Tanger Inc. (SKT) Earnings Call Transcript & Summary

Good morning, everybody, and welcome. I'm Craig Mailman with Citi. I am the analyst that covers retail and industrial REITs for the team. And I am happy to be joined today by Tanger. Steve Yalof, CEO, is in the middle; Michael Bilerman, CIO and CFO, is to my left; and Doug McDonald, Treasurer and Head of Investments is at the end of the table. I'm going to pass it off to Michael, who is going to give you guys a short intro, and then I'll kick it off with a few questions and open it up to the crowd.

Great. Good morning, everybody. Just a couple of just quick points on who Tanger is, if you're not familiar with us. Tanger has been around for 44 years, 32 years listed on the NYSE. We are an open-air retail-focused REIT with a significant presence in the outlet sector with 37 outlets across the U.S. as well as 2 up in Canada. And in 2023, we made a strategic expansion into the open-air lifestyle business. We now have 3 open-air lifestyle centers that sit in Huntsville, Alabama; Little Rock, Arkansas and Cleveland, Ohio. And those centers sit in the wealthiest demographics with a lot of work, live and play drivers around them. We are about a $4 billion equity REIT, $5.7 billion enterprise value. So our balance sheet is low leveraged, running today at about 5x debt-to-EBITDA as well as having numerous liquidity sources between forward equity, a largely untapped line of credit and significant leverage capacity. Just from a growth perspective, our growth strategy is focused really on 3 legs of the stool. One is driving our internal growth. Our rents today are well below market, and we continue to focus on remerchandising our centers and driving rents and operating efficiently. The second part of our growth strategy has been intensifying the real estate that we already own. Our centers sit typically on 40, 50 acres at the intersections of major highways and that peripheral land that we already own provides us the opportunity to densify through additional uses, and that's another key component of creating long-term value for shareholders. And the third part of the stool has been our external growth strategy. And over the last 18 months, we've deployed about $650 million into 5 new assets. One was a development of an outlet center in Nashville, Tennessee that we delivered in the fourth quarter of 2023. And then we've purchased 4 assets one of which was an existing outlet run by a private owner in Asheville, North Carolina, and then the 3 lifestyle centers that I mentioned earlier. All of this has translated into very positive top line growth. And so over the last 4 years, we've delivered same-center NOI growth of approximately 5%. Our initial guidance for this year that we maintained after 1Q earnings is 2% to 4%. And from an FFO growth perspective, our current guidance for this year that we also reiterated coming off of 1Q earnings implies 4% to 8% FFO growth, which at the midpoint would be the highest in the retail sector, and that comes after 4 years of 7% compound annual FFO growth. From a dividend perspective, we recently increased our dividend about 6.5%, in line with our free cash flow, but we maintain our payout ratio at very low levels. So our dividend today sits at 60%, 6-0 percent of FAD or AFFO or every acronym that you want to use relative to the sector being at close to 75% or greater. And what that does is it provides us the free cash flow to be able to fund both our internal investments as well as external. So we are generating almost $80 million to $100 million of free cash flow a year that really supplements our overall growth profile, and we're running at the lowest leverage level that we've ever had and well below the sector. So with that, Craig, I'll turn it over to you for some questions.

Great, Michael. Appreciate the intro there.

Maybe just kicking it off, in Las Vegas, there was the recent ICSC leasing conference. Can you maybe just give us a rundown of what the activity looked like, what retailer mindsets are today, given the backdrop of tariffs and all the other issues going on in the news?

Sure. And thanks for the question. So just having attended ICSC Las Vegas about 2 weeks ago, probably one of the best attended ICSCs I've been to, and I've been to over 30 of them during my very short career in this business. What was -- what stuck out to me was as we spoke to over 100 retailers during the course of the 3 days in our leasing suite, top of mind, obviously, is the tariff question. So we're always asking retailers, tell us what are the risks to your business? What are the problems that you guys are facing? And how is that going to impact your ability to either open new stores, remodel existing stores? And what does the portfolio look like going forward? It was a very optimistic group in that particular -- in those sessions. I think that the retailers as they related to tariffs spoke very -- I would say over 90% of them spoke about how COVID got them thinking about the diversity of supply chain. And I think that's a critical piece. One of the retailers, in particular, said that the retailers that are going to win in this tariff environment are going to be the ones that are the most agile, meaning they can move to market quickly, the time from placing an order to having the goods shipped to the United States, they keep those windows extraordinarily tight. And there's a lot of product currently in the market. I think a lot of retailers have placed larger orders thinking that there might be some issues in the back half of the year. That said, as you think about our value portfolio, should there be some of the big -- the tariff issues strike, we see that sort of equated to 2021 when there was a lack of inventory in the marketplace, yet retailers had a tendency to keep their pricing relatively high and had very good sell-throughs at the time. 2022 is a completely different story as the supply chain logjams broke around the world, and there was a lot of inventory shipped over to the United States. We saw the retail stores get that first inventory, but a lot of that excess move through our channel. And although the pricing was compressed because even in an inflationary environment, you found that there was price deflation in the outlets, retailers were pricing the products to move. So we anticipate if tariffs are as on the worst side that we will still see a lot of product in our stores, but probably priced a little bit differently. If the tsunami of tariff is less than anybody anticipates it might be, then we'll see a tremendous amount of product in the back half of the year, and it will be priced to sell.

And can you talk a little bit? I know there's concern about inflation coming from tariffs and just the stress on the consumer. But maybe just walk through for those that aren't familiar, kind of where you guys sit in the value chain with the outlets versus even the recent move into lifestyle differentiation.

Look, the outlet business is really the foundation upon which this company was born, as Michael said, about 44 years ago. Mr. Tanger was a shirt manufacturer. and had some excess inventory in his manufacturing facilities and would sell the excess inventory to friends and family, and that's really how the outlet business evolved. It was really a -- the outlet business is really a giant friends and family sale. And that excess inventory turned into, in some instances, some first round product that wound its way into the stores. Right now, we have 700 different brands that are in the outlet business currently, and they use it for a whole host of different reasons. Some of them use it to clear their excess inventory, like a Lululemon or Nike. None of the products you see in those stores have -- are manufactured for. And then you've got brands that are a little bit more sophisticated in that they are manufacturing some excess inventory or placing much bigger orders that they would to the department stores in order to have enough inventory to sell to the consumers that come through the outlet centers. In our 37 outlet centers, we see over 125 million visitors a year. That's a lot of people coming in to buy a lot of things. The outlet business of yesterday was one where the centers were 40 to 50 miles away from a department store competitor. That was because these brands did not want to sell or did not want to market to the consumer to come and shop their off-price channel. They wanted to make sure that, that consumer is shopping their full-price channel. They rely very heavily on us as the owners of that center to do the marketing on their behalf and get the customers to come and shop with us. One of the major paradigms that have shifted, particularly in our business, and I would say, going back to 2020 and 2021 is that we're finding that a lot of the geographies that were formerly far away from that whole center of the universe, the regional malls and the larger cities, we're finding that the customers who had second homes in a lot of the markets where we had centers, those are now becoming the primary residences. And because a lot of work from home and just the way people are managing their real estate and where they choose to live and where they choose to raise their families, we're finding that the local customer has gotten far more important to the success of outlet over the past couple of years. So for us, we pivoted in a number of ways in order to accommodate that change in consumer profile. First of all, we're adding a lot of different uses to our centers. So where an outlet shopping center 15 or 20 years ago was routinely just outlet retail direct to the consumer, now you're finding a lot more vertical retail, a lot more food and beverage outlets, you're finding a lot more entertainment venues and a lot more experiential things in our centers. Also, we've pivoted and we've gone after a number of different amenities and a loyalty program. You can't really fund a loyalty program if it's going to be based on tourist visits, it's a very transient customer. So that requires a very localized marketing initiative and a very localized customer base.

Any questions from the audience? Perfect. Stephen, just on that remerchandising effort and what you and the team have done since you came in, can you talk about the customer experience, but also the revenue enhancement opportunities that you guys are driving with the remerchandising and outparcel developments and what you guys have implemented?

Yes. Look, what we -- I joined the company 5 years ago. And if you can look back at April 2020, we were 40 shopping centers, 15 million square feet, 3,000 stores and everyone was closed. fun day to start work. But what we thought was as centers started to open and particularly open-air lifestyle centers were the first shopping venues to open. In fact, they were the first venues to open. I mean if you think about concert venues, theaters, museums, enclosed malls, none of those were available to the customer. So one of the first things that we did when I started and the stores were all still closed was we insisted on keeping the music on in the centers because we knew we had a very important group of people that shopped locally that wanted to come and walk in our environment. They felt safe in a shopping center environment. And then we got the coffee stores back open. So now we have places for people to gather. We have places for people to exercise. We were alive. We were watering our flowers. We were mowing our lawns. We kept our shopping centers looking beautiful. And what we found was that big local population really considered these centers to be the center of their market. And they might not have been customers of ours prior to COVID. But we were training them to now come to our venues because not only were they the only places open at the time, which kind of helps. But more importantly, they were the places that they were going to feel safe, that they were going to get the products that they wanted, and we started to open some of the brands that were considered acceptable to open earlier because they were -- I forget the official term, but things that the consumer really needed in that time. We facilitated curbside pickup. So the whole thing really started to evolve. So when we built our new center in Nashville, which was going to be a regular racetrack shopping center like a lot of the outlet centers were built in that era, we decided that this new customer, this local customer, the way the customer is going to shop really is going to inform how we're going to lay out our new center, how we're going to merchandise our center and the uses that we're going to go after. And in Nashville, it's a great example of a center that instead of it being a racetrack design, meaning you park on the outside and shop on the inside, it really is an open-air shopping center. It shops like a loop, all the parking on the inside. It's centered around a center court or a community gathering space. But more importantly, we have about 20,000 feet of 300,000, which is really big for an outlet center of food and beverage users. And it's a mix of local food and beverage from Prince's Hot Chicken, which is a Nashville staple to Shake Shack, which is now sort of growing around the globe. So we've got the products people want to buy. We've got the experiential uses that people are looking for when they come and shop with us. We've got the food and beverage that people are looking for when they come and shop with us. And we also have amenities. So for example, we put in Ulta Beauty. Now Ulta Beauty isn't typically a store that you're going to find in an outlet. Ulta Beauty is a multi-brand, almost a small big box department store that's selling beauty products. But Ulta really fit really well into this programming because the customer that's looking for that category might not find it in a typical outlet center, but we figured if we brought it into our center, we would get that car. That car comes far more frequently. That car stays a lot longer when they're there. And hopefully, they'll cross shop. So I guess at the end of the day, if we could change the outlet shopping narrative to come for the food and stay for the shopping, we flip the programming on its head, and that's what we're looking to do.

Retail, last year, this year, bankruptcies have been ticking up. Discretionary has actually stockstpp that a bit. But can you talk about Forever 21 and some of the other tenants you have in your space and maybe some of the proactive steps that you've taken to get ahead of some of these?