(https://seekingalpha.com/article/4316591-10-must-reits-to-own-during-next-decade)
Tanger Factory Outlet (SKT) is referred to as a “battleground” pick for two reasons. For one, there’s the enormous sensitivity to its dividend yield, which is now 8.9%. And then, there’s the substantial short interest involved: 57% as of Dec. 31. We’ve covered this name extensively on Seeking Alpha, the latest of which had over 136,000 web views. That’s a record, so thank you for reading. Withstanding the fundamentals, Tanger has drastically underperformed. It’s down 20.1% in 2019 with a mere 3.2% annualized return over the last 10 years. Of course, though, we’re value investors here, so fundamentals drive our decisions. Thus, we believe the next decade could be more favorable. Up until the last recession and commencing January 2000, Tanger returned an average of 21% annually. And from 2009 through 2016, the pure-play outlet REIT returned an average of 18% per year. It’s really the last few years where Tanger has completely bombed, returning an average -18% annually from July 2016. Even so, its fundamentals just aren’t that bad. The company had an occupancy of 95.9% in Q3-19 – a figure that hasn’t dropped below 95% in more than 25 years. Also, in Q3, Tanger matched its all-time-high average sales per square foot of $395. That was the same as in 2016. And although earnings, or FFO, has slipped modestly since that year, the bulk of the decline has been due to dispositions. (FFO per share was $2.23 in 2015 and is targeted at $2.25 for year-end 2019.) Meanwhile, the balance sheet is in great shape (rated BBB by S&P), with approximately 94% of the square footage unencumbered by mortgages. The unsecured line of credit has 99% unused capacity, or nearly $600 million. And Tanger generates around $100 million of free cash flow after dividends. The company has a considerable buffer (or margin of safety) to protect the dividend and 26-year track record of increasing it. We are, of course, underweight malls. And we would recommend minimizing exposure to Tanger. Yet, we still believe it will generate outsized returns over the next decade – comparable to what was witnessed in the decade preceding the great recession. Shares are trading at $15.95 with a P/FFO multiple of 7.1x.
Note: We recently published an article on our Marketplace service (The Tanger Conundrum: Why Shares Spiked Last Week), in which we explained our rationale for SKT’s likely removal from the S&P Dividend Index (SDY).
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