Tanger Outlets Demonstrates Resilience in New Standard of Brick-and-Mortar Retail
With the pandemic driving shoppers away from traditional retailers and in particular shopping centers, Tangier factory outlet centers (NYSE: SKT) released surprising numbers in its last quarter. But even more interesting for investors, it shows encouraging signs for the year to come. Is this a hidden gem in a disadvantaged area? So Motley Fool Live episode, recorded on February 18, Fool contributor Matt Frankel takes a look at the business of this popular outdoor mall to see what’s behind its resilient performance.
Matt Frankel: The Brians, we haven’t heard from Brian Feroldi yet, but I’m guessing the two companies they’re talking about are really firing on all cylinders lately. Am I right about that?
Mine isn’t, but in a good way for patient long-term investors. I’m here to talk about Tanger Outlets. The stock symbol is SKT if anyone wants to grab it. Until anyone asks, I don’t know what the warrior’s state of mind is. It’s a co-working space and it just happens to be on the wall behind me.
Tanger Outlets was therefore obviously crushed by the pandemic. Their sales centers have been virtually closed, all of their occupants are pretty much non-essential businesses. I think almost 100 percent of their wallet has been closed. Even though they are open air and everything essential could have remained open, pretty much everything was closed in March and April. Things were not going well, the stock lost, I think 80% of its value at some point this year or in 2020. But we just heard the fourth quarter results from Tangier and they are actually pretty impressive when you consider what’s going on in the world.
They got 95% of their billed rent in the fourth quarter, which is pretty impressive for a retail real estate company. What really impressed me is that they reported customer traffic to their properties in the fourth quarter was at 90% of 2019 levels. They are just down 10 percent during the shopping season of holidays. For a retail business in the midst of a pandemic at a time when cases were skyrocketing, it shows the resilience of Tangier’s business. On the one hand, it’s pretty much on the outside, so it’s very conducive to distancing more than an indoor mall. So a lot of people feel more comfortable with that.
They also reported that in January customer traffic hit 99% of pre-pandemic levels, so it’s basically unchanged. It gives me a lot of confidence in the company. Their occupation is certainly down a bit. The occupancy rate was 97% at the end of 2019, it is now just under 92%.
Many major tenants in Tangier went bankrupt in 2020 because of the pandemic. Ascene [Retail Group, Inc.] marks was a big one. They are in Loft’s parent company. [Additionally] J.Crew, Brooks Brothers were big tenants of Tangier. They left holes in the wallet which will have to be filled, Tangier seems quite confident.
The business is very profitable. Their FFO which is operating funds and roughly their real estate version of earnings, was 54 cents a share for the quarter. That’s down from 59 cents a share in the fourth quarter of 2019, which for a retail REIT in 2020 losing five cents in profits really isn’t that bad. Especially when you see what some of their peers are doing. It is a very profitable REIT.
Tanger Outlets, their FFO was $ 1.58 for the full year, which means they are trading for less than 10 times the profit. It is a very profitable business. They have $ 84 million in cash, which is a lot. It is not a giant enterprise. An uncapped line of credit of $ 600 million, almost all of their debt is at low fixed interest rates. Less than one percent of their debt is variable rate right now. The balance sheet is rock solid.
They just earned their dividend ahead of many retail and shopping center operators. That’s about half of the pre-pandemic level, which translates to about a five percent return at the current price. This is something that really impressed investors when they received their earnings report. But what really impressed them, if you remember when the pandemic hit, just about every company we cover said, “We’re not giving advice for the foreseeable future.” I’m pretty sure Twilio does exactly that and I’m not sure what Brian is covering. Most companies have said for at least a quarter or two, “We’re not going to issue advice because we don’t know what’s going on.”
In retail, most companies still don’t release any guidance, but Tangier did, and the market was very happy with what they saw. I mentioned that for the whole of 2020, they earned $ 1.58 in operating funds per share. Remember, the first quarter of 2020 was pretty normal. The pandemic did not really cause activities to stop until the end of March, especially with regard to where most of Tangier’s properties are located, namely the coastal areas of the south-east and south of the United States.
They steer basic FFOs halfway to a $ 1.52 in the future. Which means they are trading for less than 10 times the profits over time, nothing including before the pandemic. I mentioned that they were less than 10 times the profit for 2020, which includes a fairly normal first start to the year. So a full year ahead in our new normal, they expect earnings of $ 1.52 per share.
They expect additional bankruptcy-related closures. Normally, when companies apply for Chapter 11, they don’t close their wallets right away. They close their worst performing stores first, and then until they restructure and come out of bankruptcy.
These forecasts do not include any additional acquisitions or growth. Tangier hasn’t grown for some time, but the company has considered some growth opportunities. All in all, this has been a pretty impressive quarter for a company in the industry that is truly dead in 2020. I don’t know if both Brian’s are excited about shopping center REITs, but most investors aren’t. not and there is a reason for it.
This is because it has been one of the hardest hit and Tangier has proven its business, which really has to be experienced in person, unlike a lot of other malls and discretionary retailers. You can choose not to go to the mall and buy just about anything you can find online. Tangier has its point of sale, so it’s more of a scavenger hunt experience, which really keeps the company a bit more resilient than most retailers. So they really show the resilience of their business.
Just a pretty impressive quarter and the stock is one of the few to be on the rise today. I see a comment that says it’s clearance sale day, I like a good sale. Me too, but you won’t find any in Tangier today. Their business hasn’t been running at full speed like the businesses the two Brian’s are talking about, but it is certainly getting there.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.