Tanger Factory Outlet Centers (NYSE: SKT) is the only pure-play outlet shopping real estate investment trust, or REIT. With the stock still down by about 60% in 2020, the company has dramatically underperformed the S&P 500 and the real estate sector as a whole.
While there are certainly some good reasons for the poor performance, the recent news has been encouraging. So is now a good time for patient long-term investors to add Tanger to their portfolios, or is this a company that should be avoided? Let's dive in.
Tanger's business has taken a beating
As you might imagine, the COVID-19 pandemic has been rough on Tanger's business. While its 38 outlet malls technically remained operational, virtually all tenants were forced to close their stores. Tanger allowed its tenants to defer their April and May rent and even afterward had a rather low rent collection rate, collecting just 72% of billed July rent as of the second-quarter earnings release.
To make matters worse, the coronavirus-triggered wave of retail bankruptcies hasn't spared Tanger. In fact, the company's second-largest tenant, Ascena Retail Group (NASDAQ: ASNA), the parent company of Ann Taylor, filed for bankruptcy in July. J. Crew is another major tenant that has recently filed for bankruptcy, and several of Tanger's smaller tenants have as well.
In all, bankrupt retailers represent 11% of Tanger's monthly rental income. And while Tanger could end up getting some financial relief (such as lease termination fees), the reality is that this will lead to significant vacancies and lost income, and Tanger will need to find new tenants to get rental income back to where it was.
Because of the uncertainty surrounding the pandemic, Tanger suspended its quarterly dividend to preserve liquidity after a 26-year streak of consecutive increases and hasn't announced when it might be reinstated.
The recent numbers are encouraging
In mid-September, Tanger provided a business update to shareholders, and the numbers look quite strong, all things considered.
For one thing, Tanger collected 85% of its billed rent in August, an improvement over the 81% rate in July. Recall that bankruptcies account for about 11% of Tanger's rent, so this means that nearly all its tenants not in bankruptcy are now paying.
What's more, Tanger has now collected 40% of its second-quarter rent. Remember that Tanger allowed essentially all of its tenants to defer April and May rent, so it appears those payments are starting to trickle in. Shopper traffic is now back to 89% of where it was a year ago, so while things aren't quite back to normal yet for the retail tenants, it's pretty close.
Perhaps the most encouraging sign is that not only has Tanger repaid all of its outstanding credit line borrowings, it is now generating positive cash flow. With the worst of the pandemic's effects likely in the rearview mirror at this point, Tanger can now use its liquidity to reinvest in and grow its business and hopefully to reinstate a dividend sooner rather than later. On the day of the business update, Tanger's stock price jumped by more than 10%, and it's not hard to understand why.
The bottom line
In full disclosure, I own shares of Tanger in my stock portfolio, and I've added to my position since the COVID-19 pandemic began. So that alone should tell you whether I think the stock might be worth buying.
That said, Tanger is not an appropriate stock for investors who don't have a high level of risk tolerance or who don't have several years to wait for Tanger's business turnaround to unfold. There's a lot that needs to go right before Tanger's revenue (and dividend) can return to pre-pandemic levels. But there's quite a bit of opportunity in the outlet industry, especially if it's able to successfully adapt to the changing retail world.
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