Tanger: Undervalued, Recession Resistant, And Shareholder Friendly

About: Tanger Factory Outlet Centers, Inc. (SKT)
by: Sure Dividend

This post was written by The Financial Canadian for Sure Dividend.

When thinking of conservative investments with strong dividend prospects, one might not immediately be drawn to the retail industry.

After all, the industry has been on the decline for years and is expected to be further disrupted by the likes of Amazon Go.

Fortunately, the outlet store subsector of the retail industry is not being hit as hard. This is because of the lower costs of goods that are sold through this channel.

Tanger Factory Outlet Centers, Inc. (NYSE:SKT) is poised to benefit from this trend. This REIT is often considered to be the premier outlet shopping REIT - Warren Buffett personally invested in Tanger in 1999. The company is known for its strong total return record.

Source: Tanger Factory Outlet Investor Presentation, slide 29

A good portion of the company's total returns is a result of its dividend payments. Tanger has a long history of dividend growth.

The company's business strength is evident in their dividend history.

Source: Tanger Factory Outlet Investor Presentation, slide 17

This REIT is a Dividend Achiever - a group of select companies with 10+ years of consecutive dividend increases. You can see the entire list of 272 Dividend Achievers here.

This article discusses the investment prospects of Tanger in detail.

Business Overview

Tanger Factory Outlet Centers, Inc. is a publicly-traded REIT with headquarters in Greensboro, North Carolina.

The company is named after its founder, Stanley Tanger, who opened the first locations (Burlington Manufacturer's Outlet Center) in 1981. Stanley's son Steven is continuing the family business. He is currently Tanger's President & Chief Executive Officer.

Back then, the outlet store model was essentially nonexistent. Mr. Tanger's store was viewed more as a medium through which manufacturers could quickly dispose of excess merchandise. Little did he know that he was sparking the flame that would become the rapidly-growing retail outlet industry.

Today, with more than 36 years of experience in the real estate industry, the company's properties attract 185 million shoppers annually.

They are the only pure-play outlet REIT and are the go-to landlord for outlet distributors. This has enabled Tanger to develop a world-class tenant base, filling their locations with quality household names like The Gap (NYSE:GPS), Nike (NYSE:NKE), Ralph Lauren (NYSE:RL), and Under Armour (NYSE:UA).

Source: Tanger Factory Outlet Investor Presentation, slide 25

Tanger has used their brand recognition and leadership in the outlet industry to scale their business model. Since 2005, the company has grown their period end market capitalization from $1.8 billion to $4.9 billion as at September 30, 2016.

Source: Tanger Factory Outlet Investor Presentation, slide 16

Growth Prospects

Tanger has identified four key levers of growth that the REIT is focusing on for the foreseeable future:

  1. Existing Portfolio
  2. Opportunistic Acquisitions
  3. US Development Opportunities
  4. Canadian Growth Opportunities

Source: Tanger Factory Outlet Investor Presentation, slide 4

This analysis will consider each of these points in turn.

Considering growth from the company's existing portfolio, one thing is certain - the company has done a fantastic job at driving organic growth over the past few years.

Since 2010, the company has never posted negative same center NOI growth, and the lowest level of annual same center NOI growth has been 2.6% (which occurred twice - in 2010 and 2014).

Source: Tanger Factory Outlet Investor Presentation, slide 6

This track record gives me confidence in the company's ability to leverage their existing portfolio of properties as one of their drivers of business growth.

Tanger's US development opportunities are equally bright. While the domestic outlet industry is much smaller than the retail industry as a whole, Tanger has been busy developing and acquiring new properties.

Source: Tanger Factory Outlet Investor Presentation, slide 6

In the year following the company's last earnings presentation, they expect to open three new projects. These projects are diversified across geographies - Daytona Beach, FL; Fort Worth, TX; and Lancaster, PA.

Tanger also maintains a 'shadow pipeline' of projects in markets that are underserved (or not served at all) by the retail outlet industry. Altogether, Tanger's US growth prospects remain strong.

Looking at Canadian operations, Tanger has two drivers of growth in this geography.

First, US-style outlet shopping is under-represented in the Canadian retail space. This means there is limited competition for the type of properties that Tanger is hoping to develop.

Secondly, Tanger is working in conjunction with RioCan (OTCPK:RIOCF), Canada's largest REIT. Tanger will benefit from working with a partner with more experience in the Canadian real estate marketplace. Selected details about Tanger's Canadian operations are outlined in the following slide.

Source: Tanger Factory Outlet Investor Presentation, slide 6

Between the lack of industry competition and the expertise of RioCan, I expect Tanger's expansion in the Great White North to be successful.

Tanger's last expected driver of growth is through opportunistic acquisitions. While the outlet industry is small, the REIT's strong reputation and large size give them significant access to capital. Further, Tanger is the only pure-play outlet REIT, which means that they will be one of few bidders if outlet locations come up for sale (they will be competing against diversified REITs who have smaller portfolios of outlet locations).

This means that Tanger will have no problem accessing capital if it identifies attractive acquisition opportunities.

Source: Tanger Factory Outlet Investor Presentation, slide 6

All things considered, Tanger appears to have a robust plan to drive future business growth.

Competitive Advantage & Recession Performance

Compared to other subsectors of the retail industry, outlet stores are more recession-resistant.

This is because of the price differences - since outlet stores sell directly from manufacturer to consumer, they eliminate the costs associated with middle-men and pass these savings onto customers.

The company's CEO has summarized this competitive advantage succinctly:

Source: Tanger Factory Outlet Investor Presentation, April 2016, slide 27

Furthering the company's recession resiliency is their strong balance sheet. Only 9% of their real estate portfolio is encumbered (meaning there are liabilities secured against it), and the company is only using 38% of the capacity of its credit lines.

Source: Tanger Factory Outlet Investor Presentation, slide 6

This unused credit will help Tanger weather any kind of short-term economic downturns.

Because of its financial strength, Tanger holds investment grade credit ratings from both S&P (BBB+) and Moody's (Baa1). Each of these rating agencies holds stable outlooks on the REIT and have not changed ratings since the last upgrade in May 2013.

Valuation & Expected Returns

For REITs, one of the simplest ways to assess valuation is to compare current dividend yield versus historical dividend yield.

Over the past five years, Tanger has traded at a dividend yield between 2.2% and 3.8%. Today's yield of 3.5% is very close to the high end of this range, which suggests that Tanger is attractively valued at current levels.

Since inception, Tanger has compounded revenue at a 3% CAGR. I expect the company's revenues to continue to grow at a 2%-3% rate, at least in the short-to-mid term. Beyond that, it is difficult to say what to expect because of the dramatic transformations that the retail industry is experiencing.

The company's funds from operations (or FFO; the equivalent of EPS for a REIT) has historically grown faster than their revenues. For instance, the company's FFO through the first three quarters of 2016 grew by 7.3%, while revenue grew only 5.5%. This is likely because of cost savings identified by management.

In the long run, I expect FFO to grow at a rate 1.5%-2.5% higher than revenues, giving FFO an expected growth rate of 3.5%-4.5%.

Total returns for Tanger shareholders will be composed of the following:

  • 5%-4.5% revenue growth
  • ~3.5% dividend yield

For expected total returns in the range of 7% to 8.5%. These returns will likely be boosted by valuation expansions, as the company appears to be attractively valued based on the dividend yield.

Final Thoughts

While the overall retail industry appears to be in decline, Tanger offers investors direct exposure to the recession-resistant outlet industry.

The company has a strong plan for future growth, and appears to be attractively valued based on their dividend yield. They also have a promising partnership with Canada's largest REIT, RioCan. Their strong balance sheet will serve them well in the event of an economic downturn.

Not all investors can stomach the retail industry's current transformation. For those that can, Tanger offers an attractively-valued opportunity to invest in the outlet industry.