Tanger Factory Outlet Centers Inc. is charged up about growth — and finding new ways to get at it.
This month, Tanger revealed a strategic partnership, one that’s unique within the company’s portfolio of 38 properties including one in Nashville, Tenn., under development. Tanger has taken over the marketing, leasing and management of Palm Beach Outlets in West Palm Beach, Fla., and can potentially accumulate ownership of the property depending on its performance. The 455,000-square-foot property, owned by Clarion Partners, has been rebranded as Tanger Outlets Palm Beach.
Last May, Tanger broke ground on its 290,000-square-foot outlet center in Nashville, a booming market. The center is expected to be completed in the fall of 2023 at an estimated cost of $135 million to $145 million, and Tanger is eyeing other expansion opportunities.
In addition, rents are on the rise, longer-term leases are being signed, and Tanger has a strategy of “accelerated leasing,” which in effect opens the aperture of the brands and retailers it pursues as tenants.
This week, the company reported better-than-expected results for its second quarter ended June 30, and raised its outlook. Net income was $0.19 a share, or $19.7 million, compared to $0.02 a share, or $2.3 million, for the prior-year period, which included a loss from retiring $14 million in debt early. Funds from operations were $0.45 a share, or $48.8 million, compared to $0.30, or $32.4 million, for the year-ago period.
Tanger is now projecting $0.71 to $0.77 in net income a share this year, up from a previous estimate of $0.69 to $0.77 a share.
Occupancy was 94.9 percent on June 30, compared to 93.2 percent 12 months prior. Tenant sales productivity grew to $450 a square foot on average for the 12 months ended June 30, from $423 a square foot for the year-ago period, representing an increase of 6.4 percent for both the total portfolio and on a same-center basis.
The stock price is down from its 52-week high of $22.51, but has seen recent gains and currently trades at more than $16.
“We feel good as a company because we built a strategy coming out of COVID-19 where we lost some tenants and had to sort of rebuild our business,” Stephen Yalof, Tanger Outlet’s president and chief executive officer, said in an interview.
He said the strategy revolves around “three levers” of growth: accelerating the leasing platform; efficiently managing and decentralizing property operations to focus more on local needs, and digitalizing marketing to communicate better with customers. “The success we have enjoyed for the last four or five consecutive quarters is because we continue to execute to that strategy,” Yalof said.
“The most important part is we believe in our real estate. And we got our pricing power back. We’re not afraid to ask for more rent and retailers have more tolerance to spend a few more dollars on rent than they have in the past. Our rents as a percentage of sales across our portfolio is about 8.5 percent. That’s up from about 8 percent a couple of quarters ago. We think we can push that number up into the low double digits.”
He said a year ago, the average term of new leases was 5.4 years. Now in 2022, with sales and traffic rebounding, it’s 8.4 years. “That’s more normal. Typically pre-COVID-19 we were doing 10-year deals….The best indicator of our ability to push rents lie in our rent spreads — we have five consecutive quarters of rent spread growth. This year on our re-tenanted space, these new deals, we are up over 10 percent.”
Asked how the Tanger Outlets Palm Beach deal is structured, Yalof explained, “As we are successful in growing the shopping center, we will have the opportunity to acquire ownership over time.” It’s like a bonus, he said. Furthermore, Tanger Outlets Palm Beach will be “a low capital investment for us. We get leasing fees, management fees, the typical fees when a company manages a particular asset.
“This is a center that has been well leased and well managed, but we realize that with our scale and ability to lease, market and operate outlet centers under the Tanger brand name, that adds another level of cache and another level of credibility. Under our management, there is so much opportunity to take that center to the next level. We’ve got great customer marketing, and our scale gives us the opportunity to buy a lot of the operational services in bulk, which ultimately means we can manage a lot of expense out of the P&L.
“We drive shoppers to our centers in a way other brick-and-mortar retail developers don’t necessarily do,” Yalof added. “A lot of our retail partners invest a lot of their money in advertising their brand, to drive customers to their full-price venues, and not so much to their off-price venues. They rely on us and in many cases pay into a promotional fund aimed at us driving that customer into the outlet shopping center.
“From a leasing point of view, we have great access to retailers that may not have considered the Palm Beach market before. They may consider it now because they know how we operate and market shopping centers. There is some opportunity to bring some tenants that have never been there before.” Current tenants include Saks Off 5th, Polo Ralph Lauren, Nike, Michael Kors and Coach.
Tanger’s Florida centers are among the portfolio’s most productive. “There are a lot of dynamics at work,” Yalof said. “Definitely it’s tourism, and there has been a big migration from the Northeast to Florida. Palm Beach is one of the top-growing counties in Florida. It will be a bonus to give us the opportunity to ultimately get some equity in the center over time.”
Asked if Tanger is in the market for opportunities similar to Tanger Palm Beach, Yalof replied, “Yes, we continue to look for opportunity. We’d like to have a larger equity stake from the beginning, so this one is truly unique but there are several opportunities we are currently considering. We do like the Florida market and we are currently not on the West Coast.”
He also said there are between 10 and 12 small, independent developers, similar to Clarion Partners, “that we have in our sights.”
For the future Nashville center, 70 percent of the space is committed, with Nike, Oakley, Vera Bradley, Aerie, Fossil, Michael Kors, Levi’s, Ralph Lauren, Under Armour and Puma among the tenants lined up.
“This particular center is designed around a central park, essentially a community space. We’re hoping to activate that central park area with a stage, and give local musicians an opportunity to perform,” Yalof said. “We want to be a true partner in the communities where we position a shopping center.”
Asked why Nashville is such a hot market, Yalof said, “It’s music city. Amazon is building two towers in the market, and Oracle is adding 8,500 jobs over the next five years. It’s booming from a tech point of view, from a music point of view, for health care, and there is no state income tax. There’s a big tourism business in Nashville. Over 16 million people in 2019. Then you’ve got this permanent population growing by hundreds of people a day.” Eight-hundred construction jobs and 500 permanent jobs will be created with the Nashville outlet center.
Yalof suggested that Tanger’s growth will be furthered through environmental efforts that will benefit the bottom line. “We will double our solar kilowatt hours by adding more solar panels to more shopping centers. It’s great for the environment. It does require an investment from us but that investment has a low, double-digit return when you calculate the expense savings that come with it,” Yalof said. In 2021, Tanger produced nearly 6.2 million kilowatt hours of solar energy.
“Similarly, E-V charging partnership deals we have made with Volta across our portfolio, those have returns as well. We will double our electronic car charging stations over last year,” from a 2021 baseline of 150 stations. Having E-V charging stations is another reason to shop the outlets.
With Tanger’s accelerated leasing strategy, “We are not just going after those retailers that are making deals. We are going after the entire complement of anybody who is a retailer out there, whether you are a department store brand only or whether you are a direct-to-consumer online merchant only. So we are getting in front of everybody and introducing them to outlet as a channel of distribution that gives them the opportunity to clear excess inventory so they can maintain their margin, and acquire a customer that likes to shop in our channel that may not shop full-price stores.
“When we accelerate leasing it means we are increasing the population of retailers that we are going after. We are pushing our rents higher on our real estate — 3 percent on base rents and 3 to 4 percent on common areas — because we think it’s worth it. We are using our pricing power to our advantage and we’re maybe saying goodbye to some of the legacy retailers that don’t want to pay the rent or we’re converting them to shorter-term [leases] knowing we will ultimately replace them with longer-term deals that command higher rents that gives us more stability.
“I don’t want to get too out of my skis but I think we are still relatively low-priced compared to all the other retail channels out there. We think we’ve got room to push pricing. We think retailers have some tolerance for it.”