August 30, 2017 - 1:17pm EST by
2017 2018
Price: 23.50 EPS 2.4 2.52
Shares Out. (in M): 99 P/E 0 0
Market Cap (in $M): 2,330 P/FCF 0 0
Net Debt (in $M): 1,730 EBIT 0 0
TEV (in $M): 4,060 TEV/EBIT 0 0

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We are long shares of Tanger Factory Outlet Centers (SKT).  Tanger is the second largest owner and operator of outlet malls in the US behind Simon Property Group and the only outlet mall pure play REIT.  As with most things retail related, Tanger shares have been whacked this year, falling 35% and are nearly 45% off their all time high (which was reached in late July 2016).  At today’s price of $23.50, the enterprise trades at an 8% cap rate (2018 figures which credit SKT with a two new soon to be completed malls, discussed below), a P/AFFO (2018) of 9.2x and offers a current dividend yield of almost 6%.  We thinks shares offer 29% upside and offer an attractive yield in the interim.   
Tanger owns and operates a portfolio of 43 outlet malls across 22 states and Canada - the portfolio is heavily biased toward the eastern half of the US.  Tanger has 3,100 stores from 500 different retailers located in its malls.  Outlet malls are typically located out of town (20 miles) to facilitate price discrimination (so as not to directly compete with a retailer/manufacturer’s full price offering).  
The company has several presentations which give a useful overview and some interesting facts about the business:
Risks/ Why this opportunity exists
All retail REITs have struggled over the past 12-18 months as concerns about ecommerce and the death of traditional retail have increased.  Tanger has been hit harder than other mall REITs (most down 20-25% YTD and 25-35% from all time highs) as: 
  1. Tanger is more exposed to apparel than its mall counterparts who have a more diversified mix of tenants (restaurants, gyms/fitness, services, movie theaters, etc).  Apparel has been weaker than other categories over the past 12-18 months.  This will remain the case as outlet malls are a place to purchase rather than hang out/dine.  
  2. Tanger has higher tenant concentration with Gap and Ascena representing 7.7 and 7% of square footage (and a similar % of rent) respectively.  The top 10 tenants represent 36% of square footage.  
  3. Ascena (Ann Taylor, Lane Bryant, Justice, Dress Barn, among others) is a challenged retailer as evidenced by the 80% decline in its stock over the past year.  
  4. Tanger has seen YoY declines in sales per square foot (whereas top operators like SGP, GGP, MAC, and TCO have continued to show growth in sale/sq foot), an uptick in vacancy (occupancy sats at 96.1% at 6/30/17, the uptick is more or less in line with what we have seen in other malls) and stagnation in rental growth (the aforementioned other malls have seen continued rental growth). 
Why I like the REIT 
  1. I think the outlet concept is an important and economical channel for manufacturers/retailers to move excess inventory.  While retailers will continue to shrink their footprint, I don’t see closing outlet stores as being high on their list of priorities.  Outlet stores are distinct from regular stores insofar as they are located 20+ miles out of town and allow manufs/retailers to sell merchandise at a discount without fear of cannibalizing in-town locations.  As a percentage of sales, occupancy costs at Tanger are ~10% (vs. 12-14% at traditional malls).  
  2. I think consumers will continue to visit outlet malls.  The most successful retail concepts over the past several decades have been off price concepts like TJ Maxx, Ross Stores, etc.  I think there is something ingrained in people that makes them enjoy hunting for perceived bargains and think that outlets will remain relevant despite ecommerce taking over the world.  
  3. I see the decline in sales/sq foot and rental growth stagnation as being caused by the weak apparel environment (which seems like it could potentially be magnified at the outlet level to the extent that discounting increases).  With traditional malls decreasing their space dedicated to apparel, it seems that this could benefit outlet mall operators at some point in the future.  
  4. I don’t know what will happen with Ascena - it is entirely possible that the company goes bankrupt in the next 24 months.  However, even should Ascena go bust, I think successor entities will retain at least a portion of its leases (some of its concepts will remain viable, company suffers from a $1.6 billion debt load).  While ugly, I think Tanger will be able to work through the increase in vacancy from a potential bankruptcy.  
  5. Outlets remain a small percentage of retail in North America and after we work through this ugly patch, I think we could see Tanger reaccelerate new mall openings (nothing in the pipeline beyond two centers slated to open later this year).  A resumption of 1-2 new center openings coupled with 1-2% NOI growth should drive ~5% AFFO/share growth which would seem to warrant at least a 12x AFFO multiple.
  6. Strong balance sheet - discussed below.  
  7. There is an outside chance that Simon Property could bid for the company.  Simon the largest REIT in the world, is the largest owner/operator of outlet malls in the world.  There would be considerable synergies as Simon could effectively eliminate nearly all of Tanger’s SG&A (it already has leasing and management capabilities).  It may also be able to improve occupancy/rent given its larger scope.  
Balance sheet
Tanger carries $1.7 billion in debt on its B/S  .  Following the end of 2Q, Tanger issued $300 million in 10 year debt at a 3.9% coupon.  With this issuance, the company has minimal maturities until 2021.  87% of debt is fixed rate.  Overall the company’s debt has a weighted average duration of 6.3 years and cost of 3.4%.  Total debt to EBITDA is ~6x.  
The company pays out only about 60% of its AFFO which allows it the flexibility to 1) develop new properties (typically at a 9%+ stabilized yield) (2) repurchase shares without increasing its leverage profile or (3) pay down debt.  
2017 AFFO guidance         237,600   low end of 2017 guidance
+Fort Worth               8,100   mgmt guidance ROIC on $90 mn
+Lancaster              4,230   mgmt guidance ROIC on $47 mn
Assume 0% 2018 same center NOI growth          
2018 AFFO Estimate         249,930        
2018 AFFO/share                2.52   99 million shares  
Multiple of AFFO          
10                25.2        
11                27.8        
12                30.3 28.9% upside    
13                32.8        
14                35.3        


Tanger- 2018 Estimated NOI            
2016 Actual NOI         306,339          
Est 2017 same store NOI growth              1,532 0.5% vs. 0.8% 1H SS growth (company guides to 0.5-2%)
Contribution from Daytona Mall              7,500 Opened 11/18/16      
Est 2017 NOI         315,371          
Est 2018 same store NOI growth   0.0% assume no growth in 2018  
Contribution from Fort Worth Mall              8,100 9% mgmt guidance ROIC on $90 mn  
Contribution from Lancaster, PA Mall              4,230 9% mgmt guidance ROIC on $47 mn  
2018 Estimated NOI         327,701          
Equity      2,326,500 23.5 99 million shares    
Debt      1,729,002          
Total Capitalization      4,055,502          
Implied Cap Rate 8.1%          
Implied Cap Rate at Fair Value Target 6.9%         0


I use 2018 to account for two new malls (Fort Worth and Lancaster) which are slated to open later this year.  Given uptick in vacancy as well as potential difficulties facing Ascena, I assume Tanger’s same center NOI remains flat during 2018 (and give the company credit for the low end of its 2017 guidance at 0.5%).  
I apply a 12x multiple to 2018 AFFO which basically assumes a 60% payout ratio, a 10% cost of equity and a 5% growth rate.  The 5% growth rate assumes that the $100 million in undistributed AFFO is reinvested at 10-12% (similar to retained earnings so the equity portion.  With debt costs at ~3.5-4% and project yields at 9%+, with a 70/30 E/D mix, we are in the ballpark).   
At my target price of $30, the implied cap rate would be 6.9% (vs. 8% today).  
-Apparel retail is dead and I’m a big stupid idiot for buying this.
-Because these locations are out of town, alternate uses for properties are less clear if retail is no longer the highest and best use for these properties.  
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


-Market takes a moderately less negative view on retail

-Company announces new development


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