Tanger Factory Outlet Centers (SKT 0.41%) has long been considered one of the best-run mall real estate investment trusts (REITs). And yet its shares are down roughly 60% from their 2016 highs while industry bellwether Simon Property Group is down only by around 30%. Is this negative sentiment justified? Here are seven charts that should help you answer that question.
What's the model?
One of the biggest concerns today is that Tanger isn't as well run as investors have long believed. The entire mall industry has been hit by store closings related to the so-called retail apocalypse, but there's clearly a reevaluation of Tanger's business taking place based on its relatively weak stock performance. At the heart of the problem is a key industry metric: sales per square foot. Take a look at this slide from enclosed mall REIT Taubman Centers and you'll see the issue.
The graphic on the left side of the slide shows that sales per square foot at Tanger malls (SKT in the chart) is near the bottom of the barrel in the mall space. However, there's a nuance here that is very important. Every other mall owner on the list is heavily focused on enclosed malls, with some having exposure to outlet centers. Tanger owns only outlet centers. Enclosed malls and outlet centers are very different properties.
Outlet centers are generally not enclosed and have highly uniform spaces, making them less expensive to operate. That can be seen in the below slide from Tanger, which shows tenant occupancy costs. Tanger has the lowest costs because its model is inherently different.
Yes, Tanger is dealing with store closures, just like its peers, but it is still one of the most attractive places for tenants to put a store. And, with lower costs, the relatively low sales-per-square-foot metric isn't as big of an issue as it seems. Now add in the fact that the uniform nature of outlet structures makes it easier to bring in new tenants and the picture brightens further. And then layer on top of that the fact that outlet centers don't have giant anchor tenants to worry about, as do enclosed malls. It is a lot more expensive and time-consuming to revamp a cavernous anchor property once filled by a Sears than a relatively tiny Dress Barn location. Before jumping to conclusions, make sure you understand how Tanger differs from the enclosed mall peer group it gets lumped into simply because there's no better place to put it.
Holding up pretty well
None of that should suggest that Tanger has got it easy today. Like the enclosed malls, it has been hit by store closures. In fact, the outlet center REIT has long focused on apparel, which is one of the areas getting hammered by online competition. However, Tanger's sales metrics don't appear to be too big of a problem.
Notice that Tanger's sales per square foot peaked in 2015 and then fell for a couple of years. More recently, however, they have started to improve again, matching the 2015 peak in the second quarter of 2019. Essentially, they are stuck in a range but not plummeting. Its malls, then, are holding up relatively well, which is buttressed by the REIT's occupancy levels, as shown below.
Tanger's outlet centers have maintained an occupancy level of at least 95% for more than two decades. The current rate, 96%, is actually one of the highest among its peers. Even though tenants are closing locations, Tanger is managing to keep its spaces filled. To be sure, it has been forced to take aggressive action, such as granting rent concessions and agreeing to short-term leases when it would prefer long-term leases. But these are the things that have to happen in order for Tanger to rework its properties. These actions will result in some short-term pain on the top and bottom lines, but it is more important to keep its outlet centers desirable for shoppers and tenants. Empty malls are not desirable to anyone.
A solid foundation
The next big issue that sets Tanger apart from its ill-fitted peer group is its financial strength. Simply put, its balance sheet is one of the strongest in the sector. It has one of the lowest financial debt-to-equity ratios:
It also has one of the best interest coverage ratios. Note that the company pegs its interest coverage at a more robust five times, which differs from the chart below (the chart is using raw financial data while Tanger's stat is adjusted to reflect the debt covenants contained in its bonds). Either way, handling the debt it has taken on isn't a problem:
It's also worth noting that, despite being financially strong, Tanger has been working to reduce leverage even further. The REIT is, essentially, making sure it can fight through this rough patch and exit the other side a better-positioned company.
It won't be pretty
The key takeaway here is that investors don't appear to be giving Tanger credit for its many strengths, instead focusing on negatives that may or may not be entirely relevant. If you are a value-focused investor, however, not only is there blood in the streets in the mall sector, but there also appears to be a baby that's been thrown out with the bathwater (how's that for mixed metaphors!). Tanger is worth a deep dive for more aggressive investors who are willing to dig in and understand what sets it apart from its peers.