Description

Short SKT – Tanger Outlets.  This is more a secular decline short with all metrics going negative.  They’re in the same situation as the B & C Malls (e.g. CBL, PEI, WPG): they’ll continue to shrink and valuation goes lower over time

• Secular decline:  rents are going down, occupancy is going down, they have no more ability to raise rents, NOI and FFO are falling YoY, retailers are leaving, and outlet valuation multiples are going down

• The metrics are slowly worsening and cracking.  Overall not falling dramatically yet, but the trend is getting worse

• This is the same vicious cycle that has been hurting the B/C malls

• E-commerce hurts outlets more given the inconvenience of the experience

• Catalysts:

• retailers announce more store closures (store closures have been on pace for the worst year of store closures;  worse than 2017),

• Iffy tenants / possible store closures could come from Christopher Banks,  J Crew,  Ascena  

• they’re divesting bad locations (they sold assets at a very poor 12.6% cap rate lately) which was quite dilutive

• With their recent dilutive asset sales and tenant bankruptcies coming in faster than they guided, I think they’ll likely have to cut their 2019 FFO/share guidance by 6-8%.  Other non-rent income (e.g. tenant recoveries) and JVs are weak as well < this is somewhat in #s (4% cut in consensus),  but not fully I think

• although it's not an issue yet with the dividend covered by about 70% of AFFO on their 2019 guidance, I think their dividend could start to be in question after 1-2 more years of falling AFFO

• continued deterioration in operating metrics

• When they sold these bad assets, they kept SS guidance unchanged, indicating that the core properties are already worse than expected after guiding 2 months ago

• Probably means there’s downside to SS NOI guidance

• continued competition from TJ Maxx and e-commerce for the bargain shopper

• They’ve been giving short term leases to new tenants,  and there’s annual lease maturity of 10% / year, which brings incremental re-leasing risk every year

• Charts / technical quite weak (just broke multi year lows – a bad sign).  Also it’s a good hedge for other REITs / defensive names in your portfolio.  It should continue to underperform other REITs as well

• They usually disappoint around earnings somehow since there’s always some metrics to pick at

• Plus, their 2019 FFO guidance is likely too high.

• They guided FFO/share down 6% YoY to $2.34,  but that is pretty easily that’s more like -10%+ YoY (with recent divestitures) and maybe more like -15% YoY given the problems with retailers and closures. Sell side is modeling in around a 10% YoY drop now.  I think they could guide lower in the upcoming Q1 print.  

• Downside target price of $14 from $20 now in a year, with continued melting and financial & valuation declines over time

• Caution: high short interest at 27% of float. 

• But the bad retail REITs just continue to go down constantly. 

• The B/C mall markets caps are getting too small to short (CBL at $240mm, PEI $450mm WPG $950mm), so people likely roll shorts into Tanger

   

Valuation – optically cheap,  but a melting ice cube and I think valuation can go lower on a cap rate and EV/EBITDA basis

• Current metrics at ~$20/share on consensus numbers

• 8.8x P/2019 FFO of $2.23

• 12.4x P/AFFO

• 13.3x EV/EBITDA

• 7% dividend yield

• Roughly trading at 8.75% cap rate on their assets, inline with B/C mall peers (ranging between 8.5%-11.4%)

• Downside target of ~$14 in a year (with continued melting longer term):  Assumes continued slight deterioration in occupancy, NOI, rental rates, releasing rates, tenant recoveries, etc.  Also sell side seems to be too optimistic with SKT’s JVs which have had poor numbers lately 

• 7.6x P/FFO of $1.84/share in 2020 FFO 

• 12.4 AFFO of $1.44

• 12.3x EV/2020 EBITDA

• 10.25% cap rate

• 11% dividend yield < I don’t think the dividend is at risk though

• Given the leverage and the REIT investor base, many secular decline REITs look cheap on an FFO basis,  but expensive on an EV/EBITDA, cap rate basis.  Generalists usually put lower valuations on REITs, so there’s room for lower valuation as the REIT investor community increasingly won’t touch SKT

• multiples likely keep going lower as it looks more and more likely that outlet malls will be increasingly challenged

• multiples of companies in secular decline tend to have very a low floor and go lower than you think,  especially in levered situations. A REIT investor may think, "oh this is a cheap stock on a cap rate basis, and a big dividend".  A generalist would see 13x EV/EBITDA in a secular declining sector with 6x leverage.

• Over time, I think Tanger will look more stressed like CBL and WPG.

Expert calls: negative

I spoke with 1 outlet center operator and 2 outlet store retailers and they expect continued deterioration at outlet malls over the medium and long term.  Some highlights:

• They see consumers going to outlets less and less, fewer retailers to replace the empty space

• They’ve been getting more rent concessions. 

• Luxottica is effectively getting MSD declines in their occupancy costs YoY

• Estee Lauder getting LSD declines in occupancy costs, better flexibility on lease agreements.  This is effectively worse than the company is letting on

• Parking lots aren’t as full over the last 1-2 quarters

• Mixed views about the conditions of Tanger’s outlets

• These outlets have very poor food offerings.  The outlet’s don’t want to put in restaurants because it’s costly and high risk.  But the consumers want better food

• Tanger has become more promotional and it’s increasingly coming out of their own pocket

• The retailers are likely going to close a few stores at lower performing outlets

• Traffic has slowed noticeably

• Consumers making fewer trips to outlets

• Rents at the best centers are flat at best,  going down at all other locations

• Tanger putting in H&M and TJ Maxx stores is a double edged sword for the rest of the retailers.  It’s like letting the fox into the hen house.   Increases traffic,  but reduces sales.  Jury still out

• Value proposition of outlets is still OK but waning as there’s more competition everywhere else

Company description

• Tanger is a pure play outlet center company with 40 (after recent sales) outlet centers in 22 states and Canada.   There are 216 outlet centers in the US

• Tenant mix:  6.9% Ascena retail, 5.8% Gap, 3.9% PVH, 2.7% Under Armour, 2.6% Nike, 2.5% G-III Apparel, 2.4% Tapestry, 2.3% American Eagle, 2.3% Carters, 2.2% VF, 66.4% other

• It was founded in 1981 and went public in 1993

• 84% of sales are apparel or jewelry

• Average box size 5,500 sq ft

Financials

• FFO/share has been flat since 2015

• They guided 2019 SS NOI declines to be -2% to -2.75% YoY

• With recent bankruptcies/retailer trouble (e.g. Charlotte Russe, Gap), and given that they divested some underperforming locations but didn’t adjust SS NOI guidance), they’ll probably have to cut that

• 2019 occupancy down 275bps YoY to 94.25% < the declines are accelerating.  They try to keep occupancy flat at the expense of rents because having an empty outlet is bad.  But clearly they’re having trouble keeping them full

• They guided FFO/share down 6% YoY to $2.34,  but that is pretty easily that’s more like -10%+ YoY (with recent divestitures) and maybe more like -15% YoY given the problems with retailers and closures

Catalysts (more details)

• Selling assets at low valuations: 

• They recently sold assets at a 12.6% cap rate, which was very dilutive (they sold 4 properties that were generated $300 in sales per square foot for $131mm or 12.6% cap rate). 

• LTM rent re-leasing rates for these properties was -10% YoY.  These were 5.1% of total NOI and 6.8% of square footage.  The asset sale was about 5-6% dilutive to FFO/share 

•  It was bought by a PE firm who will likely lever them up.  SKT uses a lot of unsecured leverage  and hasn’t tried to over lever

• In 2017, they sold properties at a 10% cap rate, and in 2016 at a 7% cap rate.  In 2015 they sold a portfolio of assets at 10%, and one at 5.8% cap rate.  Outlet valuations are general trending worse

• Management will probably continue to divest underperforming assets,  which will likely continue to push up cap rates (and push down valuation), and be dilutive to FFO/share

• Store closures

• 60-70% of their 2019 (announced on Feb 18)  store closing assumptions already happened (they expected to get back 150k-200k sq ft of their 15mm sq ft in 2019, up from 126k sq ft in 2018 that they took back)

• Other retail REITs,  going into this year, thought 2019 closures would be higher than 2018, but not 2017.  So far, 2019 is coming in worse (chart below)

• They could come in at the high end of that number (or beyond it) pretty easily

• Occupancy, NOI, cash releasing spreads, and FFO/share are flat or declining YoY now.  This is the same spiral that has been consistently pressuring the B&C malls

• Occupancy cost for retailers (i.e. rent as a % of gross retailer sales) is at 10% which is usually as far as they can go (malls are around 15%).  Hence rents will continue to go down as the retailers’ sales go down.  If tenant sales get worse,  it’ll be tougher

• Look at the B/C malls and the speed at which they're deteriorating and occupancy is plummeting.  It's a slippery slope and Tanger has all the red flags.

• Another red flag is that they’ve started to put in regional operators like Carolina Pottery (which is a pretty sad looking, 4 store, house ware chain in the Southeast).  

• Outlet shoppers (especially those who go to Tanger) want to see deals from large national retailers, not a random / unprofessional local home goods retailer who is selling stuff.  

• From a chart/technical perspective, looks like it wants to break down (descending triangle).  Just made new lows, which is a sell/short signal

• oil prices go up (fewer people willing to drive long distances to the nearest outlet store, less discretionary dollars)

• $ strength bad for the international shopper at the touristy outlet locations

• rates go up taking down REITs in general

• SKT is at multi year lows, while REITs are at multi year highs. 

• Last quarter, they’re talked about building a new 280k sq ft Nasvhille Tennesse outlet center greenfield – their balance sheet is still OK, but this could pressure cash flows

• they may have to issue some equity to fund since they want to keep their IG rating

• Some sell siders put this project in their models already (maybe costs $75mm and generates 9% yield), even though management was careful to say that they won’t move forward until they have 60% of it pre-leased

• This led to some positivity / hope that outlets could have some organic growth again

• But I think it’s more likely that this doesn’t get built at all.    The land they bought is right next to a really bad mall that’s near closing (50% occupancy)  and worsening with elevated levels of crime.  I think it’s unlikely that retailers will want to open up new stores in a new outlet or anywhere

• If/When they down play the project, that’s another red flag

• more shift to e-commerce and more promotional / price competitive retail environment

Capital allocation

• Capital allocation wise, they’re focused on debt reduction, buying back some stock, and maintenance capex.  There’s no more organic growth/expansion for Tanger or the industry.  They’re limiting their renovations and tenant improvements, which is also a bad sign, since it shows that they don’t think it’s worth putting more money into their properties

• Generating $100mm of cash flow after dividends in 2019:  most of that is likely used to paydown debt to keep their IG rating (BBB now) and buyback stock

• In $2018 did $20mm share repo and $36mm in property investments

• Strangely, they didn’t buy back stock in Q4 2018, decided to paydown debt instead

• They’re thinking about developing a new outlet in Nashville (a city that has had a lot of growth)

• However, they bought the 300 acre parcel of land in Nashville basically next to dying C mall (50% occupied) already which isn’t doing well.  Hard to see retailers want to get on board

• If they did build it,  it’d cost around $75mm and suck up their incremental cash flow for 1-2 years.

Sector / REITs

• REITs are elevated and the sector has had a good run with lower rates and dovish central banks.  Multiples for most REITs have gotten stretched. I think REITs will take a breather as the macro picture around the world improve

• i.e. China / global stimulus working,  which will boost Europe, and cyclicals bounce back

• people have been hiding and chasing defensives and that will continue to unwind.  If Tanger stock is at multi-year lows while REITs are at multi-year highs, hard to see it go up when people are rotating away from the sector

Liquidity

• Trades around $20-$30mm worth of shares a day

• Short interest is elevated though at 28% of float

• $1.9bn market cap ($1.7bn net debt),  $3.6bn EV

Dividend

• Dividend yield 7%,  ~70% covered by AFFO, plus a decent balance sheet, so it’s pretty safe for now

• they pride themselves on being a dividend arisotract (raised dividend every year since 1993)

• But I think in 1-2 years, the payout ratio will start to look stretched, depending on how quickly this deteriorates

Balance Sheet

• Ratings Baa2, BBB

• 5.2x interest coverage

• 5.9x net debt/EBITDA LTM 12/31

• no large debt maturities till 2023

• they are buying back stock, about 1% of the shares outstanding a year  

Takeout possibility?  Very low

• retail REITs are all busy culling underperforming properties and locations

• only the Class A malls are hanging in

• unlikely anyone wants to buy these. 

Q4 earnings was weak

• 2019 FFO guidance missed by 2% to 42.31-$2.37 and NOI -2%-2.75% is below cons.

• Guided occupancy down to 94%-94.5%, lowest since 2007,  down from 97% in 2018 and 98.5% in 2017

• SS NOI -0.7% YoY,  -1.3% YoY for 2018

• LTM rent renewals -1.4% YoY

• 2018 SS tenant sales +2.% YoY

• In prior earnings (e.g. Q3) they sounded more positive after temporarily good numbers,  but subsequently things have quickly gotten worse in the next quarter.  So management’s credibility is low

Charts

SKT stock chart 1 year – down below support

SKT stock chart 5 year

SKT short interest ratio / short interest over last 3 years

CBL 1 year

WPG 1 year

PEI 1 year

Store closures in a calendar year

Store closures announced in each year YTD as of 3.11

Holders: a lot of index holders

or Legend                                    Shrs Out  94.1M    % Out  103.15   Float/Shrs Out   97.67   SI

        Holder Name                Portfolio Name       Source                      Position

% Out                                                                            Opt                    ↓     Latest Chg

                                                                     All           All

17.34    State Street Corp                                  ULT-AGG                 16,317,006                 0

14.80    Vanguard Group Inc/Th                           ULT-AGG                 13,931,026                 0

14.51    BlackRock Inc                                      13G                       13,652,549                 0

  6.87    Principal Financial GrouPRINCIPAL FINANCIAL13F                         6,462,860     -1,488,639

  2.71    Ceredex Value AdvisorsCEREDEX VALUE ADVIS13F                         2,549,276         -63,693

  1.94    Northern Trust Corp    NORTHERN TRUST COR13F                         1,829,175         -95,371

  1.85    BNP Paribas SA                                    ULT-AGG                   1,743,364       -295,629

  1.69    BANK OF NEW YORK MEL                           ULT-AGG                   1,593,677       -122,920

  1.60    Dimensional Fund AdvisDIMENSIONAL FUND A13F                         1,505,851         -18,758

  1.54    Charles Schwab Corp/T                           ULT-AGG                   1,447,886            4,649

  1.51    Millennium ManagemenMILLENNIUM MANAGEM13F                         1,416,846         326,028

  1.36    Geode Capital ManagemGEODE CAPITAL MANA13F                         1,284,322         115,944

  1.26    Tanger Steven B                                   Form 4                    1,183,888          76,905

  1.07    Foresters Investment MFORESTERS INVESTME13F                         1,011,100         -49,100

  0.89    Norges Bank             NORGES BANK         13F                           832,940       -574,132

  0.84    Virtus Investment Partn                           ULT-AGG                     793,997                 0

  0.81    ProShare Advisors LLC PROSHARE ADVISORS 13F                           757,998          73,749

  0.77    UBS AG                                               ULT-AGG                     723,574            6,496

  0.69    Wedge Capital ManagemWEDGE CAPITAL MANA13F                           652,865       -114,310

Etc

CBL EV/ forward EBITDA – last 10 years

WPG EV/forward EBITDA  last 4 years

PEI EV/forward EBITDA

WPG 8.5% implied cap rate

SKT 9%

Catalyst

Catalysts (more details)

• Selling assets at low valuations: 

• They recently sold assets at a 12.6% cap rate, which was very dilutive (they sold 4 properties that were generated $300 in sales per square foot for $131mm or 12.6% cap rate). 

• LTM rent re-leasing rates for these properties was -10% YoY.  These were 5.1% of total NOI and 6.8% of square footage.  The asset sale was about 5-6% dilutive to FFO/share 

•  It was bought by a PE firm who will likely lever them up.  SKT uses a lot of unsecured leverage  and hasn’t tried to over lever

• In 2017, they sold properties at a 10% cap rate, and in 2016 at a 7% cap rate.  In 2015 they sold a portfolio of assets at 10%, and one at 5.8% cap rate.  Outlet valuations are general trending worse

• Management will probably continue to divest underperforming assets,  which will likely continue to push up cap rates (and push down valuation), and be dilutive to FFO/share

• Store closures

• 60-70% of their 2019 (announced on Feb 18)  store closing assumptions already happened (they expected to get back 150k-200k sq ft of their 15mm sq ft in 2019, up from 126k sq ft in 2018 that they took back)

• Other retail REITs,  going into this year, thought 2019 closures would be higher than 2018, but not 2017.  So far, 2019 is coming in worse (chart below)

• They could come in at the high end of that number (or beyond it) pretty easily

• Occupancy, NOI, cash releasing spreads, and FFO/share are flat or declining YoY now.  This is the same spiral that has been consistently pressuring the B&C malls

• Occupancy cost for retailers (i.e. rent as a % of gross retailer sales) is at 10% which is usually as far as they can go (malls are around 15%).  Hence rents will continue to go down as the retailers’ sales go down.  If tenant sales get worse,  it’ll be tougher

• Look at the B/C malls and the speed at which they're deteriorating and occupancy is plummeting.  It's a slippery slope and Tanger has all the red flags.

• Another red flag is that they’ve started to put in regional operators like Carolina Pottery (which is a pretty sad looking, 4 store, house ware chain in the Southeast).  

• Outlet shoppers (especially those who go to Tanger) want to see deals from large national retailers, not a random / unprofessional local home goods retailer who is selling stuff.  

• From a chart/technical perspective, looks like it wants to break down (descending triangle).  Just made new lows, which is a sell/short signal

• dividend payout ratio gets unsustainable / close to 100% after 2-3 more years of declines

• oil prices go up (fewer people willing to drive long distances to the nearest outlet store, less discretionary dollars)

• $ strength bad for the international shopper at the touristy outlet locations

• rates go up taking down REITs in general

• SKT is at multi year lows, while REITs are at multi year highs. 

• Last quarter, they’re talked about building a new 280k sq ft Nasvhille Tennesse outlet center greenfield – their balance sheet is still OK, but this could pressure cash flows

• they may have to issue some equity to fund since they want to keep their IG rating

• Some sell siders put this project in their models already (maybe costs $75mm and generates 9% yield), even though management was careful to say that they won’t move forward until they have 60% of it pre-leased

• This led to some positivity / hope that outlets could have some organic growth again

• But I think it’s more likely that this doesn’t get built at all.    The land they bought is right next to a really bad mall that’s near closing (50% occupancy)  and worsening with elevated levels of crime.  I think it’s unlikely that retailers will want to open up new stores in a new outlet or anywhere

• If/When they down play the project, that’s another red flag

• more shift to e-commerce and more promotional / price competitive retail environment