Shares of outlet center-focused real estate investment trust (REIT) Tanger Factory Outlet Centers (NYSE:SKT) declined a massive 58% in March according to data from S&P Global Market Intelligence. The broader market fell about 13% and the average REIT, as measured by Vanguard Real Estate ETF, lost about 20%, so Tanger had a really, really bad month. The main reason was COVID-19, but the story is actually bigger than it may at first seem.
Tanger owns a collection of factory outlet centers, as its full name implies. As the coronavirus began to spread through the United States, the government, at various levels, began to ask people to practice social distancing. That included calls, or more stringent orders, for all nonessential businesses to shut down or have employees work from home. There’s no working from home for the retail stores that operate in Tanger’s centers, so its malls essentially stopped operating.
With stores not open, there are big concerns that Tanger’s tenants won’t pay their rent. That has investors worried that Tanger won’t be able to pay its own bills and that, in the end, it will be forced to cut or eliminate its dividend. This is the big-picture view of the story, and for an income-oriented stock, it is a big problem. If Tanger had to temporarily cut its dividend, it would be bad enough, but the story here gets even worse.
Tanger has been dealing with the larger shift toward online shopping for a number of years. It has managed what has been dubbed the “retail apocalypse” relatively well, keeping occupancy at or above 95%. Moreover, it has one of the strongest balance sheets and lowest payout ratios in the mall REIT sector, giving it the breathing room it needs to work through a difficult time.
The problem is that COVID-19 shutdowns could accelerate the trends underlying the retail apocalypse (increasing consumer adoption of online shopping), basically forcing tenants out of business that might have otherwise been able to hold on, even if they had to shrink, as Tanger slowly adjusted its tenant mix. Now, when Tanger is allowed to open its outlet centers again, occupancy could fall dramatically and quickly. So, Tanger’s business could look very different after COVID-19 passes and not in a good way. That would be a much different situation that even a financially strong and well-run mall REIT would have difficulty managing.
There’s an incredible amount of uncertainty around retail-focused real estate today. Tanger was already facing headwinds, and now COVID-19 has made the situation materially worse. It is likely the company survives, but what the business looks like a year from now is not clear. All but the most intrepid investors should probably stay on the sidelines. Highlighting the risks here, Tanger recently drew down substantially from its line of credit to ensure it has as much liquidity as possible during these turbulent times. That’s the right move but not one that inspired confidence.