IVT - After Fantastic Upside Tanger Is No Longer On Sale (Rating Downgrade)

2023-11-20 13:28:29 ET

Summary

• Tanger Inc., a REIT focused on outlet centers, has shown strong financial performance and generated significant returns for investors.
• The company's revenue and profitability metrics have improved, driven by positive leasing spreads and other revenue sources.
• While Tanger's stock is not overpriced, it is more expensive compared to previous evaluations, leading to a downgrade to a 'hold' rating.

Generally speaking, I would consider myself a fan of REITs. But I have not historically been a fan of companies, REITs or otherwise, whose principal business is in the ownership and leasing out of traditional retail outlets. Every so often, however, I will find a firm that operates in a market that I do not like that actually makes sense to be bullish on. One example in this space that focuses on the ownership of outlet centers is Tanger Inc . ( SKT ).

Back when I last wrote about the business in February of this year, I mentioned that robust financial performance and the affordability of its share price from a valuation perspective made it a compelling opportunity still. Leading up to that point, I had already been optimistic about the firm, having initially rated it a ‘buy’ back in August of 2019. From that time until the February 2023 article, shares had generated a return for investors of 109.8% compared to the 53.3% increase seen by the S&P 500. To many investors, the prospect of additional upside might have seemed ludicrous. But even so, my decision to keep the business rated a ‘buy’ played out well.

Since the publication of my February 2023 article, the stock has generated a return for investors of 43.1%. That's well above the 13.6% increase seen by the S&P 500 over the same window of time. The big question now is where do we go from here? Based on my own assessment, the company is far from a bad operator. But I do think that all the easy money has been made. Because of this, I am finally downgrading the enterprise to a ‘hold’. But if the performance grows stronger and/or the stock falls from here, I could see myself becoming bullish on it again.

Performance continues to impress

Fundamentally speaking, Tanger is doing quite well for itself. Consider, for instance, how the firm performed for the first nine months of its 2023 fiscal year. Revenue for that time came in at $336.9 million. That's 3.3% above the $326.2 million generated one year earlier. Working in the company's favor was rental revenue. It managed to grow by $7.4 million from $311.6 million to $319 million. The firm benefited on this front from an increase in its occupancy rate from 96.4% to 97.9%. Positive leasing spreads from tenants that renewed their contracts and re-tenanting activities helped to increase this as well.

There were, of course, other drivers behind this increase. Management, leasing, and other services revenue jumped by $1.3 million because of the addition of property management responsibilities for a center located in West Palm Beach, Florida. The company also benefited to the tune of just over $2 million from other revenue sources such as electric vehicle charging, paid media, sponsorships, the posting of on-site signage, and other factors.

On the bottom line, the picture was positive across the board. Operating cash flow, for instance, managed to pop from $122.7 million to $152.1 million. FFO, or funds from operations, grew from $149.9 million to $160.2 million, while core FFO increased from $149.9 million to $159.4 million. Another important profitability metric is NOI, also known as net operating income. It increased from $219.6 million to $233.6 million, while EBITDA for the company increased from $178 million to $183.4 million.

When it comes to 2023 in its entirety, management has provided some guidance. The current expectation is for FFO per share to be between $1.91 and $1.95, while core FFO per share should be between $1.90 and $1.94. At the midpoint, this implies FFO of $204.6 million and core FFO of $213.1 million. If we assume that other profitability metrics will increase year over year at the same rate that these are forecasted to, we should expect operating cash flow of $265.3 million, NOI of $318.5 million, and EBITDA of $245.5 million.

In the chart above, you can see how shares of the company are priced on a forward basis and how they are priced using data from 2022. As you can see, the stock is a bit cheaper on a forward basis than if we were to use data from last year. But this makes sense when you consider that the business is continuing to expand. In the table below, I took two of the five pricing metrics and compared them to five similar firms. What I found was that two of the five companies ended up being cheaper than Tanger on a price to operating cash flow basis. However, when it comes to the EV to EBITDA approach, I found that our prospect ended up being the most expensive in the group.

This mixed pricing is not ideal. I would also like to point out that while shares don't look overpriced on an absolute basis, they are quite a bit more expensive than when I last wrote about the firm. This much you can see by comparing the pricing chart now to what it was like back in February. That particular chart can be seen below. I would also like to point out a couple of other factors. For starters, I understand that some investors might be worried about debt. Leverage can be very dangerous after all, especially in a high interest rate environment. It is true that Tanger has a net leverage ratio of about 5. But that's not ridiculously high. Regarding the impact of interest rates, it's worth noting that only 5% of the company's debt is currently variable in nature. Add on top of this the fact that only 0.5% of the company’s debt comes due between now and the 2026 fiscal year, and I'm not terribly concerned about interest rates at the moment.

Another thing that should be mentioned is that management seems comfortable enough with the state of the company to continue buying other assets. In fact, on November 13, management announced that the company had acquired its 38th shopping center, which is located in North Carolina. That particular purchase cost shareholders $70 million. It's 95% occupied and spans 382,000 square feet of space. There are 70 stores located within it, including major apparel and footwear brands. And there is also a catalyst that should help to fuel further growth there. That is the expansion of the Asheville Regional Airport, which is a $400 million project involving the passenger terminal at the airport that is expected to boost capacity by 150%. Buying up high quality assets, especially when there is a catalyst to further fuel growth, is rarely a bad thing.

Takeaway

From what I can see at the moment, Tanger is doing a fine job. All things considered, I wouldn't go so far as to call the stock expensive. But it does look to be more or less fairly valued at this time. I do have a history of downgrading stocks too soon and, as such, I tend to miss out on some upside that they offer. It is entirely possible that is occurring again. But even knowing that risk, I do feel as though a downgrade to a ‘hold’ makes the most sense at this time.

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