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Let's not mince words: 2020 was a terrible year for retail landlords in the mall sector. That said, the strongest names in the space appear to have managed through the pandemic headwinds, including Tanger Factory Outlet Centers (NYSE: SKT). But is that enough to make this mall owner a buy? Maybe, maybe not. Here's what you need to know to make a final call.
A year to forget
When the coronavirus pandemic led to economic shutdowns, Tanger reacted quickly. Although its largely outdoor shopping centers didn't actually close, the tenants that occupy them did. The real estate investment trust (REIT) suspended its dividend and offered rent deferrals to all of its tenants. It was a bold move to lend a helping hand to its direct customers at a time when their businesses were hurting. Tanger also tapped a credit line to ensure it had enough cash to keep operating since it knew rent collections would fall dramatically.
Roughly one year after those widespread shutdowns, Tanger is starting to get back to business. The dividend has been reinstated, though at only half the previous level, and foot traffic at its malls is back up to pre-pandemic levels. This is great news, of course, but it speaks to the depths of the hit during what amounts to a year lost to the coronavirus. Meanwhile, the stock is now above where it was at the start of 2020, before the pandemic-led downturn. So a full recovery has basically been priced in.
More work to be done
That's an issue since the pandemic is still with us. Moreover, the damage done to the retail sector is material, given that many stores ended up in bankruptcy court. Some have come out as smaller entities, while others simply closed for good. All in, Tanger ended 2020 with occupancy of roughly 92%, the lowest level in its history. So while the stock price may be back to pre-pandemic levels, the business surely is not, even though it has seen notable improvement.
Malls are complex ecosystems in which each tenant interacts with the others. It will take time to find appropriate retailers to plug the holes left by the pandemic. Tanger's outlet centers have a leg up on enclosed malls in some regards, because they are outdoors (viewed as safer for consumers) and the space is uniform in nature (which makes it easier and less costly to update). But it still takes time to find appropriate stores to add, and the discount nature of outlet centers limits the pool from which Tanger can select. It is likely to be a multi-year process to get occupancy back up toward historical levels in the mid to high 90% area.
Meanwhile, the REIT is still working to get its finances into shape. For example, it just recently sold 6.9 million shares, with plans to use the cash to pay down debt. With the stock price above pre-coronavirus levels, the timing of the stock sale makes sense. However, the new shares will be dilutive and reduce 2021 funds from operations (FFO) -- which is a REIT metric that is similar to earnings for industrial companies -- by a huge $0.18 per share. In other words, there are still lingering issues here, not to mention that the dividend is only half what it was before it was suspended.
In fairness, Tanger has done an impressive job of navigating what has been an incredibly difficult period for mall landlords. However, the current stock price seems to be suggesting that the headwinds have passed, when they clearly have not. With more work to be done before business is back to "normal," investors need to think carefully before buying Tanger. A lot of good news has been priced in at this point, even though there's likely to be several years of work ahead before Tanger's business is operating at historical levels.
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