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  1. 1. Tanger Factory Outlets (NYSE: SKT) Mohit Hajarnis & Carter Chen 1 Tanger Factory Outlets owns and operates, or has part ownership in, 46 outlet malls in 26 states and Canada, located along highways or near popular tourist destination. Tanger is the only pure-play outlet center REIT, and the outlet format offers unique advantages to tenants and their customers, and by extension, Tangers investors. Investment Thesis Tanger is a well-run business with strong brand value, superior corporate strategy, and management. Tanger has stewarded capital well in comparison to its competitors: a low DSCR and debt/equity ratio give Tanger room to grow using extra debt without compromising shareholders equity. Demand for outlet space has increased dramatically since 2008 because retailers have come to view outlets as part of their market segmentation strategy, not just a channel to off- load extra inventory. Tangers long-lived leases are locked-in at low historical rates, but a historical premium of 20% for renewals and 70%+ premium for re-tenanted leases will drive revenue through 2018. Tangers intrinsic value is obscured by accounting and valuation intricacies. Recommendation: Long-term Buy 2 Key Drivers Outlet sales have grown at 10% CAGR since 2008, and rent has grown at 3.1% CAGR Tanger generates revenues across economic cycles: recessions drive consumers to seek discounts at outlet stores. Tangers rents represent ~ 5% of tenant costs (2Q2014), compared to mall rents, which represent ~ 12% of tenant costs. Tanger benefits from economic moats arising from barriers to entry and brand value. Bulls Say Tanger is focusing on saturating the US outlet market while competitors Simon and GGP are focusing on saving their mall franchises. Tanger has maintained 95%+ occupancy for the past 10 years. Tanger has a strong pipeline of ~1.5M square feet GLA in the next five years, which is already financed and will require no additional debt. Bears Say Tanager faces threats from e-commerce sites like Gilt.com, which offers similar discount sales on luxury goods. Discounting luxury merchandise is an unsustainable business because it damages brand value and cannibalizes sales. Summary Company: Tanger Premium Outlets 52-week low: $31.40 Ticker: NYSE: SKT 52-week high: $36.77 Shares Outstanding: 95,439,454 Analyst low: $32.00 Market Cap ($BB): $3.41B Analyst high: $38.00 Price: $35.67 Implied Price: $51.27 $30.51 $51.27 $58.30 $35.00 $34.09 $0.00 $10.00 $20.00 $30.00 $40.00 $50.00 $60.00 $70.00 DCF DDM Comps Analyst 52-Week Range
  2. 2. Tanger Factory Outlets (NYSE: SKT) Mohit Hajarnis & Carter Chen 3 Business Overview & Analysis Business Model Tanger generates revenues by collecting base rents, percentage rents, and expense reimbursement from its tenants. Base rents represent minimum rent charged per square foot to tenants. The average base rental rate has grown at 1.5% between 2012 and 2013, and 7.4% between 2011 and 2012. This is largely because Tanger does not adjust rents yearly, but rather provides long-term fixed leases, which are attractive to established tenants looking to manage costs. The growth in base rent is reflective of lease renewals and re-tenanting (footnote for definition): In 2012, 2.1 M sq ft of space was renewed or re- tenanted, and in 2011, 2.0 M sq ft was renewed or re-tenanted. The rates Tanger charges on renewed or re-tenanted leases reflect wider demand for Outlet mall space and various economic factors. In 2013, average new rent for re-tenanted space was $30.57, less than the $31.72 new rent in 2012. This drop is reflective of additional supply in the market from expansions by Tanger and its competitors. Tanger also collects percentage rent: a percentage of tenants sales volume above predetermined levels. As base rents are fixed higher, the predetermined levels are set higher as well reflecting Tangers commitment to keeping tenant costs low. Tangers second largest revenue segment is Expense Reimbursements. Contractually, tenants are responsible for certain common expenses such as common area maintenance, insurance, tax, advertising, and other property management 4 expenses. These expenses are offset by equivalent property maintenance and some SG&A expenses and have no effect on Net Income; if expense reimbursements increased or decreased, certain maintenance and SG&A expenses would increase or decrease equivalently. Nonetheless, the expense reimbursement strategy helps widen Tangers margins and keep base rents the most observed metric low. Strategy Tangers strategy is centered on capturing strong macro fundamentals (see page 4), conservative business practices and capital stewardship, and strong property development. One of Tangers strengths as a business is the constant demand for Outlet stores across economic cycles and fashion preferences. Despite the sharp downturn in 2007 2009, Tanger continued to grow its dividend because consumers switched to shopping at Outlets for discounted brands instead of department stores. Tangers tenants ability to deliver savings for customers drives additional business during economic turmoil, and provides counter- cyclical drivers for growth. Additionally, Tangers portfolio is immune to changes in fashion: its largest tenants are retailers with experience in fashion and span the fashion spectrum: Gap, Banana Republic, Old Navy, Tommy Hilfiger, Nike, Nautica, and Polo Ralph Lauren. Additionally, it has been refreshing its portfolio with new brands such as H&M, Forever 21, $0 $5 $10 $15 $20 $25 $30 $35 $0 $50 $100 $150 $200 $250 $300 $350 $400 $450 2004200520062007200820092010201120122013TTM $/Sq.Ft. $MM SKT Historicals Total RevenuesFFODividendsRev per Square FootFFO per Square Foot
  3. 3. Tanger Factory Outlets (NYSE: SKT) Mohit Hajarnis & Carter Chen 5 and Under Armour (3Q 2014 Earnings Call). According to management, as business in a brand dies down, business in another brand picks up; according to CEO Steven Tanger, For every Coach there is a Michael Kors. Tanger is unique amongst competitors Simon and GGP, which operate malls and outlets under individual names, because it operates all of its outlets under the Tanger brand. The brand has generated value with retailers and consumers, as demonstrated by its industry leading occupancy rates and traffic growth. Tanger has maintained occupancy greater than 98% for the past three years, because Tanger maintains a strong brand. Additionally, Tanger has built strong retailer relationships over its 30+ year history; the typical Tanger tenant is a large national chain, and stable over the long term. This insulates Tanger from bankruptcies and fluctuations in consumer preferences. Additionally, it eliminates the need for a provision for doubtful accounts, which competitors Simon and GGP have needed to account for loses from tenants going out of business. Tangers long- term leases provide value to tenants through locked- in rates and managed costs, making them an attractive partner to retailers. Tangers percentage rentals have also increased over the last three years reflective of higher tenant sales, and Tanger brand value with shoppers. REITs can be a risky investment because capital mismanagement can wipe out common equity and suffocate strong revenues with high interest payments. However, Tangers management is notably conservative, and a strong asset for shareholders. Tanger focuses on growth solely in the United States and Canada, seeking under-served markets as sources of future growth, while competitor Simon has undertaken a joint venture in China to expand its footprint. While the risk/reward may be higher for Simon, Tangers management has been dependable in delivering consistent returns to shareholders. Since its IPO, Tanger has increased its dividend every single year even through the financial crisis. According to Morningstar, Tanger has developed roughly 10% ROREA for the past 15 years, moving between 7.8% in 2003 to 12.3% in 2002. The highly dependable nature of Tangers management is reflective of its roots: current CEO Stephen Tanger founded the business alongside his 6 father, Stanley Tanger in 1981, and the company has the longest history in the outlet business: 33 years. Stephen Tanger has been in senior management positions at Tanger since 1986, and was paid 61%, 79%, and 67% of total compensation in restricted stock units in 2011, 2012, and 2013, respectively reflecting a skin-in-the-game mentality. Tanger has consistently grown its property portfolio by targeting specific markets that would be best served by an outlet mall. Management considers a variety of factors in building or acquiring new properties. The typical market has an average household income of $65,000, access to major highways, excellent visibility, or sees at least 5 million visitors a year. The company typically adds between 600K and 700K square feet every year, and has expanded consistently over the past five years. Simultaneously, the company has maintained strong financial health by reducing Debt/Equity from 5.20X in 2008 to 1.95X in 2010, and then slowly increasing it to 2.54X in 2013. The slow, yet consistent, expansion of Tangers portfolio reflects its commitment to manageable growth without overextending the balance sheet. The company is committed to long-term growth: while interest rates are low and the company can refinance or borrow, it is investing in new properties and a strong shadow pipeline of properties promising greater revenues in the future. This commitment to strong capital stewardship is one of Tangers defining traits. Tanger owns 44 (including joint ventures) outlet properties, while Simon owns 66, but Tanger has a superior DSCR (2.46X vs. 2.12X), and Debt/Equity ratio (2.54X vs. 4.03X). Additionally, ~ 80% of Tangers debt is fixed. Tanger has stewarded capital much better than its competitors; REITs are troublesome for some investors because the