Last year was a terrible one for the retail sector, at least when it comes to brick-and-mortar stores. Right in the center of the storm were mall landlords like Tanger Factory Outlet Centers (SKT +0.47%). That said, you can't lump all of the mall real estate investment trusts (REITs) into one pile and be done with it. Some, like Tanger, are just different, a fact that was on full display in 2020. Here are some things to consider before you decide if this REIT is a buy or not.
It was, and still is, pretty bad
Before the coronavirus pandemic, mall real estate investment trusts were already dealing with the so-called "retail apocalypse." While this "apocalypse" was usually blamed on the increasing use of online shopping, there was more to it. Retailers that were falling behind consumer trends and that had leveraged up their balance sheets just couldn't compete and were closing stores or, worse, falling by the wayside.
Image source: Getty Images.
The coronavirus pandemic simply sped up the trend, as economic shutdowns and social distancing drastically reduced foot traffic in physical stores. Companies that hadn't built up their online footprint or that had excessive leverage fell into bankruptcy, including iconic names like J.C. Penney and Brooks Brothers. In the early days of the pandemic, mall landlords were having notable problems collecting the rents they were owed.
In the end, some mall REITs couldn't muddle through. CBL & Associates and Penn REIT both went bankrupt in 2020. And Washington Prime looks like it is on the ropes as 2021 gets under way, recently withholding an interest payment as it looks to renegotiate its debts. And yet Tanger Factory Outlet Centers is holding up pretty well, relatively speaking.
Getting back to normal
There's a good reason for that, given that the 37 outlet centers Tanger owns are largely outdoor structures. That allows for ample airflow, which is a key factor in reducing the spread of the coronavirus. So, unlike a REIT that owns largely enclosed malls, it doesn't have to convince customers that it is safe to visit. In fact, the company's foot traffic was at 90% of previous-year levels in the fourth quarter. That's pretty impressive, given that COVID-19 cases were on the rise at the end of 2020. Clearly, consumers want to shop, and they believe that visiting Tanger's outdoor centers is a good way to do it.
Tanger suspended its dividend early on in the pandemic, which had some investors worried. That's totally fair, but it was a realistically cautious move. Moreover, as economic shutdowns were announced, Tanger made the strategic decision to offer all of its tenants rent abatements. Basically, Tanger was lending a hand to tenants whose stores were shut. While rent collection fell sharply, as you'd expect given the rent abatement, it collected 95% of its rents in the fourth quarter. Being a good partner to its tenants appears to have paid off. And it reinstated its dividend, albeit at a lower level, in January.
Meanwhile, the REIT has materially improved its balance sheet. In early 2020, Tanger chose to draw down its entire revolving credit facility to ensure it had ample cash on hand. But it has since repaid that facility, leaving it with $84 million of cash and the entire $600 million credit facility available if it needs it as it heads into 2021. Leverage-wise, its financial debt-to-equity ratio is among the best in the industry, second only to industry bellwether Simon Property Group. While leverage has driven other mall REITs into bankruptcy court, that just doesn't seem as likely here.
SKT Financial Debt to Equity (Quarterly) data by YCharts
The reinstated dividend meanwhile, is only about 50% of Tanger's projected 2021 adjusted funds from operations (FFO), which is a REIT metric that is similar to earnings for an industrial company. So there's even some room for adversity before investors need to worry about the REIT's dividend-paying ability. And while the 4.4% yield isn't exactly generous, it is well more than you would get from an S&P 500 index fund.
Buy it, right?
So should investors back up the truck and load in some Tanger shares? Well, that depends. Conservative investors should probably tread with caution, given that the mall REIT sector is still muddling through hard times. And, because of the nature of the sector, the industry recovery will be slow (it takes time to re-tenant vacant space).
However, more aggressive investors willing to ride out the headwinds here might want to take a closer look. Just go in knowing that Tanger is not for the faint of heart and, despite all of its positive attributes, negative industry headlines could still create some volatility in its shares. And yet, when you step back from the news flow, it appears that the future is really starting to look a whole lot brighter than it did just a few short months ago.
