In a recent article, Seeking Alpha contributor Julian Lin wrote:
“My conclusion is that Tanger is no SWAN, and will not be a core position in my portfolio.”
He added that “the problem is that in the absence of a “moat” supporting the results, I have a hard time convincing myself that the good results will continue into the future.”
As you may know, Julian and I are on opposite sides of the Omega Healthcare (OHI) trade as he recently wrote an article titled, Omega Healthcare Is No SWAN, and I countered with this article, Omega Is A SWAN, The Proof Is In The Pudding.
It seems that Julian and I are now in disagreement on Tanger Factory Outlet (SKT) as well; in his article, he expressed his belief that Tanger is not a SWAN (stands for sleep well at night) and of course, as the title to my article suggests, Tanger Is My Top SWAN For 2018.
Let me be clear, I am not attacking Julian for his opinions and it’s quite clear that market sentiment is in agreement, as Tanger shares have plunged in 2017. To be honest, I relish a good debate as it’s useful to not only the readers but also the writers because it forces transparency and objectivity.
It seems that the key difference that Julian and I disagree on is whether or not Tanger enjoys an enduring economic moat. He suggests that “[Tanger’s] current stellar portfolio performance may possibly suddenly see itself deteriorate in the next 5 years”, and I believe that Tanger’s moat is wider in that the company is well-positioned to protect itself from competitors, just as physical moats protect castles from enemies.
Tanger Is The Only ‘Pure Play’ Outlet Center REIT
Tanger Factory Outlet is the only publicly-traded REIT specializing solely in the development, leasing, marketing and operations of outlet centers in the United States and Canada. Since pioneering the dynamic outlet industry in 1981, Tanger remains an industry leader that strives to provide superior experience to consumers, retail-partners and shareholders.
Formats like off-price stores, department store clearance racks, and online shopping all fall short on at least one of these three key ingredients that make outlet shopping so appealing to the consumer. Shoppers visit Tanger locations more than 188 million times each year where they get a great deal every day with 80 to 90 brand-name and designer stores to choose from, each featuring a full assortment of colors and sizes.
The outlet industry is an operating business, and marketing outlets to consumers is a crucial skill for success. Tanger has honed this skill over many years and has developed a reputation in the retailer community for being a marketing machine.
Tanger’s loyal tenants know that they can depend on the company to help drive traffic to centers by actively engaging the consumer through all forms of media channels and providing incentives through the loyalty program and Tanger coupons to maximize the value of their purchases during their visit. They also depend on Tanger to keep the tenant mix fresh and dynamic, to maintain an upscale environment and provide excellent customer service.
As noted above, Tanger is not a traditional Mall REIT; instead, the North Carolina-based company owns 44 outlet centers in the U.S. (22 states) and Canada.
In June 1993, Tanger became the first publicly traded outlet company when it was listed on the New York Stock Exchange, shortly after Steven B. Tanger (current Chief Executive Officer as of 2009) joined forces with his father Stanley in 1986 as the company’s fourth employee. Under their leadership, the company prospered and grew to 13 outlet centers by 1992.
In 1993, Tanger led the way again by becoming the first outlet center developer to be listed on the New York Stock Exchange as a publicly traded REIT.
When Stanley Tanger set out to build his first outlet property, he knew that stores could provide benefits as a tool for price discrimination. Even as the Outlet Center has evolved, the stores allow the retailer to serve lower-value consumers without lowering prices faced by its regular store clientele.
Prices are low in outlet stores, but not low enough to attract consumers who value quality and convenience the most. Outlet stores may actually enable the retailer to improve its regular store products, which typically form the basis of a fashion brand’s image.
As Donald K. Ngwe, Assistant Professor of Business Administration at Harvard Business School, explains:
“Outlet stores offer attractive prices at locations far from central shopping districts. They form a large and growing component of many firms’ retailing strategies, particularly in the fashion industry.”
Ngwe found that the rate of new product introduction in regular stores would fall by 16% if outlet stores were closed down while variable profits would decline by 23%. “These results imply that the existence of outlet stores may enable firms to improve quality in their regular channels, thus counteracting brand dilution effects.”
Tanger Is Not A Mall REIT, No Department Stores In The Portfolio
In the previously-referenced article, Julian Lin compares Tanger to traditional Mall REITs. While it’s easy to confuse Tanger’s business model with malls (since they enjoy many common tenants), it’s important to recognize that Tanger does not have any traditional department stores in the portfolio.
Uncommon to malls that are costly to build (upwards of $100 million), and with significantly higher operating costs, Tanger set out to create a differentiated retail model that could provide both scale and low-price brand recognition aimed to meet the demands of the bargain-hunting consumer.
Tanger is the ONLY “pure-play” outlet center REIT, and as you can see below, there are NO department stores in the portfolio:
I view Tanger’s outlet center model as more of a hybrid between a shopping center and self-storage property. Although outlet stores do lease space to many conventional mall tenants, I am not keen with the comparison to malls. Outlet properties are “plain vanilla” by design so this means that when a tenant vacates a space, it is a matter of ripping out carpet and adding new paint. In other words, it’s a virtual zero vacancy model…
Warren Buffett (Fortune 1999) once said, “The key to investing is… determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them ate the ones that deliver rewards to investors.”
In order to determine the competitive advantage – or economic moat – for Tanger, I decided to take a closer look at the company’s top 10 tenants.
The Gap, Inc. (GPS)
Gap is a large international retailer operating in 90 countries with nearly 4,000 total locations. Again, they have definitely been hit by the recent decline in brick-and-mortar sales, no surprise here. However, they have not been hit as hard as most.
Over the past 5 years, Gap has returned around 35%, which is less than the S&P but is still positive. They were downgraded from a BBB credit rating to BB+ in 2016, but this is still higher than the average rating of a retail corporation.
Gap is Tanger’s top tenant with 91 stores totaling 7.6% of the total rental space. Gap has strong brand recognition in their Old Navy line and will likely continue to post consistent earnings in their core business. They will need to trim some brands but will likely keep their major brands in brick-and-mortar form, a positive for Tanger.
Ascena Retail Group Inc. (ASNA)
Ascena Retail Group is a publicly traded company that operates 8 major brand name retail vendors such as Ann Taylor. They have ~4,800 stores in the US, Canada, and Puerto Rico on top of a large online shopping presence.
Ascena’s stock price has depreciated over 60% YTD and they posted operating losses of over $1 billion so far this year. Ascena has the lowest credit rating of any retailer in Tanger’s top 10 tenants and was recently downgraded to a B+ rating by S&P.
Ascena leases 144 of Tanger’s spaces, accounting for over 850,000 square feet and 6.9% of Tanger’s total occupancy. According to Courage & Conviction Investing, Aacena “has liquidity in the form of cash and access to a revolver, but the debt burden is a major overhang to ASNA’s stock price and the high interest expense dings the income statement.”
As I review Ascena’s brands, it’s obvious to me that the retail conglomerate was growing way too fast and the company has too many stores. The net debt of about $1.25 billion is elevated, but there is ample liquidity ($844 million) in the short term. It appears that Asvena will be pruning its portfolio after the holidays, but I see no evidence to suggest that Tanger will see a dramatic decline in occupancy as a result of Ascena.
Nike Inc. (NKE)
Nike Inc. is the largest seller of athletic footwear and apparel in the world. The company has enjoyed strong growth over the past five years. They maintain a dominant share of the global athletic footwear and apparel market which drives most of their growth. Their unique position has allowed them to capitalize on both brick-and-mortar sales and online sales. S&P rates Nike at a AA-, which is a reflection of their stability.
Nike Inc. is a very strong tenant of Tanger, they occupy 3.6% of leased space with 43 active leases equaling 452,537 square feet. The company has a very large U.S. footprint, and enjoys the space that Tanger offers to continue to dominate the U.S. athletic footwear and apparel market. The partnership of Nike and Tanger is mutually beneficial, it provides Tanger with a flagship tenant, and NKE with a well-recognized national retail destination.
PVH Corp. (PVH)
PVH Corp. is one of the largest apparel companies in the world, they have over 40,000 associates operating in over 40 countries around the globe. They own prominent brands such as Calvin Klein, Tommy Hilfiger, Van Heusen, Izod, Arrow, and several others.
PVH Corp., like many other apparel companies with a large retail footprint, began to struggle in 2013 and continued the turbulence through 2015. This struggle turned around at Q1-16 and the momentum has only gained into 2017. PVH Corp. has seen very strong earnings growth of 32.3% (yoy). Strong sales and revenue growth across PVH Corp. brands has provided the environment for bit of a rebound from the stagnation on the past five years.
PVH Corp. occupies 399,608 square feet of Tanger’s retail space, which is about 3.2% of Tanger’s total space and is represented in 65 active leases. The recent growth of PVH Corp. is indicative of a strong relationship with Tanger.
Ralph Lauren Corp. (RL)
Ralph Lauren Corp. operates in wholesale, retail, and licensing. Their wholesale segment represents approximately 46% of fiscal year 2015 net revenues. These sales were generated primarily through major department stores and specialty stores around the world.
Their Retail business represents approximately 52% of fiscal year 2015 net revenues. Sales were driven through integrated retail channels, which includes retail stores, concession-based shop-within-shops, and e-commerce operations. Licensing represents approximately 2% of fiscal year 2015 net revenues. Approximately 37% of fiscal year 2015 net revenues were earned outside of the U.S. Ralph Lauren Corp. is rated A- by S&P.
Ralph Lauren Corp. occupies 365,246 square feet of Tanger space, or 2.9% of total space. It currently has 37 active leases. With retail being 52% of sales in fiscal year 2015, Ralph Lauren is heavily invested in brick and mortar.
V.F. Corp. (NYSE:VFC)
VFC claims to be “diversified across brands, product categories, channels of distribution, geographies and consumer demographics.” They pride themselves on owning a broad portfolio of brands which compete in a variety of market segments, including outerwear, footwear, denim, backpack, luggage, accessory, sportswear, occupational and performance apparel categories.
Their largest and most prominent brands which compete in these segments are Vans, The North Face, Timberland, Wrangler, Lee, Majestic, Nautica and Kipling. The company has a well-diversified brand mix.
V.F. Corp. currently occupies 353,162 square feet of retail in Tanger, or 2.9% of total space, this translates into 42 active leases between V.F. and Tanger. The brands that V.F. owns are well diversified, and also well recognized. Tanger is able to capture a large audience of customers through the diverse offerings of V.F.
H&M Hennes & Mauritz (OTCPK:HNNMY)
Hennes & Mauritz AB was founded in Sweden in 1947 and is quoted on Nasdaq Stockholm. H&M’s business idea is to offer fashion and quality at the best price in a sustainable way. In addition to H&M, the group includes the brands COS, Monki, Weekday, Cheap Monday, & Other Stories and H&M Home as well as ARKET. The H&M group has 41 online markets and more than 4,500 stores in 68 markets, including franchise markets. In 2016, sales including VAT were SEK 223 billion.
Tanger has 17 H&M locations in the portfolio that represents 2.8% of total average base rent. These locations are comprised of 357,154 square feet and H&M is Tanger’s #7 top tenant.
G-III Apparel Group (NASDAQ:GIII)
G-III is a luxury apparel conglomerate that deals in many different brands, too many to name. Here’s a list found on the company’s website:
G-III seemed to have a strong growth strategy until major turmoil in the last year. Their share price has taken a 50% downturn since 2016. The firm’s ROE was at around 13% in 2016 and has dropped to 5% this year. Their expenses are skyrocketing compared to a small increase in sales.
G-III rents out 60 of Tanger’s NNN spaces accounting for 2.3% of total square footage.
Carter’s Inc. (CRI)
Carter’s is the largest retailer of apparel for babies and toddlers in the US and Canada. Carter’s is a bright ray of sunshine in the dark world of the retail sector, performing exceptionally well over the past five years.
They have been improving their margins over the past three years and have increased earnings per share from $3.93 to $5.14. They have performed so well that they have actually outperformed the S&P 500 since 2012. They have a BB+ credit rating from S&P and have maintained that rating since 2010.
Carter’s leases 60 of Tanger’s NNN stores and accounts for 2.1% of its total occupancy. They have a very strong position in their market with high product quality and great brand recognition.
Under Armour, Inc. (UA)
Under Armour’s revenues are generated primarily from product wholesales to national, regional, independent and specialty retailers. They also generate net revenue from product sales through their direct to consumer sales channel. The large majority of products are sold in North America. Internationally, their net revenues are generated from wholesale sales to retailers and distributors, with the addition of direct to consumer sales and licensing.
They plan to continue to grow their business over the long term through increased sales of apparel, footwear and accessories, expansion of wholesale distribution, growth in direct to consumer sales channel and expansion in international markets. Almost all products are manufactured by unaffiliated primary manufacturers operating in 18 countries outside of the United States. Under Armour is rated BB+ by S&P.
Under Armour occupies 257,396 square feet of retail space at Tanger, or about 2% of total square footage. They currently have 33 active leases. Under Armour, Inc. has a large national footprint through Tanger.
A Model of Repeatability
As I said above, Tanger is unique to the REIT sector, as the company is the only “pure play” outlet sector REIT. Most all analysts (including me) use Mall REITs to compare to Tanger’s valuation metrics…
Julian Lin’s short thesis for Tanger was centered on the following chart – Tanger sales per square foot trends over the past several years:
As you can see, Tanger has seen a decline in tenant sales per square foot since 2015; however, I think it would be useful to provide a snapshot of the company’s historical tenant sales data going back to when Tanger first began reporting (2002). You can see that sales slipped for two quarters in late 2002, then again in the second quarter of 2008 before rebounding to just over the Q1-08 level by Q2-10.
Julian is overlooking an inherent difference between outlets and malls, because outlets sell product at a discount of 30%-70% off full-price retail, Tanger’s sales per square foot metric should be inherently lower.
Comparing Tanger to Simon Property (SPG) or CBL & Associates Properties (CBL) CBL is not an apples to apples comparison. On a relative basis, high-quality mall REITs currently have easier sales comps than Tanger, since their prior period sales were down due to the negative impact of reduced international tourism due to the strong dollar. Now take a look at Tanger’s sales since the end of the last recession:
I think it’s important to look at Tanger’s sales in the context of the outlet sector and not by comparison of the traditional Mall REITs. When you view Tanger’s business model over a longer time frame, you can see that the value of repeatability at work. Sales per square foot is an important metric to consider, but the reality is that Tanger is generating very reliable cash flow and the moat is getting wider not smaller.
Tanger breaks down its centers based on average sales per square foot:
As you can see, approximately 88% of the centers have sales of $408 or higher (based on NOI). As I review the list of centers (below), you can see that the lower productivity centers ($391 SPSF or below) are older and two canabalize other centers (Hilton Head and Myrtle Beach). I have visited the 5 centers (in pink below) and it’s clear to see that Tanger owns these because of their defensive attributes (blocking out competitors).
Also, it has been Tanger’s objective to include expanding and enhanced food offerings in order to extend shopper stay, and adding a variety of home product offerings as a convenience to the shopper in order to earn a greater number of overall shopping trips.
While food can be a challenging category in the outlet channel (due to the concentration of shopper traffic on the weekends), Tanger signed 44 new food leases during 2016, 19 of which were concepts new to the portfolio. Tanger centers now have seated dining options like Texas Roadhouse and Metro Diner, fast casual options like Chipotle, Zoe’s Kitchen, Rise Pies, and Scholtzky’s Deli, as well as grazing food options like Jimmy John’s, Five Guys, Dunkin’ Donuts, and Krispy Kreme.
Tanger has also signed leases with new home tenants, including Restoration Hardware, Westpoint Home, and Kirklands.
Major re-merchandising efforts at 5 Tanger Outlet Centers are expected to be completed by the end of 2017. The company projects a yield of approximately 8% on the $20.6 million planned capital investment for these projects.
Enhancing the tenant mix has historically increased shopper traffic, driven demand from additional tenants, increased rent spreads on future renewals and increased overall outlet center productivity.
Also, to-date, Tanger has executed 8 leases to re-tenant approximately 150,000 square feet in these centers with desirable high-volume retailers. These new stores required the consolidation of 24 storefronts with an average size of 6,200 square feet to create new storefronts with an average size of approximately 18,700 square feet.
As of Q3-17, stores had opened for 6 of these 8 leases. Although these sought-after tenants typically require a lower relative cost of occupancy, re-merchandising with the high-volume brands that resonate with the consumer has been a successful long-term strategy for Tanger.
Tanger continues to have the lowest cost of occupancy among all public Mall REITs and most of the company’s tenants report that outlet stores remain one of their most profitable and important retail distribution channels.
Tenant Occupancy Cost:
In Q3-17, Tanger reported consolidated portfolio occupancy of 96.9%, compared to 96.1% on June 30, 2017. As you can see below, Tanger’s occupancy has been at 95% or higher since it was a public company.
Drilling down to the property level, you can see that Tanger’s wholly-owned portfolio saw varied results, but the company generally sees higher occupancy levels in Q4. I am not concerned with the modest occupancy declines, as Tanger is in line with historic norms.
Upon examination of the JV portfolio, we can see that Tanger has similar occupancy trends:
Tanger recently opened a new outlet center in Fort Worth, Texas. This new upscale center is over 350k SF brings ~900 new retail jobs to the area. The new center opened in October and is approximately 96% leased. The center features more than 75 upscale brand name and designer outlet retailers, including H&M, Gap, Tommy Hilfiger, Children’s Place, Nike, Levi’s, Banana Republic, Express, Guess, Restoration Hardware, Off Broadway Shoe Warehouse, LIDS Sports Group and several others.
Tanger’s Fortress Balance Sheet
Tanger continues to maintain a “Fortress” balance as the company has continued to push out debt maturities, with coverage ratios that support A-rated metrics.
Tanger completed a public offering on July 3, 2017 of $300 million of 3.875% unsecured senior notes due July 15, 2027 and on August 2, 2017, and used the net proceeds and unsecured lines of credit borrowings to redeem $300 million of outstanding 6.125% unsecured senior notes due June 1, 2020.
The company’s debt-to-total market capitalization ratio is 42% and total outstanding floating rate debt is $278 million, representing less than 16% of total debt outstanding, or less than 7% of total enterprise value. Tanger’s unused capacity is $366 million under the $520 million unsecured lines of credit.
The weighted average interest rate is 3.30% and the weighted average term to maturity of outstanding debt, including extension options, is approximately 6.5 years. Approximately 91% of the company’s consolidated square footage was unencumbered by mortgages.
Tanger expects AFFO to exceed the dividend by more than $100 million in 2017; with an expected AFFO payout ratio in the mid-50% range, the dividend is well covered.
To maintain the strong and flexible leverage profile, Tanger prefers to use internally generated cash to fund any further purchases under the share repurchase program. The redemption make-whole premium and the completion of the two projects that will open later this year will consume the remaining cash flow for the balance of the year.
At Q3-17, Tanger’s AFFO available to common shareholders per share increased 2.3% compared to the prior-year period. AFFO available to common shareholders was $179.7 million, or $1.80 per share, for the 2017 period and $177.5 million, or $1.76 per share, for the 2016 period.
Tanger is revising its net income, FFO and AFFO per share guidance for 2017:
Other key guidance assumptions are as follows:
Same center net operating income growth between 1.5% and 2.0%, excluding 5 outlet centers undergoing re-merchandising efforts (between 0.5% and 1.0% including these centers).
Tanger has tightened its previous range given the anticipated impact of the hurricanes on variable rents and an increase in the expectation of space to be recaptured during 2017 to 200,000 square feet from 157,000 square feet at the end of the second quarter.
In addition to the effect of hurricanes on the days that stores are closed, traffic and tenant sales were impacted as much as a week before the storms and for several weeks following the storms. During the third quarter, four additional tenants filed bankruptcy.
It’s also important to note that Tanger’s center in Fort Worth achieved an extraordinary achievement in a challenging retail environment. We estimate Tanger’s WACC (weighted average cost of capital) to be ~6.5% and this suggests that Tanger’s development pipeline continues to generate wide investment spreads (of around 300 bps).
Tanger has always been a prudent capital allocator and the company plans to allocate free cash flow in 2018 to increasing the dividend, paying down variable rate debt and buying more stock. Steven Tanger, CEO, explains in the press release:
“We are proud to say that we have raised our well-covered dividend each of the 24 years since becoming a public company.”
Tanger Is A Wealth Building Machine
Companies that can withstand the relentless onslaught of competition for long stretches are called wealth-compounding machines and they are also called the SWANs that we want to find and own.
Tanger is the quintessential wealth-building machine.
I give credit to Julian for acknowledging the sales decline for Tanger, but as I pointed out, he is “overlooking an inherent difference between outlets and malls”. Besides there is a new catalyst in place – as of Friday – called Tax Reform. As a result of new legislation, Tanger should see an increase in discretionary spending and historically has had a positive impact on retail sales.
Also, as noted, Tanger has made a shift back to non-durable goods from durables and product innovation. With much of the consumers’ wallet being allocated to durable goods in recent years and interest rates on the rise, it makes sense that non-durable goods would become more attractive. Retailers that can provide products that resonates with the consumer seem to be the ones that outperform their competition, so a new product or fashion trend may get the discretionary spending flowing again.
The adage is true, “In good times people love a bargain and in tough times people need a bargain.”
I’ll rephrase this thesis, “in good times people love a bargain, and in tough times I will buy Tanger”….
Remember, Tanger is not a Mall REIT, but most analysts use the Mall sector as the closest peer set:
While we’re using that comparison, keep in mind that Tanger is the ONLY peer that paid and increased dividends during the last recession. Tanger has the BEST dividend record of all, yet Mr. Market continues to beat the price down.
The key to successfully buying a stock at a discount is accurately estimating the future cash flows you expect that business to generate. Accordingly, we take a fundamental approach to valuation analysis and we utilize the following FFO/share forecaster (powered by FAST Graphs):
As discussed above, we have identified the potential risks related to Tanger’s future income, and while there are notable concerns related to Ascnea (6.9% of revenue) and others, we are content that Tanger’s diversified business model provides shock absorbers that mitigate future vacancy concerns.
Also, Tanger continues to expand its tenant base providing sound traffic growth enhancement, that in turn, should restore tenant sales and grow beyond $400 per square foot. Also, as previously referenced, tax reform should also serve as a catalyst and this is effective in 2018.
Tanger’s dividend is extremely safe, as evidenced by the snapshot below:
One Final Thought:
Unibail-Rodamco (OTCPK:UNBLF) is to acquire Westfield Corp. for $16B that will bring together two multi-national retail property companies. The combined entity will have a ~$72B TEV which will make it one of the largest property companies in the world owning properties in New York, LA, Paris and London.
The Unibail-Rodamco offer of shares and cash valued Westfield at time of announcement, at an 18% premium to the prior close (~4% cap rate). How big a factor is Amazon (AMZN) in driving mall landlord consolidation? And is scale the answer for landlords? We wonder if this news and the General Growth/Brookfield situation will prompt a move by Simon Property… and we all know that Tanger is a wealth-building machine…
As a REIT analyst, I am explicitly charged with assessing the expected future changes in a company’s competitive advantages, and separating competitive threats that are merely temporary in nature from more dangerous and permanent changes in the overall environment.
While I cannot predict the future of retail, I am confident that Tanger’s business model is sound and that the outlet center model is misunderstood by Mr. Market, and therefore, shares now trade at prices that are at a wide discount, or margin of safety. As Sir John Templeton explained,
“To buy when others are despondently selling and sell when others are greedily buying requires the greatest fortitude and pays the greatest ultimate rewards.”
I am maintaining Tanger as a STRONG BUY and my #1 BUY conviction of 2018. I consider shorting a high-quality REIT dangerous and I would NEVER recommend shorting a REIT that generates steady and reliable dividend income.
Note: Brad Thomas is a Wall Street writer, and that means he is not always right with his predictions or recommendations. That also applies to his grammar. Please excuse any typos, and be assured that he will do his best to correct any errors, if they are overlooked.
Finally, this article is free, and the sole purpose for writing it is to assist with research, while also providing a forum for second-level thinking. If you have not followed him, please take five seconds and click his name above (top of the page).
Source: FAST Graphs and SKT Investor Presentation.
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