SKT - Tanger Factory: A Quality 'Buy' At The Right Price

2023-09-26 10:06:59 ET

Summary

• Tanger Factory focuses on open-air outlet centers in tourist-heavy locations with well-known brand tenants.
• It's expanding into home furnishings and is garnering strong interest in its Loyalty Program.
• It's demonstrated strong demand, high occupancy rates, and steady rental rate increases.

Underfollowed stocks can sometimes give outsized returns, and that appears to be the case for Tanger Factory (SKT), which I last covered here back in May with a ‘Buy’ rating, noting its transformation efforts and high re-leasing spreads.

It appears that the market has picked up on this gem, as the stock has given investors an 18% total return since my last piece, far surpassing the 5.2% rise in the S&P 500 (SPY) over the same timeframe. In this article, I revisit the company and discuss whether the stock is a buy or hold at present, so let’s get started.

Why SKT?

Tanger Factory is a REIT that may at times be thought of as being a lite version of Simon Property Group (SPG), considering its focus on clothing and accessories. While SPG owns both malls and outlet centers, SKT is focused exclusively on open-air outlet centers at attractive destination locations across the U.S. and Canada.

At present, SKT owns 37 well-located properties across the Sunbelt, Northeast, and other regions. As shown below, many of SKT’s locations are in tourist-heavy spots where shoppers go to spend their vacations and presumably open their wallets.

Like SPG, SKT counts many name brands as its tenants who desire to have a presence at its properties. This includes Coach, Nike ( NKE ), Lululemon ( LULU ), Adidas ( ADDYY ), Pottery Barn ( WSM ), Ulta Beauty ( ULTA ), and Tory Burch, to name a few. As shown below, SKT carries a well-diversified tenant base, with no single tenant making up more than 6% of its annual base rent.

Those who have followed SKT closely know the headwinds that it’s faced in recent years (even before the pandemic) due to tenant turnover. Those concerns bubbled up during the pandemic when occupancy hit the lowest point in at least a decade during 2020, as shown below.

However, retail has always been a cyclical industry, with brands falling in and out of favor with consumers. Tenant headwinds simply give SKT an opportunity to re-lease its properties to healthier and more profitable tenants. In addition, unlike specialty retail (i.e., restaurants) or office properties, the uniform nature of SKT's 'boxes' make for low, if any, building modification costs, when it comes to replacing a tenant.

Over the past 12 months, SKT has demonstrated strong demand for its properties, as occupancy has 230 basis points YoY, and 70 bps QoQ to 97.2% as of the second quarter. Also encouraging, blended average rental rates increased for the 6th consecutive quarter, with a 13.2% blended lease spread on new and renewal leases commenced in the trailing 12 reported months. This contributed to same store NOI growing by 4.3% YoY during the last reported quarter.

Moreover, unlike other REIT sectors that are pulling back due to market uncertainties, SKT recently opened its 37th center in Nashville, Tennessee, with a 95% leased rate. It's also seeing strong traction with its newly launched Tanger Loyalty Program, which increases its shopper engagement. Management is also expanding into the growing home furnishings' category, with notable names like Restoration Hardware (RH), West Elm, and Wayfair (W) at its San Marcos, Texas location.

Concerns around SKT include potential for a higher for longer interest rate environment, which raises its long-term cost of debt. In addition, a slowdown in the economy could pressure Tanger's consumers, since the goods at its centers are discretionary in nature. However, one could also argue that the Outlet discount model is more resilient than other asset classes. In the words of the former Tanger CEO: "In good times, people like a bargain, in bad times, people need a bargain."

Importantly, SKT carries a strong balance sheet and has investment grade BBB-/Baa3 credit ratings from S&P and Moody's. It has just $5.5 million worth of debt maturities between now and the end of 2025, and has healthy debt metrics, including total debt to adjusted asset value of 38% and fixed charge and interest coverage ratios of 4.4x and 5.7x, respectively. As shown below, SKT is well within its debt covenants.

This lends support to the 4.4% dividend yield, which is well-protected by a 50% payout ratio. While the dividend still has some ground to make up from its 2020 level of $0.3575, SKT did raise it by 3 times since 2020, including the most recent 11% raise this year to the $0.245 quarterly dividend rate.

My only complaint about SKT is that the shares appear to be fairly priced at the moment, at $22.62 with a forward P/FFO of 11.8. Considering the higher interest rate environment (with competition from treasury bonds) and analyst expectations for just 1.3% FFO/share growth next year, I believe the shares are fairly priced at present.

Investor Takeaway

I believe that Tanger Factory Outlet Centers is a well run company with strong long-term prospects. It's proven its ability to weather retail cycles, including the latest one, with well located properties and a strong balance sheet. Meanwhile, the market seems to have already caught on to SKT's quality and driven up its stock price.

For now, I would recommend investors hold off on adding to their positions as the stock appears to be fairly valued, as I'd be more interested in the stock at a P/FFO of 11x or below for the aforementioned reasons. However, long-term investors who don't mind short-term price fluctuations probably won't go wrong by dollar cost averaging into the stock over time.

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