Tanger’s Strongest Sources Of Differentiation
- When a major department store closes its stores, the surrounding tenants suffer collateral damage.
- Many leases contain co-tenancy clauses that give the operating tenants the right to reduce their rent or possibly vacate their premises when a department store goes dark.
- Tanger has built its platform on properties that are easily reconfigured to minimize tenant turnover downtime.
As I explained in an article last week, Washington Prime (NYSE:WPG) and other investors recently made “an 11th-hour bid to save Bon-Ton Stores Inc.’s (OTCPK:BONTQ) 120-year-old business that operates around 250 stores and employs more than 20,000 people across 23 states.”
WPG has a history of making investments in operating entities, such as two common area local craft beer installations (with an additional six either under construction or in the planning phase), four Shelby’s candy shops in operation (and WPG continues to open new locations), and forming a venture capital JV led by the former CEO of one of the world’s largest restaurant companies. Source
In a recent investor deck WPG explains that the company is “creating dynamism” that “includes bringing exciting events and activities” to assets. The mall REIT is hoping it can ‘deliver differentiated collateral material to tenants and sponsors’ by debunking “the notion that a tenant should be confined to the ‘four walls’ which demarcate their space.”
The future of Bon-Ton is in doubt and WPG’s portfolio includes 15 stores, 13 of which are owned by the REIT. While there is some debate as to the impact of some or all of the Bon-Ton store closings, there is little doubt that WPG’s dividend is at risk.
WPG’s annual dividend is $1.00 per share, and FFO/share is estimated to be $1.52 per share in 2018. As Dane Bowler points out, much of the difference between FFO and AFFO (Adjusted Funds from Operations) is cap-ex; however, re-tenanting a dark department store, compared with a small shop, carries enhanced risk.
For the purposes of modeling, assume that Bon-Ton were to close 10 WPG assets, I estimate that the “all-in” occupancy costs could exceed $5 million ($2.00 rent plus $3.00 NNN costs). However, the impact outside of the “four walls” could double or possibly triple that number.
When a major department store closes its stores, the surrounding tenants suffer collateral damage, and many leases contain co-tenancy clauses that give the operating tenants the right to reduce their rent or possibly vacate their premises when a department store goes dark.
Without reviewing the individual tenant leases there is no way to project the impact to WPG’s portfolio, if multiple stores close. However, there is little doubt that WPG’s dividend will become more stressed if Bon-Ton closes stores, and that is precisely why I consider the REIT a sucker yield.
While WPG and other mall REITs continue to address major department store closings, there is one REIT that has zero exposure to big boxes. This company has built its platform and properties that are easily reconfigured to minimize tenant turnover downtime, while also providing a highly diversified tenant base, the majority of which are publicly-held, high credit quality retailers.