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Tanger Factory Outlet Centers Trims Its Portfolio

Timothy Green, The Motley Fool

Tanger Factory Outlet Centers (NYSE: SKT) isn't sitting on its hands as a tough retail environment and the prospect of tenant store closings and bankruptcies threatens to hurt its financial performance. Tanger announced on Monday that it had closed on the sale of four noncore outlet centers, raising gross proceeds of $130.5 million and booking a $44 million gain on the properties.

Selling off properties that no longer make sense to own is part of Tanger's strategy. The company has now raised a total of $402 million since the end of 2014 by disposing of 13 properties. This latest deal will allow Tanger to reduce its debt load and potentially repurchase some of its shares at a discounted valuation, all while removing some poor-performing centers from its portfolio.

Women laughing and holding shopping bags.

Image source: Getty Images.

The details

Tanger is selling outlet centers in Nags Head, North Carolina; Ocean City, Maryland; Park City, Utah; and Williamsburg, Iowa. These four outlet centers account for 6.8% of Tanger's portfolio square footage and 5.1% of its expected 2019 portfolio net operating income.

The divestitures are expected to have a positive impact on 2019 net income but a negative effect on funds from operations. Net income will be hurt by the loss of about nine months of earnings from the sold properties, but that loss of income will be more than offset by the expected gain on the transaction and the impact of debt reduction. Funds from operations excludes that expected gain, and Tanger expects a negative impact of $0.09 per share this year. The company had previously guided for FFO between $2.31 and $2.37 for the year.

Tanger plans to use essentially all the net proceeds to repay debt, at least initially. In the longer run, Tanger will allocate a portion of the proceeds to share buybacks, depending on market conditions. At the end of 2018, Tanger had total debt of $1.71 billion.

Tanger is dumping these properties due to underperformance. Tenant sales per square foot were $295 in 2018 at the divested properties, well below $385 for the overall portfolio. Occupancy was also just 95.8% at the four centers, a full percentage point below the overall occupancy rate. Tanger warned in February that its occupancy rate would fall to as low as 94% in 2019, well below typical levels. These divestitures will help shore up that figure.

Good news and bad news

The good news is that these divestitures make Tanger's portfolio stronger, removing weak properties at a time when the retail industry is going through upheaval.

"By completing these asset sales, we are strengthening the overall quality, reducing the average age, and improving the longer-term growth profile of the portfolio. We believe the benefits of these dispositions over time will more than offset the expected short-term earnings dilution, given that these assets are not expected to produce the long-term growth in cash flow that we anticipate from our core portfolio," said Tanger CEO Steven B. Tanger in the press release announcing the deal.

The bad news is that these properties became "noncore" in the first place. Tanger is selling at the right time, booking a sizable gain on the properties, but the market is viewing the deal as a negative. The stock was down a little more than 3% late Monday morning as investors digested the news.

Even after the negative hit to FFO this year from this deal, Tanger stock still sells for less than 10 times that metric. And the beaten-down stock price means that the dividend yield is approaching 7%. This year will be rough as store closings and bankruptcies rip through a changing retail industry. But Tanger's focus on premium brands and its willingness to sell off properties well before they become real problems should see the company through this difficult time in retail.

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Timothy Green owns shares of Tanger Factory Outlet Centers. The Motley Fool recommends Tanger Factory Outlet Centers. The Motley Fool has a disclosure policy.