ITEM 1. BUSINESS
THE OPERATING PARTNERSHIP
Tanger Properties Limited Partnership, a North Carolina limited partnership (the "Operating Partnership"), focuses exclusively on developing, owning and operating factory outlet centers and provides all development, leasing and management services for its centers. The Operating Partnership is 71.4% (assuming conversion of all Preferred Units (as defined below)) owned and managed by its sole general partner, Tanger Factory Outlet Centers, Inc. (the "Company") a self-administered and self-managed real estate investment trust ("REIT"). According to Value Retail News, an industry publication, the Operating Partnership believes that it is one of the largest owners and operators of factory outlet centers in the United States. As of December 31, 1996, the Operating Partnership owned and operated 27 factory outlet centers (the "Properties") with a total gross leasable area ("GLA") of approximately 3.8 million square feet. These centers are approximately 99% leased, contain over 900 stores and represent over 220 brand name companies as of such date.
The Company is the sole managing general partner of the Operating Partnership and The Tanger Family Limited Partnership is the sole limited partner. As of December 31, 1996, the ownership interests in the Operating Partnership (the "Units") consisted of 6,602,510 general partnership Units and 106,419 general preferred partnership Units (which are convertible into approximately 958,835 general partnership Units) held by the Company and 3,033,305 limited partnership Units held by the Tanger Family Limited Partnership.
Each Unit of partnership interest in the Operating Partnership issued to the Tanger Family Limited Partnership, in connection with the formation of the Operating Partnership, and to the Company, in respect of the Company's contributions to the Operating Partnership of the proceeds from the public offerings, was designed to result in a distribution per Unit approximately equal to a distribution per share of the Company's Common and Preferred Shares. Each Unit of limited partnership interest is exchangeable into one share of Common Stock (subject to certain antidilution adjustments and certain limitations on exchange to preserve the Company's status as a REIT. See "Business-The Company").
Each Preferred Unit entitles the Company to receive distributions from the Operating Partnership, in an amount equal to the dividend payable with respect to a share of Series A Preferred Shares, prior to the payment by the Operating Partnership of distributions with respect to the general Units. Preferred Units will be automatically converted into general partnership Units to the extent of any conversion of Series A Preferred Shares into Common Stock, and will be redeemed by the Operating Partnership to the extent of any redemption of Series A Preferred Shares.
There are, however, certain differences between the ownership of Common Stock, Series A Preferred Shares and Units, including:
Voting Rights. Holders of Common Stock may elect the Board of Directors of the Company, which, as the general partner of the Operating Partnership, controls the business of the Operating Partnership. Holders of Series A Preferred Shares may not elect directors, except under certain circumstances. Holders of limited partnership Units may not elect directors, or elect or remove the general partner without the consent of the Company. So long as holders of limited partnership Units have at least 10% of the capital of the Operating Partnership, such holders have certain rights to approve a liquidation of the Operating Partnership, a merger of the Operating Partnership or the sale of all or substantially all of its assets.
Transferability. The shares of Common Stock and Series A Preferred Shares (and the Depositary Shares representing such Series A Preferred Shares) will be freely transferable under the Securities Act of 1933, as amended, by holders who are not affiliates of the Company or the Underwriters. The Units are subject to transfer restrictions under applicable securities laws and under the partnership agreement of the Operating Partnership including the required consent of the general partner to the admission of any new limited partner.
The Operating Partnership agreement may not be amended without consent of the general partner and a majority interest of the limited partners, except certain provisions with respect to distributions, conversion rights, and voting rights. Each limited partnership Unit is exchangeable for one share of Common Stock of the Company at any time (subject to certain limitations and antidilution adjustments). No limited partner may exchange Units for Common Stock more than once in any six month period. The issuance of additional Units will be at the discretion of the Company as the general partner, subject to certain limitations as to the terms of such issuance contained in the partnership agreement. The limited partners have certain rights to make pro rata capital contributions in the event of the admission of new partners. The Operating Partnership may not issue additional Units that would result in the Company owning less than one-half of the outstanding Units without the consent of the Company as the general partner. The Company may not assign or substitute general partners without the consent of all limited partners.
The Operating Partnership is a North Carolina limited partnership. Its principal executive offices are located at 1400 West Northwood Street, Greensboro, NC 27408, its telephone number is (910) 274-1666 and its web site is located at www.tangeroutlet.com.
RECENT DEVELOPMENTS
During 1996, the Operating Partnership completed six expansions totalling 181,142 square feet. Construction has also commenced on the initial phase of a new center in Riverhead, New York totalling approximately 240,000 square feet. Approximately 93% of this additional GLA is leased or committed to be leased and is expected to be opened by late Spring of 1997. In addition, the Operating Partnership is in the preleasing stages of three new sites located in Concord, NC (Charlotte), Romulus, MI (Detroit) and Ashburn, VA (Washington, D.C.).
Subsequent to year end, on February 28, 1997, the Operating Partnership completed the purchase of an existing factory outlet center in Sevierville, Tennessee containing approximately 123,000 square feet (the "Sevierville Property") for an aggregate purchase price of $18.0 million. Information in Item 1 and Item 2

ITEM 2. BUSINESS AND PROPERTIES
As of February 28, 1997, the Operating Partnership's portfolio, excluding the Sevierville Property which was acquired on such date, consisted of 27 opened centers located in 22 states. The Operating Partnership's factory outlet centers range in size from 8,000 to 286,195 square feet of GLA. These factory outlet centers are typically strip shopping centers which enable customers to view all of the shops from the parking lot, and therefore minimizing the time needed to shop. The centers are generally located near tourist destinations or along major interstate highways, to increase visibility and accessibility to potential customers.
The Operating Partnership believes that the Properties are well diversified geographically and by tenant and that it is not dependent upon any single property or tenant. The only property that represents more than 10% of the Operating Partnership's total assets or gross revenues as of December 31, 1996 is the property in Riverhead, NY. See "Business and Properties - Significant Property". No other property represented more than 10% of the Operating Partnership's total assets or gross revenues as of December 31, 1996.
LOCATION OF PROPERTIES
The table set forth below summarizes certain information with respect to the Operating Partnership's existing centers as of February 28, 1997, excluding the Sevierville Property which was acquired on such date.
PROPERTY PORTFOLIO
(1) GLA EXCLUDES 21,781 SQUARE FOOT LAND LEASE ON OUTPARCEL OCCUPIED BY PIZZA HUT. (2) GLA EXCLUDES 17,400 SQUARE FOOT LAND LEASE ON OUTPARCEL OCCUPIED BY WENDY'S. (3) GLA INCLUDES SQUARE FEET OF NEW SPACE NOT YET OPEN AT DECEMBER 31, 1996, WHICH IN THE AGGREGATE TOTALLED 12,400 SQUARE FEET.
(4) THE GROUND LEASE IS SUBJECT TO RENEWAL AT THE OPTION OF THE OPERATING PARTNERSHIP FOR UP TO SEVEN ADDITIONAL TERMS OF FIVE YEARS EACH.
(5) AS OF DECEMBER 31, 1996. THE WEIGHTED AVERAGE INTEREST RATE FOR DEBT OUTSTANDING AT DECEMBER 31, 1996 WAS 8.67% AND THE WEIGHTED AVERAGE MATURITY DATE WAS MAY 2001. --------------------------------
Management has an ongoing program for developing new and expanding existing centers. See Management's Discussion and Analysis of Financial Condition and Results of Operations under the caption "Liquidity and Capital Resources" for a discussion of the cost of such programs and the sources of financing thereof. In the opinion of management, all of the properties are adequately covered by insurance.
Certain of the Operating Partnership's properties serve as collateral for mortgage notes payable and revolving lines of credit. Of the 27 Properties, the Operating Partnership owns 25 and has ground leases on two. The land on which the Pigeon Forge center is located is subject to a long-term ground lease expiring in 2086. The land on which the Riverhead center is located is also subject to a ground lease with an initial term expiring in 2004, with renewal at the option of the Operating Partnership for up to seven additional terms of five years each. The Operating Partnership in turn leases to
tenants under leases that generally range from five to ten years. The rental payments are customarily subject to upward adjustments based upon contractual base rent increases during the term of the lease, tenant sales volume and operating expense reimbursements (including real estate taxes, insurance, common area maintenance and advertising and promotion expenses).
Generally, leases provide for the payment of fixed monthly rent in advance. Most leases provide for payment by the tenant of a portion of the real estate taxes, insurance, common area maintenance, advertising and promotion expenses incurred by the factory outlet center. As a result, substantially all operating expenses for the centers are borne by the tenants.
LEASE EXPIRATIONS
The following table sets forth, as of February 28, 1997, scheduled lease expirations, excluding the Sevierville Property which was acquired on such date and assuming none of the tenants exercise renewal options. Most leases are renewable for five year terms at lessee's option.
(1) BASE RENT IS DEFINED AS THE MINIMUM PAYMENTS DUE AS OF DECEMBER 31, 1996, EXCLUDING PERIODIC CONTRACTUAL FIXED INCREASES.
(2) EXCLUDES LEASES THAT HAVE BEEN ENTERED INTO BUT WHICH TENANT HAS NOT YET TAKEN POSSESSION AND EXCLUDES MONTH-TO- MONTH LEASES.
RENTAL AND OCCUPANCY RATES
The following table sets forth information regarding the expiring leases during each of the last four calendar years.
The following table sets forth the average base rental rate increases per square foot upon re-leasing stores that were turned over or renewed during each of the last four calendar years.
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(1) THE SQUARE FOOTAGE RELEASED TO NEW TENANTS FOR 1996, 1995, 1994 AND 1993 CONTAIN 15,050, 2,400, 10,000 AND 5,500 SQUARE FEET, RESPECTIVELY, THAT WAS RELEASED TO NEW TENANTS UPON EXPIRATION OF AN EXISTING LEASE. THE REMAINING SPACE WAS RETENANTED PRIOR TO ANY LEASE EXPIRATION.
The following table shows certain information on rents and occupancy rates for the Operating Partnership during each of the last five calendar years.
- --------------------- (1) REPRESENTS TOTAL BASE RENTAL REVENUE DIVIDED BY WEIGHTED AVERAGE GLA OF THE PORTFOLIO, WHICH AMOUNT DOES NOT TAKE INTO CONSIDERATION FLUCTUATIONS IN OCCUPANCY THROUGHOUT THE YEAR.
OCCUPANCY COSTS
The Operating Partnership believes that its average occupancy cost (which includes base rent, common area maintenance, real estate taxes, insurance, and promotions) to average sales per square foot ratio is low relative to other forms of retail distribution. The following table sets forth, for each of the last five years, occupancy costs per square foot as a percentage of reported tenant sales per square foot.
Occupancy Year Costs - --------------------- ----------------------- 1996 8.7% 1995 8.5% 1994 7.4% 1993 6.5% 1992 6.5%
TENANTS
The following table sets forth certain information with respect to the Operating Partnership's largest tenants and their store concepts as of February 28, 1997, excluding stores in the Sevierville Property.
SIGNIFICANT PROPERTY
The Riverhead, NY property was constructed during 1994 and tenants began to occupy space mid-year. At December 31, 1994, approximately 83% of the available GLA had been occupied by tenants and the remaining GLA was occupied in 1995. The average annualized base rental rate during 1996, 1995 and 1994 was approximately $17.73, $17.63 and $18.18 per weighted average GLA. No one tenant occupies more than 10% of the Riverhead property's available GLA. The tenants at the Riverhead, NY property principally conduct retail sales operations. The Operating Partnership currently is constructing an additional property adjacent to the existing Riverhead, NY property, which will contain an initial phase totalling approximately 240,000 square feet. See "Business-Recent Developments" and "Business-Business and Operating Strategy".
Depreciation on the Riverhead, NY property is recognized on a straight-line basis over 33.33 years, resulting in a depreciation rate of 3% per year. At December 31, 1996, the net federal tax basis of the property was approximately $37,509,000. Real estate taxes assessed during 1996 amounted to $749,000.
The following table sets forth, as of February 28, 1997, scheduled lease expirations at the Riverhead, NY property assuming that none of the tenants exercise renewal options:
(1) BASE RENT IS DEFINED AS THE MINIMUM PAYMENTS DUE AS OF DECEMBER 31, 1996, EXCLUDING PERIODIC CONTRACTUAL FIXED INCREASES.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
Except for claims arising in ordinary course of business, which are covered by the Operating Partnership's liability insurance, the Operating Partnership is not presently involved in any litigation involving claims against the Operating Partnership, nor, to its knowledge, is any material litigation threatened against the Operating Partnership or its Properties which would have a material adverse effect on the Operating Partnership, its Properties or its operations.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year ended December 31, 1996.
EXECUTIVE OFFICERS OF THE GENERAL PARTNER
The Operating Partnership does not have any officers. The following table sets forth certain information concerning the executive officers of the general partner, Tanger Factory Outlet Centers, Inc.:
The following is a biographical summary of the experience of the executive officers of the Company:
STANLEY K. TANGER. Mr. Tanger is the Chief Executive Officer and Chairman of the Board of Directors of the Company. He also served as President from inception of the Company to December 1994. Mr. Tanger opened one of the country's first outlet shopping centers in Burlington, North Carolina in 1981. Before entering the factory outlet center business, Mr. Tanger was President and Chief Executive Officer of his family's apparel manufacturing business, Tanger/Creighton, Inc., for 30 years.
STEVEN B. TANGER. Mr. Tanger is a director of the Company and was named President and Chief Operating Officer effective January 1, 1995. Previously, Mr. Tanger served as Executive Vice President since joining the Company in 1986. He has been with Tanger-related companies for most of his professional career, having served as Executive Vice President of Tanger/Creighton for 10 years. He is responsible for all phases of project development, including site selection, land acquisition and development, leasing, marketing and overall management of existing outlet centers. Mr. Tanger is a graduate of the University of North Carolina at Chapel Hill and the Stanford University School of Business Executive Program. Mr. Tanger is the son of Stanley K. Tanger.
ROCHELLE G. SIMPSON. Ms. Simpson was named Senior Vice President - Administration and Finance of the Company in October 1995. She is also the Secretary of the Company and previously served as Treasurer from May 1993 through May 1995. She entered the factory outlet center business in January 1981, in general management and as chief accountant for Stanley K. Tanger and later became Vice President - Administration and Finance of the Predecessor Company. Ms. Simpson oversees the accounting and finance departments and has overall management responsibility for the Company's headquarters.
WILLARD A. CHAFIN, JR. Mr. Chafin was named Senior Vice President - Leasing, Site Selection, Operations and Marketing of the Company in October 1995. He joined the Company in April 1990, and since has held various executive positions where his major responsibilities included supervising the Marketing, Leasing and Property Management Departments, and leading the Asset Management Team. Prior to joining the Company, Mr. Chafin was the Director of Store Development for the Sara Lee Corporation, where he spent 21 years. Before joining Sara Lee, Mr. Chafin was employed by Sears Roebuck & Co. for nine years in advertising/sales promotion, inventory control and merchandising.
FRANK C. MARCHISELLO, JR. Mr. Marchisello was named Vice President and Chief Financial Officer of the Company in November 1994. Previously, he served as Chief Accounting Officer since joining the Company in January 1993 and Assistant Treasurer since February 1994. He was employed by Gilliam, Coble & Moser, certified public accountants, from 1981 to 1992, the last six years of which he was a partner of the firm in charge of various real estate clients. While at Gilliam, Coble & Moser, Mr. Marchisello worked directly with the Tangers since 1982. Mr. Marchisello is a graduate of the University of North Carolina at Chapel Hill and is a certified public accountant.
JOSEPH H. NEHMEN. Mr. Nehmen joined the Company in September 1995 and was elected Vice President of Operations in October 1995. Mr. Nehmen has over 20 years experience in private business. Prior to joining Tanger, Mr. Nehmen was owner of Merchants Wholesaler, a privately held distribution company in St. Louis, Missouri. He is a graduate of Washington University. Mr. Nehmen is the son-in-law of Stanley K. Tanger.
VIRGINIA R. SUMMERELL. Ms. Summerell was named Treasurer of the Company in May 1995 and Assistant Secretary in November 1994. Previously, she held the position of Director of Finance since joining the Company in August 1992, after nine years of service with NationsBank. Her major responsibilities include cash management and oversight of all project and corporate finance transactions. Ms. Summerell is a graduate of Davidson College and holds an MBA from the Babcock School at Wake Forest University.
C. RANDY WARREN, JR. Mr. Warren is the Vice President - Leasing of the Company and joined the Company in November 1995. He was previously director of anchor leasing at Prime Retail, Inc. where he managed anchor tenant relations and negotiation on a national basis. Prior to that, he worked as a leasing executive for the company. Before entering the outlet industry, he was founder of Preston Partners, a development consulting firm in Baltimore, MD. Mr. Warren is a graduate of Towson State University and holds an MBA from Loyola College.
RICHARD T. PARKER. Mr. Parker is the Vice President - Development and joined the Company in April 1996. Prior to joining Tanger, Mr. Parker was with The Mills Corp for nine years where he served as Vice President of Land Development responsible for organizing and planning the development, merchandising and sale of peripheral land surrounding 2 million-plus square foot super regional mall projects. Prior to joining The Mills Corp, Mr. Parker was employed by Marriott International for 6 years where he served as Director of Franchise Development. Mr. Parker is a graduate of Golden Gate University and a veteran of the United States Air Force.
CARRIE A. JOHNSON. Ms. Johnson was named Vice President - Marketing in September 1996. Previously, she held the position of Assistant Vice President - Marketing since joining the Company in December 1995. Prior to joining Tanger, Ms. Johnson was with Prime Retail, Inc. for 4 years where she served as Regional Marketing Director responsible for coordinating and directing marketing for five outlet centers in the southeast region. Prior to joining Prime Retail, Inc., Ms. Johnson was Marketing Manager for North Hills, Inc. for five years and also served in the same role for the Edward J. DeBartolo Corp. for two years. Ms. Johnson is a graduate of East Carolina University.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDERS' MATTERS
There is no established public trading market for the Operating Partnership's Units. As of December 31, 1996, the ownership interests in the Operating Partnership consisted of 6,602,510 general partnership Units held by the Company, 106,419 general preferred partnership Units (which are convertible into approximately 958,835 general partnership Units) held by the Company and 3,033,305 limited partnership Units held by the Tanger Family Limited Partnership.
Distributions by the Operating Partnership during 1996 and 1995 were as follows:
1996 1995 - ----------------------------- ------------------ ------------------ First Quarter $.50 $.46 Second Quarter .52 .50 Third Quarter .52 .50 Fourth Quarter .52 .50 Year $2.06 $1.96 - ----------------------------- ------------------ ------------------
Certain of the Operating Partnership's debt agreements limit the payment of distributions such that distributions shall not exceed 95% of funds from operations, as defined in the agreements, on a cumulative basis. Based on continuing favorable operations and available funds from operations, the Operating Partnership intends to continue to pay regular quarterly distributions.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
(1) The selected financial data reflects the financial and operating information of Tanger Properties Limited Partnership for the periods subsequent to June 1993 and combined financial and operating information of Tanger Properties, the predecessor business, for the period prior to June 1993. (2) Pro forma net income and net income per common unit, which reflect adjustments to historical information to present income information as if the formation of the Operating Partnership had taken place on January 1, 1992, were $10,519 and $1.31 per unit during 1993 and $5,632 and $.71 per unit during 1992. (3) Not applicable in 1992 since the formation of the Operating Partnership did not take place until June 1993. All earnings prior to June 1993 have been excluded from the per unit calculation. (4) Funds from operations for all years presented have been restated in accordance with the new definition provided by the National Association of Real Estate Investment Trusts. See Management's Discussion and Analysis of Financial Condition and Results of Operations under the caption "Liquidity and Capital Resources" for a complete discussion of funds from operations.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial statements appearing elsewhere in this report. Historical results and percentage relationships set forth in the statements of operations, including trends which might appear, are not necessarily indicative of future operations.
The discussion of the Operating Partnership's results of operations reported in the statements of operations compares the years ended December 31, 1996 and 1995, as well as December 31, 1995 and 1994. Certain comparisons between the periods are made on a percentage basis as well as on a weighted average gross leasable area ("GLA") basis, a technique which adjusts for certain increases or decreases in the number of centers and corresponding square feet related to the development and expansion or disposition of rental properties. The computation of weighted average GLA, however, does not adjust for fluctuations in occupancy throughout each year shown since GLA is not reduced when original occupied space subsequently becomes vacant.
GENERAL OVERVIEW
The Operating Partnership continues to grow principally through the development of new factory outlet centers, acquisitions and expansion of existing centers. During 1996, the Operating Partnership completed six expansions totalling 181,142 square feet. In addition, construction has commenced on the initial phase of a new center in Riverhead, New York totalling approximately 240,000 square feet. During 1995, the Operating Partnership substantially completed two new centers and expanded four existing centers. Total square feet opened in 1995, including completion of certain projects that commenced at the end of 1994, was 392,312 square feet.
A summary of the operating results for the years ended December 31, 1996, 1995 and 1994 is presented in the following table, expressed in amounts calculated on a weighted average GLA basis.
(1) GLA WEIGHTED BY MONTHS OF OPERATIONS.
CAUTIONARY STATEMENTS
The discussion below contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which reflect management's current views with respect to future events and financial performance. Such forward-looking statements are subject to certain risks and uncertainties; including, but not limited to, the effects of future events on the Operating Partnership's financial performance; the risk that the Operating Partnership may not be able to finance its planned development activities; risks related to the retail industry in which the Operating Partnership's outlet centers compete, including the potential adverse impact of external factors such as inflation, tenant demand for space, consumer confidence, unemployment rates and consumer tastes and preferences; risks associated with the Operating Partnership's development activities, such as the potential for cost overruns, delays and lack of predictability with respect to the financial returns associated with these development activities; the risk of potential increase in market interest rates from current rates; risks associated with real estate ownership, such as the potential adverse impact of changes in the local economic climate on the revenues and the value of the Operating Partnership's properties; and the risks that a significant number of tenants may become unable to meet their lease obligations or that the Operating Partnership may be unable to renew or re-lease a significant amount of available space on economically favorable terms.
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
Base rentals increased $4.8 million, or 10%, for the year ended December 31, 1996 when compared to the same period in 1995 primarily as a result of a 11% increase in weighted average GLA. Base rentals per weighted average GLA decreased less than 1% from $13.92 per square foot to $13.89 per square foot reflecting a slightly lower average occupancy rate during 1996 compared to 1995. The increase in base rents in 1996 consists of $1.1 million associated with leases added during 1996 and $3.7 million related to the effect of a full year's operation of centers opened in 1995.
Percentage rentals decreased $51,000, or 2%, in 1996 compared to 1995 and percentage rentals per weighted average GLA declined $.08 per square foot, or 13%, as a result of the dilutive effect of the increase in additional square footage associated with the expansions since tenant sales at centers in their first year of operation often do not reach the level on which percentage rentals are required (the "breakpoint"). The decrease is also a result of escalating breakpoints in certain leases renewing at existing centers without comparable increases in sales. Tenant sales per square foot for centers which were opened all of 1996 and 1995 increased 2% to approximately $226 per square foot.
Expense reimbursements, which represent the contractual recovery from tenants of certain common area maintenance, operating, property tax, promotional and management expenses, increased $2.1 million during 1996 as compared to the same period in 1995 due principally to the related increase in reimbursable operating and maintenance expenses associated with the growth in GLA. Expense reimbursements expressed as a percent of property operating expenses were 93% in the 1996 period compared to 89% in the 1995 period due to certain contractual increases and reductions in nonrecoverable operating and maintenance expenses.
Property operating expenses increased by $1.1 million, or 5%, in 1996 as compared to 1995. On a weighted average GLA basis, property operating expenses decreased from $6.83 per square foot to $6.47 per square foot primarily due to a reduction in advertising and promotion expenses reflecting the Operating Partnership's use of cost efficient means in advertising and promoting its centers. The decrease was partially offset by increases in real estate taxes as a result of reassessments of recently completed properties, particularly the property in Riverhead, NY. General and administrative expenses decreased 3% on a weighted average GLA basis to $1.50 for the year ended 1996. General and administrative expenses as a percent of revenues decreased 3% to 7.2% in 1996 compared to 7.4% in 1995.
Aggregate interest expense increased $2.7 million and $.40 per weighted average GLA during 1996 period as compared to 1995. The increase is due to higher average borrowings outstanding during the period associated with the growth in GLA and due to a higher average interest rate under the senior unsecured notes issued in March 1996 when compared with the short term lines of credit previously utilized. Depreciation and amortization per weighted average GLA increased 3% from $4.37 per square foot to $4.52 per square foot primarily due to increases in tenant finishing allowances included in building and improvements which are depreciated over shorter lives and the accelerated
depreciation of certain tenant finishing allowances related to tenants who vacated or terminated their lease prior to the expiration of the lease term.
The extraordinary item represents the write off of previously deferred financing costs of $831,000 in connection with the early retirement of debt with the proceeds from the senior unsecured notes issued in March 1996.
1995 COMPARED TO 1994
Base rentals increased $15.9 million, or 53%, for the year ended December 31, 1995 when compared to the same period in 1994 primarily as a result of a 48% increase in weighted average GLA as well as the impact of leases renewing at higher base rental rates. The increase in base rents in 1995 consists of $2.2 million associated with leases added during 1995, $13.0 million related to the effect of a full year's operation of centers opened in 1994, and $670,000 related to rental renewals in previously established outlet centers.
Percentage rents increased approximately $410,000 for the year ended December 31, 1995 over the same period in 1994. However, percentage rents per weighted average GLA declined as a result of the dilutive effect of the increase in additional square footage associated with the new centers (since tenant sales at centers opening during the year often do not reach the level where percentage rents are required) and due to a changing mix in the amount of base and percentage rents on leases renewing at existing centers. Tenant sales per square foot for centers which were opened all of 1995 and 1994 were virtually the same as the prior year at approximately $226 per square foot.
Expense reimbursements, which represent the contractual recovery from tenants of certain common area maintenance, operating, property tax, promotional and management expenses, increased $6.6 million during 1995 as compared to the same period in 1994 due principally to the related increase in reimbursable property operating expenses associated with the growth in GLA. Expense reimbursements expressed as a percent of property operating expenses were 89% in the 1995 period compared to 86% in the 1994 period primarily as a result of certain contractual increases.
Property operating expenses increased by $7.0 million, or 45%, in 1995 as compared to 1994. On a weighted average GLA basis, property operating expenses decreased from $6.95 per square foot to $6.83 per square foot. New developments usually carry a higher than average cost per square foot until all the square footage for that center is open for the entire period. Fewer new centers were opened in 1995 as compared to the significant amount of openings in the 1994 period, contributing to the favorable decrease in property operating expenses per weighted average GLA in 1995 compared to 1994. Excluding the new centers which were opened in 1994, property operating expenses increased 4%, or $.27 per square foot, due primarily to additional advertising and promotion expenses, which reflect the Operating Partnership's strategy to more actively promote its centers, and increases in real estate taxes. General and administrative expenses decreased 22% on a weighted average GLA basis to $1.54 for the year ended 1995 and decreased from 10% to 7% of total revenues reflecting continued economies of scale achieved through controlling expenses despite the continued development and growth in GLA.
Financing the Operating Partnership's development resulted in further utilization of long-term borrowings and aggregate interest expense increased $8.5 million during 1995 as compared to 1994. The incremental borrowings in 1994 of $101 million, resulting from the record development that year, did not significantly impact 1994 interest expense due to the effect of capitalizing the related interest costs during the construction period. However, the completion of those projects, combined with the impact of an additional $35.4 million of borrowings in 1995, is reflected in the increase in interest expense per weighted average GLA from $1.26 per square foot in 1994 to $3.44 per square foot in 1995. Depreciation and amortization per weighted average GLA increased 20% due primarily to increases in costs associated with site preparation and improvements in the layout and design of new centers as well as increased tenant finishing allowances included in building and improvements which are depreciated over shorter lives.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $38.0, $32.5 and $21.3 million for the years ended December 31, 1996, 1995 and 1994, respectively. The increases for all three years were primarily due to the incremental operating income associated with new development. Net cash used in investing activities amounted to $36.4, $44.8 and $143.7 million during 1996, 1995 and 1994 which reflects the lower levels of development over the past two years (181,142 square feet developed in 1996, 392,312 square feet in 1995 and 1,134,900 square feet in 1994). Due to the lower levels of
construction activity, cash provided by financing activities has also decreased from $80.7 in 1994 to $13.8 and $(4.2) in 1995 and 1996.
During 1996 and 1995, the Operating Partnership slowed its pace of new development in response to a soft retail environment and lower tenant demand. In turn, management concentrated its efforts on expanding and enhancing land in the current portfolio while at the same time diligently searching for new sites which will maximize value to both the Operating Partnership's unitholders and tenants. However, management believes, based upon its discussions with present and prospective tenants, that many companies, including new entrants into the factory outlet business, desire to open a number of new factory outlet stores in the next several years, particularly where there are successful factory outlet centers in which such companies do not have a significant presence or where there are few factory outlet centers.
Construction has begun on a second property in Riverhead, NY (expected to begin opening in Spring 1997) totalling approximately 240,000 square feet. Upon total build out of this development over the next several years, the combined GLA of both properties should total approximately 750,000 square feet, making this outlet shopping center one of the largest in the nation. In addition, the Operating Partnership is in the preleasing stages of three new sites located in Concord, NC (Charlotte), Romulus, MI (Detroit) and Ashburn, VA (Washington, D.C.) and on February 28, 1997, completed the purchase of an existing factory outlet center containing approximately 123,000 square feet for an aggregate purchase price of $18.0 million. The Operating Partnership also is in the process of developing plans for additional expansions and new centers for completion in 1998 and beyond and will consider other acquisitions that are suitable for its portfolio. However, there can be no assurance that any of these anticipated or planned developments or expansions will be started or completed as scheduled, or that any acquisitions will be made. Commitments for construction underway as of December 31, 1996 (which represent only those costs contractually required to be paid by the Operating Partnership) amounted to $18.2 million.
Management intends to continually have access to the capital resources necessary to expand and develop its business and, accordingly, may seek to obtain additional funds through equity offerings or debt financing. The Operating Partnership, together with its general partner and majority owner, Tanger Factory Outlet Centers, Inc., have a shelf registration with the Securities and Exchange Commission ("SEC") providing for the issuance of up to $100 million in additional equity securities and $100 million in additional debt securities. During March 1996, the Operating Partnership used a portion of its borrowing capacity under the shelf registration to issue $75 million of senior, unsecured notes, maturing March 11, 2001, with a coupon rate of 8.75% (effective yield of 8.926%). The proceeds of this offering were used to extinguish the Operating Partnership's revolving lines of credit existing prior to January 1996. In April 1996, the Operating Partnership and the general partner filed a new registration statement with the SEC to reestablish the total amount of funds available under the shelf registration at $200 million.
During the year, the Operating Partnership established a new $50 million secured line of credit, with interest payable at LIBOR plus 1.5% and established other unsecured lines of credit totalling $40 million with interest rates ranging from prime less .25% to prime or LIBOR plus 1.75% to LIBOR plus 1.85%. Amounts available under these lines of credit, based on debt outstanding at December 31, 1996, totalled $62.2 million. When considered with the Operating Partnership's existing interest rate protection agreement covering $10 million of variable rate debt, the Operating Partnership's exposure to interest rate risk on variable rate borrowings outstanding at December 31, 1996 was limited to $17.8 million. Also, with the addition of the unsecured borrowings, the Operating Partnership has effectively unencumbered approximately 55% of its real estate assets.
Based on existing credit facilities, ongoing negotiations with certain financial institutions and funds available under the shelf registration, management believes that the Operating Partnership has access to the necessary financing to fund the planned capital expenditures during 1997 and 1998.
The Operating Partnership anticipates that adequate cash will be available to fund its operating and administrative expenses, regular debt service obligations, and the payment of distributions in accordance with REIT requirements in both the short and long term. Although the Operating Partnership receives most of its rental payments on a monthly basis, distributions are made quarterly. Amounts accumulated for distribution will be invested in short-term money market or other suitable instruments. Certain of the Operating Partnership's debt agreements limit the payment of distributions such that distributions will not exceed 95% of funds from operations ("FFO"), as defined in the agreements, on a cumulative basis.
FUNDS FROM OPERATIONS
Management believes that to facilitate a clear understanding of the historical operating results of the Operating Partnership, FFO should be considered in conjunction with net income as presented in the audited financial statements included elsewhere in the annual report. Management generally considers FFO to be an appropriate measure of the performance of an equity real estate investment trust ("REIT"). FFO is generally defined as net income (loss), computed in accordance with generally accepted accounting principles, before extraordinary item and gains (losses) on sale of properties, plus depreciation and amortization uniquely significant to real estate. The Operating Partnership cautions that the calculation of FFO may vary from entity to entity and as such the presentation of FFO by the Operating Partnership may not be comparable to other similarly titled measures of other reporting companies. FFO does not represent net income or cash flow from operations as defined by generally accepted accounting principles and should not be considered an alternative to net income as an indication of operating performance or to cash from operations as a measure of liquidity. FFO is not necessarily indicative of cash flows available to fund distributions to unitholders and other cash needs.
In March 1995, the National Association of Real Estate Investment Trusts ("NAREIT") issued an interpretive letter providing guidance as to the use and intent of its definition of funds from operations. Among other things, the letter clarifies that the amortization of deferred financing costs and depreciation of assets not uniquely significant to real estate should be excluded from total depreciation and amortization added back to net income in calculating funds from operations. All REIT's were encouraged to implement the recommendations of the letter no later than fiscal periods beginning in 1996. The Operating Partnership adopted the new NAREIT definition of funds from operations beginning January 1, 1996 and has reclassified the prior year amounts to conform with the current year presentation. Below is a calculation of funds from operations for the years ended December 31, 1996 and 1995.
(1) ASSUMES CONVERSION OF ALL PREFERRED GENERAL PARTNERSHIP UNITS TO GENERAL PARTNERSHIP UNITS.
ECONOMIC CONDITIONS AND OUTLOOK
Substantially all of the Operating Partnership's leases contain provisions designed to mitigate the impact of inflation. Such provisions include clauses for the escalation of base rent and clauses enabling the Operating Partnership to receive percentage rentals based on tenants' gross sales (above predetermined levels, which the Operating Partnership believes often are lower than traditional retail industry standards) which generally increase as prices rise. Most of the leases require the tenant to pay their share of property operating expenses, including common area maintenance, real estate taxes, insurance and promotion, thereby reducing exposure to increases in costs and operating expenses resulting from inflation. In addition, the Operating Partnership has an interest rate protection agreement which limits the effect of changes in interest rates on approximately $10 million of its floating rate debt through October 1998. This agreement, combined with the existing fixed rate mortgages, mitigate the Operating Partnership's exposure to interest rate risk on approximately 90% of total debt outstanding as of December 31, 1996.
Approximately 240,000 square feet of space is currently up for renewal or re-tenanting in 1997. Existing tenants' sales have remained stable and renewals to existing tenants have remained strong. In addition, the Operating Partnership has
continued to attract and retain additional tenants. However, as typical in the factory outlet industry, certain tenants have either filed for protection under bankruptcy laws or have elected to close some or all of their stores, resulting in approximately a 2% decrease in occupancy since year end. Although there can be no assurance that any tenant whose lease expires will renew such lease or that terminated leases will be re-leased on economically favorable terms, management currently does not expect any material adverse impact as a result of these leases up for renewal, bankruptcy filings or notices of store closings. The Operating Partnership's factory outlet centers typically include well known, national, brand name companies. By maintaining a broad base of credit tenants and a geographically diverse portfolio of properties located across the United States, the Operating Partnership reduces its operating and leasing risks.
CONTINGENCIES
There are no recorded amounts resulting from environmental liabilities as there are no known material loss contingencies with respect thereto. Future claims for environmental liabilities are not measurable given the uncertainties surrounding whether there exists a basis for any such claims to be asserted and, if so, whether any claims will, in fact, be asserted. Furthermore, no condition is known to exist that would give rise to a material environmental liability for site restoration, post-closure and monitoring commitments, or other costs that may be incurred upon the sale or disposal of a property. Management has no plans to abandon any of the properties and is unaware of any other material loss contingencies.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth at the pages indicated in Item 14(a) below.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report in accordance with General Instruction G(3) to Form 10-K as the information will be contained in a definitive proxy statement pursuant to Regulation 14A (the "Proxy Statement") of Tanger Factory Outlet Centers, Inc., which the Registrant anticipates will be filed not later than 120 days after the end of the fiscal year covered by this Report. Certain information included therein is incorporated herein by reference. Only those sections of the Proxy Statement which specifically address the items set forth herein are incorporated by reference.
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Operating Partnership does not have any directors or executive officers. The information concerning the directors of the general partner is incorporated by reference to the definitive proxy statement of Tanger Factory Outlet Centers, Inc.
The information concerning the general partner's executive officers required by this Item is incorporated herein by reference to the section in Part I, Item 4, entitled "Executive Officers of the General Partner".
The information regarding compliance with Section 16 of the Securities and Exchange Act of 1934 is hereby incorporated herein by reference to the definitive proxy statement of Tanger Factory Outlet Centers, Inc.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the definitive proxy statement of Tanger Factory Outlet Centers, Inc.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to the definitive proxy statement of Tanger Factory Outler Centers, Inc.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the definitive proxy statement of Tanger Factory Outler Centers, Inc.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS A PART OF THIS REPORT:
1. Financial Statements
Report of Independent Accountants Balance Sheets-December 31, 1996 and 1995 Statements of Operations- Years Ended December 31, 1996, 1995 and 1994 Statements of Partners' Equity- For the Years Ended December 31, 1996, 1995 and 1994 Statements of Cash Flows- Years Ended December 31, 1996, 1995 and 1994 Notes to Financial Statements
2. Financial Statement Schedules
Schedule III Report of Independent Accountants Real Estate and Accumulated Depreciation ,17
All other schedules have been omitted because of the absence of conditions under which they are required or because the required information is given in the above-listed financial statements or notes thereto.
3. Exhibits
Notes to Exhibits:
1. Incorporated by reference to the exhibits to the Tanger Factory Outlet Centers, Inc.'s Registration Statement on Form S-11 filed October 6, 1993, as amended. 2. Incorporated by reference to the exhibits to the Tanger Factory Outlet Centers, Inc.'s Registration Statement on Form S-11 filed May 27, 1993, as amended. 3. Incorporated by reference to the exhibits to the Tanger Factory Outlet Centers, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1993. 4. Incorporated by reference to the exhibits to the Tanger Factory Outlet Centers, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1994 5. Incorporated by reference to the exhibits to the Tanger Factory Outlet Centers, Inc.'s Quarterly Report of Form 10-Q for the period ended March 31, 1995. 6. Incorporated by reference to the exhibits to the Tanger Factory Outlet Centers, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995. 7. Incorporated by reference to the exhibits to the Operating Partnership's Current Report on Form 8-K dated January 23, 1996. 8. Incorporated by reference to the exhibits to the Operating Partnership's Current Report on Form 8-K dated March 6, 1996. 9. Incorporated by reference to the exhibits to the Tanger Factory Outlet Centers, Inc.'s Quarterly Report of Form 10-Q for the period ended March 31, 1996. 10. Incorporated by reference to the exhibits to the Tanger Factory Outlet Centers, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996.
(B) REPORTS ON FORM 8-K - No reports on Form 8-K were filed by the Operating Partnership during the fourth quarter ended December 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TANGER PROPERTIES LIMITED PARTNERSHIP By: Tanger Factory Outlet Centers, Inc., its general partner
By: /s/ Stanley K. Tanger Stanley K. Tanger Chairman of the Board and Chief Executive Officer
March 21, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities as officers or directors of the general partner and on the dates indicated:
Signature Title Date
/s/ Stanley K. Tanger Chairman of the Board and March 21, 1997 Stanley K. Tanger Chief Executive Officer (Principal Executive Officer)
/s/ Steven B. Tanger Director, President and March 21, 1997 Steven B. Tanger Chief Operating Officer
/s/ Frank C. Marchisello, Jr. Vice President and March 21, 1997 Frank C. Marchisello, Jr. Chief Financial Officer (Principal Financial and Accounting Officer)
/s/ Jack Africk Director March 21, 1997 Jack Africk
/s/ William G. Benton Director March 21, 1997 William G. Benton
/s/ Thomas E. Robinson Director March 21, 1997 Thomas E. Robinson
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of TANGER PROPERTIES LIMITED PARTNERSHIP:
We have audited the accompanying balance sheets of Tanger Properties Limited Partnership as of December 31, 1996 and 1995, and the related statements of operations, partners' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tanger Properties Limited Partnership as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Greensboro, NC January 27, 1997, except for Note 14, which is dated February 28, 1997
TANGER PROPERTIES LIMITED PARTNERSHIP BALANCE SHEETS
(In thousands)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
TANGER PROPERTIES LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS (In thousands, except per unit data)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
TANGER PROPERTIES LIMITED PARTNERSHIP STATEMENTS OF PARTNERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (In thousands, except unit data)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
TANGER PROPERTIES LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS
(In thousands)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND UNIT DATA)
1. ORGANIZATION AND FORMATION OF THE OPERATING PARTNERSHIP Tanger Properties Limited Partnership (the "Operating Partnership") is a limited partnership that develops, owns and operates factory outlet centers. The Operating Partnership is a majority owned subsidiary of Tanger Factory Outlet Centers, Inc. (the "Company"), a self-administered, self-managed real estate investment trust ("REIT"). Recognized as one of the largest owners and operators of factory outlet centers in the United States, the Operating Partnership owned and operated 27 factory outlet centers (the "Properties") located in 22 states with a total gross leasable area of approximately 3.8 million square feet at the end of 1996. The Operating Partnership is a fully-integrated real estate company and provides all development, leasing and management services for its centers. The Operating Partnership is the successor to a factory outlet business that consisted of 17 Properties (the "predecessor business") that were individually owned and controlled by Stanley K. Tanger and the Tanger Family Limited Partnership (the "Original Owners").
The Operating Partnership was formed in June 1993 through the contributions by the Company, the sole general partner, the Tanger Family Limited Partnership, the sole limited partner, and Stanley K. Tanger. The Company contributed the proceeds of an initial public offering ("IPO") and two properties it had acquired for shares of the Company's Common Stock. The Original Owners contributed the remaining 15 Properties, subject to their related mortgage indebtedness, as well as the net assets of the related property and lease management business and certain other assets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION - The Operating Partnership accounted for the transfer of the Properties and the management business to the above mentioned entities as a reorganization of entities under common control using an "as if pooling" method of accounting, whereby historical results of operations and financial condition of the properties and the management business were combined with the Operating Partnership's results of operations and financial condition.
USE OF ESTIMATES-The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
RENTAL PROPERTIES-Rental properties are recorded at cost less accumulated depreciation. Costs incurred for the acquisition, construction, and development of properties are capitalized. Depreciation is computed on the straight-line basis over the estimated useful lives of the assets. The Operating Partnership generally uses estimated lives ranging from 25 to 33 years for buildings, 15 years for land improvements and seven years for equipment. Expenditures for ordinary maintenance and repairs are charged to operations as incurred while significant renovations and improvements, including tenant finishing allowances, that improve and/or extend the useful life of the asset are capitalized and depreciated over their estimated useful life.
The pre-construction stage of project development involves incurrence of certain costs to secure land control and zoning and complete other initial tasks which are essential to the development of the project. These costs are transferred to developments under construction when the pre-construction tasks are completed. The Operating Partnership provides for the costs of potentially unsuccessful pre-construction efforts by charges to operations.
CASH AND CASH EQUIVALENTS-All highly liquid investments with an original maturity of three months or less at the date of purchase are considered to be cash and cash equivalents. Cash balances at a limited number of banks may periodically exceed insurable amounts. The Operating Partnership believes that it mitigates its risk by investing in or through major financial institutions. Recoverability of investments is dependent upon the performance of the issuer.
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND UNIT DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEFERRED CHARGES-Deferred lease costs consist of fees and costs incurred to initiate operating leases and are amortized over the average minimum lease term. Deferred financing costs include fees and costs incurred to obtain long-term financing and are being amortized over the terms of the respective loans. Unamortized deferred financing costs are charged to expense when debt is retired before the maturity date.
IMPAIRMENT OF LONG-LIVED ASSETS-In the event that facts and circumstances indicate that the cost of the Operating Partnership's long-lived assets may be impaired, an evaluation of recoverability would be performed. If an evaluation were required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset's carrying amount to determine if a write-down to market value or discounted cash flow value is required.
REVENUE RECOGNITION - Minimum rental income is recognized on a straight line basis over the term of the lease. Substantially all leases contain provisions which provide additional rents based on tenants' sales volume ("percentage rentals") and reimbursement of the tenants' share of advertising and promotion, common area maintenance, insurance and real estate tax expenses. Percentage rentals are recognized when earned. Expense reimbursements are recognized in the period the applicable expenses are incurred. Payments received from the early termination of leases are recognized when the applicable space is released, or otherwise, are amortized over the remaining lease term.
INCOME TAXES- As a partnership, the allocated share of income or loss for the year is included in the income tax returns of the partners; accordingly, no provision has been made for Federal income taxes in the accompanying financial statements.
INCOME PER UNIT-Income per unit is calculated by dividing income, less applicable preferred distributions of $2,399, $2,903 and $4,351 for the years ended December 31, 1996, 1995 and 1994, by the weighted average number of general and limited partnership units outstanding (9,434,810, 9,127,972 and 8,210,597 for the years ended December 31, 1996, 1995 and 1994). Options outstanding are not included since their inclusion would not be materially dilutive. The assumed conversion of preferred general partnership units as of the beginning of the year would have been anti-dilutive.
CONCENTRATION OF CREDIT RISK-The Operating Partnership's management performs ongoing credit evaluations of their tenants. Although the tenants operate principally in the retail industry, the properties are geographically diverse. During 1995 and 1994, one tenant accounted for approximately 10% and 11% of combined base and percentage rental income. No single tenant accounted for 10% or more of combined base and percentage rental income during 1996.
SUPPLEMENTAL CASH FLOW INFORMATION-The Operating Partnership purchases capital equipment and incurs costs relating to construction of new facilities, including tenant finishing allowances. Expenditures included in construction trade payables as of December 31, 1996, 1995 and 1994 amounted to $8,320, $11,305 and $21,636, respectively. Interest paid, net of interest capitalized, in 1996, 1995 and 1994 was $10,637, $10,266 and $1,824, respectively.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform with the current year presentation.
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND UNIT DATA)
3. RENTAL PROPERTIES The following summarizes the carrying amounts of rental property as of December 31, 1996 and 1995:
1996 1995 -------------- ----------------- Land $43,339 $37,176 Buildings and improvements 299,534 284,292 Developments under construction 15,488 4,413 358,361 325,881 Accumulated depreciation 46,907 31,458 $311,454 $294,423 ============== =================
Buildings and improvements consist primarily of permanent buildings and improvements made to land such as landscaping and infrastructure and costs incurred in providing rental space to tenants. Interest costs capitalized during 1996, 1995 and 1994 amounted to $1,044, $580 and $1,481, and development costs capitalized amounted to $1,321, $1,253 and $1,599, respectively. Depreciation expense for each of the years ended December 31, 1996, 1995 and 1994 was $15,449, $13,451 and $7,571, respectively.
Commitments for construction of new developments and additions to existing properties amounted to $18,242 at December 31, 1996. Commitments for construction represent only those costs contractually required to be paid by the Operating Partnership.
4. DEFERRED CHARGES Deferred charges as of December 31, 1996 and 1995 consist of the following:
1996 1995 --------------- ----------------- Deferred lease costs $6,705 $5,538 Deferred financing costs 4,657 3,628 11,362 9,166 Accumulated amortization 3,516 3,438 $7,846 $5,728 =============== =================
Amortization of deferred lease costs for the years ended December 31, 1996, 1995 and 1994 was $799, $731 and $434, respectively. Amortization of deferred financing costs for the years ended December 31, 1996, 1995 and 1994 was $953, $955 and $690, respectively. During 1996, the Operating Partnership expensed the remaining unamortized financing costs totalling $831 related to debt extinguished with other current year borrowings. Such amount is shown as an extraordinary item in the accompanying statements of operations.
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND UNIT DATA)
5. LONG-TERM DEBT Long-term debt at December 31, 1996 and 1995 consists of the following:
Maturities of the existing long-term debt are as follows:
% 1997 $1,153 1 1998 13,561 8 1999 16,880 9 2000 10,567 6 2001 76,184 43 Thereafter 59,659 33 $178,004 100 ============= =============
The Operating Partnership maintains revolving lines of credit which provide for borrowing up to $90,000. The agreements expire at various times through 1999. Interest is payable based on alternative interest rate bases at the Operating Partnership's option. Amounts available under these facilities at December 31, 1996 totalled $62,200. Certain of the Operating Partnership's properties, which had a net book value of approximately $141,640 at December 31, 1996, serve as collateral for the fixed rate mortgages and revolving lines of credit.
The credit agreements require the maintenance of certain ratios, including debt service coverage and leverage, and limit the payment of distributions such that distributions will not exceed 95% of funds from operations, as defined in the agreements, on a cumulative basis. All three existing fixed rate mortgage notes contain prepayment penalty clauses.
6. DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS The Operating Partnership selectively enters into interest rate protection agreements to mitigate changes in interest rates on its variable rate borrowings. The notional amounts of such agreements are used to measure the interest to be paid or received and do not represent the amount of exposure to loss. None of these agreements are used for trading purposes. The cost of these agreements are included in deferred financing costs and are being amortized on a straight-line basis over the life of the agreements.
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND UNIT DATA)
In October 1995, the Operating Partnership entered into an interest rate swap, at no cost to the Operating Partnership, effective through October 1998 with a notional amount of $10,000 which fixed the 30 day LIBOR index at 5.99%. The impact of this agreement, together with an interest rate swap agreement which expired during 1996, reduced mortgage interest expense by $88, $693 and $275 during 1996, 1995 and 1994.
The carrying amount of cash equivalents approximates fair value due to the short-term maturities of these financial instruments. The fair value of long-term debt at December 31, 1996, which is estimated as the present value of future cash flows, discounted at interest rates available at the reporting date for new debt of similar type and remaining maturity, was approximately $179,636. The estimated fair value of the interest rate swap agreement at December 31, 1996, as determined by the issuing financial institution, was an unrealized loss of approximately $23.
7. PARTNERS' EQUITY On June 4, 1993, the Company completed an initial public offering of 4,857,796 shares of $.01 par value Common Stock. The net proceeds totalled approximately $91,916 and were contributed to the Operating Partnership in exchange for general partnership Units in the Operating Partnership equivalent to the number of shares issued in the offering. In addition, the Operating Partnership issued 3,033,305 limited partnership Units to the limited partner in exchange for the 15 Properties as described in Note 1. The limited partner's Units are exchangeable, subject to certain limitations to preserve the Company's status as a REIT, on a one-for-one basis for shares of the Company's common stock.
On December 9, 1993, the Company sold 3,000,000 Depositary Shares, each representing 1/10 of a share of Series A Cumulative Convertible Redeemable Preferred Shares, at $25 per share. Proceeds from this offering, net of underwriters discount and estimated offering expenses, totalled $70,800 and were contributed to the Operating Partnership in return for preferred general partnership Units. Preferred general partnership Units issued by the Operating Partnership have the same characteristics, with respect to liquidation rights, distributions and conversion, as preferred shares of the Company. The Preferred Shares have a liquidation preference equivalent to $25 per Depositary Share and dividends accumulate per Depositary Share equal to the greater of (i) $1.575 per year or (ii) the dividends on the Common Stock or portion thereof, into which a depositary share is convertible. The Preferred Shares rank senior to the Common Stock in respect of dividend and liquidation rights.
The Preferred Shares are convertible at the option of the holder at any time into shares of Common Stock of the Company at a rate equivalent to .901 shares of Common Stock for each Depositary Share (equivalent to a conversion price of $27.75 per share of Common Stock). Preferred Units are automatically converted into general partnership Units to the extent of any conversion of Series A Preferred Shares of the Company into Common Shares of the Company. At December 31, 1996, 958,835 shares of Common Stock (and 958,835 general partnership Units) were reserved for the conversion of preferred Depositary Shares. The Preferred Shares and the related Depositary Shares are not redeemable prior to December 15, 1998. On and after December 15, 1998, the Preferred Shares and Depositary Shares may be redeemed at the option of the Company, in whole or in part, at a redemption price of $25 per Depositary Share, plus accrued and unpaid dividends.
As of December 31, 1996, the ownership interests of the Operating Partnership consisted of the following:
1996 1995 -------------- ----------------- General Partnership Units 6,602,510 6,286,581 Limited Partnership Units 3,033,305 3,033,305 Preferred general partnership units, held by the general partner 106,419 141,484 ============== =================
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND UNIT DATA)
8. EMPLOYEE BENEFIT PLANS
The Operating Partnership has a non-qualified Unit option plan ("The 1993 Unit Option Plan"). Units received upon exercise of Unit options are exchangeable for Common Stock of the Company. The Operating Partnership accounts for these plans under APB Opinion No. 25, under which no compensation cost has been recognized.
Had compensation cost for these plans been determined for options granted since January 1, 1995 consistent with SFAS #123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the Operating Partnership's net income and earnings per unit would have been reduced to the following pro forma amounts:
1996 1995 ----------- --------------- Net income: As reported $15,346 $15,352 Pro forma $15,243 $15,339 Primary EPS: As reported $1.37 $1.36 Pro forma $1.36 $1.36
Because the Statement 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years.
The Operating Partnership and the Company may issue up to a combined 1,000,000 shares and units under The 1993 Stock Option Plan and The 1993 Unit Option Plan. The Operating Partnership has granted 889,550 options, net of options forfeited, through December 31, 1996. The option exercise price is determined by the Stock and Unit Option Committee of the Company's Board of Directors. Non-qualified Unit options granted expire 10 years from the date of grant and are exercisable in five equal installments commencing one year from the date of grant.
A summary of the status of the Operating Partnership's plan at December 31, 1996, 1995 and 1994 and changes during the years then ended is presented in the table and narrative below:
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND UNIT DATA)
Options outstanding at December 31, 1996 have exercise prices between $22.50 and $26.63, with a weighted average exercise price of $23.69 and a weighted average remaining contractual life of 7.9 years.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1996 and 1995, respectively: expected distribution yields of 8%; expected lives ranging from 5 years to 7 years; expected volatility 20%; and risk-free interest rates ranging from 5.6% to 6.75% in 1996 and from 5.8% to 5.9% in 1995.
Unamortized stock compensation, which relates to options that were granted at an exercise price below the fair market value at the time of grant, was $533 and $871 at December 31, 1996 and 1995. Compensation expense recognized during 1996, 1995 and 1994 was $338, $334 and $342, respectively.
During 1994, the Operating Partnership established a qualified retirement plan, with a salary deferral feature designed to qualify under Section 401 of the Code (the "401(k) Plan"), which covers substantially all officers and employees of the Operating Partnership. The 401(k) Plan permits employees of the Operating Partnership, in accordance with the provisions of Section 401(k) of the Code, to defer up to 20% of their eligible compensation on a pre-tax basis subject to certain maximum amounts. Employee contributions are fully vested and are matched by the Operating Partnership at a rate of compensation deferred to be determined annually at the Operating Partnership's discretion. The matching contribution is subject to vesting under a schedule providing for 20% annual vesting starting with the third year of employment and 100% vesting after seven years of employment.
9. LEASE AGREEMENTS The Operating Partnership is the lessor of a total of 916 stores in 27 factory outlet centers, under operating leases with initial terms that expire from 1997 to 2014. Most leases are renewable for five years at the lessee's option. Future minimum lease receipts under noncancelable operating leases as of December 31, 1996 are as follows:
1997 $49,125 1998 44,768 1999 39,219 2000 30,050 2001 21,863 Thereafter 41,516 $226,541 ===============
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND UNIT DATA)
10. COMMITMENTS The Operating Partnership purchased the rights to lease land on which two of the outlet centers are situated for $1,520. These leasehold rights are being amortized on a straight-line basis over 30 and 40 year periods. Accumulated amortization was $419 and $371 at December 31, 1996 and 1995, respectively. The annual rental payments for these leases aggregated $315, $312 and $231 for the years ended December 31, 1996, 1995 and 1994, respectively. Minimum lease payments for the next five years and thereafter are as follows:
1997 $318 1998 321 1999 338 2000 351 2001 354
Thereafter 26,166 $27,848 ===============
11. RELATED PARTY INFORMATION The Operating Partnership reimburses the Company for its expenses which are primarily associated with operating as a public company. Such expenses for the years ended December 31, 1996, 1995 and 1994 totalled $779, $884 and $906, respectively. In addition, Vernon, Vernon, Wooten, Brown, Andrews & Garrett, P.A., a law firm in which a partner served on the Company's Board of Directors from June 1993 to December 1994, provides legal services to the Operating Partnership. During 1994, the Operating Partnership paid approximately $1,523 for these services.
The Company, as the general partner, guarantees certain of the Operating Partnership's long-term debt obligations.
12. ACQUISITION On October 19, 1994, the Operating Partnership completed its acquisition of the assets of MillStream Factory Shops, a factory outlet center in Lancaster, Pennsylvania, for an aggregate purchase price of $23,800. The acquisition was accounted for using the purchase method whereby the purchase price was allocated to assets acquired based on their fair values. The results of operations of the acquired property have been included in the results of operations since the acquisition date.
Pro forma total revenues, net income and net income per unit for the year ended December 31, 1994, which reflect adjustments to present the historical information as if the acquisition had occurred as of the beginning of the respective period, were $48,833, $14,950 and $1.29, respectively. The pro forma information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the acquisition occurred at the beginning of the respective period, nor does it purport to represent the results of operations for future periods.
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND UNIT DATA)
13. SUPPLEMENTARY INCOME STATEMENT INFORMATION The following amounts are included in operating and maintenance expense for the years ended December 31:
1996 1995 1994 ------------- --------------- ------------ Advertising and promotion $7,691 $8,884 $5,769 Common area maintenance 6,681 5,960 4,079 Real estate taxes 4,699 3,483 2,210 Other operating expenses 4,488 4,140 3,442 $23,559 $22,467 $15,500 ============= =============== ============
14. SUBSEQUENT EVENT On February 28, 1997, the Operating Partnership completed its acquisition of Five Oaks Factory Stores, a factory outlet center in Sevierville, Tennessee, for an aggregate purchase price of $18,000. The acquisition will be accounted for using the purchase method whereby the purchase price will be allocated to assets acquired based on fair values.
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the financial statements of Tanger Properties Limited Partnership is included on page of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 26 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Greensboro, North Carolina January 27, 1997, except for Note 14, which is dated February 28, 1997
TANGER PROPERTIES LIMITED PARTNERSHIP SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION FOR THE YEAR ENDED DECEMBER 31, 1996 (Amounts in thousands)
(1) Aggregate cost for federal income tax purposes is approximately $346,583,000.
(2) The Operating Partnership generally uses estimated lives ranging from 25 to 33 years for buildings and 15 years for land improvements. Tenant finishing allowances are depreciated over the initial lease term.
(3) Acquired in October 1994.
(4) Under construction at December 31, 1996.
TANGER PROPERTIES LIMITED PARTNERSHIP SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED) For the Year Ended December 31, 1996 (Amounts in thousands)
The changes in total real estate for the three years ended December 31, 1996 are as follows:
The changes in accumulated depreciation for the three years ended December 31, 1996 are as follows: 1994 1995 1996 --------------- ----------- ----------- Balance, beginning of year $10,436 $18,007 $31,458 Depreciation for the period 7,571 13,451 15,449 Dispositions and other --- --- --- Balance, end of year $18,007 $31,458 $46,907 =============== =========== ===========