Tanger Inc. (SKT) Earnings Call Transcript & Summary

Welcome to the 5:00 O'clock session at Citi's 28th Annual Global Property CEO Conference. I'm Michael Bilerman. I'm sitting here with Steve Yalof. We're extraordinarily excited to be here. I'll turn the microphone over to Nick Joseph.

You nailed it. And Craig Mailman will be here as well. We forgot, this session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast at the AB desk for those in the room or the webcast, can submit questions through live QA. Steve, I now turn it over to you. You can introduce the company, any members of management that are with you today, provide any opening remarks, and then we'll get into Q&A.

I think Michael wanted to share a few notes on this year's conference before we jump to in. I'm Steve Yalof. I'm the Chief Executive Officer and President of Tanger Outlets. And I've been with the company for going on 2.5 years. I've been in the outlet center since they started outlet center business since they started back in the early '90s. So I spent my journey both leasing outlet centers and representing retailers in the outlet center space. Sitting with us tonight are Doug McDonald, who is our Head of FP&A, and the gentleman on my left who needs no introduction. And I'm going to hand the mic over to him and let him take over and talk a little bit about the founding of Tanger and where we are today.

Thank you, Steve. Extraordinarily excited to be here. It's weird being on this side of the table versus that side. For those that don't know us, Tanger Outlets is a pure-play outlet REIT. We're about $2 billion of equity value, $3.3 billion of enterprise value. We're currently 5x debt to EBITDA. And of that debt to EBITDA, we're sitting on $273 million of cash. We operate 36 centers across the U.S. as well as 2 in Canada. Is there Canadians in the room? Afternoon. Okay. We're also celebrating 30 years as a public company this year. The company was founded 42 years ago. And so there's a tremendous amount of heritage and foundation that exists at this company. And when Steve and I met, I guess it was July of last year. As I thought about my path, I couldn't be more excited to join a company that has such an engaged team overall and such a great growth opportunity ahead of us in a channel that means so much to the retailers and brands that occupy our centers and the consumers that shop every day in our centers. And that uniqueness of the channel is so important overall to both the retailers and the brands as well as the consumers that shop our centers. And we can go through a number of that, but that's a little bit about who we are, and I'll turn it back over to Nick and Craig to go through the Q&A.

Awesome. Thank you. We are doing our opening question. What are the top 3 reasons that investors should buy your stock today?

Only 3?

It's only a 35-minute session, Mike.

Sorry. Look, the key one, our strong organic growth with multiple levers to pull to get there. The second is and I mentioned in the opening comments, that our underleveraged balance sheet with significant cash, which provides us the opportunity not only to be defensive in an uncertain environment, but provides us significant capacity to go on offense. And the third is our team, the Tanger team and all 600 employees, whether they're full-time or part-time that's driving this growth, the Tanger brand name and the Tanger operating platform overall as the 3 reasons. I stuck 3 into the 3, but that's okay.

That works. So one of the challenges that has faced Tanger's sort of the perception gap between how investors may view the company and the outlet asset class, first out of tenants. Could you just discuss this divide and maybe some of the ways you think it can be bridged over time?

Thank you for the question. Well, first of all, I think that if you take a look at Tanger and take a look at the history of Tanger, they really developed the concept of the outlet. I mean Stanley Tanger 40 years ago was selling men's sportswear out of the back of his manufacturing facility and finding out there were more customers waiting out back then were waiting upfront and the outlet channel was birthed. Since that time, the trick has been to lease the space to manufacturers direct to the consumer, so that the manufacturers can ask some of those savings that came from no middleman back to the consumer. And I think a lot of that same challenge is with us today as it relates to what the outlet center makeup looks like. There's a lot of brands that were in the outlets 40 years ago that are still there today, and then we've cycled through a number of brands. And so the makeup of the shopping centers, the mix of old and new. For us, as I look at the last, I would say, 3 years since we -- since COVID actually pushed the big reset button on our business is we had to look at our business slightly differently. I think that you have to look at it from a customer perspective and then also you have to look at it from the perspective of how do we, as asset managers, go out and actually monetize a lot of the opportunity in the centers that maybe wasn't as important or things that we -- that hadn't been looked at in the past. So the levers that Michael was talking about when we talk about organic growth, the first lever is we -- this team that we've assembled in the last 2.5 years truly believes in the real estate in our assets. And where at 8.5% OCR, which is our occupancy cost ratio, we think we're the lowest in retail. Forget about being the lowest in bricks and mortar. I mean we're as cheap as you can get for a real estate -- for a retail company to come and start a business. But for us, we think there's great opportunity for us to push our rents. So the first big growth driver for us is how do we push our rents. And if you've been listening to our earnings calls or reading along with our growth over that period of time, we've had 7 consecutive quarters of rent spread growth and, most notably, our most recent quarter, we've grown our spreads on a blended basis by 10%. That's 30% in re-tenanting and about 8.5% in renewals. And I think renewals is really important because basically what that is, is existing tenants voting to stay in your shopping center and voting to pay more to be there. So when you've got some of these tenants, whether it's Nike or Coach or Kate Spade or Ralph Lauren and their leases are coming up without option, we have the opportunity to go back and reprice our real estate. And we've been doing it quite successfully. Another important lever that we're pulling is we're monetizing our external land. I mean that's something that we really hadn't done as a core driver of growth in our business before. So where shopping center sits on 30 acres that covers the outlet center itself and the parking that extra 20 or 30 acres that we bought when we originally built this has a lot of external peripheral opportunity, and we put a team together in the last 1.5 years just to go after that peripheral opportunity. And then the third leg of growth from a revenue driving point of view is we get over 100 million people a year come through Tanger centers, and that's a lot of eyeballs. And we've figured out real constructive ways to go ahead and monetize those eyeballs. Whether we're doing that with digital advertising on site that advertises not only the retailers that are in the portfolio, but also some of some external brands, national brands, international brands, Unilever, Heineken, Tesla that want to monetize the eyeballs on an outlet center and pay us a lot of money to do so. And what's interesting is our scale. So if you do a deal with Tesla, you don't put them in one shopping center for a weekend, you put them in all 40 for the weekend. So there's a lot of opportunity, a lot of upside, and that's a big business. We put that in the other revenues line, and that's a big growth driver for us. And then lastly, we know how to operate centers. We put an operating team together. And the -- I would say that the prior Tanger regime was a little bit more centralized. One of the first things that we did when we took over this portfolio is we completely decentralized our operating team. So I put our general managers, we made them as the CEO of their shopping centers. And we said, if there's a square foot of vacancy, you go out and find a tenant to take that vacancy until we put a permanent tenant in that space. So a lot of people have questioned our temp occupancy and saying, well, your number has gone from 6% to 9% or 10%. Well, that's because I now have 36 new leasing people out in the field leasing space when I've got Under Armour, you can't take delivery possession until '24. I want to make sure I don't have just a coming soon Under Armour side in that space. I've got a vibrant tenant cash flow and paying us rent lights on. I often say that the shoppers that come and shop in our centers, they don't know the difference between a short-term tenant and a permanent tenant, but everybody knows the difference between a closed store and an open store. And for us, we want to make sure all of our stores are open, they are cash flowing and lights are on. And then the last piece of that is the ability for those general managers, those CEOs of each of our centers to actually go in and manage the P&L and manage the expense structure. So when we're centralizing we're treating all 36 shopping centers the same, I've got general managers that understand snow in the north and others that understand the important shade structures in the south. And it's important to have those general managers operating the centers. They know how to pull expense levers when they need to pull expense levers, and we're operating each one of our centers far more efficiently than we had in the past. So expense savings is a growth driver for us as well.

That's really helpful. And you hit on a bunch of topics, I want to unpack a few of them. One of the first ones, you mentioned your OCR sub-9%, one of the lowest in the overall retail space. And we adjusted on our property tour on Sunday, which much appreciate you guys participate in that. And he was just going through the opportunity. And maybe to put Michael on the hotseat a little bit here. Not that he ever did that to anybody. But just to try to put some flesh around if you were to bring that 9% up to more of where you think the OCR should be for your tenant base for the assets, what kind of earnings growth that may have over time.

A lot. I mean you can do the math, right? I mean at 8.5%, every 50 basis points is a dramatic amount of rent. And it's going to take time for us to get there based on our role. So where we sit today, we have 17% of our rents rolling this year and another 22% next year. You've got 40% roll. And at the same time, we have that shorter-term temporary space, which we can see multiples of growth on because our OCR is just in that permanent occupancy, and we feel that over the next few years, we'll be able to move that 8.6% higher. Some new deals we're doing are in the double-digit spread range. And you can do the math in terms of our gross sales, take our sales per foot times 12.5 million square feet, north of $5 billion of sales, take 100 basis points of that sales number, start to buy by 110 million shares, there's a fair amount of upside over time in our portfolio.

And we got a follow-up to that, where -- and just again, touched on this on the bus, but for people that weren't on the tour. The question is outlet retailers typically pay low minimum rent per square foot, explain how you're able to get these tenants to pay substantially higher fixed minimum rents and kind of sweeping that overage rent into that fixed minimum to improve your spreads over time.

Yes, I'll go back to the renewal activity that we've seen. And I think it's important to call that out. Like I said a few minutes earlier, when a tenant renews in your shopping center, they're voting to stay in a store that's pretty productive for them. Having spent a lot of time in my career on the retailer side of the transaction, I know firsthand, retailers are not going to close stores that are cash flowing positively. Not only that, but where they have a built store that's fully amortized, if you take a simple example of a store that cost $2 million to build it, has $500,000 worth of positive cash flow, you can't replace that cash flow without spending that money and building a brand-new store. So just that thought process alone gives us a little bit of leverage when we go into a negotiation because we know that the retailer is not necessarily going to close that store. They can pull a head fake and a lot of retailers do. A lot of retailers threaten to close if they don't get the economic deal that they're looking for. So when we've got pricing power, which is we believe that we do now, and I've got a team of people that are doing our leasing that truly believe that in our real estate and know that we can push more rent through that portfolio of ours, we'll call the bluff. And in many instances, we find ourselves in a really dominant location where we can actually recast those deals. What Justin was sharing with you was during the COVID period of time where we were favoring occupancy over rent, and we were making sure that we kept retailers alive lights on because once a retailer closes a store, there's a very strong possibility, you're not going to get them to reopen that store again. We made a couple of strategic decisions to trade base rent for a larger piece of overage rent. As we all saw in '20 and '21, outlet and open-air retail rebounded probably faster than any of the retail category that with the exception of online, obviously. But for us, we saw sales in excess of the prior year sales, which with higher percentage rent breakpoints yielded us far more rent than we had anticipated getting. In a lot of instances, a lot of the retailers who thought that they were being smart and derisking their business by taking a lower base but paying up a higher percentage ultimately pay close to the same and, in some instances, more rent than they had been paying in the prior year. So as we took those short-term leases and we started to recast them, what we did was we took a lot of that variable or percentage rent, but in the base rate -- base rent line and therefore, derisked a lot of that variable going forward. So that's sort of how we've been able to build these new structures. Now historically, percentage clauses in outlet leasing carried in the 4%, 5%, 6% range. But through COVID, where we started to charge 8%, 9% and 10%, we made a strategic decision as a company that we're not going to go backwards. So now not only are we getting those market-based rents, but we're also getting much higher piece of the profit share, 8%, 9% and 10%, and that's all that all together, that's helped driving this NOI growth that we've been showing you over the last couple of quarters.

And to go back to your comments on the temp space being 5% to 10%, and you guys getting questions from investors, but then you're framing it as, well, we're not going to have a commencement for a year or so, I don't want the space dark. I guess if we think about that 5% to 10% temp space, how much of that is actually a space that's leased in the future with future commencement dates that's sort of temporary temp space versus just vacancy that you haven't gotten to yet that's a pilot store or something that is sort of a test case.

Yes. Look, it's probably a pretty low percentage or a lower percentage. I was using that as just as an example. But I will say without measure that every one of our 10 [ deals ] has a 30-day right landlord CAC. So basically, we control the real estate. And that's the most important part of a temp deal. So if I'm going to put lights on for a retailer in there, get them open while I'm waiting for a permanent lease, somebody who expand next door or a new tenant that I'm working on, that's just not open yet. At least I know that there'll be very little friction in getting that retailer out won't cost me anything to move them. And frankly, in time store is cost maybe even put them in there and certainly won't cost me anything to move them. What's interesting about the temp percentage rate of temp space that we have in one of our shopping centers, if I have a center that's less than 100% occupied, I obviously have some space in that center to lease. So if I'm using that example that I gave you before, if I put -- Under Armour in that 2,500 square foot temp space that I'm holding, I give that temp retailer when I said him his 30-day cancellation notice up against the -- Under Armour delivery possession date, I give me the opportunity to take a temp space someplace else in the shopping center. And if they move, theoretically, my temp percentage stays the same, but my permanent occupancy is growing. And that really all contributes to that 170 basis points of occupancy that we've seen in our growth in our -- in that last quarter. But more importantly, at a 97% occupancy, we've got half of our portfolio is 99% to 100% occupied right now. And that's coming off of Cove, where we lost 1 million square feet in a 12.5 million square foot.

And as you think about that, and again, not to dwell on the Temp space, but some of it ultimately becomes incubator, right, where some of these flyers or whatever you guys call them in terms of that pop-up.

Try before you buy.

Try before you buy. How -- what's the hit rate on that turning into a tenant at that center or a tenant in multiple centers? And to give a return on that short-term investment for investors to understand that this is just part of the business of fostering new relationships to try to get on the ground.

Yes, we have a pretty good success rate. I mean, let's go back a couple of years, [indiscernible] started out as a pop-up and now we have in 12 centers. UGG was a pop up. We have them in 15 centers. So a lot of these national brands that everybody knows, they're going to come in, they're going to try outlet before they -- first of all, what's interesting about outlet is we talked earlier about whether it's made for outlet or excess inventory that they're cycling through the outlet channel. A lot of retail, you can't just go into the outlet business and start manufacturing. You have to start with that excess inventory because that's pretty much what fuels a lot of these pop-up stores. I've got 100,000 units of excess inventory. Not sure how long that's going to last, not sure how many units I'm going to have in '24 and '25. So not willing to commit long term right now. But I'd like to give this thing a go, so let me pop up until either I run out of excess inventory or let's just see what '24 and '25 yields as far as excess is concerned. And we're finding a lot of instances. It turns out to be a very profitable channel for a lot of the retailers because they're clearing a lot of excess, they're turning it into cash and they're converting a customer who may shop aspirationally may not -- may see price resistance in Ralph Lawrence or Madison Avenue. They might not want to walk in thinking it's more of a museum. I can't touch anything when they walk into these stores. But in an outlet store, Ralph Lauren, it's aspirational. It's built for people who love the brand and want to buy in and gives them their first opportunity to do so. It's great for us because Ralph Lauren is a great draw to any outlet center. And it's also great for the shopper because that shopper gets to buy into a brand that they have aspired to buy into perhaps for many years. And it's great for the retailer because now Ralph Lauren has a brand-new customer who's finally bought into their product, and it's up to Ralph to figure out how to drive them and get them into their higher-priced products.

And one of the questions I've heard from people, you guys have a pure-play outlet, Simon has the premium outlet. I think Chelsea, which Simon Bolt, always said that reputation being more of a clearing outlet relative to maybe the view of Tanger and the public market. I mean, could you educate us on the kind of mix of made for outlet in your asset base versus that clearing channel and kind of give us a sense of myth bust, I guess, to some extent that -- that view of your portfolio made for outlet.

Yes. Look, I think most outlet retailers really started as clear a channel, 100%, whether you're Coach, Mike Kors, Kate Spade, it was a clearance channel. There is a customer there in said 100 million customers a year shopping to our shopping centers, a lot of people there to buy a lot of that excess inventory. Now what's happened as they begin to evolve, particularly some of the apparel retailers or footwear retailers, if they decide to manufacture some of their goods and the goods that they manufacture can come in a lot of different forms. They could make product excess runs, so things that might have been in an apartment store. They just do an excess run a lot of those goods wind up in an outlet channel. They can do that product line called the cut-up. And what that means is if a manufacturer has excess piece goods that they use, they have roll and they have this top seller that they were cutting in Cashmere, they take that cashmere selling silhouette. They cut it in the wool excess piece goods. They call that cut-ups and they sell those in the outlet because it's a great style. They know it's sold out, but now they can get rid of some of their excess piece good inventory by selling cut-up goods. And then the last piece of it is that a lot of these brands, they wanted size runs. If you go into some of the more high-end luxury outlet stores, you might find in the shoe category, size 2 in size 14 and nothing in between because none of the size ranges come back to the outlet because they typically sell through. So a lot of the retailers had to manufacture product in the size ranges so that they don't frustrate and walk customers. So what we're seeing is a real mixed bag, the more seasoned, the more professional or outlet retailers who've been in the game for far longer definitely have figured out how to manufacture for the category, but there is some of the newer brands, and we've just got a bunch of deals with direct-to-consumer brands, All Birds, Mac Weldon, Serena and Lilly just to name a few. They're in this business to clear excess inventory. They're not in this business because they're manufacturing for outlet right now.

So a couple of questions coming in. First one, your properties are typically in remote locations, not near dense populations. Is it realistic to really add mixed-use components to these assets?

That's fake news. So if you take a look at the outlet center of 30 years ago when I was just a boy leasing outlet centers, Yes, they were further away. Why? Because they had all this wholesale channel conflict. And Ralph Lauren didn't want to be within 50 miles of a Dillard's or a Macy's or Nordstrom where there would be -- where they would compete at wholesale price point. That narrative has changed considerably. In fact, I've got a shopping center currently under construction in Nashville, which will open up in September, September 14, and it's 12 miles from downtown. So that paradigm has broken. A lot of our shopping centers are far closer -- closer in than they had ever been before. We're also in a lot of destinations that are high American drive-to tourist destinations, Myrtle Beach, Hilton Head, Daytona, Palm Beach just up the street. I would argue that Palm Beach is not in a remote destination by any stretch of imagination, over 150,000 cars a day passing that center.

And this goes to one of your other initiatives, right, to shrink down or take some of the existing retail to repurpose to F&B to increase 12x and just enhance the center. I mean could you talk about that initiative? What types of returns do you think that could ultimately have a tangible and intangible, I guess, as well?

Well, I think, first of all, A lot of these outlet centers have food courts. I think the food court is sort of a thing of the past. I think sit-down restaurants are far better experience for shoppers who want to spend a day and make an outing of a shopping center visit. We like to think of ourselves as an experienced company so that we want to make sure that we think customer first, think customer experience and what does the customer want to see when they come and shop at one of our shopping centers. Not only do they want this great opportunity to buy great brands at value every day and that's what we offer. That's our core business model. But in addition to that, we're looking for a far better food and beverage experience, looking for better amenities, they're looking forward to entertainment, ways to keep themselves occupied on center for longer. And they're looking for reasons to come far more frequently. And if we can deliver that complement of things, whether it's better food and beverage, better entertainment, better experience, better amenities when you're there. And that amenities could be, whether it's a fire pit in a colder climate shopping center or our amenities could be Tanger Club that is sort of a gamified program that we run, where if you're a member of the Tanger Club in addition to the everyday value that you get in our stores, we can provide additional value to you. And the more that you sort of play in the club, the more you can unlock additional value. So we think that there's lots of different ways that we can take the Tanger brand coast-to-coast, figure out how to unlock a lot of that Tanger Club value and provide a much better experience to our shoppers as they come to our centers.

And from a capital commitment perspective, I mean, doing that initiative versus maybe unlocking some value in the parking field, either through pad sites that you ground lease or develop themselves. I mean what kind of -- what's the magnitude of a capital commitment we should think about here? And what would the targeted return be?

Can I turn that one over to my Chief Investment Officer.

So as we think about I will take that. So look, we want to get the best return possible. We're going to target high single-digit, low double-digit returns on our capital. And you articulated something that we're focused on, it's activating a lot of our land surrounding our assets and being able to bring those uses in on an outparcel basis where we are they're going to develop a box or round lease the box and then fill in within the in-line space and those we want to get appropriate rents relative to others, we don't take a low rent just to have the use. We want to make sure that we're earning the appropriate return on that capital and on that space.

And Michael, maybe sticking with you, we got a question coming in, considering the discount to NAV, why aren't you using cash to buy back shares.

So a question that I would have asked myself sitting on your side of the table. We agree our shares are trading at attractive valuation, whether we look at it on a multiple basis or a value implied cap rate basis based on the city model, we're trading at almost a 10% implied cap rate. And we looked at our capital in a couple of ways. When we think about buyback, we would reduce our equity base and raise leverage. We think that capital today would provide us a better use in investing in our portfolio and looking at potential external growth initiatives. And that capital today is earning a yield, right? So Doug has done an amazing job at getting great interest income on that cash. And so it's not burning a hole in our pocket right now. And so then we have to evaluate the best use, but we don't think shrinking our equity base right now is the right thing for us to be doing.

Why do you think you trade at that discount.

I mean why do you think we trade at that discount.

You answered a question with a question.

You wanted the rapid fire. You're surprised.

Our shares have performed really well. We're not -- we're very cognizant of that, and we're cognizant of our valuation. We think that we are unique in the retail space. We don't really have a comp per se, and I think it's going to be our job to work with the investment community and demonstrate why we believe our cash flows deserve a higher multiple. But even if we don't get the higher multiple, we think we can provide an extraordinarily attractive total return. We came out with our guidance this year. That tells a lot better on this. Yes, we came out a pretty attractive growth profile. And combined with our yield today, which is north of 5%, 4.5% with a below average payout ratio, right? So we're offering a higher-than-average dividend yield with a below average payout ratio, which is providing us a lot of free cash flow to invest and to bolster our resources. We think that's an attractive total return for shareholders.

We've been trying to probe people on ESG initiatives for 2023. Just curious maybe what the #1 focus is for Tanger in this year?

So we have our ESG report that's out there. One of the key initiatives we have for this year is to continue our commitment to help build out our EV charging network for our consumers to come to our centers. I mean when Mr. Yalof comes with in his [ Rivian ], he's able to plug it in. when it works. We've actually changed out all of our vehicles at our centers to electric vehicles, which we think is also an important initiative. So we're trying to do our part in our operations in being ESG friendly.

So before I go to the rapid fires, I think one of the questions that came in, how has Bilerman complained about the conference, i.e., music, food, lack of photos of him. That's verbatim, by the way. I think that's for Steve.

Who's the answer that one.

Moving on to the rapid fire, though. Before I do that, does anyone have a question from the audience? I don't want to -anything -- literally, anything you can ask me. You've all been waiting for this to come on right. Come on. All right. So what will same-store NOI growth be for, I guess, retail overall, not necessarily Tanger in 2024?

5%.

Best real estate decision today for Tanger, buy, sell, build, redevelop or hold?

All of the above. But I'll give you -- I will say, buy for the spreadsheet. But as a company, we constantly look at every decision every day, right? And we're going to adjust to the marketplace. We feel today with our balance sheet where it is and the opportunities that could come unfold, we think that's an attractive market for us to expand our portfolio.

Try to keep it to one word answer -- and then will the retail sector have fewer, more of the same amount of public companies this time next year?

Fewer.

Is the city office much more quiet without Michael? Again, [indiscernible] Is the Tanger office louder?

Yes.

Well, thank you guys so much. And Michael, congratulations. I know you missed being on this side of the table. Anything that you would have asked that we didn't?

I mean, I don't know, on a personal basis, it's wonderful to have had the team and the career at Citi. And for my own self, I was the son of a leather manufacturer growing up. I started as the retail analyst, and I feel a little bit coming home in many ways coming to a family founded business and joining a new management team that were all really hungry to deliver value for all of our stakeholders. And so I missed being on that side, but I'm extraordinarily excited to have joined Tanger when I did and hopefully deliver value for our current and hopefully, our future shareholders, where we think we have a great opportunity to deliver really strong growth from a channel that's really valued and is open air shopping centers, we trade at the lowest multiple. So hopefully, that provides some experience.

We're extraordinarily excited. Thank you for taking us out to Fort Worth in May, May 17.

May 16 through 18. All right. Thank you.