I'm not a fan of most bricks-and-mortar retail concepts, and that means that I'm not going to bother with traditional mall operators. The chunky distributions that come with many of these retail landlords structured as real estate investment trusts (REITs) don't impress me. The only thing worse than counting on a single physical retail concept to keep humming along is counting on having several of them humming along together in perfect harmony.
The mall concept isn't dead, but it is dying. Shoppers have gone online. Multiplex operators, video game arcades, and other entertainment concepts are now playing out in consumer living rooms and the smartphones in their hands. Third-party takeout delivery apps now provide restaurants a way to reach in-home diners without having to pay overpriced mall rents. As mall traffic slides, the entire ecosystem hollows out. So I'm not buying most mall landlords, but that didn't stop me from investing in Tanger Factory Outlet Centers (NYSE:SKT).
Discounting the discounter
Tanger Factory Outlet Centers owns or has an interest in 39 upscale outlet shopping centers. Its empire spans 2,800 stores, divided among 510 different brand-name companies that turn to Tanger's malls to house their clearance shops. It attracts more than 181 million visitors annually across it properties, even if that isn't the norm these days.
Like most of the physical retail world, Tanger shut down its shopping centers in mid-March. Its cost-cutting moves included deferring rent for tenants during the shutdown as well as suspending its quarterly distributions after 27 consecutive years of increasing payouts.
The shares took a beating through the first few months of 2020, but now the stock -- and its operations -- are getting back into a good groove. Tanger put out an encouraging financial update after Monday's market close. Its largely outdoor shopping centers have opened for the most part. The stores that have reopened account for 72% of total occupied stores and 69% of pre-pandemic annualized base rent.
The encouraging news is that shoppers are hungry for bargains. Weekly traffic is now more than 85% of prior year levels. Centers that have been open longer -- at least a month -- are seeing traffic exceeding 90% of year-ago levels, with the percentage of total occupied stores approaching 90%.
There's no word on when the distributions will come back. If Tanger could return to where it was before the COVID-19 crisis, the quarterly payouts translate to 18.6% based on Monday's close. Tanger has shed nearly half of its value in 2020, but the stock has soared 90% since bottoming out in early April.
Tanger is doing a lot of things right these days. Late last week, it completed amendments to debt agreements for its credit lines and bank-term loans that will afford it greater flexibility in the future. On Monday, it repaid $100 million in outstanding balances under its lines of credit, leaving it with $433 million in cash on hand.
Things aren't all rosy at Tanger, though. Compass Point analyst Floris van Dijkum initiated coverage of the discount retail specialist with a sell rating, concerned about the inevitable bankruptcies among its tenants. That's a fair shot. Tanger isn't going to be back to the 97% occupancy rate it was operating at in the near future, and there are some default rent payments it will never see. However, outlet centers are a recession-resistant beacon for deal-seeking shoppers and retailers looking to move what isn't selling at their full-priced stores. The stores left behind by bankrupted concepts will be filled by more vibrant battle-tested chains. The quarterly distribution checks will start to go out again, even if they will initially be lower than before.
Tanger will get better over time, and for now it's the only retail landlord that I care to have in my portfolio.