Physical retail was struggling long before the COVID-19 pandemic spread across the world. This is why when the pandemic hit, many retail real estate investment trusts (REITs) were trading like bankruptcy was imminent. However, we recently got a glimpse at the latest results from mall REIT Simon Property Group (NYSE:SPG) and outlet shopping REIT Tanger Factory Outlet Centers (NYSE:SKT).
In this Fool Live video clip, recorded on Nov. 8, Fool.com contributor Matt Frankel and Industry Focus host Jason Moser discuss the results and why they're such a positive surprise for investors.
Jason Moser: Simon Property Group and Tanger Factory Outlet Centers both reported earnings last week. I tell you, we're talking about how Square got a lukewarm reception from the market. These two, I'll tell you, the market was picking up, but they were putting down. Tanger shares up 27% last week, Simon up 16% for the week. Let's start with Tanger as we reopen, I think these are two companies that you really like. Talk a little bit about Tanger and Simon together, however you want to break it down, but what's stood out to you in these quarters? Why is the market so enthusiastic?
Matt Frankel: You remember the "retail isn't dead" basket we did about a year ago?
Moser: I do.
Frankel: These were two companies that were in it. I loaded up on these companies during the pandemic. Tanger was trading about a fourth of what it is now. Everyone thought these companies we're going to go bankrupt. If only someone had been saying they were not only going to survive but thrive, this is going to accelerate their adaptation to the new digital economy in a good way. I was grading year-to-year when I was reading these earnings reports, I got to tell you.
Moser: Someone was out there beating the drum for these things and I can't remember his name.
Frankel: I'm going to do an update on the "retail isn't dead" basket because the numbers, they might give your "war on cash" basket a run for their money right now. Both of these were fantastic. Tanger was the winner, in my opinion. Simon's already had a really strong business, they didn't even completely eliminate their dividend during the pandemic like all the other companies including Tanger did.
Frankel: The big story, I'll start with Simon because that'll be a quick one. Occupancy is the big story with both of these. Simon's occupancy went from 91.8% in the second quarter, it increased by a full percentage point to 92.8% now. Even before the pandemic, retailers were losing tenants. The retail bankruptcy started way before COVID ever hit.
Moser: Oh, yeah.
Frankel: For a retail REIT to be trending in that other direction is something investors have been waiting for, for five years now. Net operating income from Simon's domestic properties is up 25% year over year. They're really getting past the pandemic even after acquiring one of their rivals, Taubman Centers earlier this year. Simon has $8 billion of liquidity, including over $1 billion of cash left to continue to innovate its properties. I'm very optimistic about they've raised their dividend in the past few quarters in a row. Their dividend is now 27% higher than it was this time last year. They did a 10% sequential dividend increase after raising it in the third quarter already. They raised their full-year guidance.
Their numbers were just excellent. Tanger was another story altogether, they boosted their occupancy even better than Simon. Tanger's properties are 94.3% full. That's 150-basis-points greater than Simon, which is the best mall REIT in the world. Beating them in occupancy rent spreads were up 240 basis points, meaning when they're releasing these properties, they're getting more money now. Their tenants said here's the key statistic for Tanger's earnings report. Tanger's tenant sales are at an all-time high on a square footage basis. Thirteen percent higher than pre-pandemic levels for a retail REIT. Everyone's said no one is going to go to outlets anymore. You can't social distance at outlet stores and they're all crowded and no one wants to do that. Yes, they do.
Moser: Well, we've talked about this a lot. I mean, you see on the headlines with companies that are keeping their offices closed, but you can look around, there are more that are opening up and you look all, I mean, anywhere you look with these NFL games, were ready to get out and do stuff and travel. We're seeing it. I mean, I'm sure that you are seeing it there in Vegas. I mean, people are letting their guard down and starting to go back out and that's certainly is reflecting in the traffic a lot of these stores are getting as well.
Frankel: I mean, I think that per square foot sales number is at a record. That has big implications for the future growth of the outlet industry. Tanger didn't want to open any more properties when occupancy was falling before the pandemic. Now that occupancy is rising and its tenants are happy, it has existing relationships with these tenants. So it can go to Gap (NYSE:GPS), which is its biggest tenant and say your sales are killing it at all these properties you have stores at now, we're about to open a new one in Nashville, which is where they're planning the next one. Are you in? All their tenants are going to say yes, it's a great catalyst for growth in the industry, which the outlet industry is a very small part of retail still. I'm very excited for Tanger. It's about quadrupled since the pandemic lows and I don't plan on selling any of it.