Goldman Sachs Sees Trouble Ahead For Tanger Factory Outlet Centers

Tanger Factory Outlet Centers Inc SKT, an operator of high-end outlet shopping malls, opened Tuesday down 10% following a downgrade by Goldman Sachs.

Last week, shares of Tanger skyrocketed 40% after r/WallStreetBets targeted short sellers of the real estate investment trust. At the time, Tanger was the most heavily shorted stock next to GameStop Corporation GME, with a short interest of almost 40%.

The Tanger Analyst: Goldman Sachs analyst Caitlin Burrows downgraded Tanger from Neutral to Sell and raised the price target from $11 to $12.50.

The Tanger Thesis: The COVID-19 pandemic has hit the retail sector hard as closures and stay-at-home orders have forced shoppers to buy online. When vaccines began to really roll out at the beginning of this year, however, shares in retail companies have soared as investors pegged them as re-opening names.

Tanger's stock is up 67% in 2021 and similar companies such as Brixmor Property Group Inc BRX have seen shares rise 25% over the same period.

“Retail REIT multiples have seen the greatest multiple expansion across REITs, +88%, since 11/1/20 (prior to vaccine announcements) versus +11% for REITs overall, and Retail REIT multiples are now 6% above where they were at the beginning of 2020,” Burrows wrote in the note.

Tanger’s FFO: While Tanger’s funds from operations midpoint guidance came out above consensus, Tanger’s guidance for the upcoming year points to a steep decline of 34%.

“This signals management expectations that both secular and COVID-induced headwinds will persist into 2021 (despite easy comps in 2Q-4Q21), and uncertainty on returning to pre-pandemic earnings levels,” the analyst said.

Since Tanger's core FFO declined in 2019, the firm says this "suggests Covid may have accelerated what would have been future earnings declines rather than created an easy comp."

Tanger’s Portfolio: Tanger’s growth was slowed in 2020 through both the inability to expand and the loss of tenants during the pandemic. Occupancy rates are currently down 510 bps year-over-year, Burrows noted.

Although Tanger has a strong portfolio, retailer bankruptcies and closures will continue into 2021. Christopher & Banks and Francesca's, retailers in Tanger’s portfolio, have already shut their doors, and others such as Walt Disney Co DIS and Chico’s FAS CHS have indicated they plan to do the same.

Burrows said Tanger's “occupancy was already declining pre-Covid, suggesting some retailers are reconsidering their outlet footprint."

Although Tanger has one new outlet mall planned for Nashville, Tennesse, the project is currently on hold due to COVID travel restrictions. Moreover, Tanger hasn't completed any new developments since 2017 and is not forecasting any new developments until 2022 or 2023.

“A lack of development and acquisition opportunities, plus a dissipating occupancy cost advantage are additional factors pressuring earnings recovery,” said the analyst.

The Upside Case: If retail stores tied to the economy reopening continue to outperform, Tanger could catch tailwinds. The company could also see more upside if shoppers return more quickly than expected or if Tanger is able to increase its occupancy levels more quickly than anticipated.

Furthermore, Tanger doesn't have any exposure to department stores "which reduces the risks of co-tenancy headwinds and capex-intensive redevelopments," the analyst said. 

SKT Price Action: Tanger's stock traded down 3.6% to $16.50 at publication time.

Photo by Billy Hathorn on Wikimedia