SKT - Tanger Factory: Growing Dividend Strong Finances Solid Value

2023-05-03 08:05:00 ET

Summary

• Tanger Factory Outlet delivered a strong first quarter with high re-leasing spreads.
• Management evolving company with digital amenities and in-person events.
• It remains a good value with a respectable, growing, and well-covered dividend.

It's not easy to buy a stock with headline risks, but those buys can be the most rewarding if one is willing to do the legwork in separating value stocks from value traps. In other words, if you want to achieve market-beating returns, you have to be willing to take calculated risks.

Such I find the case to be with Tanger Factory Outlet ( SKT ), which I last covered here in March of last year, when it was largely being ignored by the market. SKT has produced a 23% total return since then, far surpassing the 7.5% decline in the S&P 500 ( SPY ) over the same timeframe.

In this article, I highlight SKT's recent quarterly results and discuss whether it remains a good buy, so let's get started.

Why SKT?

Tanger Factory is a leading owner of outlet centers, with 36 centers that are spread across the 20 U.S. states and Canada. It's been around for over four decades and at present, has over 2,700 stores operated by over 600 brand name companies.

What sets SKT apart from a traditional mall owners like Macerich ( MAC ) and Simon Property Group ( SPG ), which also owns outlets, is the easily fungible nature of its properties. This means that SKT's properties can easily and quickly be converted when an existing tenant moves out, thereby resulting in lower end-of-lease frictional costs compared to traditional malls.

SKT recently posted strong results, with same center NOI rising by 7.4% YoY during the first quarter. Occupancy also grew by an impressive 220 basis points over the prior year period to 96.5%. While average tenant per square foot increased by 0.4% sequentially from the end of 2022, it did decline by 3.7% on a YoY basis.

I don't find that to be too concerning, however, as the first half of 2022 was a tough comparable due to a hot job market combined with heightened retail demand as consumers emerged from the pandemic.

Moreover, while consumers have dialed back a little bit, tenant demand appears to be robust. This is reflected by the blended average rental rates rising by 14% (36% spread on new leases and 12% spread on renewal leases) over the past 4 reported quarters. For comparison, this is over 10x more than the 1.3% lease spread that SKT saw in the first quarter of last year.

Looking ahead, management continues to evolve the company with digital amenities and in-person only events. This helps to make SKT's physical retail channel relevant with today's consumers, as reflected by management during the recent conference call :

We have added digital assets to all of our centers, including digital directories, tenant signage and easily identified QR technology, directing customers to our Tanger digital channels and our virtual shopper services platform. Our enhanced platform provides shoppers with amenities and same-day access to every day and limited-time promotional offers from our retailers, plus the ability to earn personalized retailer-funded incentives as they continue to shop with us. As shoppers turn to our digital services, we can increasingly personalize their experience.

In the first quarter, we enjoyed great success on Super Bowl weekend at our Glendale, Arizona Shopping Center, securing campaigns from national brands such as Nike ( NKE ) and Under Armour ( UA ) as well as the NFL, which hosted a game day tailgate party on our site.

SKT is also well-positioned from a balance sheet standpoint, as it carries a BBB- investment grade credit rating and low net debt to EBITDA ratio of 5.2x, one of the lowest in the retail sector. It carries a low weighted average interest rate of 3.5% on its debt and 93% of debt is held at fixed rates. Plus, management has proactively extended debt maturities and has no significant debt maturities until spring of 2026.

Importantly for income investors, SKT currently yields a respectable 5%, and has raised its dividend twice over the past 4 quarters. The dividend is well-covered by a 52% payout ratio, based on Q1 FFO per share of $0.47, and I do see a pathway for the quarterly dividend rate to return to the 2020 level of $0.3575.

Lastly, SKT remains a good value at the current price of $19.27 with a forward P/FFO of 10.4. At this low of a valuation, SKT doesn't have to deliver mind-boggling growth and could easily beat the market over the long run with just 5% to 6% annual FFO per share growth combined with a 5% dividend yield. Analysts have a conservative price target which sits above the current share price, at $19.93 .

Investor Takeaway

Tanger Factory remains a compelling opportunity for investors. The company is well-positioned for growth as reflected by strong leasing spreads, while reaping the rewards of operating digitally enabled physical shopping centers that offer an enhanced experience.

Moreover, SKT has a strong balance sheet and low re-tenanting costs that can help to smooth out economic bumps in the road. With a growing and well-protected dividend, SKT can reasonably deliver strong total returns for growth and income investors over the long run.

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