Please ensure Javascript is enabled for purposes of website accessibility

Is the Worst Over for Tanger Factory Outlet Centers?

By Brent Nyitray, CFA – Sep 14, 2020 at 9:18AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Retail bankruptcies have hurt, but this mall REIT is cash-flow positive.

The COVID-19 crisis has wreaked havoc on retailers and the real estate investment trusts (REITs) that house them. The mall REITs were having issues even before COVID-19, with high debt levels and struggling tenants.

For the moment, it seems like the economic fallout from the coronavirus pandemic is improving, and the economy is at least not getting worse. How are some of the retail REITs like Tanger Factory Outlet Centers (SKT 0.57%) faring as a result of this less-severe situation? 

Picture of an outlet mall

Image source: Getty Images.

Tanger responded well to the COVID-19 pandemic

As the COVID-19 shelter-in-place orders began to take effect, Tanger's tenants closed. Despite this, most Tanger outlets remained operational, despite being temporarily closed. The company worked with its tenants to defer rent. It generally allowed them to defer April and May rent until January and February of 2021. The presumption is that after the upcoming holiday shopping season, the retailers will be flush with cash and able to pay back those deferred payments.

Tanger also took steps to preserve cash, including deferring capital expenditures, slowing down spending in general, and taking down its revolving lines of credit. Tanger also suspended its dividend and stock buybacks. 

Retail bankruptcies have been an ongoing headache

The retail sector has been struggling for years as online shopping has eaten into margins and foot traffic. The COVID-19 crisis caused (or at least accelerated) several retail bankruptcies. Year-to-date, a total of 14 retailers with space in Tanger outlets have filed for Chapter 11 bankruptcy protection that includes major restructurings with store closings or they have had to resort to full liquidation (Chapter 7 bankruptcy).

Tanger's second-largest tentant, Ascena Brands, parent of Ann Taylor stores, filed for Chapter 11 bankruptcy in July. Ascena has 96 stores in Tanger outlets, and accounts for about 4.7% of base rent for Tanger. Brooks Brothers is another tenant that declared Chapter 11 bankruptcy, which accounted for 23 stores and 1.4% of rental income. J. Crew is another retailer that filed for Chapter 11 bankruptcy and accounts for 1.4% of rent. G-III apparel announced plans to close all of its Wilson and Bass stores -- another 38 stores that account for 1.6% of rent. Finally, other smaller tenants have filed for bankruptcy protection, which accounts for 46 stores and 1.9% of rent.

Overall, those brands represent 11% of Tanger's monthly rents. Tanger expects to receive substantial lease termination fees, however, and may end up getting some of its rents owed back. 

Tanger has managed to navigate through the crisis

Tanger has now reopened essentially all of its 39 outlet center locations that were closed due to the COVID-19 lockdown, and traffic is running about 85% of last year's numbers. Cash flow was positive in July, and the company earned $0.10 per share in funds from operations (FFO) -- the equivalent of earnings for a REIT -- in the second quarter. The company paid down its revolving lines of credit, and currently has total liquidity of $564 million and no significant debt maturities for over a year.

While all bets are off if we see an uptick in COVID-19 cases in the fall, Tanger is a cash-flow positive business that should continue to improve. Don't forget that Tanger's outlet malls are generally outdoors, which makes them a little safer than enclosed shopping malls, based on the current understanding of how the virus spreads. During tough times, outlet malls should perform a bit better as well. 

The stock is beaten up 

Tanger stock has been beaten up this year, falling about 63% year-to-date. It has substantially underperformed the S&P 500 retail REIT index, which was already struggling. 

SKT Chart

SKT data by YCharts

At this stage of the game, the worst is indeed over for Tanger. While this upcoming year could mean some big changes in its tenant mix, Tanger has plenty of liquidity to avoid financial distress. The company suspended its quarterly dividend, which was just under $0.36 a share. CEO Steven Tanger said on the second-quarter earnings conference call that it intends to remain compliant with the REIT taxable income requirements, and the Board of Directors will evaluate the dividend on a quarterly basis. While a return to the pre-COVID dividend is unrealistic (it would work out to a 26% dividend yield), a return to dividends will probably boost the stock somewhat.

It is hard to get too excited for the retail REITs until the economy improves substantially, but the worst of the downturn seems to be over for Tanger. 

Brent Nyitray, CFA has no position in any of the stocks mentioned. The Motley Fool recommends Tanger Factory Outlet Centers. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Tanger Factory Outlet Centers Stock Quote
Tanger Factory Outlet Centers
SKT
$19.52 (0.57%) $0.11

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
356%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.