Tanger Inc. (SKT) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to our conference meeting with Tanger Factory Outlet Centers. Tanger is a REIT that owns and operates factory outlet centers, which are located coast-to-coast across the nation. With us today, we have Stephen Yalof, President and CEO; Jim Williams, CFO and Treasurer; and Cyndi Holt, Senior VP, Finance and Investor Relations. Before I turn it over to management for its opening remarks, I want to remind everyone that if you want to ask a question, please use Veracast software to input your question at the bottom of the screen. We will be looking for these questions and asking them on your behalf. I will now pass it on to Steve to start us off with an introduction and overview of Tanger. Steve?

Thanks, Craig. Tanger Outlets is the only retail REIT specializing solely in upscale open-air outlet centers in the United States and Canada. Our second quarter results demonstrate the successful execution of our strategic initiatives and progress in evolving Tanger to drive improved profitability and shareholder value. We grew occupancy, traffic and tenant sales during the quarter as our open-air centers offer an excellent value proposition for both retailers and shoppers. Occupancy and tenant sales trends have persisted into the third quarter and tenant feedback indicates that high conversion rates have also continued. We believe that sustained tenant sales growth will allow us to continue to increase portfolio occupancy and improve rent growth. Our key initiatives are centered around the core elements of our business; leasing, operating and marketing our centers. We are curating a compelling mix of brands and uses, creating a sense of place for experiential outings, connecting with shoppers in a more personalized way and monetizing the non-store elements of our centers. The core tenancy of our portfolio remains apparel and footwear. However, we're continuing to realize the tremendous appeal of our centers through new categories and uses. The addition of new food concepts such as sit-down restaurant, iconic quick-serve brands, local micro-breweries and upscale gourmet grocers have added to our place making, our experiential activation and entertaining uses which have helped achieve our goal of driving shopper visits, frequency, dwell time and ultimately building bigger baskets. Welcoming these new uses to Tanger has provided the opportunity for our retailer partners to introduce their brands and concepts to a whole new shopper base. Additionally, as part of our ESG strategy this year, we've launched our small business initiative aimed at supporting up and coming retailers in our local communities. Through this program, we've discovered compelling new retailers and brands, which have enhanced our tenant mix and provided us access to new shoppers. We are focused on growing our non-store revenue streams, which are delivering promising results. These initiatives include creating on-site paid sponsorship and media opportunities, where brands can promote their businesses on center but outside the 4 walls of their store. This includes marketing opportunities on bright walls, digital directories and common area activation. In addition to providing more on-center branding, these programs and activations create fun ways to engage our shoppers during their shopping visits. We've also stood up a peripheral land team to take advantage of our existing portfolio of outparcels and ancillary land. We presently have peripheral land inventory at over 2/3 of our centers and will opportunistically acquire additional parcels as leasing demand for these property types increase. As an example, we've recently acquired a parcel adjacent to our Glendale, Arizona shopping center to expand our footprint at that center and provide more F&B, entertainment as well as additional pay for event parking. We continue to enhance and expand our digital initiatives as we execute our strategy to meet our customers where they are. To further develop seamless customer experiences that connect our digital presence to the physical asset, we are expanding our online pre-shop capabilities where customers can search and see products that are available in-store at our Tanger shopping centers. Through our Virtual Shopper program, customers can shop remotely and either pick up on site or have merchandise shipped directly to them. We're also growing our Tanger flash pop-up sales and live sales through our website, app and social channels, which we host with participating retailers. Through all of our digital channels, we're providing more personalized and relevant and recently introduced our Tanger Fashion Director, who shops our brands and retailers, curates looks and post them on our social media channels. This initiative is aimed at our loyal Tanger insiders and Tanger club members who shop our centers with greater frequency as well as attracting new shoppers to the brand. These digital touch points complement our on center experience and helps attract new customers, particularly in younger demographics. In addition, we've strategically strengthened our balance sheet during 2021. This year, we have opportunistically tapped our ATM program to raise $190 million of equity, issued $400 million of tenured bond debt at a rate of 2.75%, the lowest coupon in Tanger history, and redeemed or repaid $550 million of higher rate, shorter-dated debt. These transactions extended our weighted average term to maturity and reduced our weighted average rate. Along with organic EBITDA growth, this activity has reduced our net debt EBITDA significantly, and we believe by the year-end, we will achieve a sustained -- we will achieve and sustain that metric at 6x or less. Also, we currently have over $600 million of liquidity, including over $100 million of cash and $520 million of undrawn lines of credit. In summary, we continue to execute our strategic plan and focus on our core business. Our operating metrics are improving rapidly, and we are positioned to use this momentum and our strong balance sheet to increase the value of our real estate, drive cash flow and deliver long-term shareholder value. Craig, we'll now be happy to answer any questions you have.

Great. Thank you, Steve. This summer, we saw retailers and landlords benefit from higher traffic, sales increases and really improving leasing metrics. We're just wondering if the Delta variant and the recent rise of COVID cases has had any impact on your traffic and has there been any hesitancy from retailers in terms of leasing new space because of these events?

I really don't see. I really don't think so. Our traffic continues to build sales to our shop and our shopping centers continue to build. And our leasing activity right now is as frenetic as we've seen since the retail has started to come back with an open to buy late in the fourth quarter of last year.

Are you seeing an improvement in terms of kind of closures from the previous retail [ populous period ]? Are you -- I mean, we're seeing overall a benign level of store closing. I'm just wondering is that also extended to the outlet space.

So, we had guided to getting back about 200,000 square feet this year. And so far, have got 135,000 square feet back. I think the 65,000 that's still in that number is probably a conservative estimate. But I think the accelerated brand restructurings and bankruptcies and store closure that occurred in '20, a lot of that is behind us.

Great. And one of my questions, you sort of addressed in your opening comments. It sounds like you're very positive on F&B and bringing it into the outlet centers. I know in years past, people do not consider that, let's say, the most vital component. Maybe express your feelings on F&B and your success in winning those tenants to your properties?

Well, the F&B growth is going to come in 2 different ways. One, in line. And yes, you're right. Food and beverage has always been something that we struggle with in the outlets over the years. But lately, and if you take a look at our portfolio and see where our shopping centers are in the geographies that they serve, they've really become the open-air community centers in a lot of these markets. And we're seeing customers shop our centers for more frequently than we had in the past. Some of that has to do with people moving to these resort destination vacations and moving there -- these resort and vacation destinations and moving there for extended periods of time. We're seeing that customers shop us more frequently. We're also seeing our customers shop more during the week than we had in years past. And I think that, that weekly, daily traffic to our shopping center is something that helps support the food and beverage business. So in line, food and beverage is working for us. We've got a number of locations where we've opened up sit-down restaurants that serve a lot of things for a lot of the customers, not only did they get them in place to refresh and get lunch or dinner depending on the hour that they're shopping, but it also provides an alternative activity for a partner that's shopping that doesn't necessarily want to go store to store and they're looking for something else to do. So fortunately, for us, we've leaned pretty heavily into that, and that's working pretty well. The second phase of that would be in some of the outparcels. We've -- we're going after our peripheral land in a big way. We find that in the geographies where our shopping center is the #1 draw traffic driver, that peripheral land has a lot of value for quick-serve restaurants, drive-through restaurants and other sources of food and beverage.

I'm wondering, I mean, you -- some of your centers have been there for a while. Are you starting to see more development surrounding those centers that add to that resident customer that can be a more frequent shopper? Or is it just that the people are more willing to take more frequent trips to the outlet centers?

No, I think it's a combination of both. I think it's our job to get the customer to shop more frequently. And I think we're doing that with the food and beverage amenity as well as other amenities, great brands. If we provide the things that the customer wants, the trade is they'll come and shop us more frequently. But I also think that a lot of the shopping centers that we built maybe a ring road out of the major city or 2 ring roads out of the major city. Many years ago, I think the growth has followed, and our centers are now sitting in the heart of large residential areas, commercial areas, office buildings and other draws that act as a daytime draw to our shopping centers.

And how important is the international tourists to your centers? I know that you're a very strong domestic tourist draw. But is that another layer of business that could be added on in the months ahead?

Well, that's our hope. We -- although we don't necessarily rely heavily on the international tourism to a lot of the markets that we serve, I'm finding -- we're finding that we -- in markets such as Memphis that there happens to be an international component that visit that market, and we certainly love to get that customer back. But our Memphis center seems to be doing pretty well. So we're doing a great job enjoying the local customer and the domestic drive tourists that's coming to visit that part of the world. And that's one example of 20. So other centers that might rely a little bit more heavily on international tourism, we'd love to see that business come back. But again, our local initiatives have done a great job in making sure that we sustain our traffic level.

Great. And then maybe you could run through some of the new tenants that are approaching the outlet and opening stores that are driving your leasing volume.

So, I'll share some of the tenants that have -- that have opened stores. We don't talk about deals that we're working on, but we'll certainly share with you stores that are already open. And I think some of the more significant, perhaps non-standard retailers that have opened in our shopping center in recent days and months, we've done a great job adding furniture to our shopping centers. Mitchell Gold just joined us in Riverhead. So we're excited about that. They joined a great lineup of other home retailers in that shopping center, and we're really creating a destination there. One of the retailers that opened this summer that has had a tremendous impact on the shopping center is Nantucket Meat & Fish. They opened up in our shopping center in Hilton Head. And I think the impact of that high-end gourmet grocer joining us in that shopping center is that we're seeing a customer shop that center far more frequently. Obviously, a gourmet grocer is going to drive a customer perhaps daily if they're in that market for a few weeks on vacation or staying in their second home, but was getting a better quality of customer that we haven't seen before a higher-end customer and they're demanding higher products as well. So Hilton Head has definitely been the grateful recipient of this high-end movement that the gourmet grocer has driven to that shopping center.

Great. And then how about pop-up? I assume that's still an important component of drawing more traffic to your centers as well as introducing you to these new concepts?

Sure. A year ago, 1.5 years ago, we made the bold move and the swift move to empower all of our general managers to be leasing people. And basically, when nobody was traveling, including our own leasing team, we said to our general managers go out and cheer local geographies and go source some of the local concepts that have become iconic, that have great followings and great draws in your community and let's offer them space in some of these newly created vacancies that we have seen come back during the bankruptcy that we endured during 2020. A lot of these concepts are proven to be great draws to the center. We are seeing customers we hadn't seen before. Some of these concepts are bringing a much younger demographic to our shopping center. And I think that, that's sustainable. So I think that's just one of our short-term strategies that turned out to be a great win for us. When you talk about pop-up, we define a pop-up in our business as a national retailer that wants to try a market that perhaps they've had no traction in the past to see if they can get some sales wins and if so, convert to a longer-term deal. And we continue to use that strategy as we've had for years. And that's a great source of new business and new long-term leases for us as well.

Okay. Sure. And maybe for Jim. Can you talk a little bit about your current net debt-to-EBITDA ratio? And what is the range that you're comfortable that your REIT could operate in, in a net debt-to-EBITDA ratio?

Sure. Craig, our net debt-to-EBITDA ratio for June 30 that we reported in our supplemental was 5.4x, which is very, pretty strong. Pre-COVID, we were around -- we were 6x. But then going through COVID was really tough and challenging and our debt-to-EBITDA ratio climbed into the 7s. Rating agencies, both rating agencies, downgraded us a notch. And really to get back to that rating agency model, we would need to get down to 6 or below, so one of the reasons we set out with a very aggressive strategy to try to get that back down. We did the ATM program, and as Steve mentioned in his prepared remarks and was able to pull down $190 million of equity to pay down $200 million of debt. And then after that, we get a $400 million bond at a lowest coupon rate of our history to extend some maturity. So we were able to do 2 big things on our goal. This was just get the net debt-to-EBITDA down to pre-COVID levels, which I think we will do. Now, the 5.4x, I will say, is probably a little artificial because it's based on a rolling-12 months, and it has fourth quarter of 2020, which had big termination fees and some revenue reversals from some bad debt reserves we set in second quarter 2020. But based on the progress that we're making with the debt reductions with the improvement in our performance and our EBITDA this year, I do think that we'll probably be back to 6x or maybe even a little bit below by the end of the year. And we think that's probably a good spot for us to be.

Sure. And then what is your bad debt reserve trend line look like going to the third and fourth quarter?

Well, we're not giving guidance on that, Craig. I mean I think we have some very positive and strong collections. I think for second quarter, we reported that we had collected 98% of our contractually billed rents for the first half of 2021, which is very strong. We had the big deferred program that we've been talking about that we put in place in 2020, where we allowed tenants defer April and May rents, and that program has come -- has been very highly successful. And I think we've collected 98% or more of that money. So from a bad debt perspective, we're very pleased with the collection rates that we've seen so far this year.

Great. And then are we approaching a time that we might start to see tenants move back to accrual basis versus cash basis? Or is that still ways off?

I think there's probably a few more months. We have a few tenants on a cash basis, probably less than -- probably around 5% or less of our tenants. So there's not that many of those tenants that's on that basis. But certainly have seen some -- for the most part, some good trends. I think we'll want to see a few more months behind us before we see that come back into -- to an accrual basis.

Okay. I mean it seems like you have a benefit that you really have an open-air environment. And the people who have been concerned about shopping in a closed environment, obviously, wouldn't have that hesitancy at yours. What steps are you taking to ensure your assets are safe, including your cleaning regimen? And how do you communicate that your assets are safe to the consumer?

So we were pretty swift in how quickly we stood up our protocols. When the stay-at-home mandates were first instituted and non-essential retail was mandated to close, our team went to work. And obviously, we followed CDC guidelines, and we were pretty cutting-edge in making sure that each one of our shopping centers followed those protocols. Obviously, on-center signage was critical. But as importantly, our use of social media, our use of the Internet, our communication with our retailers, are second to none. We've got a group of VIPs that shop us far more frequently than other customers. And we also have a larger group of -- a group that's called our Tanger insiders that interact with us on our web and our app on a far more frequent basis. And we were able to use those channels to stay in communication. We have maintained those protocols and offer opportunities for sanitation -- for folks to sanitize. Our public spaces are constantly being cleaned and we'll maintain the signage and follow the CDC protocols with regard to mask wearing. Obviously, each of the individual retailers have their own protocol, but we follow CDC guidelines as far as following our protocol.

Okay. I noticed that traffic has returned to the assets. So you're very, very close to 2019 traffic. How soon might it be before you start to report sales per square foot again?

Well, we talked about our sales per square foot at the end of last quarter, being $424 a square foot across the portfolio with the extra note that it was the highest sales per square foot volume recorded in the history of the company, which, if I can add, is 40 years. This summer, Tanger enjoyed 40 years.

Right. And maybe if you could talk a little bit about Nashville. I know it's predevelopment, but what steps are moving and taking that project forward?

We certainly believe in the Nashville market. If you'd been there recently, you'll see it's probably one of the fastest-growing communities in the country. We're very disciplined in our approach to opening up these shopping centers. And we're going to get to a certain leasing threshold before we announce any names and before we put shovel in the ground. At the rate we're moving, it's our expectation that we should be commencing the project early next year. But again, the pace of leasing and making sure that we get the best possible name to the shopping center, we're going to wait until probably the beginning of next year before we start reporting on that.

Okay. And then, how many of your assets in your portfolio have a BOPUS or a curb-side feature? I remember you mentioned it in your opening comments.

Well, we have it in every one of our shopping centers. We've stood up. We're very quick to stand up 3 Ways to Shop. When our shopping centers started to reopen, our 3 Ways to Shop was something that we promoted very heavily on our social media. The first obviously is in-store. The second was our curbside pickup. And being open-air, curbside pickup, particularly in some of our race track design shopping centers is extremely convenient for both the retailer to deliver the project -- the product to the consumer, but also for the consumer to pick that product up. And then the third is our Virtual Shopper. And our Virtual Shopper program is one where a customer could see product online or have shopping concierge shop live for them, package the product and have it ship directly to the consumer.

Great. And is the -- where is the transaction market for outlet centers right now? Do you see many things trading? And are you considering any acquisitions in the coming year?

Yes. I'll speak to the opportunity and maybe Jim can add a little additional color. Like, I don't think that the outlet centers are really trading at any great philosophy right now. We think that if there are projects out there for us to take a look at, they'd be projects that will be accretive from the sales per square foot basis. I think we've set up a best-in-class operating company. So we've got what I consider to be one of the best leasing teams. Our peripheral land team definitely adds a new dimension to that as well. We've got best-in-class marketing, digital initiatives, led by our virtual shopping program, which we believe is here to stay. And lastly, operations; we -- when COVID first came about in March, April of last year, our operations team very quickly went from a centralized operating model to a decentralized operating model, where we quickly empowered each of our general managers to not only be the CEO of their shopping center, but also to go out onto their local communities and be a driver of big business, sourcing short-term tenants, long-term tenants, just to make sure that the lights were on, that our properties were cash flowing. Craig, I said before, that a lot of the shoppers don't know the difference between a short-term lease and a long-term tenant, but they know the difference between a closed store and an open store and keeping the lights on and the properties vibrant was a huge initiative of ours. And I'm very thankful for our operations team, led by Leslie Swanson, who went out there extremely quickly and turned that around. We have occupancy. We reported above 93% that we really have our operations team to thank for a lot of that incremental occupancy.

Great. Okay. And then maybe if we could talk a little bit about your ESG efforts and hit on those that you're most proud of?

Well, yes, ESG is obviously something extremely important to us as a company. And I would guess, if we're talking about the one that I'm most proud of, we have this small business initiative that we stood up. I think in a lot of our communities, we are the center of that geography. We create -- we're the first job for a lot of people that live in that market and for many miles around that market. I don't know about you, my first job was in the retail business. And so it's -- I think I learned a tremendous amount serving customers. I know that it's a great place to start one's career or even if it's a part-term job as it was for me while I was still in school. But we've got one step further and we've -- some of the occupancy that was created by some of these -- the early bankruptcies and some of the store closings give us an opportunity to go into local communities and offer space to businesses that without that opportunity might not have had a chance to stand their business up. In some instances, they were direct-to-consumer. In some instances, they were on the Internet only. But for us to provide an opportunity for some folks to open a store, partner with us for us to enjoy their customer base has been loyal to them that will come and shop our shopping center, I think it helps us grow our business, helps them grow their business. And last week, we just announced in Houston that we opened up 6 of these businesses, mainly women-owned businesses in the Houston market, and they're all enjoying great success right now. So from an ESG point of view, I think that's one of the initiatives that I'm most proud of.

Great. Okay. Well, at this point, I'd like to turn to our rapid-fire question. I have 3 of them. The first one, which of the following is the greatest challenge facing U.S. REITs today; a, Fed action and higher rates; b, supply chain issues, which include labor and logistics; and c, flow to non-traded REIT?

I'm going to go with b.

Okay, supply chain. I find that interesting, given that during the outlet with supply chain issues...

You said labor, and I think that one of the big issues that a lot of our brands are seeing right now is keeping the stores staffed. And although they're doing a great job of converting customers into higher sales and bigger baskets, that's -- we, as a company, are running multiple job fairs trying to do the best that we kind of bring people in to help our stores, keep them staffed with quality sales help.

Okay. Great. And then the second question, over the next 5 years, which market will outperform, Urban Coastal or Sunbelt?

Sunbelt.

Sunbelt. But what is your exposure to Sunbelt?

Well, we are -- I would say that we are pretty much Sunbelt dominant right now. We believe in that market. We're in South Carolina, North Carolina, Virginia, Georgia, Texas, Florida. And we believe in those markets. We've seen the traffic. That's where we saw the traffic return quickest, and that's where we saw the sales impact inflect quickest.

Great. Okay. And then, the last question, and this is for your company's office. For your company's office plans post pandemic, will you, a, have no changes from pre pandemic; b, leave it up to the teams; c, offer hybrid; or d, go full remote?

C.

Offer hybrid. Great. Okay. And then, when you think about Tanger and the 20-plus other retail REITs out there, what do you think is your single biggest advantage versus those other 20-plus retail REITS?

I think Tanger has a great brand name. And the name Tanger, it means outlet, it means value shopping, it means great customer experience. And I'm personally thrilled at the recognition that, that name gets, whether it's on an investor conference or when we're meeting with individual customers or retailers. So we're thrilled that we've over 40 years really built a great brand in Tanger.

Good. I think that's a good note to end on. I would like to thank you, Steve, Jim and Cyndi for agreeing to come on and do this roundtable. I hope you have a great rest of the year, and I hope you have a great rest of the conference. Take care.

Thanks, Craig. Appreciate it.