Tanger Factory Outlet Centers (NYSE: SKT) is the only real estate investment trust, or REIT, 100% focused on outlet retail. The company was founded in 1981 and went public in 1993. While Tanger has been an impressive growth story over the years and has a strong track record of delivering returns and dividend growth for its investors, recent times have been rather challenging.
Tanger Factory Outlet Centers company profile
As of mid-2020, Tanger owns 39 outlet centers with 14.3 million square feet of space, located in 20 states and Canada. Most of the properties are concentrated along the East Coast, with the vast majority located near major metropolitan areas or in popular vacation destinations.
We'll discuss the COVID-19 situation in the next section, but Tanger has a fantastic track record of strong performance. From 1993 through 2019, Tanger's year-end occupancy rate never dropped below 96%.
The general thesis behind Tanger's business model is that outlet shopping is recession-resistant and isn't as easily disrupted by e-commerce headwinds as other forms of discretionary, brick-and-mortar retail. CEO Steven Tanger has remarked that "in good times, people love a bargain, and in tough times, people need a bargain," referring to the discounted nature of outlet stores. Discount-oriented retail tends to hold up well in tough times -- this is why companies like Walmart (NYSE: WMT) and Costco (NASDAQ: COST) thrive during recessions.
Outlet malls have excellent economics. They are typically cheaper to build than standard malls, and when tenants vacate, the properties are easy to reconfigure to accommodate a new retailer. To retailers, outlets have a relatively low occupancy cost and can be a highly profitable way to move merchandise. And to consumers, they represent a way to buy their favorite brands at a discount while still seeing products before they purchase.
In regards to e-commerce competition, Tanger aims to create experiences, not just malls. There is definitely a "treasure hunt" aspect to outlet shopping, and consumers can often find bargains simply not available online. To be fair, most outlet tenants also operate full-price retail stores that can be affected by e-commerce, and this is certainly an ongoing concern.
Tanger is run by CEO Steven B. Tanger, who has done an excellent job of growing the business over the years, and President, COO, and future CEO Stephen Yalof, who is a recent addition to the team after a successful run as CEO of Simon Property Group's (NYSE: SPG) market-leading Premium Outlets division. Yalof will become CEO on January 1, 2021, at which time Tanger will become Executive Chair.
Tanger Factory Outlet Centers news
The COVID-19 pandemic hit Tanger's business rather hard. While the company's properties technically remained open throughout the shutdowns and stay-at-home orders, virtually all of the stores located within the outlet centers were forced to close their doors.
Several of Tanger's key tenants have declared bankruptcy this year as a result of the pandemic. Ascena Retail Group (NASDAQ: ASNAQ) is Tanger's second-largest tenant and filed Chapter 11 in July. Brooks Brothers and J. Crew, which combine to account for nearly 3% of Tanger's rental income, have also filed, as have several smaller tenants.
Tanger is taking steps to re-lease vacated space, but this could have a major impact on Tanger's occupancy for some time. At the end of the second quarter, Tanger's properties had a respectable-sounding 93.8% occupancy rate, but the recent bankruptcies are likely to lead to a wave of store closures that could take several years to fully play out.
The good news is that the worst of the pandemic is over. Tanger once again became cash-flow positive early in the third quarter of 2020 thanks to a decent 72% rent collection rate and smart expense management. As of July 31, 95% of Tanger's occupied stores had reopened. And it's also important to mention that while Tanger only received or expects 43% of its rent for the first half of the year, another 26% is deferred until 2021, so the company will collect it eventually.
Despite the headwinds caused by e-commerce growth and the pandemic, Tanger still sees a bright future for its business and is taking steps to adapt to the changing retail landscape. For example, the company recently rolled out a virtual shopping service that allows customers to shop for outlet bargains from home, which could help for the remainder of the pandemic and beyond. And its Tanger Club membership program has more than 1.6 million paid members and grew by 18% over the past year alone.
Outlet shopping is a relatively small industry, representing less than 1% of all U.S. retail space. Tanger has estimated that there is more retail space in Chicago alone than there is outlet space in the entire United States. There are many major metropolitan areas and tourism destinations that have little or no outlet space, which could be future growth avenues. For example, Tanger has no outlet properties in South Florida and only has one location west of Texas.
So while the company admittedly has some work to do when it comes to making sure its properties stay occupied and creating more experiential components at its centers, Tanger sees lots of room to grow post pandemic. With $564 million in liquidity as of mid-2020, Tanger has the financial flexibility to pursue attractive opportunities as they arise.
Tanger Factory Outlet Centers stock price and performance
Tanger's stock price performance hasn't exactly been strong in 2020. Because of the effects on the business and longer-term uncertainty caused by COVID-19, Tanger's stock price was still more than 60% lower for the year as of late August.
However, throughout its history, Tanger has been a solid income stock, producing impressive results for investors. From 1993 through 2019, Tanger increased its dividend every year. From the 1993 IPO through the end of 2019, Tanger generated a 1,030% total return for investors (about 9.8% annualized). Even after the devastating impact of the pandemic, an investor who got into Tanger's IPO would be sitting on a 384% gain, assuming dividends were reinvested along the way.
The bottom line on Tanger Factory Outlet Centers
Tanger Factory Outlet Centers is a rather cheap stock, but to be clear, it's cheap for a reason. Tanger faces an uphill battle in the near term as it attempts to undo the damage caused by the pandemic and simultaneously attempts to position its properties to thrive in a world where e-commerce is becoming an increasingly viable option for value-seeking shoppers.
Having said that, there's certainly a ton of upside potential if Tanger gets it right. If the company is successful in boosting occupancy and growing the shopper traffic in its properties, Tanger's stock could seem like an absolute bargain at the current level. And that's not to mention the potential earnings implications if Tanger can successfully grow its footprint.
But those are all big ifs right now. The bottom line is that Tanger is a REIT that could multiply investors' money several times over, or it could potentially have a rough time ahead. The reward potential could certainly justify an investment in Tanger, but only if you have a high level of risk tolerance and aren't investing any money you can't afford to lose.