Tanger's Tough Buy

Last month, Tanger Outlet Centers made a $491 million growth play, joint venturing with private equity firm Blackstone Group to acquire nine centers from Charter Oak Partners. The deal, which represents a cap rate of 10 percent, boosts Tanger's holdings by 53 percent to 9.5 million square feet and makes it the second largest outlet center owner after Chelsea Property Group.

Tanger management expects to drive net operating income on the Charter Oaks properties by rebranding them as Tanger centers, adding carts and kiosks and bringing in newer, higher-end tenants. But 49 percent of the acquired portfolio's occupied square footage will roll over in the next 27 months, and Tanger needs to effectively lease 1.5 million extra square feet just to maintain its current 93 percent occupancy level.

Though the deal reinforces Tanger as an important presence in the outlet business, the huge growth spurt will require additions to the REIT's management team, says Merrill Lynch analyst Steve Sakwa. Only 39 percent of Tanger's pre-existing portfolio will roll over by 2005, and only 33 percent of Chelsea's portfolio will roll over. “This level of leasing may be more difficult given that Tanger's strategy is to improve occupancy through the addition of upscale tenants,” he says in a report.

NOT A PERFECT PORTFOLIO

Though Tanger does gain control of some enviable properties — namely Rehobeth Outlet Center in Rehobeth, Del., and Riveria Centre Factory Stores in Foley, Ala. — not all of the Charter Oaks properties are gems. The bulk of the deal's value lies in these two centers. The other properties are facing double-digit vacancies. “Given some of the challenged properties in the Charter Oaks portfolio, this type of leasing may require more time than straightforward renewals,” Sakwa adds.

But Tanger execs remain bullish. In a conference call, CEO Stanley Tanger said he hopes to reduce occupancy costs at the Charter Oak properties, currently about 8 percent, closer to Tanger's own 7.2 percent rate. While Tanger properties' average sales per square foot are $300 and its occupancy rate is 96 percent, Charter Oak's properties produce sales per square foot of $280, with 93 percent occupancy.

Tanger is putting up $100 million of the total purchase price, will retain a one-third equity stake in the joint venture, and will also take over the lucrative managing, leasing and marketing contracts on the properties. The deal also decreases Tanger's “dependence on a single asset,” says credit rating service Moody's, referring to the trust's popular Riverhead, N.Y., property.

Charter Oaks Portfolio