Retailers nationwide are trying to figure out what normalcy looks like for shoppers in the era of the coronavirus, but the new normal is a moving target.
Retail sales plummeted 16.4% in April, on top of a drop of 8.3% in March, according to the U.S. Census Bureau. The rapid decline can be attributed to government-required retail store closures.
Mall owners have been hit hard as many tenants can't pay rent, and possibly teeter on the edge of bankruptcy. Tanger Factory Outlet Centers (SKT -1.53%) is one of those property owners waiting to see what happens next. With its stock down 58% year to date, the company hopes happier days are ahead.
Headquartered in North Carolina, Tanger Outlets is a real estate investment trust (REIT) with 39 upscale outlet shopping centers in 20 states and Canada, leasing to over 2,800 stores.
A look at Tanger's results during the coronavirus crisis
On May 11, Tanger released first-quarter 2020 results. As for the impact of COVID-19 on retail, it's reasonable to assume this first-quarter report is indicative of quarters to come, at least until the virus is defeated.
Overall occupancy was 94.3%, down year over year from 95%. Before COVID-19, Tanger's occupancy rate was drifting lower, and in the current circumstances it's doubtful it will improve.
In an effort to support its tenants through government-mandated closures, Tanger offered April and May interest-free rent deferrals to all occupants. The deferred rents are to be paid back in January and February 2021. As a result, only 12% of tenants paid their usual rents. The company expects regular rent payments to start again in June.
The profitability of real estate investments, which is Tanger's business, is calculated by net operating income (NOI). This important metric equals all property revenue minus reasonable operating expenses. First-quarter 2020 same-center NOI was down 3.70% year over year. The decrease was mostly due to tenant bankruptcies, lease modifications, and store closures.
With the first-quarter earnings release, Tanger announced the suspension of its dividend. REIT dividends are treated a bit differently from other dividends. The Securities and Exchange Commission (SEC) requires REITs to distribute at least 90% of taxable income to shareholders annually as dividends.
Tanger believes it has met that annual requirement already. "We intend to pay the dividend that we declared in January, as scheduled on May 15, which based on what we know today should satisfy the minimum rate, taxable distribution requirements for the year," CEO Steve Tanger said during the earnings conference call.
So what about liquidity? As of April 30, Tanger had $594 million in cash, and estimates it will retain $35 million per quarter by suspending the dividend. The company drew down "substantially all of the capacity" under its $600 million unsecured line of credit, which matures in October 2021 but can be extended to December 2023 at Tanger's option.
Based on estimated pre-COVID-19 cash expenditures, and assuming no dividend payments, debt maturities, or rent collections for two years, the company expects to have sufficient liquidity to meet obligations, according to CFO James Williams.
During the quarter, Tanger Outlets had its credit rating cut by both Moody's and S&P. I don't think that will reverse course anytime soon, given decreasing revenue and Tanger tapping its credit line. In fact, more downgrades are possible.
What does this mean for investors
Consumers will both want and need good retail buys as the economy slowly recovers. Unemployment rose to new heights, and could linger for quite awhile, muting retail reopenings.
But shopping is more than store transactions. It is a social activity that Tanger has been built around, and Americans will want to return to that once the pandemic passes. The big question is: How long will the recovery take?
Tanger Outlets has a large national footprint and in-demand tenants like Ralph Lauren, Nike, and Coach. But when you consider falling occupancy, negative same-center NOI growth, rent deferrals, a suspended dividend, and credit rating cuts, it's clear that this is not the time to commit hard-earned cash to this company. I think investors should stay away from Tanger Outlets stock for the foreseeable future.