Recessions can be rough for the retail industry as consumers pull back on spending and become more conscious of where their money goes. Tanger Outlets (SKT -1.70%), which operates 37 outlet centers in major tourist destinations and suburbs of growing cities, should be able to weather the storm by offering great deals to consumers and a low-cost, high-margin channel for retailers.

A strong recovery

Tanger was hit hard in the early days of the pandemic as stores were forced to close, but the real estate investment trust was able to battle through the period of depressed occupancy. Its portfolio of open-air outlet centers certainly helped, as did the company's policy to offer deferred rent payments for tenants in early 2020. Losing fewer tenants made Tanger's post-pandemic recovery less of an uphill battle.

Today, Tanger is mostly back to business as usual. The tenant base remains highly diversified, with the largest tenant accounting for just 6% of the annualized base rent. Occupancy has also recovered, reaching 96.5% in the first quarter of 2023. That's still slightly below pre-pandemic levels, but not by much.

The company's recent financial results have been solid. Revenue edged up slightly in the first quarter, and cost reductions helped boost the bottom line. Core funds from operations (FFO) came in at $0.46 per share in the first quarter, up from $0.45 in the prior-year period. The company also increased its core FFO guidance for the full year to range from $1.82 to $1.90.

Dividend growth is back

Tanger was forced to suspend its dividend in 2020 as it grappled with the impact of the pandemic. The dividend was restarted in early 2021 as the company's results began to improve, and Tanger has increased it four times since then. The most recently declared quarterly dividend of $0.245 per share works out to a dividend yield of about 5.2%.

One thing working in Tanger's favor is a strong balance sheet. Total debt, most of which is not secured by the company's properties, sat at about $1.4 billion at the end of the first quarter, and Tanger had $235 million in cash and short-term investments. Importantly, almost none of Tanger's debt matures before 2026. The effective interest rate is currently just 3.5%, and almost all the debt has fixed interest rates.

Room for growth

Beyond attracting more retailers and boosting occupancy, Tanger is working on various initiatives that could drive long-term growth. The company is adding more non-retail tenants, including restaurants, entertainment businesses, and digitally native concepts.

By attracting new visitors to Tanger's outlet centers and boosting the time they spend there, Tanger can make its centers even more attractive for retailers. The company is also looking to generate additional revenue through marketing partnerships and other non-rental activities.

Tanger won't be immune to a recession, but its value propositions for consumers and retail tenants are strong. Unfortunately, Tanger won't be able to avoid bankruptcies among retailers. With inflation pressuring consumers, retail failures could pick up over the next couple of years. The bankruptcy of Bed Bath & Beyond probably won't be the last time a significant retail chain goes belly up.

However, the diversification of Tanger's tenant base should mitigate the impact of future bankruptcies. As consumers seek bargains in the age of inflation, Tanger is in a great position to drive more traffic to its outlets, no matter the state of the economy.