Dividend investors looking for a long shot might want to carefully examine Tanger Factory Outlet Centers (NYSE:SKT). Tanger is a real estate investment trust, which some analysts think will fare poorly when the Fed hikes interest rates. But I don't think so.
Let's take a look at the numbers. At the end of October 2016, Tanger released its earnings report. 2016's revenue for the recently reported quarter rose 5.5% year over year. On November 15, Tanger paid a $0.325 dividend. During the last five years, Tanger's dividend has increased 63%. The dividend return on Tanger is 3.9%.
Tanger's AFFO for the third quarter of 2016 rose 5.1% to $62.3 million; and the AFFO for the first three quarters of 2016 rose 7.3% to $177.5 million.
Tanger's business is outlet shopping malls, which the company develops, owns and operates in North America. In the middle of November 2016, Tanger opened its 44th outlet mall in Daytona Beach, Florida. Five days prior to the grand opening in Daytona Beach, Tanger began expanding its outlet mall in Tilton, New Hampshire. The expansion project includes a new Five Guys Burgers and Fries and a bigger Starbucks, complete with drive-thru. Tanger also began construction on its new outlet mall in Fort Worth, Texas. The Texas mall, along with another in Pennsylvania, will open in 2017.
Tanger's stock price on Friday was $34.65. That price reflects analysts' fears of an impending rate hike by the Fed. This fear is an overreaction to the impact of rising interest rates on debt. The thinking goes like this: companies like Tanger lug around a lot of debt that they need to develop new properties. And that is true; however, what analysts fail to realize is that rising interest rates are indicative of economic growth. Economic growth means consumers have more discretionary money to spend, which allows Tanger to increase rent on its retail space.
At the present juncture, Tanger's occupancy rate sits at 97.4%. This high rate of occupancy signifies the allure and attraction of outlet stores to consumers. Everyone likes to believe they are getting name brands at a reduced price.
Added to the above is the fact that Tanger is internally managed, which precludes such risks as the issuance of debt even though interest rates are escalating, as well as reduced dividend returns. Internally managed REITs seem to reduce conflicts of interest between management and shareholders, whereas externally managed REITs work a little like some NFL contracts, with performance-based incentives that sometimes result in a clash between management's personal goals and the goals of shareholders. More often than not, internal management provides shareholders with a greater return.
For example, during the third quarter of 2016, Tanger's management renewed its rental leases, raising rents 5%, an increase of $3.7 million. This increase, along with more than 2500 lease agreements that provide a stable and identifiable income stream in conjunction with new mall projects coming online in 2017, should reduce the impact of rate hikes to manageable levels. In addition, during the last economic recession, the company actually increased its dividends.
The price target on Tanger presently ranges from $40 to $48, with a low of $34, which is where the price currently sits. Even with the expected interest rate hike from the Fed, Tanger's position is solid. Increased rents, along with renewed leases at higher rates during the third quarter and excellent management, will allow Tanger to go unscathed by the Fed's moves.
Right now, Tanger's share price is a bargain. The company's valuation is low. Price-to-funds-operations is 14.7x. Regarding valuation, Hilliard Lyons' Carol Kemple stated, "Tanger's current price share provides investors an attractive entry point to purchase these high quality shares." With new outlet malls opening in 2017, increasing funds for operations from higher rents, and Tanger's track record of steadily raising dividends, the portents look good. This is a chance to buy low and sell high, while reaping dividends over the next three years.
Investors should look for Tanger's share price to hit the $40 mark during the beginning of 2017, with a jump to $45 by the end of 2017 into 2018. And by 2018, dividend yield should top 4%.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.