The topic of the day in the retail space is the ongoing assault on physical stores. Over the past few years, dozens of retailers have filed for bankruptcy and/or closed thousands of stores in what has been dubbed the “retail apocalypse.”
At center stage is the American Mall, which once served as a public plaza. The combination of the convenience of online shopping and an oversupply of retail stores in the United States has resulted in lower traffic in malls. This caused an overall decline in retail sales and put financial pressure on the entire industry.
Tangier Factory Outlet Centers (NYSE: SKT) is a real estate investment trust (REIT) specializing in the development and operation of shopping centres. Although it is in the mall business and has also seen its stock price suffer along with other mall operators, malls are actually somewhat resilient to broader retail trends. detail.
The concept of the mall
The malls are not like your typical main street mall. Retailers use outlet stores to sell old or excess inventory at a discount to prices listed in department stores. To avoid direct competition with full-price stores, Tangier-operated malls are typically located outside of city centers and at least 10 miles from traditional department stores. The advantage of locating in less densely populated areas is that the cost of land is generally lower, which boosts margins for retailers.
Consumers are generally interested in finding deals and ready for a day of shopping. In many cases, malls will be in more touristy areas close to beaches or other popular travel destinations. Tangier specifically draws a lot of business from US domestic tourists who like to shop while on their travels.
The strong value proposition for retailers and consumers is reflected in Tangier’s key operating parameters. It reports a high occupancy rate of 96% in its shopping centers and has maintained an occupancy rate above 95% since its IPO in 1993, indicating strong demand from retailers to maintain locations. points of sale. Visiting traffic from buyers is also important. In 2019, the REIT saw customer traffic increase by 1.5%, despite less than stellar traffic numbers across malls.
A healthier tenant mix
The health of a shopping center operator depends on the health of its tenants. The biggest headache for operators of traditional shopping centers such as CBL & Associates was the issue of replacing department stores, which massively left real estate. Department stores serve as anchors for malls and have not only historically driven traffic to malls, but also paid healthy rents. Also, it is not easy to replace a flagship retailer with another retailer, as their retail store bases tend to be massive.
The good news here is that Tangier isn’t prone to department stores or anchor-style real estate footprints. This is a key differentiator between the quality of Tangier’s tenant base and that of shopping malls.
This does not mean that its tenants are in perfect condition. Its main tenants are Ann Taylor, Loft (both owned by Ascena Retail Group), and Difference. Ascena and Gap are closing stores. However, Tangier also benefits from significant exposure to up-and-coming brands, such as Nike and VFis The North Face and Timberland.
The health of Tangier’s tenants is important, but regardless of that, outlets aren’t usually the first stores to close when a retailer is struggling, as they typically outperform full-price stores in traditional malls. Therefore, Tanger can perform well and maintain a high occupancy rate even if some of its customers are not operating at their peak.
Numbers suggest resilience
The bottom line for investors is that the financial figures released by Tangier continue to support the idea that its business model is resilient. It continued to generate strong operating income and increased its dividend each year (as shown in the chart below). The stock now generates a whopping 9.1% dividend yield! Of course, a high dividend yield could be partly related to the 22.8% drop in the share price since the start of the year, but the REIT has the free cash flow to maintain the rate, and this reflects the continued strength of Tangier’s earnings. Tangier having the confidence to continue increasing its dividend should reassure investors here.
Its stock price chart is a different story. Investors sold its shares in line with other mall operators as the entire sector is now up for sale. Tangier appears to be a cut above many of its retail counterparts in terms of financial stability and business model differentiation. But there is evidence that it is indirectly impacted by poor mall performance due to exposure to many of the same retailer brands.
Either way, Tanger may be worth considering as a long-term value investment for people interested in dividend-paying stocks who aren’t afraid of some exposure to the sell sector. by retail.
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