Tanger Factory Stock: This 4.6% Yield Trust Has Huge Potential (NYSE:SKT)
Tanger Factory Outlet Centers, Inc. (NYSE: SKT) benefits from a fundamental recovery in the retail market in the United States. The real estate investment trust recently increased its dividend by a significant percentage, giving investors reassurance that the US retail market is strong enough to support dividend growth going forward.
Additionally, the Trust’s business operations are well capitalized and Tanger Factory has a very low payout ratio, which will allow for many more dividend increases in the future.
Let’s start with the good stuff
Tanger Factory recently increased its dividend by 9.6% amid a strong market rally in the commercial real estate sector, bringing the total annual dividend to $0.80 per share from $0.73 per share previously . Tanger Outlet’s current stock price is $17.43, implying a stock yield of 4.6%.
To receive the next dividend payment of $0.20 per share, you must purchase Tanger Outlet shares by April 28, 2022, the trust’s ex-dividend date for the next dividend payment.
Tanger Factory’s activity is experiencing a strong recovery
If you haven’t heard of Tanger Factory, you’ve missed something.
Tanger Factory owns and operates a network of high-end outdoor shopping malls across the United States. The Trust’s operating properties include 36 shopping centers totaling 13.6 million square feet across 20 states and Canada. Tanger Factory leases its properties to well-known retail brands such as Michael Kors, The Gap (GPS), adidas (OTCQX:ADDYY) (OTCQX:ADDDF), NIKE (NKE), Lululemon (LULU) and others.
Tanger Factory Outlet Centers are primarily located on the East Coast, but states such as Texas, South Carolina, and North Carolina are also represented in the trust’s geographic footprint. South Carolina, in fact, has the most malls in Tanger Factory’s portfolio, while the majority of states only have one or two outlet malls within their borders. In addition to the 30 consolidated outlet properties listed below, the trust holds non-consolidated investments in 6 other brand centers.
The strong rebound in Tanger Factory’s occupancy rate after Covid-19 provides compelling justification for an investment. Despite the Tanger Factory Outlet Centers business being crushed by Covid-19 restrictions in 2020 and, to a lesser extent, in 2021, confidence has seen a strong recovery in the property markets where it operates. Tanger Factory’s occupancy rate fell from 97% before Covid-19 to 92% in 4Q-20 and 1Q-21, but it has steadily recovered in 2021.
The trust’s occupancy rate at the end of 2021 was 95%, not quite where it was before the pandemic, but Tanger Factory could return to pre-Covid occupancy -19 by the end of this year. Growth in occupancy rates means growth in net operating income and funds from operations, two key numbers for REIT investors.
Recovery of net operating income
If retail market fundamentals remain strong in 2022 and a recession does not derail Tanger Factory’s investment case, the trust could see a significant increase in net operating income and funds from operations this year. .
For REITs and investors, net operating income is a critical number. A landlord’s net operating income (NOI) is the amount of money earned by tenants after real estate expenses have been deducted. Tanger Factory generated $284.8 million in net operating income at the same center in 2021, an increase of 16% over the previous year.
The same-center RNE is used to assess a trust’s financial performance on a like-for-like basis, which means that the growth in net operating income of acquired properties is not included in the calculation. Tanger Factory net operating income increased due to improved asset performance (higher occupancy rates) in a recovering real estate market.
Growth in net operating income can be expected to translate into increased funds from operations. The Tanger Factory outlet center assets generated $138.1 million in funds from operations in 2021, down 10% year-on-year.
Without a one-time loss from early debt extinguishment of $47.9 million in 2021, the Trust’s FFO would have been significantly higher and would have shown year-over-year growth. Adjusting Tanger Factory’s operating funds for this one-time effect results in operating funds (base) of $188.4 million, a 23% year-over-year increase.
Tanger Factory’s FFO per share fell 18% year-on-year to $1.29 per share. Even with the lower FFO figure, Tanger Factory had a payout ratio of only 55%, indicating that the trust has plenty of room to increase its dividend payout in the near future.
Solid balance sheet
Tanger Factory’s balance sheet is sufficiently capitalized. Coverage ratios, such as consolidated income available for debt service versus annual debt service costs, are 5.1x, indicating that the trust has significantly higher portfolio income than what is necessary to service its debts.
The trust’s credit metrics are also well below contractual covenant requirements. Finally, Tanger Factory had over $160 million in cash on its balance sheet. The trust has more than enough cash to fund its operations and, in fact, make acquisitions, thanks to $520 million of unused capacity under unsecured lines.
2022 outlook, multiple FFOs
Tanger Factory forecasts a 1.5% to 3.5% increase in net operating income of the same center in 2022. Tanger Factory could see an FFO of $1.68 per share to $1.76 per share for the funds operation of the trust. Because SKT closed last week at $17.43, the implied FFO multiple here is only 10x, which makes the exit center trader a good buy for me.
SKT is so cheap compared to other retail trusts with a broader investment focus because outlet and mall operators are more vulnerable to a recession, which some say will happen in 2022.
What could lower SKT?
A recession and soaring inflation.
Although inflation is good for homeowners and investors, high inflation increases the risk of recession. Clearly, the risks of recession are increasing and an economic downturn poses a significant risk not only to SKT, but to the industry as a whole.
SKT has a payout ratio of just 55% and recently increased its dividend by 9.6%. Based on expected operating funds for 2022, inventory is cheap and recovery in occupancy could lead to higher net operating income for the trust going forward.
Given Tanger Factory’s low payout ratio (and high occupancy), I’m confident investing in SKT even if the real estate market experiences a downturn later this year.