This Baby Has Been Thrown Out With The Bathwater

Summary

• REIT macro trends have thrown the baby out with the bathwater.
• Tanger isn't a typical mall REIT with big box anchors and risks.
• If Tanger can return to historical P/AFFO by the end of 2019 we're looking at 40% annualized gains.

Macro trends, like how Amazon (AMZN) is eating retail, really seem to throw people. But, trends don't tell the whole story. You must look at businesses one by one, in any market. Very often, there are businesses that aren't impacted by trends. For example, Tanger Factory Outlet (NYSE:SKT) is doing just fine.

We'll get to SKT specifically in a just a moment. First, we need to look at dividends, prices, and trades. Then, we'll fold in how trends and macro thinking can poorly impact investors.

I want to be clear about something. I care about both dividends and total returns. I will often look at dividends as one indication of success but it's not everything. I do care about capital gains, even though I rarely sell and don't trade much. All that said, I think it's a bit crazy to look at "draw downs" and top-to-bottom numbers to determine risk.

I definitely care about dividend consistency, dividend growth and dividend payout ratios. But again, that's not the entire story. I want to buy when the price is right. I almost always avoid paying when I see a stock at a 52-week high. And, quite frankly, as a net buyer of stocks, I cheer when prices fall.

This will likely get me into a lot of trouble, but I pretty much ignore macro factors. For example, I think there's a lot of money to be made in market sectors that are threatened (e.g., oil and gas in light of solar and wind), and market sectors that people "hate" (e.g., sin stocks like guns, tobacco, alcohol). And, I mostly don't care to use politics as a ladder, or as a slide.

All of this matters when we look at retail-exposed REITs. Recently, CBL & Associates (CBL) took a massive beating. They cut the dividend, management ain't so great, and they cut their full year guidance. The news is bad. So, the price fell and who really knows what happens next. But, I can tell you this very clearly:

• I was never interested in CBL
• I am not interested now
• I will probably never be interested

That's past, present and future. Yet, I bring up CBL because is facing serious headwinds as a retail REIT. More importantly, I am not interested in mall REITs. I think brick and mortar is fine, but I don't like malls, especially if they are "big box" oriented. In any event, this is a case where CBL never even shows up on my radar. Perhaps that's macro but I don't see it that way. CBL was too risky for me to start and I generally don't like mall REITs that are big box, and that's that.

However, I try not to throw the baby out with the bathwater. I still like REITs. And, I like retail REITs. I just don't like mall retail REITs. I like to pick and choose areas where I can have a better advantage.

For example, I like to go with REITs that have been strong for a long while. In fact, just to be 100% clear about this, I did a head to head of Tanger Factory Outlet to Simon Property Group (SPG).

The result? SKT wins because it has been paying dividends for more than 20 years now. And, those dividends have been growing and growing.

Source: F.A.S.T. Graphs

The most impressive part to me is that Tanger increased dividends through the Great Recession. The dividend payout ratio is under control. Total annualized rate of return crushes the S&P 500 during this time.

So, in a quick bake off, would I choose CBL or SKT? The answer is pretty obvious. I wouldn't buy CBL in the first place, but even if I considered it, why put money in CBL when I can put it into SKT?

Source: F.A.S.T. Graphs

CBL is bleeding whereas SKT is taking a "hit" due to being a retail REIT. But, not all retail REITs are created equal. SKT's business model is based on outlets. Indeed, they are far, far different. SKT's occupancy has been outstanding for years and they are designed as destinations. SKT's also done a great job building digital tools for shoppers, while keeping locations very fresh and clean.

I think a lot of people missed all the good news about the outlet malls. In fact, the Wall Street Journal said this back in March:

Internet shopping is reshaping the retail landscape and slamming mall operators. But one corner of the industry is thriving: outlet centers.

Buoyed by shoppers looking for discounted goods and bustling demand for space, owners of outlet centers are posting strong results in an otherwise bleak retail environment.

See, this brings me back full circle. The problem with "macro" is that SKT looks like a mall REIT on the surface and it gets thrown out. But, it's a different animal. It's not a regular "mall REIT" and it's done quite well following a simple business model and script. Macro analysis throws it away. What a shame.

I'll close this out by saying that the normal P/AFFO for SKT is above 21. But, right now, it trades at just over 13 P/AFFO. From this point, if it can return to its average P/AFFO of 21 then we're looking at total annualized rate of return above 40%. I don't know if that can happen, but I'm willing to take the small risk that it can close some of the gap, and land around 16-18 P/AFFO and that easily gives investors double-digit returns.

While it's accurate to say that buying SKT at a 52-week high would be foolish, my cost basis is way down near the 52-week low. It might take me a year to recovery my loss but that also assumes that "Retail REIT Apocalypse" continues to hold down SKT. I just don't see it. SKT is doing fine. I'm buying.

The deeper points are the following:

• Not all retail REITs are the same. Not all "mall REITs" are actually mall REITs because outlets don't follow the same business model. Furthermore, SKT doesn't have the same exposure to Amazon-crushed retailers as most mall REITs. In short, they are different animals, with different risks.
• It's a poor strawman to talk about "recovering losses" from 52-week high price points, unless you personally have bought at peak prices. Instead, it's far superior to look at your own situation and average cost per share. It's only then that you can look at how long it'll take for dividends to smooth over the rough edges.
• Macro analysis can give us some useful hints. However, to be blunt, I'll take fundamental value-oriented analysis any day because I believe it's a market of stocks not a stock market, or even a "sector" market. SKT is an excellent example of how a label and a poor macro vibe can throw the baby out with the bathwater.
• Although I care about dividends, and dividend growth, I do pay attention to price and value. That means that if a stock is overvalued I will sell. I'll capture those capital gains and I'll redeploy the cash. I don't do that often, but I'm not blind to gains and I don't ignore overvaluation. Further, I relish undervaluation as an opportunity not as a weakness or risk. I'm going to dig deeper when the price falls but if the cash flows are there and leadership is strong, I'll be more inclined to buy, not sell.

Ultimately, even if SKT doesn't get back to its historical P/AFFO we're still looking at incredible potential here and a very juice dividend right now. It only has to improve slightly for investors to create double-digit gains.

In fact, SKT doesn't need to do much at all. There's not a requirement for any type of revolution. Instead, investor psychology just needs to change a slight amount and we'll be doing just fine. The business is strong, the dividend is strong, the management is strong. Again, I've been buying and I might be buying even more.

Analyst’s Disclosure: I am/we are long SKT. 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.

Comments

[wallstreet368841]

I personally decided to cut my losses Tanger stock. I admittedly was uncomfortable on in the stock probably never should have bought it. I became annoyed by Steve Tanger management style although a lots of investors love him. occupancies at 97% in order to be a strong bull you have to believe that that number stays within a few percentage points if occupancy Falls below 94% Look Out Below. due to secular headwinds facing the industry it's really hard to say how this well affect Tanger 3 to 4 years from now. it's much more convenient to shop at home and more and more people are becoming more comfortable buying things online. good luck to you I hope it works out for you but exiting the position was the right decision for me and admitting that I made a mistake.

[rusty13]

It's up +3.19% in AH.. I was looking to add in the $21's but I won't be able to until we get another bad ER from another retailer/REIT.. Hopefully we can gain some positive momentum lasting more than just half a trading day..

[Steve Rasher]

John: Thanks for the extended comment and laying it all out. I forgot to add the most important sentence from the PR, which you include in your comment, but which bears repeating:

"We plan to allocate our free cash flow in 2018 to increasing our dividend, paying down our variable rate debt, and buying our stock. We are proud to say that we have raised our well-covered dividend each of the 24 years since becoming a public company," commented Steven B. Tanger, Chief Executive Officer."

If this doesn't go up based upon this, then I don't know what will move the stock. Steve

[John Rhodes]

@Steve Rasher

We shall see.

More good news coming out and folks are calling bottoms on some mall retail REITs, and more.

I posted this above. Maybe worth posting again.

http://bit.ly/2j96MqC

Take care.

[Steve Rasher]

John: Thanks. I actually saw that earlier in the day. As noted above, I actually added another 300 shares today at $22.39. Hopefully, the market will react on these nice fundamentals. Steve

[User 329415]

Next April they will become a Dividend Champion. It's only a matter of time before the shorts get killed. You don't keep a Dividend Champion down 50% from its high for long, especially one that keeps reporting decent results even during the Amazon scare days.

Some companies that had previously filed for bankruptcy have emerged, such as Gymboree. Many other retailers have announced massive store closings, but as most outlet stores are among their most profitable, I would expect few, if any, of those to close.

[John Rhodes]

https://seekingalpha.c...

Tanger Factory (NYSE:SKT): Q3 FFO of $0.27 beats by $0.01.
Revenue of $120.77M (+1.4% Y/Y) beats by $1.23M.

"Tanger has, as of September 30, 2017, extended the weighted average term to maturity of its debt to 6.5 years and lowered its average interest rate to 3.30%, and expects to realize cash interest savings of approximately $6.8 million per year."

Taking a short term hit to set up strong, safe future. Smart positioning. Conservative.

"Our new center in Fort Worth, Texas opened 93% leased, which is an extraordinary achievement in a challenging retail environment."

For just being launched, this is reasonable. Needs to come up, however.

"We plan to allocate our free cash flow in 2018 to increasing our dividend, paying down our variable rate debt, and buying our stock."

Good, good, and more good. Just what I wanted to hear.

"Tanger raised its guidance for 2017 year-end consolidated portfolio occupancy to be between 96.5% and 97.0%."

Nice. I didn't know this.

"Tanger continues to have the lowest cost of occupancy among all public mall REITs and most of the Company's tenants report that outlet stores remain one of their most profitable and important retail distribution channels."

Nice. (I already knew this.)

"Same Center NOI for the consolidated portfolio increased 0.7% during the third quarter, marking the 56th consecutive quarter of Same Center NOI growth, and increased 0.8% on a year-to-date basis"

56 quarters!

"Tanger does not plan to deliver a new outlet center during 2018."

I like this. Playing it safe in light of recent growth. Consolidating, optimizing. Yummy!

"Repurchased 414,000 common shares during the quarter at a weighted average price of $24.18 per share for total consideration of $10.0 million, leaving $75.7 million remaining under Tanger's $125.0 million share repurchase authorization, which is valid through May 2019"

No problem. $24 is still way below intrinsic value. They are doing the right thing with shares down this low. I know SKT is below $24 but I'm happy with that price. +1 for management.

"During the nine months ended September 30, 2017, Tanger repurchased a total of 1.9 million common shares at a weighted average price of $25.80 per share for total consideration of $49.3 million"

$26 is still reasonable. Clearly, this quarter they averaged down. Just like me. +1 again.

"Approximately 91% of the Company's consolidated square footage was unencumbered by mortgages"

Love this.

"Interest coverage ratio was 4.38 times for the third quarter of 2017"

Helps me SWAN.

--

I see this in the previous report:

Estimated diluted net income per share
$0.70 - $0.75

Now it's...
Estimated diluted net income per share
$0.61 - $0.65

BUT...

Previous:

Estimated diluted FFO per share
$2.04 - $2.09

AFFO adjustments per share
0.36 - 0.36

Estimated diluted AFFO per share
$2.40 - $2.45

...and now...

Estimated diluted FFO per share
$2.05 - $2.09

AFFO adjustments per share
0.36 - 0.36

Estimated diluted AFFO per share
$2.41 - $2.45

...in other words, no changes except "Estimated diluted AFFO per share" range is slightly up. So, hurricane and related bad news barely made a dent. The share buybacks have helped with this, of course.

Whew!

I think this is mostly moderate to good news, at-a-glance. ;-)

Cheers.

p.s. Now we'll see what the market says. I am NOT in any panic. I don't see the Big Bad Amazon crushing Tanger, ha!

[wallstreet368841]

virtually the stock is unchanged after hours. where do you see the start going near-term based on these results? is it good enough to shake the short sellers?

[John Rhodes]

@wallstreet368841

Perhaps, especially with this juice added:

https://seekingalpha.c...

And if not, we're playing the long game. I actually have no problem with low prices for a long time, if share are being bought back and I'm adding. If earnings go up but not price? Coiled spring! Eventually, it'll pop, and pop big to reflect the juice and power.

[Steve Rasher]

Here is the link to the earnings PR from the SKT website: http://bit.ly/2j7Ikpr

There is a bit of noise in this quarter primarily, but not exclusively, because of the redemption of certain notes that a) resulted in a 3% reduction of interest and annual interest savings of about $6.8M and b) resulted in an extinguishment charge of about $.36 per share. This impacted GAAP EPS and FFO. When all this noise is eliminated AFFO for the quarter increased to $.63/share versus $.62/share for the same quarter in 2016. Now this may have been helped a bit because of the repurchase of shares, but these results are a far cry from the results of what other "mall" operators, like CBL are printing.

Steve

[User 329415]

SKT is up over 2% in last half hour. Somebody know something about earnings?

[User 329415]

LOL, it gave it all back in 20 minutes.

[Steve Rasher]

Rebel: No, but I did buy 300 more at $22.39. Steve

[rusty13]

Thanks for the article.. Long SKT but I have to admit that I'm very nervous owning SKT and I would sell all my shares $27- $28 if I was lucky enough..

[Bucklansford]

I drive by a large and expanding Tangier outlet mall in Castle Rock, Colorado every week on my way to work. It has recently expanded its footprint 30-50% with all-new construction.

Several weeks ago my wife made me stop so she could check out the new arrivals at Restoration Hardware (actually, a furniture and decorating store). She spent $500. Next, she went home and got our next door neighbor and they went back the next two weeks, and each spent $500-$1000 on Christmas gifts and decorating stuff each trip. They and their friends all love Tanger.

My wife frequently shops online clothing because she can return things free, but I don’t like that hassle. I like trying on my Eddie Bauer fleece vests at the Tanger outlet before buying— I never buy these on line. I use Amazon a lot for different type things, but only buy gifts and clothes that I can “put hands on” first.

We go to Tanger outlets for quality, price, and a hands-on buying experience. I agree with other posters here that Tanger is not just a retail mall— it is something special.

I have been looking at REITs recently, and think SKT will be my next purchase for my dividend growth portfolio.

Thanks, John, for an intriguing article.

Buck

[8iron]

I'm long as well with an oversized position. The high-quality retail REITs (TCO, SPG, NNN) are doing well. I'm counting on SKTdelivering as well.
You'd think after 20+ years and a well-seasoned management that SKT would be well understood by WS. But it's all about how Ebenezer Bozos will steal all the Christmas sales (at a negative margin, given their new "aggressive" pricing strategy.) Lawyers call this predatory pricing but it's Amazon...laws are for little retailers.

[Hampton108]

8Iron,
Couldn’t agree more...and as much as I like to shop on-line, mall shopping will never be removed from my shopping habits, especially the stores and brands that provide both. If you need it, you drive to the store and get it, if not you wait, and that can sometimes take 2 weeks, as I’m experiencing right now with 2 items. Also last month, had my simple order canceled by Amazon because they couldn’t fill it(6 pairs of glove gloves)...
The possibility that on-line retailer could over reach is a real possibility...UPS, FEDEX, USPS, DHL etal. Can only put so many vehicles on the road at one time, and drones aren’t going to deliver a set of golf clubs!!!...IMO

[User 47647308]

Hi John,
good article thanks. I believe in the SKT model with a concentration of strong brands in one place. I also think that Tanger Outlets make especially women happy. The placement of outlet centers in holiday destinations has been a good move.

I have worked out the following points in my research. My special thanks go to Brad Thomas, who has excellently worked out these in one of his articles. Thanks Brad ..

• Most experienced Player on the Market - Tanger Factory was the first of its kind to create a new Outlet Center distribution channel or retailers
• Tanger is the only pure outlet center REIT and has no department stores in his portfolio
• Unlike traditional shopping malls, which are costly to build and have significantly higher operating costs, Tanger has developed a sophisticated retail model that delivers scale and value brand awareness to meet the bargain requirements
• So far, Tanger has performed extremely well in various business cycles. Tanger's premium brand is particularly well-watched in times of uncertainty. Unlike many other retail distribution channels, Tanger's stores benefited during the recession. Where consumers did not have that much disposable income but still wanted to buy quality products from brands and designers they know and trust.
• Tanger has become a "go-to" landlord over the years and has established trusted relationships in the outlet sector, building the efficiency of maintaining high quality tenant relationships across the portfolio.
• Tanger has the ability to leverage the company's track record and brand by scaling the business model
• Tangir has a more effective model that can expand its portfolio without the risk of department store chains

I expand my position step by step to over 1000 shares. I have a long breath and enough cash parked for the coming months. Tangier will do it well ..

Disclosure: Iam long SKT, KIM and STOR

[Steve Rasher]

Dave: Nice summary. Thanks. Steve

[DEhammerhead]

I’d be so happy if this went back towards $30, I’d take my wife shopping at the outlets!

[Dr Hey hey he]

Your parked cash at

[Steve Rasher]

John: Thanks for the article. I agree that with SKT the baby has been thrown out with the bath water. We are long with a basis in the mid-$30s, so we are way underwater. Unfortunately, although the SKT the company seems to be doing well, the stock is not reflecting that. I would like to buy more, and, although I am primarily a fundamental analysis guy, I do look at some technical indicators to help me optimize my entry points. The stock does appear way oversold, but I don't see any bottom forming yet. Maybe the earnings release might convince the market that SKT is a different animal. Also, the new outlet mall in Ft. Worth, Texas just opened on October, 27, and, although it won't impact Q3 numbers I would be interested to hear how it is doing. Thus, I am waiting patiently for the right time to pull the trigger to add more. Steve

[User 329415]

After hours tomorrow afternoon should tell the story. I would love to see the shorts start getting killed.

From a technical standpoint, Friday's low came within $0.05 of the 200 month moving average, a very long term chart. It has never been below this average going back to at least 2003, which is as far as the chart goes back. If it's going to bounce, this would be the time.

[Steve Rasher]

Rebel: Agreed. That is why I am waiting to see what the earnings report looks like. Steve

[Kenmare]

Steve, I’m in the same position with Tanger — deeply underwater. But I like the business model and continue to believe in its viability. The dividend makes it a lot easier to hang on until the probable upturn. The idea that Tanger rents to brands rather than retailers seems lost on the market.

[cprauseusa]

I believe that expected AFFO for 2017 is somewhere around $2.40-2.45. So it's trading at 9x AFFO. I believe the article states 13x

[dividend4ever&ever]

Hispanics are being run out of the country? Illegal immigrants are being deported and ones that have committed felonies get launched over the border by a trebuchet. Hispanic citizens are more than happy to stay in the USA. MAGA

[dealraker]

The number of people in the south capable of walking any significant distance continues to decline as we log in continual body weight increases and the resulting poor health earlier in life cycles. 70% of our adults and characterized as overweight to obese and the numbers are growing. On top of that with whites at zero population growth and fattening/aging, blacks barely growing, Asians barely on the radar, and Hispanic people being literally run out of the country the idea that over-retailed real estate is a growth sector is somewhat illogical. Add in the fact that only the top is gaining income and wealth while the new tax plan will slightly hurt lower income people...

Oh, I'm not a liberal.

[NukeGuy]

Your forgetting the yankees moving south. They spend but unfortunately, they ARE liberal.

[Guy at Work reading SA]

Outlet centers are higher quality, higher quality (net worth) people are less obese and don't have the same problems that you're describing.

[dividendhigh]

Nice review! SKT is the only mall REIT I own. Although I am down 10% I will be adding within my ROTH until I attain a full position. The bottom may be near.

[kkrambo]

SKT's business may be doing just fine but the stock price is not. The stock price is down more than 30% this year. Short interest is high and rising. So despite the company being just fine, the stock price still gets pulled down in the tide of bath water. There is going to be more bath water thrown out during the upcoming months. Does it really make sense to fight the tide? Why not invest elsewhere until the tide turns?

[wallstreet368841]

it really depends Tanger is the dividend for 20-plus years and have a 6.17% yield that's highly likely to rise next year. the payout ratio is extremely low at 55%. shorts are betting that the macro trends in retail will continue to affect tanglers business as more people shop online. vacancy in Tangers business is a cancer could spread quickly if and when it takes hold. I'm torn on the tangler buying between the prices of 25 to $22 a share.

[John Rhodes]

@kkrambo

I have kept adding more and more with the drop. As a net buyer, with a long time horizon, this is a beautiful situation.

The fundamentals are excellent. The macro trends look bad but SKT itself is doing well. And, there doesn't appear to be any smoke and mirrors.

I strong believe that price will catch up to value. It almost always does and with the yield? No problem being patient.

Thanks for your note.

[zito]

SKT rents to brands not retailers, which is very different than a mall. Brands are looking for more sales outlets given the closing of retailer stores. I see an improving market for outlet malls.
I'm long and looking for upside to at least $30 where the dividend would be 4.5%.

[John Rhodes]

@zito

"SKT rents to brands not retailers..."

^ ^ ^ That's an elegant way of explaining the difference. Thanks!

[MikeRich]

The PREVIOUS normal P/AFFO for SKT is above 21.

Times change. If the retail sector is shrinking, won't the Outlet market shrink proportionally?

[Guy at Work reading SA]

The entire argument of the article is that retail and outlet are two very different areas. If they were to shrink proportionally why has SKT been able to maintain 95% occupancy while RETAIL has been shrinking (look at CBL NOI and occupancy). This article was comparing apples to oranges for a reason!