Tanger Inc

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Tanger Inc. (SKT) is a self-managed REIT that owns, operates, and develops open-air shopping centers in the United States and Canada, primarily focusing on upscale outlet malls.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Tanger Inc. operates in the retail REIT industry, primarily focusing on upscale outlet shopping centers. This is not just a typical mall operation; Tanger’s outlet centers are tailored toward providing a unique shopping experience for consumers looking for branded goods at discounted prices. Here is a breakdown of what that means:

Revenue Streams: Tanger’s revenue is primarily generated through leases to tenants, often on a percentage of their revenue plus a base rent. This structure allows Tanger to benefit from the success of its tenants and also gives them some resilience against the volatility of specific retailers. Additionally, they get a revenue stream from management and leasing fees.

It’s important to note that rental revenue continues to form the bulk of SKT’s revenue.
Industry Trends: The retail landscape has been evolving over the last few years, with increasing competition from e-commerce and changing consumer preferences. While online sales have seen consistent growth, outlet malls continue to provide a physical space that attracts consumers. There’s a growing interest in experiential retail, which provides the reason to shop in real life. Tanger has adapted to the changing retail scenario by focusing on creating a desirable shopping experience through a mix of retailers, amenities and community engagement. Moreover, in recent years, a larger emphasis is being placed on mixed-use developments which involve not only retail stores, but also restaurants, entertainment options, residential areas etc. and these are helping the properties to remain relevant.
Margins and Profitability: Tanger has traditionally enjoyed high margins in the past because of their premium offering and the scale and stability that their REIT structure provides. Their ability to maintain high occupancy rates is indicative of their strong asset quality and operating capabilities. However, they also face considerable competition from other retail properties and also pressure to reduce their own debt. In the recent times, the pressure has been to increase occupancy rates and reduce vacancies, which has seen a little drag on their margins as they offer more incentives to bring in clients and manage their existing properties.
Competitive Landscape: The competition within the retail space is intense, from traditional retail spaces to online marketplaces. As a REIT, Tanger competes with other REITs for access to low-cost debt financing, capital and development opportunities. From a business perspective, Tanger’s competitors include other regional mall operators, power centers, and online retailers that provide a wide variety of options to consumers. Also, outlet malls are very dependent on the availability of low-cost inventory from the brands it works with, which puts the company at risk of supply chain issues and if brands become more choosy with who they decide to give their products too.
What Makes Tanger Different? Tanger’s specific strength and focus on upscale outlet malls sets it apart from its competitors in the general retail landscape. There’s an emphasis on maintaining a high-quality tenant mix and providing a desirable shopping experience to draw consumers. That coupled with their long-term contracts and relatively predictable stream of income from their contracts is the main reason they’re still in business and still hold some value. As mentioned before they are expanding on the idea of mixed use locations. This is in-part a measure of them not being fully certain in their core strategy and trying to expand into new areas to generate the needed growth. Also, they are now focusing on increasing tenant services and helping smaller brands become more recognizable via their platform.

Financial Deep Dive:

Here is a deep dive into Tanger’s financials, focusing primarily on their performance over the recent periods, keeping an eye on the long-term trends.

Revenue: Tanger’s revenues are derived primarily from rental income from its properties, along with reimbursements for operating expenses, and fee income for management and leasing. There is a degree of correlation to retail sales volumes which creates revenue uncertainty. The past 2 years have seen relatively weak numbers with declining profits in certain segments, partially due to changing shopping patterns as well as interest rates. As of the latest results in their 2024 10-Q, their income shows an improvement but it remains to be seen if this trend is sustainable.
Operating Expenses: Tanger’s core operational expenditure comes from property operating costs, primarily consisting of general and administrative (SG&A) expenses, taxes, marketing and maintenance related to their properties. In the recent time periods they have also seen increased interest costs which has impacted their bottom line, but they are trying to refinance into lower rates when possible.
Profitability: There’s been substantial pressure on the margins, primarily because of the increase in financing costs and operating expenses, both. Historically, the margins were strong because of their premium offering and relatively stable lease rates. As their business model changes and they expand their property profile, this should impact their long term profitability.

It would be important to see if they can return back to previous margins as interest rates cool off, and they increase their operational efficiency.
Cash Flow: The company generates substantial operating cash flow from their leases. However, a lot of this free cash flow has been diverted in capital expenses, including new center development and maintaining existing centers, plus also to reduce debt. While the operating cash flow remains consistently positive, they are spending more than before. It is worth keeping an eye on whether the management is allocating their capital effectively to improve investor returns.
Debt: Tanger has traditionally operated with debt to capitalize on the REIT structure and acquire properties. However, the debt to total capitalization has increased in the recent past. For most of 2022 and 2023, their debt metrics have seen some improvement. With a higher debt level, the company is more prone to interest rate fluctuations as well as market downturns. They’ve had some success in refinancing their loans but they may not always get better interest rates moving ahead. Their total outstanding debt in the latest report is around $1.5 billion.
Dividends: Tanger has had a history of consistent dividend payouts, and with a high dividend yield, they remain attractive to dividend-focused investors. However, a dividend is nothing but the return of free cash flow and that means the higher the dividend, the less cash available for expansion, reinvestment, and debt reduction. It will be interesting to see what happens with dividends as the company looks towards expansion into mixed-use areas.

Moat Assessment:

Tanger’s business has some defensible features, although it is not a very strong moat:

Scale Economies: They have a vast portfolio of centers that has strong brand recognition, which may give them a small competitive advantage, due to the volume of traffic they see on their sites. Also, the large network allows the company to spread costs related to their central teams, maintenance and more, over a larger footprint, which allows them to remain slightly more cost effective as compared to new entrants.
Brand Identity: They have built a reputation for upscale outlet shopping and their centers are often sought out by a lot of brands wanting to offer a premium shopping experience to their users. This brand, may offer a limited pricing power, and it also helps them bring in more clients as many high-end retailers have to choose outlets to get rid of their surplus.
Switching Costs: There is very low switching costs for the tenants in this segment, as retailers do not have very high costs to move locations if they are not happy, or the costs aren’t attractive.
Overall Moat rating: A Narrow Moat, which is a 2/5 on my scale, owing to the somewhat strong presence in their specialized outlet niche, and a few aspects that may give them a competitive advantage. However, as demonstrated in the text, the moat is not wide and could be vulnerable to competitors in the future, especially those with larger capital and more diversification.

Risks to the Moat and Business Resilience:

Tanger faces several risks that can impact their business and erode their competitive advantage:

E-commerce: Online sales continue to grow and threaten the traditional retail sector. Their current expansion into mixed-use sites can help them counteract this, but if more shopping moves online, this could severely impact the moat of companies like Tanger which depend on in-person shopping experience. This risk remains highly relevant for the company.
Changing Consumer Preferences: Consumers and consumer tastes continue to change. To accommodate this, retailers could increasingly start opting for new or smaller format stores, which means the need for outlet-only retailers could decline. For the retail model to work, these changes need to be monitored and acted on, and if that isn’t done, then Tanger will slowly get irrelevant. Also they could try out new online models that makes traditional outlets obsolete.
Interest Rate Fluctuations: Rising interest rates affect both their borrowing costs and the capitalization rates used in real estate valuation. These may reduce the value of their properties and also increase their cost of capital. The recent rise in interest rate has already impacted their profitability and any future increase is a serious threat to their financial stability.
Competition from Other Retailers: While Tanger operates in a niche space, it’s not entirely immune from competition. Other outlet centers and competing REITs can aggressively pursue tenants and try to lure away some brands. This could lead to decrease in their occupancy rate and also a reduction in their pricing power and margins.
Tenant Financial Health: The financial health of their tenants is also a considerable risk. If their tenants struggle financially, or if there are issues in their supply chain, they may not be able to continue paying the lease. Also, if some tenants fail, that may lead to vacancies in a few of their malls and lower margins.

The management has stated that they are actively pursuing a strategy that focuses on improving operational efficiency, optimizing capital structure, and providing a more desirable and engaging shopping experience to their customers. These plans can be successful, but the market isn’t pricing that in as of the moment.

Understandability: 2 / 5

While the business model is simple to grasp—buying property to lease to retail outlets—the intricacies of REITs, real estate valuations, and the interplay of factors that affect revenue (such as occupancy, rates of leases, local market conditions) can be complex, hence we assign them this rating.

Balance Sheet Health: 3 / 5

Tanger’s balance sheet is fairly okay, but it’s not great. Their debt levels are high and while they have made some progress to reduce them in recent times, they remain high relative to peers. They have had consistent positive cash flows and are trying their best to reduce their debt burden. A more aggressive approach toward reducing debt would lead to more investor interest and better overall financial health.

Overall, Tanger is a good company but one that has yet to adjust to the new market conditions and its profitability has taken a hit. They are taking steps that could improve their long-term performance but they still are vulnerable to various external factors. A narrow moat rating, a medium understandability, and an okay balance sheet health is my assessment of this company.