SKT - Tanger Factory Outlet: Flush With Cash 4.2% Dividend Yield A Buy?

2023-07-19 04:39:19 ET

Summary

• Tanger is paying out a 4.2% dividend yield that has been raised by 19% over the last 12 months.
• SKT currently covers this payout by 188% to set the backdrop for further dividend raises.
• A lack of floating rate debt on its balance has hedged the investment story as interest rates and rent spreads surge.

Tanger Factory Outlet's ( SKT ) dividend is still around $0.11 lower than its pre-pandemic levels but the commons have staged a blistering 60% rally over the last year as FFO growth and a healthy dividend coverage place in view future dividend hikes. The REIT last declared a quarterly cash dividend of $0.245 per share , in line with its prior payment and for a 4.2% annualized forward yield. This has grown dramatically since the pandemic cut with a 19.2% trailing 12-month dividend growth rate set against a sector median growth rate of 10.8% over the same period. Critically, Tanger realized FFO per share of $0.46 for its last reported fiscal 2023 first quarter, a beat by $0.02 on consensus estimates to cover the current dividend by 188%.

Do I think Tanger is a buy at this level? It depends. Bears, who form the 9% short interest, would be right to flag a dramatic rally that has defied a bleak macroeconomic backdrop. This has been highly defined by disruption with a Fed funds rate that was hiked ten consecutive times up until the June FOMC meeting and is now set to be increased by 25 basis points when the Fed meets next week on July 26th. However, bulls would highlight that Tanger is currently swapping hands at 12.34x its price to forward FFO, around 6% lower than its peer group median.

Rental Revenue Flatlines Year-Over-Year

Tanger brought in total revenue of $108.94 million for its first quarter, growth of 0.1% over its year-ago comp and a small beat of $220,000 on consensus estimates. Rental revenue actually dipped from its year-ago number with the marginal growth of total revenue being driven by a $715,000 growth in other revenue to $3.45 million . This consisted of revenue from paid media, sponsorships, and onsite signage across Tanger's portfolio. The REIT's open-air portfolio consisted of 36 centers with an additional center currently under development as of the end of the first quarter. This was spread across 20 states, and Canada, totaled 13.9 million square feet, and was leased to over 2,700 stores.

The core operating metrics of the portfolio were decent. Occupancy dipped by 50 basis points to 96.5% sequentially from 97% but was up from occupancy of 94.3% in the year-ago comp. This dip was more than offset by a same center net operating income that increased by 7.4% on a cash basis and over its year-ago comp to $83.6 million. Tanger's core investment pitch is built around an incredibly attractive balance sheet with a rising cash and equivalents position set against low variable rate debt. Around $100 million of debt, 7% of its total, was floating rate debt as of the end of the first quarter with cash and equivalents at $203 million . This meant the REIT's year-over-year increase in interest expenses was only 6.1%, a balance sheet positioning that has greatly hedged operations and improved the visibility of FFO even with the outlook for inflation and the direction of interest rates still so uncertain.

Dividends Face An Upward Growth Trajectory

Crucial to Tanger's investment pitch is the outlook for dividends which is one of the healthiest of any retail REITs that I've seen. The REIT now sees 2023 core FFO per share of $1.83 to $1.91, up from a prior guidance range of $1.81 to $1.89. For some context, Tanger's current annualized dividend payout is set to be around $0.98, and management flagged during their first-quarter earnings call that the excess cash set to be generated for the year will be almost equivalent to their current floating rate debt.

Hence, the dividends are likely to continue rising even against the specter of a recession. A possible hard landing of course forms a core risk but market expectations of a hard landing have moderated since the June CPI number was released to show inflation dropping below consensus to 3%. Subsequently, Goldman Sachs has cut its recession odds to 20% from 25%. However, the situation is still fluid.

Tanger was able to deliver markedly improved rent spreads during the first quarter with its blended average rental rates increasing 13.8% for the trailing 12 months. This formed a sequential improvement of 370 basis points of rent spread growth and was up from a 1.3% spread reported in the year-ago comp. This was as average tenant sales productivity grew to $447 per square foot for the trailing 12 months from the end of the first quarter, up marginally from $445 per square foot in the prior fourth quarter. Further dividend gains could continue to push shares higher with the REIT still trading at a relatively decent price to forward FFO multiple. Hence, this is a hold.

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