Tanger Factory Outlet Centers (NYSE: SKT), the only pure-play outlet shopping real estate investment trust, or REIT, was heavily impacted by the COVID-19 pandemic. Virtually all its properties were forced to close as the pandemic spread across the U.S., some of its top tenants went bankrupt, and Tanger found itself with tons of newly vacant space at its properties.
First, the bad news
During the pandemic, Tanger's properties technically remained open where allowed, but virtually all its tenants were forced to close. Many stopped paying rent during the shutdowns, and some of Tanger's key tenants, such as Ascena Brands (parent company of LOFT), were forced to declare bankruptcy and close stores.
Since the mid-1990s when the company went public, Tanger had never finished a year with occupancy below 96%, even in the depths of the 2008 to 2009 financial crisis. But the COVID-19 pandemic changed that. Tanger's properties are 91.7% occupied, which is the lowest in the company's history, leaving more than one million square feet of space without tenants.
There's more good news than you might think
As you can see, Tanger was certainly not unscathed by the pandemic, and some of the bad news (like the high vacancy rate) will take some time to work out, even in a best-case scenario. However, it's important for investors to realize that there's perhaps more good news than bad from a long-term investor's perspective.
First and foremost, Tanger is profitable. This is perhaps the most important takeaway if you're worried about the viability of the business. In the first quarter, Tanger generated $40.6 million in adjusted funds from operations (FFO), the best metric of REIT profitability. That was about 20% lower than a year ago, but it's still a very profitable business, even with the higher vacancy rate.
Tanger has also seen success in attracting larger (read: space-filling) tenants recently, with the first DICK's Sporting Goods (NYSE: DKS) opening at a Tanger property earlier this year. The company is in discussions with other retailers that would need large spaces and is actively increasing non-retail elements in its properties, such as food and experiential tenants. As one example, a Tanger property in Michigan recently welcomed a new microbrewery.
Another reason to be optimistic is that the outlet industry is still relatively small, and the fact that many lower-quality malls didn't survive the pandemic could create some interesting opportunities to expand.
Tanger has done a great job of taking advantage of the rebound in its stock price, recently raising $130 million in a stock sale. At the end of the first quarter, Tanger had $790 million in liquidity, including $190 million in cash -- a rather large figure for a REIT with a market cap of $1.8 billion.
For one thing, the pandemic showed the resilience of the outlet shopping industry. In the first quarter (when COVID-19 restrictions were still quite prevalent), the company reported that customer traffic had reached 97% of pre-pandemic (2019) levels and rent collections had reached 95%. What's more, by April, customer traffic had exceeded comparable 2019 levels.
The Millionacres bottom line
Tanger was impacted by the COVID-19 pandemic, but that doesn't mean investors need to worry. The business is still highly profitable, Tanger has a great deal of financial flexibility to invest in its existing properties and develop new ones, and with strong customer traffic levels, the company should be able to attract new tenants to fill its space.
Tanger's income certainly isn't where it was before the pandemic yet, but there's no good reason for investors to worry about Tanger's business going forward.