Tanger: Trying To 'Snap' Out Of The Downtrend

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About: Tanger Factory Outlet Centers, Inc. (SKT)
by: Brad Kenagy
Summary

Tanger reported an inline quarter that saw some metrics improve slightly.

2019 guidance and comments on the conference call show the rest of 2019 is likely to be worse than Q1.

I am still maintaining my $15 price target.

Tanger Factory Outlet Centers (SKT) just reported earnings a couple days ago and the results were in-line with what analysts expected. In addition to reporting earnings, Tanger also updated their guidance to account for the recent property sale they did at the end of the quarter. SPOILER Warning (If you have not seen Avengers Endgame): Tanger stock price and underlying business are still in a long-term downtrend, and unlike in Avengers Endgame, I do not believe Tanger will be able to go back to what things were like before e-commerce took over.

Image source

Occupancy & Same Center NOI

Looking at the top locations, I would classify Q1 occupancy as neutral, which is actually a slight improvement over last quarter. As you can see in the table below, four locations posted lower occupancy year/year, four posted higher occupancy year/year and two locations had the same occupancy year/year. From this table, it appears that the Atlantic City location is having some serious issues. The last four quarters (counting the current quarter) of occupancy for the Atlantic City location have been 80%, 84%, 86%, 87%. This is a clear deceleration in one Tanger's largest properties and I was surprised it was not included in the property sale because it has performed poorly for a while.

Q1 2019

Q1 2018

Trend

GLA

Deer Park

98%

95%

Higher

739,109

Riverhead

95%

95%

Same

729,778

Rehoboth Beach

97%

97%

Same

557,353

Foley

94%

96%

Lower

554,673

Atlantic City

80%

89%

Lower

489,706

San Marcos

95%

97%

Lower

471,816

Sevierville

99%

100%

Lower

447,815

Savannah

97%

96%

Higher

429,089

Myrtle Beach Hwy 501

98%

88%

Higher

426,523

Jeffersonville

94%

89%

Higher

411,866

Top 10 GLA

5,257,728

Total GLA

12,047,341

Top 10 GLA as % of Total

43.64%

Table data from Tanger Q1 supplemental presentation

Looking at company-wide occupancy, it declined again, marking the ninth straight quarter year/year occupancy has declined. Having continued occupancy declines is not ideal and I expect that occupancy will continue to trend lower, given the updated guidance Tanger gave today, which I will be covering later in this article.

Occupancy

Occ Y/Y Change

Q1 2016

96.60%

Q2 2016

96.90%

Q3 2016

97.40%

Q4 2016

97.70%

Q1 2017

96.20%

-0.40%

Q2 2017

96.10%

-0.80%

Q3 2017

96.90%

-0.50%

Q4 2017

97.30%

-0.40%

Q1 2018

95.90%

-0.30%

Q2 2018

95.60%

-0.50%

Q3 2018

96.40%

-0.50%

Q4 2018

96.80%

-0.50%

Q1 2019

95.40%

-0.50%

Table data from Tanger 8-K filings

The final chart puts into visual form occupancy rates and same-center NOI growth since the beginning of 2016. You can visually see the Q3/Q4 seasonal bounce in occupancy and then a move lower in Q1 and Q2. This pattern has continued to hold true as occupancy fell in Q1 because Q4 seasonal tenants moved out.

When it comes to same-center NOI growth, it is very clear that the trend has been lower. Tanger has posted five quarters in a row of negative same-center NOI growth. However, on the bright side, same-center NOI has been getting "less bad" the last three quarters. I believe this trend the last three quarters will be short-lived because Tanger guided for 2019 same-center NOI to be -2.00% to -2.75%. With the current quarter being -0.50%, if Tanger is close in their guidance, it likely means that the rest of the year is going to be worse than the current quarter for same-center NOI growth.

Chart data from Tanger 8-K filings

AFFO continues to decline

Once again, underlying AFFO decreased for the quarter and for the full year. It was expected that FFO would decline because of the property sale. However, as you can see, the year/year change had already been negative for the previous three quarters. Therefore, it is not shocking to see such a negative number. It is an important distinction to point out that I looked at underlying AFFO instead of AFFO/share. I view the underlying trend as more important and have been hounded in the past because of my focus on underlying AFFO.

AFFO

Y/Y Change

Q1 2016

62,281

Q2 2016

59,394

Q3 2016

55,821

Q4 2016

60,921

Q1 2017

58,317

-6.36%

Q2 2017

59,409

0.03%

Q3 2017

61,938

10.96%

Q4 2017

65,632

7.73%

Q1 2018

59,349

1.77%

Q2 2018

59,051

-0.60%

Q3 2018

61,851

-0.14%

Q4 2018

63,096

-3.86%

Q1 2019

55,891

-5.83%

Tanger Supplemental Presentations

Short-Term vs. Long-Term spreads

The chart below showing leasing activity for all-terms has been trending lower because of the use of short-term leases to help maintain occupancy. Surprisingly, in Q1, Tanger showed year/year improvement in all-term leasing spreads (green boxes). The green boxes highlight the data points I have used in past articles because for this quarter Tanger added a new column into their presentation, so I wanted to make sure I continued using the same data points that I have compared in the past. It remains to be seen if this is just a one off quarter, or if this can be the start of stabilization in rent spreads. As I will show in the property sale section further on in the article, the properties Tanger sold appear to have been a big drag on rent spreads, so there is the possibility that spreads could stabilize.

Tanger Q1 supplemental presentation

Looking at long-term spreads, the picture remains the same and shows that Tanger continues to have a lack of long-term pricing power. The green boxes once again show the percent increase for leases of more than 12 months declined year/year.

Tanger Q1 supplemental presentation

I collected data since the beginning of 2017 and as you can see the trend for all-terms and more than twelve-months has been trending lower. It is clear that Tanger is not able to increase rents at the same percentage as they have in the past. This quarter did show a qtr/qtr improvement, but this has happened before in Q2 2018, and then the declines resumed after that.

Tanger Supplemental Presentations

Updated Guidance

When Tanger recently reported earnings, they updated their guidance to include the impact from the property sale. Tanger guided for FFO per share in a range of $2.22 to $2.28, which is lower than the $2.48 in FFO the company posted in 2018. Original guidance before the property sale was for FFO of $2.31 to $2.37, so Tanger was already guiding FFO to be lower this year even without the property sale. Many were bullish on the property sale; however, when you look at the guidance, which gives the most important metrics, the property sale had no impact at all. Updated same-center NOI guidance is the same and occupancy is the same. In addition, the projected 200,000 square feet of store closures for all of 2019 seems low given 82,000 square feet that was closed in Q1, and 86,000 square feet that closed so far in Q2.

Due to the limited NOI contribution of these assets, the Company does not anticipate any material impact to its Same Center NOI trend assumptions for 2019. ~Tanger press release

SeekingAlpha

Conference Call Commentary

There were a number of comments on the conference call that I would like to highlight. The first quote below shows the expectation that the remainder of 2019 will be softer than the first quarter due to store closings. The second quote shows that Tanger is still focused on apparel, which in my opinion is wrong given apparel clothing and accessories are projected to have the largest gain over the next three years in terms of e-commerce growth.

Economist.com

While our same center NOI was down only 50 basis points for the quarter, occupancy and same center NOI are expected to be softer during the last nine months as a result of the store closings anticipated to occur during the year, including the 82,000 square feet that closed late in the first quarter and 86,000 square feet of additional closures that occurred in April. ~ Jim Williams, CFO

We still think that there is a lot of growth with apparel and we're focused on that. ~Steve Tanger, CEO

Property Sale

On April 1st, Tanger announced they had sold 4 properties for total gross proceeds of $130.50 million. As the following table below shows, a number of metrics improved with this sale including tenant sales per square foot, cash basis rent spreads and straight-line basis rent spreads. The first quote below shows that Tanger will likely be using the proceeds to pay down debt and buyback shares, which will help improve their balance sheet. It is interesting that they are using the funds for debt repayment and buybacks rather than looking for growth initiatives, which Tanger lacks. They have the future Nashville location, which is likely to come online in late 2020 or 2021. Since Tanger has no new locations coming online soon, they are reliant on their existing centers and the best gauge of performance for existing centers is same center NOI. The bulls were quick to point out all the improvements in the table below but conveniently glossed over the second quote below from the press release showing the property sale will not have a significant impact on the same center NOI trend, which has been negative.

Ultimately, the Company intends to allocate the proceeds between two of its key capital allocation priorities - opportunistically repurchasing its common shares as market conditions warrant and reducing outstanding debt balances to maintain a strong and flexible balance sheet. ~Tanger press release

The transaction is not expected to have a significant impact on Tanger's 2019 same center net operating income trend. ~Tanger press release

Seeking Alpha

What I find interesting is the bulls have been touting Tanger is trading at a significant discount to its historical price/FFO multiple for a long time. The following table from a fellow author's recent article on Tanger shows the historical Price/FFO multiple has been 14.8x. On Monday May 6th, which was the day Tanger reported earnings after the close, Tanger was trading at a 7.6x FFO ($18.85/ 2018 FFO of $2.48= 7.6x). Looking forward, if the 2019 FFO guidance from above of $2.22 to $2.28 ($2.25 midpoint) is met, that means if the share price stays the same, Tanger would be trading at a 8.38x FFO ($18.85/ $2.25= 8.38x). All else being equal, the property sale actually made Tanger trade at a more expensive valuation.

Image via Dividend Sensei Tanger article

Performance during recession

In this section, I am going to show those who say Tanger will perform well in a future recession to be wrong. The first chart below shows same center NOI growth and straight-line rental increases were both trending higher in the years leading up to the great recession. Then the recession hit and same center NOI growth fell by more than half, but still remained positive. Then for straight-line rental increases, they fell by nearly half, but still posted double-digit gains. Simply put, Tanger entered the great recession from a place of strength, which allowed them to weather the storm.

Tanger Q4 2011 Investor presentation

Looking forward to a future recession, Tanger would be entering it from a place of weakness. If a recession were to occur in the next couple of years, the following two charts show same center NOI has been trending lower for years and was negative in 2018. In addition, straight-line rental increases were only 5.3% and have been trending lower for years. If a recession does occur Tanger will get hurt with likely further negative same center NOI growth and straight-line rental increases that will remain at low levels or run the risk of going negative in a future recession, since they would be starting from a much lower base than the previous recession.

Tanger Q4 2018 Investor presentation

Tanger Q4 2018 Investor presentation

Ascena troubles

Those interested in Tanger should make sure they pay close attention to Ascena Retail (ASNA) because Ascena accounts for the largest percentage of base rents for Tanger. In late March, a Bloomberg story came out about how Ascena was looking to sell their portfolio of 674 Dressbarn stores. The article also notes that there is the possibility if a sale is not made that all the Dressbarn locations could close down. To gauge the potential exposure to Dressbarn that Tanger has, I went to the Tanger website where you can search by store and found that Tanger has 20 non-JV Dressbarn locations. In their supplemental presentation, it shows non-JV Tanger locations have 132 Ascena stores. Therefore, Dressbarn accounts for 16.67% (20/132) of Ascena stores, which if the chain were to close would definitely affect results for Tanger.

If a sale isn't completed, the chain could face the possibility of shuttering, they said. ~Bloomberg article

No department store exposure

Those who are bullish on Tanger, repeatedly bring up the point that Tanger has no department store exposure. While that is true, Tanger is still impacted by tenants leaving, just in a different way. For example, I equate a department store closing to a shotgun slug and many small stores closing (like Tanger has) to birdshot. Both are going to do damage, just in different ways.

Image Source: Quora

For example, in the JC Penney Company (JCP) 10-K on page 18, it shows they have 864 department stores totaling 95 million square feet of space. So some simple math, 95 million divided by 864 stores equals an average size of 109,954 square feet per location. Then when you look at store closure guidance Tanger gave of 200,000 square feet, you can see Tanger is essentially guiding for the equivalent of 1-2 department store closures in terms of square footage.

Positive Developments

Many of the positive developments or improvements I have covered in other sections and I will cover here again. Occupancy of the top 10 tenants improved to a neutral stance, same-center NOI is negative, but has improved three quarters in a row and leasing spreads for all-terms improved year/year. Another positive is that Tanger used the proceeds from the property sale to pay down debt. In addition, as I will describe below, Tanger is in a seasonal period where in the past shares have rebounded from May lows.

Tanger used the net proceeds of $128.2 million to repay outstanding balances under its lines of credit. ~Tanger press release

Seasonal Price Pattern

In past articles, I have referenced the "summer bump" pattern that I discovered. In each of the last three years, shares of Tanger have seen a double-digit summer bump in the share price. Simply put, whatever the intraday low is in May, each of the last three years Tanger has posted double digit returns in the following three months. This could be something attractive for those bullish on a Tanger bounce in the short-term since the stock has performed poorly this year. The intraday low might already be in for May because on May 1st, the low was $17.93.

2018

2017

2016

Intraday low in May 2018, on May 2nd at $19.86

Intraday low in May 2017, on May 18th at $24.71

Intraday low in May 2016, on May 19th at $33.71

Intraday high the rest of 2018, on August 20th at $24.91

Intraday high the rest of 2017, on July 27th at $27.88

Intraday high the rest of 2016, on August 1st at $42.20

GAIN: 25.43%

GAIN: 12.83%

GAIN: 25.71%

Closing Thoughts

In closing, I still see no reason to change my $15 price target. Same-center NOI growth and occupancy are still guided to be worse than 2018. Long-term spreads are still showing year/year pressure and it remains to be seen if improvements in all-term spreads and other metrics will stabilize after the property sale. As I noted in the previous section, there is the possibility of a summer bounce, so that is something to watch for.

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