There are some clear risk factors Tanger Factory Outlet Centers (NYSE:SKT) investors need to be aware of. E-commerce is an obvious threat to any physical retail business that sells things people don't need, and many of Tanger's tenants fit into this category. E-commerce has steadily climbed from less than 1% of U.S. retail sales in 2000 to nearly 15% today, and this isn't likely to reverse course anytime soon.
In addition, the COVID-19 pandemic has led to several major tenants going bankrupt and closing stores. Ascena Brands (parent of Loft), J.Crew, and Brooks Brothers are just a few reasons why Tanger's occupancy has declined from over 97% at the end of 2019 to less than 92% at the end of 2020.
Finally, unlike other mall REITs, Tanger remains mostly a pure retail play. While Tanger has discussed the need to incorporate non-retail elements into its properties, such as entertainment attractions, it hasn't done too much of that just yet. For example, mall REIT leader Simon Property Group (NYSE:SPG) has been actively adding entertainment venues, trendy restaurants, co-working spaces, apartments, and hotels to its properties to diversify its revenue stream and create "destinations" instead of just retail centers. For the time being, Tanger is mostly reliant on retail. Aside from coffee shops and snack-type food and beverage venues, there really isn't anything other than pure retail at many of Tanger's properties.
Why Tanger isn't as risky as you might think
Despite these risk factors, there are some reasons why Tanger isn't the ultra-risky retail play many investors assume it is:
- Strong financial position: Tanger ended 2020 with $84 million in cash and $600 million in available credit. And the company is quite profitable. There's absolutely no need to worry about Tanger running into serious financial trouble, even during a deep recession.
- Massive consumer demand: Tanger reported that in early 2021, customer traffic at its properties is virtually unchanged from year-ago levels before the pandemic. Consumers want to shop the outlets.
- Resilient property type: Former CEO Steven B. Tanger used to say that in good times consumers like a bargain and in tough times consumers need a bargain. In other words, outlets (like most discount-oriented retail) tend to hold up quite well during recessions.
- Industry growth potential: The outlet industry is still a relatively small part of the retail landscape, and recent customer traffic data shows it's in demand. By early 2021, Tanger's properties were seeing 99% of year-ago traffic levels despite the pandemic. As retail evolves, outlets could become a much larger part of the retail world.
- Well-covered dividend: With lots of cash and consistent profitability, Tanger felt comfortable reimplementing its dividend. And the current payout (a 4.9% yield) represents less than half of the company's 2021 FFO guidance, so it should be pretty secure.
- It's cheap: Speaking of Tanger's FFO guidance, the stock trades for just 9.6 times the midpoint of its forward core FFO, making it a very cheap stock. This is extremely low, especially for a consistently profitable REIT with a rock-solid balance sheet.
The Foolish bottom line
To be perfectly clear, I wouldn't call Tanger a low-risk stock by any definition of the term. Physical retail was struggling to adapt to the rapidly evolving world of e-commerce long before the COVID-19 pandemic started, and it will take a while for occupancy in Tanger's properties to return to pre-COVID levels.
However, there's a lot to like about Tanger as a long-term investment, especially at the current low valuation. While there are some unanswered questions, like how Tanger will fill its vacant space and create more of a "destination" feel to its properties, there is clear consumer demand for outlets, and Tanger could have a very bright future in a post-pandemic world.