Tanger Factory Outlet Centers (SKT -0.84%) has been one of my worst-performing stocks in recent years. I accumulated most of my shares throughout 2017, and I'm now sitting on an unrealized loss of about 75%.
Four things initially drew me to Tanger. First, outlet centers remained resilient during the retail apocalypse as traditional malls faltered. Second, Tanger is a landlord instead of a retailer, and its outlet occupancy rates remained high even as its tenants changed.
Third, Tanger paid a high dividend. It's a real estate investment trust (REIT) required to pay out most of its profits as dividends, and it raised its payout annually for over two decades. Lastly, Tanger's P/E ratio was much lower than the valuations of comparable companies like Simon Property Group (SPG -2.17%) and Brixmor Property Group (BRX -2.15%).
But throughout 2019, Tanger's same-center NOI (net operating income) declined due to tenant bankruptcies, store closures, and lease modifications, which suggested its outlet centers weren't impervious to the headwinds that hurt traditional malls. In the first half of 2020, the COVID-19 crisis shut down its outlets and doused any hopes for a quick recovery. Faced with looming net losses, Tanger suspended its dividend payments in May.
That disastrous series of events blew up my initial thesis on Tanger, and the stock has now dropped to its lowest point in nearly two decades. If you're in the same boat as me, you're likely wondering if it's smarter to sell now or wait for a post-pandemic bounce. Let's take a look into Tanger's potential performance over the next year to decide.
Down but not out
Tanger ended fiscal 2019 with an occupancy rate of 97% at its centers, marking the 38th straight year that percentage exceeded 95%. Its peers Simon and Brixmor -- which are both exposed to traditional malls -- ended the year with occupancy rates of 95.1% and 92.4%, respectively.
However, Tanger's occupancy rate slipped to 94.3% in the first quarter of 2020, and fell again to 93.8% in the second quarter, which bore the full impact of COVID-19 closures. Tanger expects renewal rates for leases expiring within the year to be below its historical average of about 80%, due to tenant bankruptcies.
Tanger allowed tenants to defer all their rent payments in March and April, and is gradually collecting those rents as its centers reopen. But that process will be bumpy: 95% of Tanger's occupied stores had reopened by the end of July, but it still doesn't expect to collect rent from 25% of its tenants in the second quarter, due to bankruptcy filings, "uncollectible" accounts, and "one-time concessions".
On the bright side, Tanger noted its rent collections in early August were improving, and that shopper traffic in the six weeks leading up to Aug. 6 had rebounded to approximately 85% of the prior year's levels -- even as its centers operated on reduced hours throughout the pandemic.
Tanger won't go bankrupt anytime soon
Back in May, Tanger declared it had enough liquidity to last for about two years without collecting any rent from its tenants.
It ended its second quarter with a total liquidity of $564 million, which includes its cash, cash equivalents, and untapped lines of credit, and it doesn't face any significant debt maturities until the end of 2023. The suspension of its dividend will also save roughly $35 million per quarter.
Tanger probably won't go bankrupt in the near future, but its near-term outlook remains cloudy. It didn't provide any guidance for the full year, but CFO James Williams warned that Tanger would remain "pressured" throughout the rest of 2020 and 2021 due to "potential store closures and rent modifications" during last quarter's conference call.
For now, analysts expect Tanger's revenue to decline 19% this year and for its earnings to dip into the red. But looking further ahead, they expect its revenue to dip less than 1% in fiscal 2021 as it returns to profitability.
What should investors keep an eye on?
Over the next few quarters, investors should see if Tanger's occupancy rates, rent renewal rates, and NOI stabilize. If Tanger becomes profitable again, it will be obligated to reinstate its dividend to retain its tax advantages as an REIT.
Back-to-school sales might attract shoppers, even as some areas stick with online learning programs, and a flood of cheap post-pandemic inventories could amplify that traffic into the holidays.
These tailwinds probably won't fully offset the bankruptcies of weaker retailers, but they could help Tanger resume its turnaround efforts -- which include attracting more off-price retailers, furniture retailers, and restaurants; hosting seasonal and social events; and convincing online-only brands to set up brick-and-mortar stores. Those efforts could prevent its outlet centers from suffering the same fate as traditional malls.
Based on these facts, I believe Tanger's stock will gradually recover over the next year. It probably won't regain all its losses from the past 12 months, but investors might see this retail survivor in a different light after the pandemic ends.