Tanger Factory Outlet Centers: Strong Buy

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About: Tanger Factory Outlet Centers, Inc. (SKT)
by: Achilles Research
Summary

Tanger Factory Outlet Centers makes a compelling value proposition on the dip for DGI investors.

The REIT has strong portfolio stats and a conservative AFFO-payout ratio, limiting cash flow and dividend risks for investors.

Shares are reasonably valued on the drop.

An investment in SKT yields 6.6 percent.

Tanger Factory Outlet Centers, Inc.'s (SKT) shares are a "Strong Buy" on the drop for investors seeking high, recurring dividend income and that want to have a shot at capital appreciation. The outlet center REIT has excellent portfolio stats including high, very stable occupancy rates, which greatly reduce cash flow and dividend risks to shareholders. Tanger Factory Outlet Centers easily covers its dividend with adjusted funds from operations and has a conservative AFFO-payout ratio. After the most recent drop, shares are attractively valued and have a compelling risk/reward. An investment in SKT yields 6.6 percent.

Tanger Factory Outlet Centers' share price has dropped - in line with the broader stock market - in December, potentially providing income investors with an entry window into the stock. Though shares are no longer oversold according to the Relative Strength Index, or RSI, the REIT's shares also have not yet recovered from the steep drop at the end of last year.

Source: StockCharts

Tanger Factory Outlet Centers - Portfolio Overview

Tanger Factory Outlet Centers operates and (partially) owns a real estate portfolio consisting of 44 upscale outlet shopping centers. The REIT's property portfolio includes 15.3 million of square feet of commercial space in 22 U.S. states and Canada.

Here's a location map.

Source: Tanger Factory Outlet Centers Investor Presentation

The majority of Tanger Factory Outlet Centers' properties are currently located in South Carolina, which consolidates 12 percent of the REIT's gross leasable area.

Here's a breakdown by U.S. state.

Source: Tanger Factory Outlet Centers 3Q-2018 Supplement

Ascena Retail Group, Inc. (NASDAQ:ASNA) is Tanger Factory Outlet Centers' largest tenant, currently accounting for 7 percent of annualized base rent. Nonetheless, the commercial property REIT is highly diversified in terms of tenant structure: Its top ten tenants account for just about one third (~34 percent) of the REIT's base rent.

Source: Tanger Factory Outlet Centers

As far as the REIT's portfolio occupancy is concerned, Tanger Factory Outlet Centers has consistently delivered top-notch occupancy rates. In the last 25 years, the REIT's portfolio occupancy rate has never dropped below 95 percent.

Commercial property REITs with consistently high occupancy rates independent of the economic environment are preferred income vehicles for investors seeking high-quality, sustainable dividend income.

Source: Tanger Factory Outlet Centers Investor Presentation

Balance Sheet And Debt Maturities

Tanger Factory Outlet Centers has a strong, investment-grade rated balance sheet that adds another layer of protection for shareholders in the event of an industry downturn or a U.S. recession. Standard & Poor's rates Tanger Factory Outlet Centers BBB+ and Moody's rates the REIT Baa1.

Here's Tanger Factory Outlet Centers' most recent balance sheet.

Source: Tanger Factory Outlet Centers

As far as debt maturities are concerned, the REIT has a staggered maturity schedule and no major debt maturities until 2021 reflecting a low degree of refinancing risk.

Source: Tanger Factory Outlet Centers

Distribution Coverage And Growth

Tanger Factory Outlet Centers covers its dividend with funds from operations and adjusted funds from operations. The REIT has pulled in $0.56/share in FFO and $0.62/share in AFFO, on average, in the last five quarters. The AFFO-payout ratio averaged just 55.4 percent, leaving plenty of room for dividend growth on the table.

Source: Achilles Research

Tanger Factory Outlet Centers has increased its dividend every year since 1993, including throughout the Great Recession of 2008/2009 which strongly tilts the odds in favor of continued dividend growth going forward.

See for yourself.

Source: Tanger Factory Outlet Centers

Valuation

Tanger Factory Outlet Centers has become more affordable on the drop. Today, income investors can gobble up Tanger Factory Outlet's 6.6 percent covered yield for just ~8.4x Q3-2018 run-rate AFFO.

And here's how Tanger Factory Outlet Centers compares against other commercial property REITs in the sector in terms of price-to-book ratio.

Chart SKT Price to Book Value data by YCharts

Risk Factors Investors Need To Consider

Though Tanger Factory Outlet Centers has rather good portfolio stats and a conservative AFFO-payout ratio, investors should not underestimate the REIT's valuation risk. Should a U.S. recession manifest itself in 2019 or beyond, Tanger Factory Outlet Centers' valuation multiple is likely going to take another hit. That said, though, Tanger Factory Outlet Centers' past dividend growth makes the commercial property REIT a "Buy" despite downside risks.

Your Takeaway

Tanger Factory Outlet Centers is a promising income vehicle for DGI investors that want to bet on a continued strong performance of U.S. commercial real estate. The commercial property REIT has high-quality portfolio stats including a high degree of tenant diversification and excellent occupancy rates, both of which reduce cash flow and dividend risks for shareholders. The dividend has plenty of room to grow based on distribution coverage, and shares are rather attractively valued on the drop. Buy for income and capital appreciation.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SKT over 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.