SKT - Tanger Factory Outlet: A Strong Comeback Sets Pace For Future Growth

2023-07-19 10:38:18 ET

Summary

• Tanger Factory Outlet Centers has seen a share price gain of 56.21% over the last year, outperforming the S&P 500, and is a solid dividend payer.
• The company has been introducing new brands and alliances to increase diversity and has seen improved financial results, including a rise in occupancy rates and better rent spreads.
• Despite potential risks such as property-specific issues, tenant bankruptcies, and changes in the real estate market, Tanger is recommended for investors seeking a company with potential for future growth and dividend increase.

Investment Thesis

Tanger Factory Outlet Centers (SKT) is a real estate investment trust [REIT] that is fully integrated, self-administered, and self-managed. The company owns and runs shopping malls in the United States and Canada. Its main purpose is to build, buy, own, run, and manage outlet shopping malls.

While the retail sector as a whole has lagged this year, Tanger is bouncing back strongly. This is shown by its strong momentum compared to the S&P500, which has translated to a share price gain of 56.21% over the last year. The company is also a solid dividend payer, which makes it a good choice for investors.

Given a number of initiatives, I feel this company is better positioned to maintain its present upward trajectory, which bodes well for its future growth. I believe its loyalty program will boost existing customer retention and bring in new business. Its ESG focus, in my opinion, will lead to long-term viability, which will appeal to the sector's discerning clientele. The company's strategic moves, such as introducing new brands and alliances, will also increase the company's diversity, which is crucial for satisfying the diverse and dynamic needs of the company's clientele.

Recovering From Economic Setbacks

The retail sector is particularly vulnerable to the deteriorating economic climate, and no company is completely immune. However, in times when household resources are tight, Tanger's main message to customers should hit home even more. Its stores allow customers to trade down without actually doing so by offering name-brand products at reduced costs.

Retailers appreciate the company's stores because they offer a place to offload unsold stock without slashing prices at regular locations. In addition, its outlets allow stores to generate healthy margins despite reduced prices due to decreased occupancy costs.

Its tenant pool is extremely diverse. The top 10 tenants account for around 35% of the REIT's annualized base rent, while the largest tenant only contributes 6%. Tanger's numerous smaller tenants each get a portion of the remaining 65%. In order to increase the appeal of its outlet complexes, the firm has also been exploring outside stores, incorporating restaurants and entertainment options.

The REIT's bottom line has progressively improved in recent years as occupancy rates have recovered from pandemic-era lows. In the first quarter of 2023, occupancy was 96.5%, slightly below historical averages but more than 2 percentage points more than last year.

Adjusted FFO has increased due to rising occupancy and better rent spreads. This FY, the figure might reach $1.90 per share, resulting in a price-to-FFO ratio of roughly 12. The bottom line has a lot of potential to grow because adjusted FFO is still below pre-pandemic levels and far below peak levels attained in 2016.

Transformative Initiatives

The company's efforts to fortify its business have led to the formation of new alliances and the introduction of a number of new brands. By carefully selecting outdoor areas with upgraded conveniences and first-rate dining and drinking establishments, SKT is revolutionizing the shopping experience.

Shake Shack, a new addition to the Tanger portfolio, will debut in San Marcos, Texas, this summer. The food at Shake Shack is a modern take on classic American dishes made using premium ingredients. Famous for its fresh, made-to-order burgers prepared with Angus beef, hand-spun milkshakes, house-made lemonades, beer, wine, and more, this restaurant has something for everyone. Customers are sure to enjoy Shake Shack, one of America's most renowned restaurant brands.

Dave & Buster's will debut in Savannah, Georgia, and Atlantic City, New Jersey, further expanding Tanger's unique selection of cuisine and fun. The premier entertainment and dining destination is being offered as part of Tanger's outparcel strategy and will be situated on the outlet's neighboring land. This is the latest addition to Tanger's experiential product portfolio, including X-Golf.

This company's long-term vision depends on carefully observing customer behavior and deliberately investing in experiential services that drive traffic and develop loyalty. The addition of Shake Shack and Dave & Buster's illustrates this strategy. These customer-centric alterations are strengthening Tanger's business portfolio by bolstering the offers of established and up-and-coming merchants and expanding the range of activities available to shoppers of all ages.

I credit the company's current success to these initiatives and others like these that were launched last year. SKT expanded its retail network by roughly 30 outlets in the first quarter of 2022, among them the trendy shoe and clothing shop Allbirds.

MRQ Results: A Testament That The Initiatives Are Paying Off

I believe that initiatives already completed, such as the addition of the 30 outlets in Q1 2023, contributed to the MRQ results depicting a lot of improvements. The company's leaders acknowledged that including new products and services contributed to the company's diversified portfolio. Here are the quarterly results and some remarks from management to help put it all in perspective.

First-quarter 2023 total gross sales increased over the same period the previous year. They had a sequential increase in average tenant sales for the trailing 12 months from the end of the fourth quarter to the end of March 2023, when it hit $447 per square foot. Management believes that stabilizing trends at their key merchants and the efficiency benefits from their new partners were the primary drivers of this sequential improvement.

"This sequential improvement is driven mainly by stabilizing trends in our core retailers, plus productivity gains derived from our new partners that are outperforming brands for stores that have exited our portfolio." - Stephen Yalof

In addition, for the twelve months ending March 31, 2023, their blended average rental rates increased by 13.8%, marking the eighth consecutive quarter of better rent spreads. This is an increase of 370 basis points from the previous quarter and an increase of nearly 10 times from the 1.3% spread we reported in Q1 2022.

Looking at these statistics, I am convinced that the company's transformative initiatives are paying off. Given the recent plans to expand and diversify, I expect the company's performance to improve even.

Dividends

Though SKT's payout is lower than it was before the pandemic, the company still offers a desirable dividend yield. The company has a dividend yield of around 4.2%, based on the most recent quarterly dividend payment of $0.245 per share. The most recent dividend payment was around 11% greater than the prior payment, and the company has increased its payout by 38% since dividend payments were reintroduced in early 2021. Its dividend payment is currently using about half of its adjusted FFO, but the company should be able to increase the payout as FFO grows.

Risks

Buying SKT has its fair share of potential downsides, like any other investment. Some of the potential risks of investing here are outlined below.

• Property-specific risks: Tanger Factory Outlet Centers are susceptible to risks associated with each property they own, such as changes in local market conditions, zoning regulations, or natural disasters. Any adverse events at a property could lead to financial losses for the company.
• Tenant bankruptcies: If their tenants file for bankruptcy or go out of business, it could result in vacancies within the company's properties. This could lead to lower rental income and increased costs associated with finding new tenants.
• Changes in the real estate market: The company is closely tied to the real estate market. Changes in property values, rental rates, or demand for retail properties could impact the company's financial performance.

My Final Thoughts

Despite the setbacks caused by COVID-19, SKT appears to be making a strong comeback with rising share prices and improved financial results. The business is currently moving forward quickly thanks to sound expansion and revolutionary initiatives. These initiatives are paying off, according to the MRQ, and given the company's strong growth potential, I am upbeat about its future. Given its increased FFO, I anticipate the company's dividend payout to keep rising in the future. In summary, I believe SKT to be in a strong position for future growth, which is good news for its dividend policy. As a result, I recommend the stock to investors seeking a company with the potential to grow its dividend in the future.

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