Tanger Inc. (SKT) Earnings Call Transcript & Summary

Good afternoon -- or good morning, everyone. Welcome to Citi's 2025 Global Property CEO Conference. I'm Craig Mailman with Citi Research, and we're pleased to have with us Tanger and CEO Stephen Yalof. This session is for Citi clients only, and disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand or go to liveqa.com, and enter code GPC 25 to submit questions. Steve, I'm going to turn it over to you to introduce your company and team, provide the opening remarks, tell the audience the top reasons that investors should buy your stock today, and then we can go to Q&A.

Well, thanks a lot. Thank you for having us. And as is the tradition at this conference, I find I would be depriving everybody in the room if I didn't turn my opening remarks over to Mr. Bilerman.

Thank you, Mr. Yalof. Thank you all for being here today. I'm Michael Bilerman, Tanger's CFO and Chief Investment Officer. We're joined here by Stephen Yalof, our President and CEO; and Doug McDonald, our Treasurer and Head of Investments in all Capital Markets; and Cassey and Suzanne, our IR team. Tanger, for those that don't know, we're an open-air retail REIT, with investments in both the outlet as well as open-air lifestyle industry, been around for 44 years, 32 years listed on the NYSE, market cap today, just over $4 billion and an enterprise value just under $6 billion with an investment grade, well laddered, low leveraged balance sheet. Today, we have 42 centers across the U.S. that comprises 38 outlet center, 3 open-air lifestyle centers and one adjacent managed center within our portfolio. Over 3,000 different stores in our portfolio from over 700 brand name retailers. And the company, with this foundation, is really positioned for growth. And we think about the opportunities, both from an internal perspective, as well as an external perspective to help drive that overall. Craig, you asked for the top three reasons an investor should buy our stock, which is their decision, like we can't comment in terms of why. What we can do is hopefully put our heads down and try to create the most value for shareholders overall. And we think about what those three key reasons, but what we're trying to do, which is drive internal and external growth, and we think that there's a lot of opportunities for that. Number two, it's our solid balance sheet with ample liquidity and low leverage to be able to execute against those growth objectives. And the third one is really the best-in-class operating, leasing and marketing platform that we have built that we believe affords investors the opportunity to share in that growth that the team can go after. And all of this is backed by very positive retail industry dynamics with low supply and a lot of tenants demand. So having the industry tailwinds, combined with our own tailwinds, we think, creates a very good match.

That's helpful. And maybe just starting on the leasing side, you guys have transitioned from solely outlet focused to now, including some lifestyle centers. But even with that, you kind of sidestepped a lot of the bankruptcy issues that are weighing on some of your open air peers in more of the strip space. But could you walk through some of the tenant exposures you're actively managing from a retenanting perspective, maybe some of the legacy brands? And in the outlet, so then kind of the tenant pool that you're dealing with, whether it's Forever 21 or others. Kind of talk about the watch list.

So Michael, why don't you share the facts and then I'll talk about the strategy.

Sure. So we talked about in our earnings call 1.5 weeks ago, our watch list remains at manageable levels. We did get asked specifically about Forever 21. We have 9 Forever 21 stores. They average 11,000 square feet. So just call it about 100,000 square feet on a total portfolio of 15 million square feet or just under 70 basis points. And we commented that the rent levels are below our square footage levels and something that we have contemplated within our guidance, and we think there's a lot of opportunity within those specific boxes that you called out [ prior ].

And I think strategically, if you take a look at what we've done as an organization, I would say even going back 4 or 4.5 years, is when we got a lot of space back post-COVID, I would say we were a 12.5 million square foot company that got about 1 million square feet back pretty significant. Just taking a look at the geographies where our centers were, taking a look at the makeup of our centers, who the customer base was, shopping those centers. We fill a lot of that space, not only with other outlet retailers, but we also fill it with different uses. We added entertainment uses. We added restaurants. And we found over time, the evolution was that the customer was actually coming and staying longer, maybe coming for the food and staying for the shopping, coming from the shopping and staying for a movie. And so because of those changes that we made to the footprint in the outlet space, we felt that we were set up pretty well to go after other types of retail, similar in scope in that, as you know, Craig, I spent 15 years at the head of real estate at Ralph Lauren. Somebody wanted to do a full price Ralph Lauren store, a street store or an outlet store, we were a one-stop shop. You picked up the phone and called us, and we were able to execute to that to Ralph Lauren across all categories. Knowing that, that exists with a lot of our other retail partners, but the outlet is not in one geography and streets or in another, it's just -- it's the same relationships that we have with most of those retailers. Lululemon's in our outlet footprint, Lululemon's in our full price footprint. Sephora, same thing. And I can multiply that by 50 or 60 tenants that we've got great access to. The other side of that coin is getting into this new business model. We now have access to retailers that we never had a chance to talk to before. Apple is a great example of a retailer that is not in the outlet business and probably won't be in the foreseeable future. But now with several Apple stores in our portfolio, we have a communication with a really important brand, that ultimately is going to continue to grow. And who knows if one day they decide they want to be in a different business, we now have a relationship with them, and multiply that by the 15, 20, 30 other brands that similarly have that sort of non-outlet yet mindset, that may ultimately come into our portfolio.

And having towards a fair amount of your assets over the last couple of years, we went to Glendale in -- after NAREIT. And that's just an asset in a market that's filling in around you, right? And some of that, as you guys kind of bucket your portfolio to the 4 different levels, as you move into adding the lifestyle centers, which is the natural extension, is there an opportunity for a center like that or other centers in that Tier 1 bucket to just become lifestyle over time to where an Apple, in 10 years, could say, it does make sense to come to Phoenix, because we don't have a store in this market, maybe it's a great place to be, right? Is that -- how has that transition revolution going to play out for you guys over time with the line between kind of outlet and lifestyle submarkets borders?

So I think it plays out in a number of different ways. First of all, in line retail, obviously, we've been -- Deer Park is a center that's probably same Tier 1, very similar to Westgate, where we have a movie theater in an outlet shopping center, which is very unique. And we have -- we've been replacing a lot of the retailers with brands like Sephora, that isn't necessarily an outlet retailer, but draws a great local customer, has them come and shop with us more frequently and obviously keeps that stay longer when they are there. Sephora is a great brand for a number of reasons. I mean they draw a much younger customer, who, we're trying to market to right now, but also has a lot of experiential and entertainment-oriented uses embedded in that store. You can get your hair done, you get makeup done. There's demos all the time. They're giving away free product. So stores like that create excitement and create motivation for people to get off the couch and into the shopping center. Using Westgate as another example, we bought 7 acres of peripheral land in Westgate that we're now currently leasing between restaurants or other uses. So we're expanding the outlet nature of that property, include alternative uses that drive a customer into our parking lot, and hopefully get them to stay for the outlet shopping as well.

And you guys have made a push into more technology with the Tanger app and -- what has been the early takeaways from that project from a data analytics perspective? I don't know what kind of information you're gathering, but are you seeing anything from dwell time from income demos changing of that customer base? Kind of what's that giving you insight into?

Well, from a technological point of view, I mean, look, we'll look at two different avenues. Obviously, our social media game has been accelerated and elevated in a way that is just -- I mean far surpassed anything I ever thought about when I thought about social media, things like TikTok, Instagram, content creators, influencers that are creating content for Tanger just by virtue of shopping our centers. University of Alabama coming and shopping at our center and then doing the University of Alabama Hall, where these women who go attend the university come by bags full of stuff and then they go home and show their friends in the TikTok, "Hey, look, what I bought it Tanger today." You can't get better advertising and marketing than that. From a technological point of view, I think where we're really leaning in heavily is in our loyalty program. Now loyalty is really tough to crack the loyalty code when you don't own a product. But in the outlet space, what we do own is the ability to give our loyalty customers additional value. And there's a concept in value shopping called stacking that not a lot of people understand. I sure everybody who's gone in with a discount code to a store and said, "Hey, I've got my 30 off code, and there's a product on the rack that's also 30 off. And at the register, they're going to say, "Oh, you took the 30 off that we're already giving you. You can't pile this other code on top of it. Our loyalty program allows you to stack those offers on top of each other. So you can get 30 on top of 30 just by virtue of being a loyalty customer. Now for us, how -- the product that we're exchanging for loyalty is partnership with retailers that allow us to give that extra discount. They can do that in the outlet space, not necessarily in the full price space. So, as we continue to craft our loyalty program amongst outlet retailers, we'll see how it ultimately extends. But what we're getting in exchange for the additional discounts is great data about our customers. You compare your credit card with our loyalty program. And so if you shop at Sephora or Polo or any of those stores in our shopping center, you'll automatically get your loyalty points on the app, without any extra steps taken. So it's like scan your credit card that you use on the loyalty program and then you get rewarded with those points. So -- and the redemptions are great too because they're funded solely by the retailers. So it's a -- it's an operationally intensive business for us. We have a team of people that just think about what's the next great offering. But it's a great opportunity for the brands to capture data, for us to capture data and then using generative AI, which is sort of the future of this program, we're going to be able to communicate to you if you're a Nike customer, only serve you up Nike stuff or Adidas and New Balance versus if you're a Coach shopper, we'll serve you up Coach, maybe Kate Spade, maybe Tory Burch or Michael Kors. The point being, we want to train you to open the e-mails, not delete the e-mails. And we're actually pivoting now into more text, because we find that the text opening rates are far better than the e-mail opening rates.

And for the retailers that participate in these programs, are they allowed you to stack like, what type of bump do they see on those days that they offer this, right? And how is that -- and how does that benefit others in the center? And so collectively, like is there a buy-in from tenants at assets that you should participate in this because not only do you get a bump, but you bring in more traffic generally. And so everyone kind of takes their turn and it's -- you may lose out on profitability that one day, on the margin, but over the long term, it lifts all books.

Look, outlet retailers have outlet stores for a number of different reasons. Obviously, they're very profitable and the cost of opening them are relatively low. So there's a lot of margin in outlet, believe it or not. But there's retailers that are still looking to use outlet to clear excess inventory. So even if it's a breakeven on the product, they've turned inventory into cash, and that cash becomes working capital for the next shipment. So we find that the retailers are definitely very willing to work with us, if we can continue to drive traffic to their stores and into our shopping centers. And that's really -- that's how the project is funded. The real sophisticated outlet retailers in the space today give the general managers or the district managers of those stores the ability to change their own pricing on a daily basis if they need to. So if there's an extra shipment -- Polo knows that they're getting a big shipment on a Thursday, and they didn't sell through the inventory that's on hand. They can, on Wednesday, do a promotion to clear out the excess to make room for the shipment that's coming. And this is how it works. And it's pretty amazing just to check it out from a sort of an operational point of view. But using our loyalty program, we can very quickly turn around and add, hit those retailers that have held up their hand and said, "Hey, I'm a Polo customer, and we can get out in front of them and help them move that inventory at a -- in some instances, a better price or maybe move a key item, however, that works from a retailing and merchandising point of view.

And we have a question coming in from live QA. Usually, we think in outlets in the outskirts of the city, however, value stores are getting into the city. Do you think that is a trend where the location for outlets is changing?

Yes. I love that question. As you know, Craig, I've been in the outlet business for over 30 years. So when I was originally leasing for New Plan Realty Trust, now Brixmor, we had 4 or 5 shopping centers that were 200 miles away from anything. And the reason being, Polo wouldn't put an outlet store or Nike wouldn't put an outlet store that close to a department store, for fear that it would create cannibalization. That narrative has completely changed. Over that time period, those many vast years, the brands have changed, vertical retail has gotten into the outlet business. Gap's a great example. When I was at Gap in the mid-90s, every 10 stores, we would have a consolidation store, meaning in order to pull all the sale inventory out of a Gap store, you would push it into a consolidation store so all of that sale merchandise would be consolidated into one store, protecting the margins of the rest of the stores in the network. As Gap discovered the utility of that format, they decided to go into the outlet business and use outlet stores as the consolidation stores. I think a lot of vertical retailers have a similar mindset. So because of that, the whole manufacturing distance from Macy's, distance from Dillard's, has broken down. Outlet centers have gotten closer and closer to city centers. We just built Nashville, 15 minutes outside of Nashville. So I think that centers like that have resonated with the shoppers that live in that community, the tourists that visit those big cities and the retailers are like, this is an opportunity for us to turn our inventory into cash with a customer that has an appetite to buy our product, much closer to the cities than ever before.

And the other big thing, Craig, you think about what has changed, too, is the population and employment growth in and around our portfolio. So if you take your MSA level report and you look for the apartments and you look at the 3-, 5-, 10-year population growth and you look at the MSAs that we already operate in, those have been some of the fastest-growing populations in the country. And so, you have that dual benefit of the product and the industry dynamics, and then turbocharged by the fact of how much population has gone in and around our assets, which goes back to that remerchandising, and the ability to bring those uses and new brands and retailers into the portfolio overall.

Yes, go ahead.

Talking about [indiscernible] renting any tenants that were maybe initially [indiscernible] your business, but they seem like [indiscernible].

Yes. I mean we see that every day. It's been pretty amazing. I mean Sephora is a great example. So Sephora went into the outlets, because they saw the traffic generated in these parking lots and said, "Hey, we need some of that action. And because, they wanted to put their brand in front of as many customers as possible, I mean, that's really -- that's the storyline. But they're not necessarily an outlet -- discounting outlet retailer. But what they're finding is, when they have more promotion in their store, they're selling it through. Because there's a customer that's coming with a mindset of I want to buy brand at value -- and brands don't want to disappoint that customer. They want to bring them in and maybe trade them up. Retailers see outlet for a number of different reasons. I talked about clearing excess inventory. But if you take a look at some of the higher-end brands that we have in our portfolio. See, outlet is a strategy to engage a customer that might have some price resistance in their full-line stores. But once they buy in and get the product that they want at the best possible price, it really becomes up to the brand to trade them up through their own retail ecosystem. And we see a lot of that happening. And a lot of that -- starting in our customer, even with the younger consumer, who's always wanted a Polo shirt, now can buy it at maybe 50 off and becomes a Polo customer for life.

How many of you [indiscernible]?

Well, again, Ulta is another example of a brand that's never been in the outlet space before. And Michael's got great slides, you can read off some of the brands that we've had some success with, if you want.

Yes. There's a great investor deck. We can -- we posted on our website with all these new brands and also the reason why how the retailers use it, the -- all the different ways, why they use it, how we are as a partner and what we bring to the table. But there's been a lot of retailers, Lulu came into our channel, which as -- these retailers coming to outlet does take -- you got to figure out your inventory levels because you want to don't want to disappoint that customer that comes in. And then Crocs was already a big part of our portfolio. Crocs bought HEYDUDE and HEYDUDE rolled out in our portfolio. You think about Victoria's Secret, which should not been in the outlet channel. And so pre-COVID, I think we had two stores. They cracked our top 25. And so there's so much of this activity that's going underneath our portfolio, which is why we sort of put out that brand slide of -- all of these new tenants that just to come into our portfolio, we want to get into every single one of our stores. And Craig, when we were in Phoenix, right? You saw the Lulu and then we were on the corner and there was [indiscernible], right? So every one of these categories has got multiple retailers that generally follow each other. And so as we bring these newness into the portfolio, whether it's in beauty with Ulta and Sephora, whether it's in home, whether it's in toys, whether it's in athleisure, it just has expanded the scope of what's in our centers. And then you combine that with the food, beverage, entertainment, and it all sort of turbocharges that internal growth potential of our assets. And that our rents are still relatively low, at 9.5% occupancy cost, we still think there's a tremendous amount of opportunity to grow the existing base, but bring in new tenants that are -- can do higher productivity, and hence pay us additional rent at the same level of OCR, which is why we're driving that internal growth up 5.1% last year.

[indiscernible].

Yes. There's some great success stories, but there's also some great failures, too, unfortunately. But Vineyard Vines, is a good example of an outlet REIT of a full-priced vertical retailer that also has a big department store business, sells into specialty stores and golf jobs across the country and was very resistant of the outlet business. Roger Federer, former, Ralph Lauren person, went there. They saw a little bit of light. They decided that it might be best for their business to start out as a pop-up store. So we popped them up in a couple of hours. I know they popped up in other competitive shopping centers as well, and it turned out to be great for them. A lot of retail, there's a lot of barriers to entry to the outlet center business, because retailers who want to go in because they want to close out their excess inventory, may think they only have a year of excess inventory. It isn't until they get into the business and find out that, wow, this is a real business, and I can not only turn inventory into cash, it can make great margin doing it, too, because the cost of entry into the business is so low. That's when they stay, sign longer-term leases, and ultimately build a real business around outlet. So that's how we're seeing. And that's one example of a bunch -- that offline, I could sort of be happy to share with you.

Have any questions from the audience?

[indiscernible].

A couple of reasons. First of all, we just built Nashville and we bought Huntsville, and the economics of buying Huntsville was far superior than the economics of building a new Nashville. Nashville's an outlet center, Huntsville is a full price center. We think that a lot of the moves that we've made over the last 4 or 5 years, going after better food and beverage, going after retailers that aren't necessarily outlet retailers, nonstandard outlet retailers in the outlet environment, because we wanted to create a much better shopping experience for the customer, just sort of gave us the courage and sort of we saw the returns, and we know the brand, same relationships to bring them into this different business model. As far as the ability to buy outlet centers that are already existing or lifestyle centers that are already existing, I think that the environment for the lifestyle centers is far greater, and the ability to buy existing outlet centers that may have that same upside opportunity. So we think where we can add value to lifestyle product, which has a lot of the similar tenants, a lot of the similar retailers. And we also -- we built this marketing machine. I think Michael might have said it earlier in a prior meeting, but the unique thing about outlet is that the brands don't spend a lot of their marketing capital to get the consumer to go shop outlet. They spend their marketing capital to get them into their full-price business. They pay into a marketing fund in outlets to get the outlet developer to drive the customer into our venues. And so because of that, we built a pretty sizable market machine, a marketing team that's a machine that can go -- that we can afford to build a loyalty program. Now we can afford to do all this, these marketing extensions, which, when we buy non-outlet retail centers, they might not have had that marketing muscle behind them, and we can really leverage this team in ways in the lifestyle space to really go after marketing a way that those centers have never been marketed before. And there's a lot of embedded value in driving those customers to those centers, driving sales productivity up, and sales productivity is a great basis upon which we charge greater rents.

[indiscernible].

In terms of quantifying? Yes. I mean, look, when we think about -- we've done -- we've added 5 assets to the portfolio, 4 through acquisition, 1 through development and aggregate was about $650 million. We talked about first year NOI of greater than $50 million. And those -- the three lifestyle centers, Huntsville, Alabama, Little Rock, Arkansas and then Pinecrest in Cleveland, we went in north of an 8 on all three, a little bit higher in Huntsville, on that initial yield. And we think that there is a significant amount of growth potential from the existing retail base, but then also, each of those assets have some level of peripheral or additional opportunity that could provide additional return down the road if we seek to go that route. And then there's been cross-fertilization across tenants between the two different products, but we operate as one company. We didn't add -- the management team was all built. It wasn't like a separate division. It's the same leasing team. It's the same operating team. It's the same marketing team. It's the same management. And so, it was highly synergistic as we expand the scope of what Tanger does.

Going back to acquisitions. You guys have been successful at it. What sort of the pipeline look like of assets that fit your geographic footprint, maybe that would have been more secondary-type markets where you still have the good demographics, but you're not paying the kind of gateway yield and competing with some of your other public peers. And then just sort of the cadence, some of these have been back-end weighted. I don't know if that's just coincidental to the year? Or if that's kind of how the pipeline builds, then timing kind of hits?

Yes. I mean the timing is all based on when the transactions -- as they go through different processes. And we've looked at a lot of things. There's things that we didn't win, right? So -- and part of that is we're trying to be very prudent and disciplined in that external growth to ensure that the assets we buy are both strategic in nature and also financially accretive, so that we're maintaining that optionality. And at our leverage level today, were 4.9 to 5x debt to EBITDA, low leverage relative to enterprise value. We have generally an untapped line of credit, and we have $70 million of committed forward equity that we can pull down. We feel no pressure to go out and acquire, because these deals have to work. We have to be able to see the value that our platform and our team can create in them rather than just amalgamating a lot of assets. Craig, I think there's more things on the market today. I think retail, given those positive industry dynamics, the fact that a lot of institutions have been underweight retail, as well as office asset class in totality as they invested in some of the other sectors that saw a tremendous amount of development or news. You think about data centers, you think about apartments, you think about industrial, all trading at much lower yields, retail is attractive in that way. And so we got to find our spots at our size. We're $5.7 billion, $5.8 billion enterprise value. We don't need a lot of transactions, and our pipeline continues to move around across all of the different categories that we're looking at. And so we look at outlet opportunities. We look at things that are physically adjacent. Steve talked about Phoenix, where we did buy that land in terms -- and other outparcels and then looking at open-air lifestyle centers.

And then some of these Asheville, Huntsville and, [indiscernible] Huntsville what's...

Little Rock.

Little Rock. I was going towards the assets that you bought are now in the same-store pool. And so, when you have that yield uplift, what that could kind of look like for your same-store growth for the next couple of years relative to peers, because you have sort of this new merchandising that you guys had planned on? Is that -- how additive is that?

Doug running our 10-year pro forma, so we'll...

Sure. Everything we look at from -- adding to the portfolio, we want to make sure that the growth there is at least equal to, most likely greater than the growth in our existing portfolio. So we do think that assets like that coming into the same center pool should be additive, that's factored into the guidance that we put out there. But you'll see that you should continue to see that with other acquisitions as stuff that we've just recently announced with Little Rock and Cleveland, when those roll in, in about a year, those should also be growth rates that we would expect to be above average.

And then just going back, you had cited, Steve, Vineyard Vines has started a pop-up store. The temp space has always been sort of a question that you guys get your 10%, but it serves dual purposes, right? It's not -- some of it is intentional so that you can do some of these things. So as you guys look at kind of running that, where is the opportunity to maybe bring that in a bit versus keeping that inventory to do some creative things with local tenants or de novo brands?

Well, I think it's always beneficial to have some frictional vacancy in the portfolio. So if we're going to replace a tenant that's been with our -- in our portfolio for a long time, and Sephora wants to come in. Sephora will take -- there might be some downtime between the tenant leaving and Sephora coming in. We'll fill that space with a [ temp ]. There might be a retailer like Vineyard Vines. UGG also started that way with us. Tory Burch started that way with us. Colombia went into smaller markets and big brands, small markets, they started as a pop-up. So we just find the pop-up as a strategy. It doesn't necessarily mean they're paying the cheapest rent. It just means that they are -- they just want to test a marketplace to see whether or not there's a viable long-term business for them. Fortunately, for us, the Columbias of the world, now they're in every one of our centers. So the strategy is tendency to work. So again, we could talk for hours and hours about temp as a strategy. I think we report our temp as a percentage of our entire portfolio, but you could probably surmise that the top half of our portfolio is far less temp than perhaps some of the assets in the bottom part of our portfolio.

Great. And rapid fire, same-store for next year for the group?

For retail, overall, we would say 3%.

And more or less of the same amount of companies?

Less.

Thank you guys so much.

Thank you.