Tanger Factory Outlet Centers (NYSE: SKT) is the only real estate investment trust, or REIT, that is exclusively focused on outlet retail. The company owns 36 outlet malls, mostly located in the Eastern and Southern United States.
As you can probably imagine, this wasn’t the best business to be in when the COVID-19 pandemic started. While Tanger’s properties technically remained open for the most part, virtually all of its tenants were forced to close in the early lockdowns, and some ended up declaring bankruptcy. And not only that, but Tanger had been struggling to keep its occupancy strong for years (even before the pandemic) as e-commerce competition caused some of its largest tenants to struggle.
In the past year or so, however, Tanger has pleasantly surprised investors. Its occupancy is on the rise, tenant sales look incredibly strong, and the company looks ready to start growing for the first time in years.
Tanger’s recent results look excellent
Tanger’s numbers look very strong, both from the perspective of occupancy, and the value the company is delivering for its tenants.
First, 94.3% of Tanger’s properties are occupied, an impressive 230-basis-point improvement over a year ago. The company has done a great job of releasing spaces that were left vacant due to bankrupt tenants and is using this as an opportunity to bring new retailers into the outlet industry (for example, Dick’s Sporting Goods (NYSE: DKS) opened its first outlet during the pandemic, in a Tanger property). Same-center NOI increased by 10% year-over-year in the first quarter, and the company announced a 9.6% dividend increase for shareholders. The stock now yields 5.6%, and the payout is well-covered by the company’s earnings.
Second, and more significantly, Tanger’s tenant sales look fantastic. Average tenant sales per square foot were 18% higher in the first quarter than they were in the comparable pre-pandemic quarter. This is an essential component in the investment thesis, as it shows that outlet retail is an extremely valuable type of retail store for the tenants, and the higher the sales, the more likely tenants would open a new outlet at another Tanger property.
The outlet industry could have tons of room to grow
One important point is that the outlet industry is relatively small, and Tanger is one of the leaders. Simon Property Group‘s (NYSE: SPG) Premium Outlets is by far the largest, and Tanger is number two.
However, outlet space still makes up a tiny fraction of the overall retail landscape. In fact, management estimates that the total quality outlet space in the U.S. at less than 1% of all retail space. Tanger in particular has lots of room to grow, as it doesn’t have a presence in most of the Western half of the United States.
Plus, it looks like Tanger is finally ready to get back to growth mode, planning to open a new outlet center in Nashville in 2023. The company sees long-tailed growth opportunities ahead, so this could be the first of many projects to be announced in the years to come.
Invest with the long term in mind
As a final thought, it’s important to point out that I have absolutely no idea what the stock market or Tanger will do over the next few weeks or months. There is likely to be some short-term volatility as the current economic dynamics (inflation, rising rates, recession fears, war, etc.) play out. However, the past couple of years have shown the resilient nature of the outlet shopping industry, and Tanger could be a great way for long-term investors to play it.