I own Tanger Factory Outlet Centers (NYSE:SKT) and am losing money on the investment. The shares are now down more than 30% from my purchase price.
My body and mind have started to diverge on this stock, with my gut screaming run away and my brain telling me that such a move would be a bad idea. Here's my thinking on Tanger today and what I'm considering doing with this investment: buy, sell, or hold... or maybe something else entirely.
1. Should I sell Tanger?
Let's boil it down to a simple list. I purchased Tanger because of the real estate investment trust's (REIT's) long and successful history, strong financial position, low payout ratio, and unique outlet center focus. None of these things have changed.
For example, occupancy remains in the mid-90% range and is among the best in the enclosed-mall peer group (not exactly a perfect fit for an outlet-focused landlord, but no other comparison group is better). Sales per square foot grew in the most recent quarter and have held fairly steady in the high $300 space for a number of years.
While that would be low for an enclosed mall, Tanger is an outlet center, and the bigger issue is that the performance of its properties isn't falling off a cliff -- like the stock price. And occupancy costs remain low relative to enclosed malls, which means Tanger's outlets are still attractive places for lessees' stores.
Meanwhile, Tanger's balance sheet remains strong. Only 6% of its leasable square footage has mortgage debt attached. It has a $600 million line of credit on which it has only drawn $18.5 million (leaving 97% of the facility available, if needed). Debt to adjusted total assets is around 50% and well below debt covenants. And it covers its interest expenses by a solid five times. These are some of the reasons why Tanger has an investment grade credit rating.
To be fair, there are issues. For example, the company is dealing with the impact of the so-called retail apocalypse. That's basically the overhyped shift taking shape as more shopping takes place online. It is a real issue, but online shopping is unlikely to replace physical shopping, and well-positioned malls are transitioning their businesses. Tanger, for example, is working to find tenants to replace ones that are closing.
It just takes time, which shouldn't be a problem given the REIT's financial strength. Right now, however, that means granting rent concessions and weak rental hikes as Tanger works through this difficult period. I'm not worried about the company going bankrupt, and I expect it to at least muddle through the transition taking shape today. In any case, I'm not selling.
2. Should I buy more?
The problem is that, right now, things look like they're going to get worse before they get better. For example, one of Tanger's largest tenants is Ascena Retail Group, which owns brands like Ann Taylor, Loft, and Dress Barn. The company has already announced that it wants to shutter all of its Dress Barn locations, which Tanger has said are poor performers within its malls.
However, there are very real concerns that Ascena will go bankrupt. The company represents roughly 7% of 2018 base rent. That's a material number.
Moreover, Tanger has sizable debt maturities in 2023 and 2024. That seems like a long way off today. However, if the mall landscape doesn't improve quickly (and a swift upturn seems pretty unlikely), Tanger could easily wind up facing higher interest rates when it refinances in just a few years.
The payout ratio remains robust, at around 60% to 70% of funds from operations (FFO), the REIT equivalent of earnings. Both an Ascena bankruptcy and higher debt costs, however, would put material pressure on the safety of the payout. This, in turn, could lead to the current 10% yield falling sharply because of a dividend cut.
Management isn't hinting that this is in the cards, and the company has a 26-year history of annual increases behind it, but that doesn't mean a cut won't happen. Tanger is dealing with very real problems. It's hard to justify buying more right now.
That said, for an aggressive investor, taking a small position might be worth the risk, assuming you factor in the chance of a dividend cut. The one thing I'm doing is reinvesting my dividends. While that's not exactly buying, I'm allowing that 10% yield to increase my position in Tanger at what I believe will be a good price point.
3. Should I hold, or maybe do something else?
Essentially, I'm sitting tight with the position I have today and reinvesting the dividend. One key factor in that decision is that Tanger is my least diversified holding. It does one thing and one thing only -- own outlet centers.
Although Tanger is good at what it does, I tend to prefer companies that have multiple business lines and divisions. This brings up another option: find a similar company to increase my diversification within the mall space.
On that score, I'm currently looking at Simon Property Group (NYSE:SPG), which is one of the largest and most diversified mall REITs. So far, it's proven itself adept at managing through the issues facing anchor tenants and has its portfolio spread between enclosed malls, outlet centers, and international assets (where it's actually successfully developing new properties). Like Tanger, it's being hit by Wall Street's fears over the retail apocalypse, so it's trading at what appears to be an attractive price (off 35% from its 2016 highs) and yield (5.7%). And like Tanger, it's financially strong with a reasonable payout ratio.
For now, I've decided to simply hold Tanger. If I didn't own it, I might consider buying a small position, since there's nothing at this point that suggests the company is at risk of catastrophe. In fact, even an Ascena bankruptcy and higher interest rates are manageable events, though they would increase the likelihood of a dividend cut.
But since I do own Tanger, I'm not willing to double down on a company that's facing trouble and lacks diversification. It's just not a great call for my portfolio, noting that the troubles it's facing right now are taking place outside of a recession. Falling into an economic malaise would simply put more pressure on Tanger and all of the mall REITs.
That said, there's blood in the streets in the mall space today and I'm looking at Simon as a way to increase my exposure to the broader space while adding a bit more diversification to my mall bet.