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Tanger’s Strategy: Follow the Money

Solid and consistent financial performance has characterized the company's balance sheet since going public in 1993.

The competition might be heating up, but Tanger Factory Outlet Centers Inc., a pioneer of today’s outlet concept, has a big head start and a valuable knack for cajoling the right mix of retailers into its regional shopping meccas.

Tanger jumped into outlets in 1981 when the stores were a venue to clear factory overruns. Now the centers are a way to bring new shoppers to fashion brands at lower prices.

The consumer affection for a good deal — something that’s nice in good times and necessary in bad times — has kept the outlet real estate sector on a relatively steady trajectory.

 

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Consumers are also focused on the task at hand when they go to an outlet center.

“They make the trip with the intention of shopping,” said Cyndi Holt, vice president of finance and investor relations. “They stay longer and they spend more than they would at their neighborhood mall.”

Holt said the Tanger’s business has held up in good as well as in challenging times, adding that the firm’s year-end occupancy rate has never fallen below 95 percent.

And the Tanger footprint has been growing. The company built or acquired 21 outlet centers over the last decade, bringing its total to 43. Four more centers are in the works.

A big part of the formula is finding the right spot for a center.

Holt said Tanger looks for areas with at least 1 million people within 30 to 40 miles, household incomes of $65,000 or more, and 5 million or more tourists each year. Prime sites also include frontage on major roads and a daily car count of at least 55,000.

Without anchor stores like Bloomingdale’s or Nordstrom, which draw shoppers to regional malls, Holt said Tanger has to market and brand its outlet centers to draw in consumers and keep them happy with a nice shopping environment.

Rich Moore, an equity analyst at RBC Capital Markets, said outlet centers have become an important part of the distribution mix, along with full price stores and e-commerce.

“[The demand] is kind of off the charts,” Moore said. “There’s an enormous desire by retailers to be in the outlet centers. You’ve got very full centers. For the most part, these things are running 98, 99 percent occupied, which is very unusual.”

Moore said Tanger’s experience — both in knowing where to put new centers and what retailers are looking for — is an asset, as other real estate firms look to expand into outlets.

“You have a 400,000-square-foot center,” Moore noted. “You probably have about 100 tenants. There is not [an] anchor to speak of.…You have Coach saying, ‘I’ll come if this guy comes.’  You have each of these retailers saying, ‘If you get the mix and the type of retailer….’”

That’s a balancing act Tanger has had time to hone to a fine art.

Carol Kemple, analyst at Hilliard Lyons, said outlet centers “seem to be the best space in the retail REIT sector right now.”

“Even if the economy is suffering, there are still people who like their Nikes and they might not want to trade down to a Wal-Mart shoe,” Kemple said.

Outlet centers also don’t tend to have electronics or book retailers, both of which have been hit hard in recent years and left voids in other shopping formats, she said.

The success of the outlet concept has spurred new entrants and increased talk about continued development, giving some investors the jitters.

But Citi analyst Michael Bilerman said Tanger should continue to outperform. He upgraded the firm’s stock to buy from neutral this week, and increased his target price to $37.50 from $31.75. The stock closed at $33.55 Monday, marking a 17.6 percent increase for the year so far. Over the same time frame, the MCSI U.S. REIT Index increased 11.2 percent.

“While there is an increase in development plans in the U.S. and Canada, we believe only a small portion of proposed projects will proceed and there appears to be solid tenant demand to ensure the success of projects,” Bilerman said in his upgrade. “In the 1990s, the outlet industry became overbuilt and a number of centers went dark. However, the outlet sector is on more stable ground today with the tenant base performing very well over the past five years.

“While rents are increasing, reasonable sales growth is helping keep occupancy costs low versus other retail channels, and we see solid demand from retailers across their outlet channels,” Bilerman said.

Steven B. Tanger, president and chief executive officer, told analysts on a recent conference call, “We don’t perceive any overbuilding. We’ve never been in a position in our industry of overbuilding. To put it in perspective, the entire industry by our computation has only about 150 outlet centers in the entire U.S., totaling between 50 million square feet and 55 million square feet. The city of Chicago alone has 178 million square feet of retail. So you can fit our entire industry 3.5 times into Chicago. Nobody is going to convince me that our industry is overbuilt.”

Tanger’s books show a company that is growing — and sharing the wealth with its shareholders. The firm has paid a dividend every quarter since going public in 1993, and that payment has increased each year. It now stands at 84 cents a year.

Tanger’s funds from operations — the standard financial yardstick for real estate trusts — rose 19.6 percent to $116.1 million for the nine months ended Sept. 30. The firm’s same-center net operating income increased 6.5 percent for the period.

Over the past year, comparable sales among Tanger’s tenants increased 5.4 percent.

Moody’s Investors Service gave the firm’s senior unsecured debt a credit rating of “Baa2” — an investment grade score. The outlook is positive.

“The [real estate investment trust’s] solid credit metrics continue to reflect the strength and profitability of the outlet business for both tenants and consumers,” Moody’s said in a credit opinion this summer. “These positive factors are offset by the REIT’s relatively small size in a highly concentrated outlet mall industry. In addition, Tanger’s business depends largely on consumer spending and particularly on discretionary softline goods.”

Going forward, Tanger’s Holt said the company hopes to keep the ball rolling by developing centers in the U.S. and Canada, acquiring existing centers and boosting results within its current portfolio.