Tanger Factory Outlet Centers (SKT +0.83%) is starting to see business improve, along with its mall real estate investment trust (REIT) peers. That's very good news for investors, noting that it just announced a dividend increase, putting it on the dividend growth path again. But there's another business trend here that investors need to monitor, and it's subtle. Here's what you need to know.
What exactly is Tanger?
The big saying in real estate is location, location, location, which is a very important thing. But part of the location equation is really property type. Think about putting an office complex in a small town that really needs more housing stock. In this situation, the office might sit half vacant even if it offers low lease rates. However, had an apartment complex been built, it would have been a better fit and likely seen high occupancy and strong rents. That's obviously a hypothetical example, but there are real-world implications here.
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For example, Tanger's only property type is outlet centers. It gets compared to the mall real estate investment trust peer group since it largely contains the outlet version of stores you might find in an enclosed mall. There are material benefits to the outlet focus. For example, the properties are largely outdoor structures and require far less maintenance than an indoor mall would. In addition, the spaces are uniform in nature, so putting in a new tenant is fairly easy and cost effective. When built, outlet centers are often outside of main metropolitan areas, so property and construction costs are lower than what would be spent to build closer to a main population center. And construction costs are lower because of the outdoor nature of the properties and the uniformity of the space.
This often leaves outlet centers as one of the lowest-cost options for retailers to sell their wares. It gives Tanger, and outlets in general, an advantage when it comes to occupancy since it could be easier for a retailer to turn a profit in an outlet center than it would be in a higher-cost enclosed mall. So, Tanger is kind of like a mall but not really. Which is where things start to get a little hazy given some recent moves by the REIT.
Changing things up
There's no question that Tanger has to change and adjust with the world around it. If it didn't, it wouldn't survive -- no company would. So it makes sense that management has been experimenting with different types of retailers. For example, it has brought in discount stores like Marshalls or Saks Fifth Avenue OFF 5TH. These stores basically compete with the typical store you'd find in an outlet center because they sell discounted products from major retailers. The big difference being that there are multiple brands housed in one location in a sort of scavenger hunt model. Tanger had to make sure that stores like these didn't cannibalize its retail tenants looking to sell directly to customers via a branded store. In they end they didn't and they made a good addition to the lessee list.
Management has also brought in Dollar Tree, a highly successful company experimenting in its own way with price points. At its core, though, Dollar Tree is a discount store of a different type that wouldn't compete with Tanger's regular tenants. However, it branches in a different direction, perhaps pulling down the quality of the overall shopping offering. Put a different way, Tanger is now offering dollar store fare at a mall that will also be selling things like high-end Coach bags. Malls are sensitive ecosystems and this particular move could backfire over the long term if it degrades the shopping experience even if it improves occupancy numbers.
In Tanger's second-quarter 2021 earnings conference call, meanwhile, CEO Stephen Yalof talked about including retailers like Dick's Sporting Goods and, more to the point, Nantucket Meat & Fish. Dick's is a name that draws traffic, but it's something you might find anchoring a power center. And Nantucket Meat & Fish is basically a grocery store. Yes, grocery stores help drive regular traffic to a property, but it is entirely outside the nature of what has traditionally been inside an outlet center. To be fair, enclosed malls are making similar experiments, but the building structure is vastly different that leads to a unique shopping experience almost regardless of the tenants. Basically, an enclosed mall will always be an enclosed mall until it is torn down.
However, there is already a large REIT segment dedicated to outdoor structures that contain a mix of grocery stores/anchor tenants and other retailers, like restaurants (another type of business increasingly finding its way in Tanger properties). They are called strip malls. Although Tanger has hardly turned into a strip mall REIT at this point, directionally the experiments it is making are potentially heading it down that path. And that would be a very different business than what Tanger is positioned as today. Investors need to keep this in the back of their minds as they watch the REIT shift and change over time.
No need to worry, yet
Tanger's comparison group still remains the enclosed mall sector. That's likely to be the case for some time to come, and it may never change. However, investors need to be aware that it is adding retail concepts that are far outside of the factory outlet space. And, if this trend goes far enough, it might be less mall REIT and more strip mall REIT. That's a change that would materially alter the equation for investors and needs to be monitored.
