Tanger Outlets Is Showing Resilience in Brick-and-Mortar Retail's New Normal

With the pandemic keeping shoppers away from brick-and-mortar retailers and especially malls, Tanger Factory Outlet Centers (SKT -0.30%) posted some surprising numbers in its most recent quarter. But even more interesting for investors, it's showing encouraging signs for the upcoming year. Is this a hidden gem in a beaten-down sector? On this Motley Fool Live episode, recorded on Feb. 18, Fool contributor Matt Frankel dives into the business of this popular outdoor outlet mall to see what's behind its resilient performance. 

Matt Frankel: The Brians, we haven't heard from Brian Feroldi yet, but I'd assume the two companies that they are talking about are firing on all cylinders lately. Am I correct on that?

Mine is not, but in a good way for patient long-term investors. I'm here to talk about Tanger Outlets. Ticker symbol is SKT if somebody wants to type that in. Before anybody asks, I don't know what the warrior mindset is. This is a co-working space and that just happens to be on the wall behind me.

So Tanger Outlets was obviously crushed by the pandemic. Their outlet centers were pretty much shut down, all of their occupants are pretty much non-essential businesses. I think almost 100 percent of their portfolio was shutdown. Even though they're open-air and anything essential could have stayed open, pretty much everything was shut down in March, April. Things were not looking good, the stock lost, I think 80 percent of its value at one point this year or in 2020. But we just heard fourth-quarter results from Tanger and they're actually pretty impressive when you consider what's going on in the world.

They collected 95 percent of their billed rent in the fourth-quarter, which for a retail real estate company is pretty impressive. What really impressed me is that they reported that customer traffic at their properties in the fourth quarter was at 90 percent of 2019 levels. They're just down 10 percent in the holiday shopping season. For a retail company in the midst of the pandemic at a time when the cases were spiking, that shows the resilience of Tanger's business. For one, it's outside pretty much, so it's very conducive to distancing more so than an indoor mall is. So a lot of people feel more comfortable with it.

They also reported that now in January, customer traffic has reached 99 percent of pre-pandemic levels, so it's essentially unchanged. That gives me a lot of confidence in the company. Their occupancy is certainly down a little bit. Occupancy was 97 percent at the end of 2019, it's just under 92 percent now.

A lot of Tanger's major tenants went bankrupt in 2020 because of the pandemic. Ascena [Retail Group, Inc.] brands was a big one. They're in the parent company of Loft. [Additionally] J.Crew, Brooks Brothers were big Tanger tenants. They left some holes in the portfolio that are going to need to be filled, Tanger sounds pretty confident.

The company is nicely profitable. Their FFO which is funds from operation and pretty much their real estate version of earnings, was 54 cents a share for the quarter. That's down from 59 cents a share in the fourth quarter of 2019, which for a retail REIT in 2020, losing five cents of earnings really is not that bad. Especially when you see what some of their peers are doing. That's a highly profitable REIT.

Tanger Outlets, their FFO was $1.58 for the full year, that means they trade for less than 10 times the earnings. They are a very profitable company. They've $84 million in cash, which is a lot. They're not a giant company. A $600 million uncapped credit line, pretty much all of their debt is at low fixed interest rates. Less than one percent of their debt is floating rate right now. Balance sheet is rock solid.

They just brought their dividend back before a lot of retail and mall operators have. It's about half of the pre-pandemic level, translates to about a five percent yield at the current price. That was something that really impressed investors when they got their earnings report. But what really impressed them, if you remember when the pandemic hit, pretty much every company we cover said, "We're not issuing guidance for the foreseeable future." I'm pretty sure Twilio did just that and I'm not sure about what Brian is covering. Most companies at least said for a quarter or two, "We're not going to issue any guidance because we don't know what's going on."

In retail, most companies still are not issuing guidance, but Tanger did, and the market was very happy with what they saw. I mentioned that for the full-year in 2020, they earned a $1.58 in funds from operations per share. Remember that the first quarter of 2020 was pretty normal. Pandemic didn't really cause things to shutdown until late March, especially when it comes to where most of Tanger's properties are located, which is the coastal areas in the Southeast and Southern US.

They're guiding for core FFO at the midpoint of a $1.52 going forward. Meaning that they're trading for less than 10 times forward earnings, not anything including pre-pandemic. I mentioned they're less than 10 times 2020 earnings, that includes a pretty normal first start to the year. So a full year going forward in our new normal, they're expecting a $1.52 per share in earnings.

They expect some additional bankruptcy related closures. Normally, when companies file for Chapter 11, they don't shutdown their portfolio right away. They close their lowest performing stores first, and then on down the line until they eventually restructure and emerge from bankruptcy.

That guidance does not include any additional acquisitions or any growth. Tanger hasn't grown in some time, but there are some growth opportunities that the company has considered. In all, this was a pretty impressive quarter for a company in the sector that's really been just left for dead in 2020. I don't know if the two Brian's are excited about any mall REITs, but most investors aren't and there is a reason for it.

It's because it was one of the most affected and Tanger has proved that its business, which really needs to be experienced in-person unlike a lot of other mall and discretionary retailers. You could choose not to go to the mall and pretty much buy everything you can find online. Tanger has their outlet, so it's more of a treasure hunt experience, which is really keeping the business a little more resilient than most retailers. So they're really showing the resiliency of their business.

Just a pretty impressive quarter and the stock is one of the few that are up today. I see a comment that says, it's a fire sale day, I do love a good sale. I do too, but you're not going to find one in Tanger today. Their business has not been firing on all cylinders like the companies the two Brian's are talking about, but it's certainly getting there.