Tanger: Customer Traffic Is Back To 80% Of Pre-COVID-19 Levels (NYSE:SKT)

6.07K Followers

Summary

People stuck at home are showing a willingness to get out and shop, fueling optimism about recovery for spending at brick-and-mortar stores.
Customer traffic is back to 80% of pre-COVID-19 levels at Tanger Factory Outlet Center's properties in South Carolina.
Other retail REIT executives also indicated that shoppers are coming back quickly, giving a substantial boost to mall stocks.
It is positive that Tanger's properties are open-air (helps with social-distancing) and offer reduced prices (in tough times like these, people need a bargain).
Tanger has sufficient liquidity to survive for two years even under the most catastrophic rent collection scenario of not receiving any rent for ~2 years.

Tanger Factory Outlet Centers (NYSE:SKT), along with many other retail REITs, is going through a very rough time. This is reflected in the share price performance, down by almost 50% on a YTD basis (versus declines of ~8% and ~3.3% for the Dow and S&P 500, respectively).

To be fair, SKT was facing challenges prior to the coronavirus, primarily due to certain retailer bankruptcies. 2020 guidance was terrible. Among others, it included:

Negative Same Center NOI for the consolidated portfolio between -8.25% and -6.75%.
Projected average occupancy for the year expected to be between 92% and 93%. The long track record of occupancy always exceeding 95%, for more than 25 years in a row, will be broken.

Again, this guidance was issued prior to the coronavirus. This led me to sell most of my SKT position in late January, booking a small gain. The key reasons for my bullish stance in the past included:

constituent of the S&P High Yield Dividend Aristocrat Index (very well-covered dividend; ~60% FFO payout ratio)
stable occupancy; always exceeding 95% for more than 25 years
low debt; strong and flexible investment-grade balance sheet with manageable maturities
stable sales PSF despite the so-called 'retail apocalypse'
attractive tenant occupancy cost (~10%)
efficient capital allocation including a progressive dividend, share repurchases, and deleveraging, while pursuing selective growth opportunities

The financial crisis of 2007-08 didn't interrupt SKT's dividend, but the coronavirus did. During the peak of the lockdown, Tanger collected just 12% of April rent and May is not looking much better. As a result, the dividend was suspended in order to save ~$35M in cash per quarter and preserve balance sheet strength/flexibility. In addition to suspending the dividend, SKT took many decisive actions to navigate COVID-19, including:

reduced based salaries for most employees and reduced board and executive compensation
drew down substantially all of the capacity under $600M unsecured lines of credit
reduced or deferred certain operating expenses and capital expenditures
deferred Nashville pre-development-stage project
offered all tenants the option to defer 100% of April and May rents interest free (the deferred rent will be payable in equal installments due in January and February of 2021)

Despite all of the aforementioned actions during these unprecedented times, there is cause for optimism. Since March's extreme sell-off, there have been three attempts for STK to rally (depicted by the circles in the graph below). The latest one is taking place this week.

The previous two attempts to rally were short-lived, but this one feels different. Previous attempts were based on sentiment during the big lockdown, with very limited data. This attempt is based on preliminary data following reopening efforts.

Source: Bloomberg

Shoppers in South Carolina are active. In fact, customer traffic is back to 80% of pre-pandemic levels at properties in the state that are owned by Tanger, according to CEO Steven Tanger. The comments came at a virtual REITweek conference organized by NAREIT. Other retail REIT executives also indicated that shoppers are coming back quickly, giving a substantial boost to mall stocks. For example, both Simon Property Group (SPG) and Macerich (MAC) ended the day ~15% higher (SPG hit the highest intraday level since April 30).

What's more, it is also positive that SKT's properties are open-air (helps with social-distancing) and offer reduced prices, two important factors as the U.S. emerges from lockdown. As Steve Tanger mentioned: "in good times, people like a bargain" and "in tough times like these, people need a bargain."

What is also positive is that SKT has sufficient liquidity for two years even under the most catastrophic rent collection scenario of not receiving any rent for ~2 years (assuming no dividend distributions or debt maturities).

While e-commerce will continue its rapid growth trajectory and fears of the so-called 'retail apocalypse' are here to stay (just like before the coronavirus), for now, people who have been stuck at home during the lockdown are showing a willingness to get out and shop. This is fueling optimism about a recovery for consumer spending at brick-and-mortar stores.

Source: Seeking Alpha

This optimism is also backed by sales trends at individual retailers/restaurants as well. For example, Abercrombie (ANF) reported sales productivity for reopened stores in the 60-80%, as compared to last year's levels, and The Cheesecake Factory (CAKE) reported that reopened restaurants have recaptured approximately 75% of prior year sales levels. Overall, it is very encouraging that traffic and sales productivity for reopened centers/stores are strong. To be honest, I was expecting much slower progress following store reopenings.

Even though we are in a much better situation today compared to when the lockdowns began (the economy is finally reopening), uncertainty is still high (but not as high compared to the peak of the lockdown). That said, there is always the risk of a potential second coronavirus wave, which will keep investors nervous. Also, social distancing comes with challenges, as it affects the customer shopping experience and also limits capacity.

This article was written by

Marel

6.07K Followers

Value-oriented investor focusing on marketable securities, real estate as well as early-stage companies.

Analyst’s Disclosure: I am/we are long SKT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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