Tanger Factory Outlet Centers (NYSE:SKT) has become a battleground stock. Some 27% of Tanger stock is sold short at the moment. And of late, the shorts have taken a bit of beating. Heading into its most recent earnings report, Tanger stock had bounced 20% from May lows. And a 2.1% gain in after-hours trading after an earnings beat could add to the pain from the short side.
That said, it’s a bit too early for Tanger longs to take a victory lap just yet. For one, the company still sits 40% below 2016 highs. The levels reached in May in fact were a nearly eight-year low. And even in the Q2 report, there were some reasons for concern. In fact, some Tanger bears very well may see the quarter as confirming, rather than negating, the bear thesis.
From here, the market looks like it has it about right, with Tanger trading above $24 after hours. But it also looks like the bull/bear battle over SKT stock will last for at least a few more quarters.
Tanger Stock Earnings
Relative to expectations, Tanger’s Q2 numbers look rather solid. Revenue was basically flat year-over-year, but a couple of points better than Street estimates. FFO (funds from operations) of $0.60 was up a penny year-over-year – and beat consensus by the same amount.
On an absolute basis, though, the earnings look rather tepid. Flat revenue and a less than 1% increase in NOI (net operating income) would seem to raise some concerns.
Tanger bulls see the weakness as temporary, a result in part of a few major bankruptcies over the past few years. Tanger bears see the weakness as the beginning of a long decline. Q2 results likely did little to move either group off their positions.
The Bear Case for Tanger Stock
The core of the bear case here is that Tanger’s business essentially has peaked. There’s a huge fixed-cost base here, between facility maintenance, administrative spending, and interest service on $1.77 billion in debt. And so as revenue stalls out and eventually declines, profits will fall sharply.
And Tanger’s results don’t necessarily disprove that thesis. Portfolio NOI rose 0.8% in the quarter and is up just 0.6% year-to-date. But same-center NOI actually declined 1.9% year-over-year. The culprit was the occupancy rate, which dropped 50 bps to 95.6% from 96.1% a year ago.
That doesn’t sound like a big move, but again, those declines are leveraged by the fixed-cost base. Incremental tenant revenue losses have a significant impact on margins. Consider the fact that Tanger itself attributed the 2% decline in same-center NOI to that lower occupancy, and the news elsewhere isn’t exactly great either.
Tenant same-store sales rose just 1% – below the rate of inflation. Average sales per square foot were flat. Tanger did manage to get rent increases from existing customers, with a 5.8% cash-basis increase.
But it lost a number of customers too. Bankruptcies led Tanger to recapture 105,000 square feet in the first half of the year. That’s better than the 142K last year – but it’s equal to the total for all of 2016.
An Tanger short is going to argue that profits are flat overall, and declining on a same-store basis. Both Q2 results and reiterated full-year guidance support that argument. And if that trend accelerates – and/or if the economy turns south – it could be bad news for Tanger.
The Bull Case for Tanger Stock
The bull case is that the stock is cheap and the numbers still aren’t that bad.
Tanger trades at just 10x the midpoint of FFO guidance. That’s a figure much closer to Class B and C operators like Washington Prime Group (NYSE:WPG) and CBL & Associates Properties (NYSE:CBL) than Class A owners like Simon Property Group (NYSE:SPG), Macerich (NYSE:MAC), and GGP (NYSE:GGP).
Assuming outlets have a real niche in the U.S. retail space (unlike some old-line suburban malls) that multiple is just too low. So is a nearly 6% dividend yield, which is notably higher than those of Class A operators. And Tanger’s results certainly aren’t showing the pressure that second-tier malls are.
Retailers like the outlet channel, even designing “made for outlet” merchandise. Growth could be better, to be sure, but a higher rate of bankruptcies has pressured occupancy and limited Tanger’s negotiating leverage with remaining clients.
Certainly, bulls are going to see the report as good enough to keep that thesis intact. And even a reasonable 12-13x multiple suggests Tanger stock could reach levels around $30. And as I wrote just a week ago, short selling could accelerate that move.
I’m not sure I see quite enough in the results to be that optimistic. Occupancy rate declines seem minor, but they’re not. Customer weakness is discomfiting at a time when the economy should be booming. I think there are worries here. But those worries have been put off for another quarter.
As of this writing, Vince Martin has no positions in any securities mentioned.