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 (NYSE:SKT) faring as a result of this less-severe situation?
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.
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.