Tanger Inc. (SKT) Earnings Call Transcript & Summary

Good morning. I'm Katy McConnell, Citi equity research analyst covering retail REITs, and I'm pleased to be moderating the Tanger Outlet Factory presentation today. Please note a copy of disclosures can be available upon request. A question-and-answer session will follow some opening remarks from the company. [Operator Instructions] Joining us today from the Tanger team, we have CEO, Steve Tanger; Steve Yalof, President and Chief Operating Officer; Jim Williams, CFO; and Cyndi Holt, VP of Investor Relations. So now I will turn it over to Steve to kick things off with some opening remarks.

Thank you, Katy. Our company, Tanger Outlets, is the only publicly traded REIT specializing solely in the ownership and operation of destination, open air, outlet centers in the United States and Canada. Our centers provide an excellent value proposition for retailers that cannot be duplicated by e-commerce or other brick-and-mortar formats. Many of our tenants report that outlet stores remain one of their most profitable and important retail distribution channels. For many, the outlet business provides higher margins and lower customer acquisition and logistics costs than other distribution channels. Our open air, value-oriented centers provide retailers a direct touch point to what is often an incremental consumer and allow our tenants to maintain brand integrity through control of product placement and pricing. From a shopper perspective, we deliver sought-after brands, consistent value and more importantly, now than ever, a great experience. Our portfolio has proven resilient throughout our history, especially since governmental mandates were lifted throughout the second quarter of 2020. Shopper traffic has now rebounded to more than 90% of prior year levels and virtually all occupied stores are now open. October rent collections are more than 90% of the billed amounts. Each of these metrics demonstrates the value of outlet stores for retailers. Our balance sheet further differentiates Tanger. Our financial strategy has always been conservative with great emphasis on maintaining sufficient liquidity to provide optimal flexibility. This has served us well in 2020. As of today, our $600 million in unsecured lines of credit are fully [Technical Difficulty] debt maturities for over 3 years. Our business has generated positive cash flow since July and our $40 million cash balance as of the end of October has continued to grow during the fourth quarter. There is no question that COVID-19 has been impactful to our tenants and to our business. In the first 9 months of 2020, we recaptured over 0.5 million square feet of space in our consolidated portfolio due to retailer bankruptcies and restructuring, including over 200,000 square feet during the third quarter. Most of these situations were caused or accelerated by the virus. This provides a unique opportunity to diversify our tenant mix to include more our goods and to upgrade the mix to include more upscale brands. Today, everyone in our company acts as a leasing rep. On a mission to fill vacant space with exciting tenants and produce incremental NOI. While uncertainty remains around the duration and magnitude of the pandemic, we are encouraged to have already leased approximately half of the space recaptured during the quarter with incrementally new leasing. A portion of this new leasing is to pop-up stores, which allow us to introduce new brands and product categories to our portfolio, providing our shoppers with more brand variety and product choice and allowing the retailer to test the outlet distribution channel or a new Tanger market. While pop-up arrangements do not generate the same level of revenue as permanent leases, they do not require a landlord investment, and they offer the upside of potentially converting to permanent leases in the future. As we continue forward, we are sharpening our focus to -- on returning to long-term sustained growth. These efforts are centered around our core business. In addition to leasing, we are enhancing property operations and marketing. On the operations front, we have strengthened our operations team to amplify the planning and execution of operational strategies and expense management initiatives, grow center occupancy and develop new revenue opportunities. The underlying element of this approach is to ensure we have an empowered field-driven organization that is laser-focused on increasing NOI. Regarding marketing, driving shoppers to our centers remains a key priority. We have accelerated our digital marketing efforts, including the launch of our curbside and virtual programs as initial mandates expire, along with enhancements to our loyalty program and mobile app. The entire Tanger team is excited by the prospects for our company. Although it will take time to return to sustained growth as we continue to work through the impact of the pandemic and recent tenant reorganization, our portfolio of open air, value-oriented assets and our balance sheet are poised to perform and thrive in the future. Katy, I'll turn it back over to you.

Okay. Great. So with all that's happened since earnings with the election and a COVID vaccine potentially on the near-term horizon now, how has your outlook for the business, leasing and a potential recovery time line changed, if at all?

Steve Yalof, are you on? I'll let you take that.

Thanks, Steve, and thanks for the question, Katy. Well, as far as the time line is concerned, I think leasing, we've realized -- and I would say, in the past month, that the leasing reps that we're doing business with, representing the retailers have turned the faucets back on, so to speak. And there's been some leasing activity -- a lot more leasing activity in the last 30 days. So we're pretty encouraged. As far as the -- some of the vacancy that we've taken back that was exacerbated by the pandemic. It's going to probably take us a little while to get through that. But we are encouraged by our pop-up program, that's been pretty robust over the past 3 or 4 months. We brought some new tenants to the platform. And if history is any indication where we've had pop-up tenants in the past, we've converted them into long-term and full-term tenants that have grown within our portfolio. So we're excited about the prospects of growing some of that pop-up business. Most recently, 2 new tenants to our portfolio, Robert Graham and J. McLaughlin just joined us. They just opened stores in our portfolio as pop-ups, and we're hopeful that they'll grow within our portfolio as well. So I think we have a little bit of a steep road ahead of us as far as leasing is concerned, but I think prospects are pretty good as retailers are now starting to look at space again and have open to buy.

Great. And then can you just touch on some of the advantages that you've seen in being an outlet focused REIT that have differentiated the company, especially as you've dealt with the impacts of the pandemic and how you expect to recover from it?

Well, first, let's start with the fact that we're open air shopping centers. And I think that's probably the most important part. As the mandates lifted in the retail stores, the non-essential retail started to open, our retailers returned back to our platform extremely quickly. In fact, Steve mentioned in his opening remarks that over 99% of our leased space has reopened. Traffic has also returned pretty quickly. We reported that our September traffic was in the high 90 percentile. In October and November, both over 90% of last year's numbers, and that's with about 30% less operating hours. Going forward, the month of November, we've now gone to -- we've added back 2 hours to the day, and we did so as a holiday selling season, we started promoting our holiday selling season at the beginning of the month. So we think the open air format, we think the value pricing, we've got an extremely loyal customer. Our VIP customer and our Tanger insider makes up a large portion of the folks that interact with us regularly on the web. And are digitizing our mobile app and web has given us the opportunity to showcase more product online so that a customer can have the full journey from shopping online, window shopping online and actually executing their purchases in our shopping centers. So I think open air, coupled with everyday value pricing, coupled with our amplification of digitizing our offering on our mobile app has made our platform a real solid platform for the go forward.

Yes. Maybe you can expand on some of those digital programs that your tenants have worked on. And in light of that, how are you thinking about the risk of a second wave of lockdowns in your markets and how your tenants are positioned to keep business going to some extent?

Well, first of all, on the digital front, when -- when the mandates were ordered, we went to work over here. And obviously, one of our key initiatives was to figure out how we could distribute product to our loyal customers. I referenced earlier, our Tanger Insider and our Tanger VIPs, both of whom interact with our website on a regular basis. And we wanted to make sure that we were able to sell products to our loyal customers, who were in a geography where perhaps their stores -- the stores or the shopping centers in their markets had not yet reopened. And in that connection, we birthed the virtual shopper program. We stood it up as a beta test at the beginning of June, and it went live towards the end of the month. And since that time, we've had over 220,000 interactions. Obviously, we set that up just as a test, and it was more of an amenity to our VIP customers. But with the amount of traction that we've gotten, we've -- we're working on programs currently to commercialize that. And I think that, that's going to be an important piece of our business. If God forbid, there is a second wave, and we're -- and some of the non-essential retail has to close, at least we have a way of distributing our products to our customers. We have a way of our customers communicating with the retailers. And through this virtual shopping program, we believe that customers who need products or want to buy products from our outlet centers can purchase those products, and we can have those shipped and delivered to them. With regard to the non-essential -- with the essential retailers, a number of retailers in our portfolio have -- are starting to sell as part of their merchandise mix, essential products with the expectation that should there be a non-essential closing, they will have a product assortment in their store that will allow them to stay open. And obviously, being in an open air format, that will be a desirable place for a lot of people to go and continue to shop.

And bigger picture, how do you think about the risk that e-commerce could ultimately play in the outlet space if more of your tenants are building out these online platforms?

Well, I think a lot of our tenants already have online platforms, but I think most of our retailers don't have outlet online. Because their online business, the margins in online business are stressed as it is, they're selling their full-priced products primarily on their -- through their e-commerce and their channels. But we provide the opportunity for retailers that are using their online or e-commerce selling platforms to sell full-price product, we can allow them to sell their off-price product through our channel. And a number of retailers have stood up a lot of the product that is available in an outlet, hard to find online the outlet assortments, and we showcase a lot of that outlet assortment on the Tanger web and on the Tanger mobile app.

All right. And then, Steve, given you joined Tanger during the beginning of the pandemic, what would you say are your initial impressions so far? And as you step into the CEO role, what would you say are your top corporate priorities heading into 2021.

Well, having stepped in, in the middle of the pandemic, my top priorities, obviously, are sticking to our core business, which is the leasing, the marketing and the operating shopping centers. From an operational point of view, we have had a new Executive Vice President of Operations join our company in the last 1.5 months, somebody who I had the opportunity to work with in past positions in the outlet business. Who is going to bring a whole set of discipline and focus to how we operate ground up our shopping centers. And the timing couldn't be any better. One of the discipline she brings to the table is local leasing initiatives. And right now, with some of the restructurings and a lot of stores coming back to us, we're going to -- and with most of our leasing team unable to travel, we have the opportunity to leverage our general managers and our field teams in each of the shopping centers to do a lot of the canvasing and a lot of the local leasing on our behalf. So we've got our leasing team working with their national tenants. We've got a robust top-up program from a leasing point of view. And then from the ground up, we've got our field teams out in the field looking for exciting retailers, local retailers, food and beverage, experiential retail that has become important in those particular geographies, and we're moving forward in doing a lot of that leasing as well. So it's a top-up and a bottom-down attack from a leasing point of view.

Great. So before we dive into leasing, I just want to touch on where do rent collection levels stand now? And in recent months, October and November, have they been trending in the right direction?

Jim, I'll turn that over to you. You may have your phone on mute.

I did. I'm sorry, Katy. Yes, we're very pleased to have made tremendous progress in third quarter and reporting an 89% rent collections with another 3% expected to get to 92%. And so we're continuing to make progress, and we're seeing as we move into October, already in the 90% and so far, November is trending very similar to that. I think just kind of looking forward, we will -- this whole year, there's still going to be a few and smaller amounts deferrals and these onetime concessions. Most of that was occurred in second quarter where most tenants selected to take those as a lump sum. But there's a few that had -- were taking credits on a monthly basis. So a little bit of that's going to be flowing through the balance of the year. So we won't get to 100%, for sure. But we're very pleased to see that now get into the 90s and growing.

All right. Great. And then can you update us on your exposure to bankruptcy tenants today? And what's your outlook for tenant fallout that's still to come in 4Q and post holidays, relative to the impact that we saw in 3Q?

Well we shared with you that we anticipate getting another 400,000 square feet back between now and the end of the middle of next year. And we don't foresee any surprises beyond that. But as we indicated, at least in Q3, we were able to mitigate a lot of that occupancy that we got back with new leasing. And obviously, employing all the strategies that I just shared with you, we feel pretty confident that we'll take a bite out of that space. We certainly think it's going to take some time to get there, but I think we'll be able to -- I think our leasing team -- and Steve said in his opening remarks, everybody on our team is a leasing representative. I think we're equal to this task. And obviously, the open air outlet shopping facility, coupled with the fact that we are pretty much a low-cost provider relative to other bricks-and-mortar and street retail and e-commerce. So there's a reason why a lot of the retailers returned as quickly as they have to the outlet format, low capital requirement to open new stores and great margins for retailers. So we're looking forward to moving forward and getting that space leased.