The topic du jour in the consumer retail space is the ongoing assault on brick-and-mortar stores. Over the past several years, dozens of retailers have filed for bankruptcy and/or closed thousands of stores in a phenomenon that has been labeled the "retail apocalypse."
At center stage is the American mall, which used to serve as a sort of town square. A combination of the convenience of shopping online and an oversupply of retail stores in the U.S. has led to a decline in mall traffic. This has caused an overall decline in retail sales and has put financial pressure on the entire industry.
Tanger Factory Outlet Centers (NYSE:SKT) is a real estate investment trust (REIT) that specializes in developing and operating outlet malls. Although it is in the mall business and has similarly seen its stock price suffer along with other mall operators, outlet malls are actually somewhat resilient to the broader retail trends.
The outlet mall concept
Outlet malls are not like your typical Main Street mall. Retailers use outlet stores to sell old or excess inventory at a discount to prices listed at department stores. To avoid direct competition with full-price stores, outlet malls run by Tanger generally are outside of city centers and at least 10 miles away from traditional department stores. The upside of locating in less densely populated areas is that the cost of land is generally lower, bolstering retailer margins.
Consumers are generally interested in finding deals and are willing to make a day trip out of shopping. In many cases, outlet malls will be in more-touristy areas near beaches or other popular travel destinations. Tanger specifically derives a lot of business from U.S. domestic tourists who like to shop when they are on a trip.
The strong value proposition to both retailers and consumers is reflected in Tanger's key operating metrics. It reports a high 96% occupancy rate at its outlet malls and has maintained occupancy above 95% since its IPO in 1993, indicating strong demand from retailers to maintain outlet locations. Shopper visitation traffic is also strong. In 2019, the REIT has seen shopper traffic increase by 1.5%, despite less-than-stellar traffic numbers at malls overall.
A healthier tenant mix
A shopping mall operator is only as healthy as its tenants. The biggest headache for operators of traditional malls such as CBL & Associates has been the issue of replacing large department stores, which have vacated real estate en masse. Large department stores serve as mall anchors and not only have historically driven traffic to malls but also have paid healthy rents. Furthermore, it is not easy to replace a retail anchor with another retailer because their retail store bases tend to be massive.
The good news here is that Tanger doesn't have exposure to department stores or anchor-style real estate footprints. This is a key differentiator between the quality of Tanger's tenant base versus malls.
That's not to say that its tenants are in pristine shape. Its largest tenants include Ann Taylor, Loft (both owned by Ascena Retail Group), and Gap. Both Ascena and Gap are in the process of closing stores. However, Tanger also has significant exposure to brands that are thriving, such as Nike and VF's The North Face and Timberland.
Tanger's tenant health is important, but regardless of that, outlets are not typically the first stores to be closed when a retailer is struggling because they usually outperform full-price stores at traditional malls. Therefore, Tanger can do well and maintain high occupancy even if some of its customers are not operating at their peak.
The numbers suggest resiliency
The bottom line for investors is that Tanger's reported financial figures continue to support the idea that its business model is resilient. It has continued to generate strong operating income and has raised its dividend every year (as seen in the chart below). The stock is now generating a whopping 9.1% dividend yield! Of course, a high dividend yield could partially be related to the stock price being down 22.8% year-to-date, but the REIT has the free cash flow to sustain the rate, and it reflects the continued strength in Tanger's earnings. Tanger having the confidence to continue raising its dividend should give investors some comfort here.
Its stock price chart is another story. Investors have sold down its shares in line with other shopping center operators since the whole sector is now on sale. Tanger does appear to be a cut above many of its retail peers in terms of its financial stability and business model differentiation. But there is a case to be made that it is indirectly hurt by poor shopping mall performance due to exposure to many of the same retailer brands.
In any case, Tanger may be worth considering as a long-term value investment for people who are interested in dividend stocks and are not afraid of some exposure to the consumer retail sector.