increasing relative to its level in the 2016 period, (3) and the additional debt incurred related to the 2016 acquisitions of Westgate and Savannah.
GAIN ON SALE OF ASSETS
In May 2017, we sold our Westbrook outlet center for approximately $40.0 million, which resulted in a gain of
$6.9 million
.
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.
In August 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 (LOSSES) OF UNCONSOLIDATED JOINT VENTURES
Equity in earnings (losses) of unconsolidated joint ventures decreased approximately
$8.9 million
or
116%
in the
2017
period compared to the
2016
period. The following table sets forth the changes in various components of equity in earnings (losses) of unconsolidated joint ventures (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Change
|
Equity in earnings (losses) from existing properties
|
|
$
|
(2,293
|
)
|
|
$
|
3,671
|
|
|
$
|
(5,964
|
)
|
Equity in earnings from new development
|
|
1,092
|
|
|
366
|
|
|
726
|
|
Equity in earnings from properties previously held in unconsolidated joint ventures
|
|
—
|
|
|
3,643
|
|
|
(3,643
|
)
|
|
|
$
|
(1,201
|
)
|
|
$
|
7,680
|
|
|
$
|
(8,881
|
)
|
Equity in earnings (losses) from existing properties includes our share of impairment charges totaling $9.0 million in the 2017 period related to the Bromont and Saint-Sauveur outlet centers in Canada, and totaling $2.9 million in the 2016 period related to the Bromont outlet center. . The increase in equity in earnings of unconsolidated joint ventures from new development is due to the incremental earnings from the Columbus outlet center, which opened in June 2016. The decrease in equity in earnings (losses) from properties previously held in unconsolidated joint ventures in 2016 is related to the Westgate and Savannah joint ventures. We acquired our venture partners' interest in each of these joint ventures in June 2016 and August 2016, respectively, and have consolidated the results of operations of these centers since the respective acquisition date.
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.
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, to 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 May 2017, we announced that our Board of Directors authorized the repurchase of up to
$125.0 million
of our outstanding common shares as market conditions warrant over a period commencing on May 19, 2017 and expiring on May 18, 2019. Repurchases may be made through open market, privately-negotiated, structured or derivative transactions (including accelerated share repurchase transactions), or other methods of acquiring shares. The Company intends to structure open market purchases to occur within pricing and volume requirements of Rule 10b-18. The Company may, from time to time, enter into Rule 10b5-1 plans to facilitate the repurchase of its shares under this authorization.
Between May 19, 2017 and August 25, 2017 we repurchased approximately
1.9 million
common shares on the open market at an average price of
$25.80
, totaling approximately
$49.3 million
exclusive of commissions and related fees. The remaining amount authorized to be repurchased under the program as of September 30, 2017 was approximately
$75.7 million
.
In October 2017, the Company's Board of Directors declared a
$0.3425
cash dividend per common share payable on November 15, 2017 to each shareholder of record on October 31, 2017, and the Trustees of Tanger GP Trust declared a
$0.3425
cash distribution per Operating Partnership unit to the Operating Partnership's unitholders.
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,
|
|
|
|
|
2017
|
|
2016
|
|
Change
|
Net cash provided by operating activities
|
|
$
|
181,530
|
|
|
$
|
177,723
|
|
|
$
|
3,807
|
|
Net cash used in investing activities
|
|
(89,052
|
)
|
|
(39,490
|
)
|
|
(49,562
|
)
|
Net cash used in financing activities
|
|
(95,954
|
)
|
|
(134,464
|
)
|
|
38,510
|
|
Effect of foreign currency rate changes on cash and equivalents
|
|
(54
|
)
|
|
532
|
|
|
(586
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
(3,530
|
)
|
|
$
|
4,301
|
|
|
$
|
(7,831
|
)
|
Operating Activities
The increase in net cash provided by operating activities in the 2017 period compared to the 2016 period was primarily due to incremental operating income as a result of the acquisition of our venture partners' interest in our Westgate and Savannah outlet centers, previously held in unconsolidated joint ventures, in June 2016 and August 2016, respectively, and the opening of our newest wholly owned outlet center in Daytona Beach, FL, which opened in November 2016.
Investing Activities
The primary cause for the increase in net cash used in investing activities was due to the change in restricted cash of
$118.4 million
. In the 2016 period, we used restricted cash, which represented a portion of the proceeds received from certain assets sales in 2015, to pay 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 our Deer Park outlet center. Partially offsetting the increase in cash used in the 2017 period compared to the 2016 period was the cash used to acquire our venture partners' interest in our Westgate joint venture and Savannah joint venture in the 2016 period.
Financing Activities
The primary cause for the decrease in net cash used in financing activities is due to the incremental borrowings required to fund the Company's development needs, net of asset sales proceeds, in the 2017 period compared to the 2016 period. A significant portion of the 2016 development needs was funded with the $118.4 million held in restricted cash during that period. In addition, cash used was higher in the 2016 period compared to the 2017 period due to a special dividend of approximately $21.0 million that was paid during 2016.
Capital Expenditures
The following table details our capital expenditures (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
2017
|
|
2016
|
|
Change
|
Capital expenditures analysis:
|
|
|
|
|
|
|
New center developments
|
|
$
|
87,376
|
|
|
$
|
74,441
|
|
|
$
|
12,935
|
|
Major center renovations
|
|
13,813
|
|
|
13,908
|
|
|
(95
|
)
|
Second generation tenant allowances
|
|
15,815
|
|
|
6,963
|
|
|
8,852
|
|
Other capital expenditures
|
|
19,791
|
|
|
8,576
|
|
|
11,215
|
|
|
|
136,795
|
|
|
103,888
|
|
|
32,907
|
|
Conversion from accrual to cash basis
|
|
(4,183
|
)
|
|
8,325
|
|
|
(12,508
|
)
|
Additions to rental property-cash basis
|
|
$
|
132,612
|
|
|
$
|
112,213
|
|
|
$
|
20,399
|
|
|
|
•
|
New center development expenditures, which include first generation tenant allowances, relate to construction expenditures for our Fort Worth, Daytona Beach, Lancaster and Tilton outlet centers in the 2017 period. The 2016 period included new center development expenditures for our Daytona Beach, Fort Worth, Southaven, and San Marcos outlet centers.
|
|
|
•
|
Major center renovations in both the 2017 and 2016 periods included construction activities at our Riverhead and our Rehoboth Beach outlet centers. The 2016 period also included renovations at our Howell outlet center while the 2017 period also included renovations at our Myrtle Beach 17 outlet center. We expect to spend approximately $7.7 million for the remainder of 2017 to complete our current renovation projects.
|
|
|
•
|
The increase in other capital expenditures in the 2017 period is primarily due to the installation of solar panels at several of our outlet centers and tenant interior build outs.
|
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. 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, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
Fort Worth
|
|
352
|
|
|
$
|
256
|
|
|
$
|
90.2
|
|
|
$
|
74.7
|
|
|
October 2017
|
Lancaster Expansion
In September 2017, we opened a
123,000
square foot expansion of our outlet center in Lancaster, Pennsylvania.
Fort Worth
In October 2017, we opened a
352,000
square foot wholly-owned outlet center center in the greater Fort Worth, Texas area. The outlet center is located within the 279-acre Champions Circle mixed-use development adjacent to Texas Motor Speedway.
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. See “Off-Balance Sheet Arrangements” for a discussion of unconsolidated joint venture development activities.
Financing Arrangements
As of
September 30, 2017
, unsecured borrowings represented
91%
of our outstanding debt and
89%
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 up to
$1.0 billion
through an accordion feature in certain circumstances. The unsecured lines of credit have an expiration date of October 24, 2019 with an option for a one year extension. The Company guarantees the Operating Partnership's obligations under these lines. As of
September 30, 2017
, we had
$366.3 million
available under our unsecured lines of credit after taking into account outstanding letters of credit of
$5.5 million
.
In July 2017, we completed an underwritten public offering of
$300.0 million
of our
3.875%
senior notes due 2027 (the "2027 Notes"). The 2027 Notes priced at
99.579%
of the principal amount to yield
3.926%
to maturity. The 2027 Notes pay interest semi-annually at a rate of
3.875%
per annum and mature on July 15, 2027. The estimated net proceeds from the offering, after deducting the underwriting discount and offering expenses, were approximately
$295.9 million
. In August 2017, we used the net proceeds from the sale of the 2027 Notes, together with borrowings under our unsecured lines of credit, to redeem all of our
6.125%
senior notes due 2020 (the "2020 Notes") (approximately
$300.0 million
in aggregate principal amount outstanding). The 2020 Notes were redeemed at par plus a “make-whole” premium of approximately
$34.1 million
.
Subsequent to quarter end, we successfully settled litigation with the estate of our former partner in the Foxwoods, Connecticut joint venture. In return for mutual releases and no cash consideration, the estate tendered its partnership interest to the Company. Prior to this settlement, we had a
100%
economic interest in the consolidated joint venture as a result of our preferred equity interest and the capital and distribution provisions in the joint venture agreement. On November 3, 2017, Tanger repaid the
$70.3 million
floating rate mortgage loan secured by the property with borrowings under its unsecured floating rate lines of credit.
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 2018.
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 when our next significant debt maturity, which are our unsecured line of credit facilities, occurs in 2020 assuming the extension option is 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%
|
52
|
%
|
Total secured debt to adjusted total assets
|
<40%
|
5
|
%
|
Total unencumbered assets to unsecured debt
|
>150%
|
184
|
%
|
OFF-BALANCE SHEET ARRANGEMENTS
The following table details certain information as of
September 30, 2017
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
|
|
|
$
|
6.8
|
|
National Harbor
|
|
National Harbor, MD
|
|
50.0
|
%
|
|
341
|
|
|
2.4
|
|
RioCan Canada
|
|
Various
|
|
50.0
|
%
|
|
924
|
|
|
116.6
|
|
Investments included in total assets
|
|
|
|
|
|
$
|
125.8
|
|
|
|
|
|
|
|
|
|
|
Charlotte
(1)
|
|
Charlotte, NC
|
|
50.0
|
%
|
|
398
|
|
|
$
|
(3.6
|
)
|
Galveston/Houston
(1)
|
|
Texas City, TX
|
|
50.0
|
%
|
|
353
|
|
|
(12.5
|
)
|
Investments included in other liabilities
|
|
|
|
|
|
$
|
(16.1
|
)
|
|
|
(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.
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, 2017
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joint Venture
|
|
Total Joint
Venture Debt
|
|
Maturity Date
|
|
Interest Rate
|
|
Percent Guaranteed by the Operating Partnership
|
|
Maximum Guaranteed Amount by the Company
|
Charlotte
|
|
$
|
90.0
|
|
|
November 2018
|
|
LIBOR + 1.45%
|
|
5.0
|
%
|
|
$
|
4.5
|
|
Columbus
|
|
85.0
|
|
|
November 2019
|
|
LIBOR + 1.65%
|
|
7.5
|
%
|
|
6.4
|
|
Galveston/Houston
(1)
|
|
80.0
|
|
|
July 2020
|
|
LIBOR + 1.65%
|
|
12.5
|
%
|
|
10.0
|
|
National Harbor
(2)
|
|
87.0
|
|
|
November 2019
|
|
LIBOR + 1.65%
|
|
10.0
|
%
|
|
8.7
|
|
RioCan Canada
(3)
|
|
11.4
|
|
|
May 2020
|
|
5.75%
|
|
28.1
|
%
|
|
3.2
|
|
Debt origination costs
|
|
(2.0
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
351.4
|
|
|
|
|
|
|
|
|
$
|
32.8
|
|
|
|
(1)
|
In July, the joint venture amended and restated the initial construction loan to increase the amount available to borrow from
$70.0 million
to
$80.0 million
and extended the maturity date until July 2020 with
two
one
-year options. The amended and restated loan also changed the interest rate from LIBOR +
1.50%
to an interest rate of LIBOR +
1.65%
. At the closing of the amendment, the joint venture distributed approximately
$14.5 million
equally between the partners.
|
|
|
(2)
|
100% completion guaranty; 10% principal guaranty.
|
|
|
(3)
|
The joint venture debt amount includes premium of approximately
$405,000
.
|
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,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Fee:
|
|
|
|
|
|
|
|
|
|
|
Management and marketing
|
|
$
|
564
|
|
|
$
|
656
|
|
|
1,676
|
|
|
2,199
|
|
Development and leasing
|
|
20
|
|
|
65
|
|
|
$
|
87
|
|
|
$
|
611
|
|
Loan Guarantee
|
|
4
|
|
|
85
|
|
|
13
|
|
|
449
|
|
Total Fees
|
|
$
|
588
|
|
|
$
|
806
|
|
|
$
|
1,776
|
|
|
$
|
3,259
|
|
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Refer to our
2016
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
2017
.
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.
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:
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•
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FFO does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
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•
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FFO does not reflect changes in, or cash requirements for, our working capital needs;
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•
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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;
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•
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FFO, which includes discontinued operations, may not be indicative of our ongoing operations; and
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•
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Other companies in our industry may calculate FFO differently than we do, limiting its usefulness as a comparative measure.
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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.
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:
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•
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AFFO does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
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•
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AFFO does not reflect changes in, or cash requirements for, our working capital needs;
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•
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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;
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•
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AFFO does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; and
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•
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Other companies in our industry may calculate AFFO differently than we do, limiting its usefulness as a comparative measure.
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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.
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):
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Three months ended
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Nine months ended
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September 30,
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September 30,
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2017
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2016
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2017
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2016
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Net income (loss)
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$
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(16,034
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)
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$
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72,774
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$
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38,427
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$
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178,693
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Adjusted for:
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Depreciation and amortization of real estate assets - consolidated
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30,396
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28,850
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93,634
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80,992
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Depreciation and amortization of real estate assets - unconsolidated joint ventures
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3,583
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4,325
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10,971
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15,472
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Impairment charges - unconsolidated joint ventures
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9,021
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2,919
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9,021
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2,919
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Gain on sale of assets
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—
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—
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(6,943
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)
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(4,887
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Gain on previously held interests in acquired joint ventures
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—
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(46,258
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)
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—
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(95,516
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)
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FFO
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26,966
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62,610
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145,110
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177,673
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FFO attributable to noncontrolling interests in other consolidated partnerships
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—
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(3
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)
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—
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(62
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)
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Allocation of earnings to participating securities
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(306
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)
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(539
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)
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(1,346
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)
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(1,675
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)
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FFO available to common shareholders
(1)
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$
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26,660
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$
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62,068
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$
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143,764
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$
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175,936
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As further adjusted for:
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Compensation related to director and executive officer terminations
(2)
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—
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887
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—
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1,180
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Acquisition costs
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—
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487
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—
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487
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Demolition costs
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—
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259
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—
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441
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Gain on sale of outparcel
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—
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(1,418
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)
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—
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(1,418
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)
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Abandoned pre-development costs
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(99
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)
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—
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528
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—
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Make-whole premium due to early extinguishment of debt
(3)
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34,143
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—
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34,143
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—
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Write-off of debt discount and debt origination costs due to early extinguishment of debt
(3)
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1,483
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—
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1,483
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882
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Impact of above adjustments to the allocation of earnings to participating securities
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(249
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)
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(2
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)
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(254
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)
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(15
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)
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AFFO available to common shareholders
(1)
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$
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61,938
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$
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62,281
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$
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179,664
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$
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177,493
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FFO available to common shareholders per share - diluted
(1)
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$
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0.27
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$
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0.62
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$
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1.44
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$
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1.75
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AFFO available to common shareholders per share - diluted
(1)
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$
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0.63
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$
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0.62
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$
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1.80
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$
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1.76
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Weighted Average Shares:
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Basic weighted average common shares
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93,923
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95,156
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94,781
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95,075
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Effect of notional units
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—
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426
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—
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393
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Effect of outstanding options and restricted common shares
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—
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90
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23
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68
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Diluted weighted average common shares (for earnings per share computations)
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93,923
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95,672
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94,804
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95,536
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Exchangeable operating partnership units
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5,028
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5,053
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5,028
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5,053
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Diluted weighted average common shares (for FFO and AFFO per share computations)
(1)
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98,951
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100,725
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99,832
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100,589
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(1)
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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.
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(2)
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Represents cash severance and accelerated vesting of restricted shares associated with the departure of an officer in August 2016 and the accelerated vesting of restricted shares due to the death of a director in February 2016.
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(3)
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Due to charges related to the redemption of our
$300.0 million
6.125%
senior notes due 2020 and 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 net operating income ("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.
Below is a reconciliation of net income to Portfolio NOI and Same Center NOI for the consolidated portfolio (in thousands):
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Three months ended
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Nine months ended
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September 30,
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September 30,
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2017
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|
2016
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|
2017
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|
2016
|
Net income (loss)
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$
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(16,034
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)
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$
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72,774
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$
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38,427
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$
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178,693
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Adjusted to exclude:
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Equity in (earnings) losses of unconsolidated joint ventures
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5,893
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(715
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)
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1,201
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(7,680
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)
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Interest expense
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16,489
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15,516
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49,496
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44,200
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Gain on sale of assets
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—
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(1,418
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)
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(6,943
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)
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(6,305
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)
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Gain on previously held interests in acquired joint ventures
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—
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(46,258
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)
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—
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(95,516
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)
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Loss on early extinguishment of debt
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35,626
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—
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35,626
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—
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Other non-operating (income) expense
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(591
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)
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(24
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)
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(683
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)
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(378
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)
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Depreciation and amortization
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30,976
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29,205
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|
95,175
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|
82,078
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Other non-property (income) expenses
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372
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(47
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)
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|
993
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|
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(437
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)
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Abandoned pre-development costs
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|
(99
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)
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—
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|
528
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—
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Acquisition costs
|
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—
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|
487
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—
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|
487
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Demolition Costs
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—
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259
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|
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—
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|
441
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Corporate general and administrative expenses
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11,020
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12,076
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33,499
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|
34,989
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Non-cash adjustments
(1)
|
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(1,020
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)
|
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(967
|
)
|
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(2,580
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)
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(2,938
|
)
|
Termination rents
|
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(162
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)
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(1,450
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)
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(2,796
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)
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(3,491
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)
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Portfolio NOI
|
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82,470
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|
79,438
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|
241,943
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|
224,143
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Non-same center NOI
(2)
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(9,813
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)
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(7,320
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)
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(29,643
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)
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(13,514
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)
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Same Center NOI
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$
|
72,657
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$
|
72,118
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|
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$
|
212,300
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$
|
210,629
|
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|
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(1)
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Non-cash items include straight-line rent, net above and below market rent amortization and gains or losses on outparcel sales, as applicable.
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(2)
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Excluded from Same Center NOI:
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Outlet centers opened:
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Outlet centers sold:
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Outlet centers acquired:
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Outlet center expansions:
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Daytona Beach
|
November 2016
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Fort Myers
|
January 2016
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Glendale (Westgate)
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June 2016
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Lancaster
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September 2017
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Westbrook
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May 2017
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Savannah
|
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. A component of most leases includes a pro-rata share or escalating fixed contributions by the tenant for 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.
The current challenging retail environment could impact our business in the short-term as our operations are subject to the results of operations of our retail tenants. A portion of our rental revenues are derived from percentage rents that directly depend on the sales volume of certain tenants. Accordingly, declines in these tenants' results of operations would reduce the income produced by our properties. If the sales or profitability of our retail tenants decline sufficiently, whether due to a change in consumer preferences, legislative changes that increase the cost of their operations or otherwise, such tenants maybe unable to pay their existing rents as such rents would represent a higher percentage of their sales. 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, or may request modifications to their existing lease terms.
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,
2017
, excluding the Westbrook outlet center, which was sold in the second quarter of 2017, we had approximately
1.5 million
square feet, or
12%
of our consolidated portfolio at that time, coming up for renewal during
2017
. As of September 30, 2017, we had renewed approximately
78%
of this space. In addition, for the rolling twelve months ended September 30, 2017, we completed renewals and re-tenanted space totaling 1.5 million square feet at a blended
11.8%
increase in average base rental rates compared to the expiring rates. While we continue to attract and retain additional tenants, there can be no assurance that we can achieve similar base rental rates. In addition, if we were unable to successfully renew or re-lease 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 re-leased. Occupancy at our consolidated centers was
97%
as of
September 30, 2017
and
2016
.