This article was co-produced with Williams Equity Research.
Though rarely discussed on Seeking Alpha, the first tenet of successful investing starts with saving money – even if it’s just $100 a month. Admittedly, it gets blurry after that as personal biases, philosophies, and aversion to risk enter the equation. But one tried and true strategy is value investing.
Legendary investors, both past and present, such as Benjamin Graham, Warren Buffett, Michael Lee-Chin, David Abrams, and Allan Mecham have dedicated their professional careers to this strategy. And they’ve done very well for themselves as a result.
The reality is we’re all value investors though. Aren’t we?
We look for deals at the grocery store or while shopping on Amazon. We carefully balance the costs and features of different models when selecting a new or used car. And, we have a certain price range we’re willing to pay for homes and certain ranges we won’t touch.
Like in other aspects of life, value investing tends to pay off.
A popular segment of value investing involves dividend-paying stocks. Within this segment are business development companies (or BDCs) and real estate investment trusts (REITs). The latter of those are required by law to distribute a certain portion of their taxable earnings to investors.
Like every other asset class, REITs' valuations ebb and flow over time. Early on in our present bull market, the larger S&P 500 was arguably cheaper than REITs when comparing price-to-operating earnings on the S&P to price-to-funds from operations (FFO) for REITs. More recently, however, REITs have become quite attractive on a relative and absolute basis, as shown above.
Within the REIT sector, retail has become the stand-out value investment. There are undoubtedly challenges involved in such institutions. Lower-quality malls with heavy exposure to bankrupt tenants, for example, face some serious issues. And non-core retail in markets with declining economic and demographic trends is another place you don't want to be.
On the other hand, high-quality malls are one of the more attractive areas for institutional capital from a risk-adjusted return and cash flow basis. Believe it or not, even within retail, 91% of sales still occur in-store rather than online, according to Deloitte.
I say this all to set up today's analysis of four well-established but discounted retail REITs. Photo Source
Moreover, these REITs have more than money to lose. There’s also reputation involved, and family reputation at that.
Each one is led by a family member of the founder. That means the acting CEOs are in charge of not just businesses, but legacies.
When you’ve got the family name riding on your shoulders, you’d better believe you’re going to feel every failure and success on a deeper level. Which means that, more than likely, you’re going to work even harder to avoid those failures and advance those successes.
That’s certainly the story I’ve found with these four REITs.
Tanger Factory Outlets
According to its Yahoo Finance profile, Tanger Factory Outlet Centers Inc. (SKT) is a:
“… publicly-traded REIT headquartered in Greensboro, North Carolina, that presently operates and owns, or has an ownership interest in, a portfolio of 39 upscale outlet shopping centers. Tanger's operating properties are located in 20 states and in Canada, totaling approximately 14.3 million square feet, leased to over 2,800 stores, which are operated by more than 500 different brand-name companies. The company has more than 38 years of experience in the outlet industry. Tanger Outlet Centers continue to attract more than 181 million visitors annually.”
As much as the markets right now seem very anti-Tanger, there are a few key reasons why the company is actually attractive. First, for many years – over 25, to be precise – its occupancy levels have never faltered from within 100 basis points of its current 96% showing.
That may have something to do with Steven B. Tanger being a director at the firm since that chart began in 1993. Steven is the son of the company's founder, Stanley K. Tanger, and he worked side by side with him to build Tanger into the behemoth it is today.
As such, it only makes sense that he took over as CEO in May 2017.
We also can partially credit him for the company’s excellent geographic diversification. And its tenant diversification, which also is impressive. No single tenant represents more than 7.9% of gross leasable area (GLA), and the top 25 represent barely half (53%) of that square space. This isn’t an easy task given that The Gap (NYSE:GPS) and Ascena Retail Group (NASDAQ:ASNA), for two, count as individual tenants yet have five or more underlying brands.
Annual lease expirations by percentage of GLA and total annualized base rent, meanwhile, never exceed 14%. This demonstrates laudably disciplined management.
The company's leverage profile also is favorable.
Source: Q2 Supplement
Total consolidated debt is $1.59 billion, with an effective average interest rate of 3.6% and weighted average years to maturity of 5.9 years. And 92% of its total debt, which includes unconsolidated joint ventures, is fixed rate.
Source: Q2 Supplement
Tanger's total secured debt-to-adjusted total assets is a mere 3%. Its total consolidated debt-to-adjusted total assets is less than 50%. And it has among the strongest debt position of any publicly-traded REIT. So, its investment-grade rating of BBB by S&P with a stable outlook isn’t surprising.
Even the most bearish retail analysts don't attack Tanger based on those variables. They’re just too solid. They tend to focus on the company's cash flow, long-term viability, and whether or not it can sustain its 8.9% distribution.
So, let's tackle these issues head on.
Once diluted, adjusted funds from operations (or AFFO) for the first half of 2019 were $1.14 compared to $1.20 in the first half of 2018. Q1's contribution was exactly 50% of that, so there clearly hasn't been material changes since.
If we want to get even more conservative, we can use funds available for distribution (or FAD), which adjusts FFO for amortization of equity-based compensation, second-generation tenant allowances, and capital improvements, among a litany of other factors.
Source: Q2 Supplement
Tanger's payout ratio by FFO and FAD have moved modestly higher in the past year. Using both, the payout ratio for the first half of 2019 was between 65% and 69%.
Higher-quality, investment-grade REITs target a 65% to 75% FFO payout ratio. So, despite the recent increase in payout ratios, Tanger still has among the best metrics in the business. If the FAD and FFO payout ratios breach 80% and continue rising, that's when the sustainability of the distribution can and should come into question.
For the time being, though, and all other things equal, Tanger can continue to raise its distribution a few percentage points a year and still maintain better-than-average payout ratios. Its number of shares outstanding has declined marginally to 98.15 million from 98.47 million a year ago. As such, dilution hasn't been an issue.
Admittedly, Tanger's -0.3% same-center net operating income (NOI) trend is far from ideal. However, its tenant sales per square foot were up $12 in the last year to $395.
Source: Q2 Tanger Presentation
That figure ties with its all-time high set in 2015. How many people bearish on Tanger would believe that its tenant’s sales performance in Q2-19 matched its previous record?
In short, Tanger's long-term outlook is stable just as long as its tenants are healthy. Many bears and individual investors cite their own disdain for outlets as a reason not to invest in Tanger. But we would caution against this approach.
And, we know for a fact that Steven B. Tanger would too. His father’s company has paid a cash dividend every quarter since its founding and increased that dividend each and every year. That’s not a legacy he takes lightly.
As they say though, “haters are gonna hate.” And they certainly hate Tanger, which just set new 52-week and 10-year lows despite reporting a relatively stable quarter. Its price-to-FFO is 7.12 with a forward yield of nearly 9%, which are unheard of for an investment-grade REIT of Tanger's caliber.
Despite the challenges Tanger has faced in improving same-store sales and several other important metrics, the stock is priced as if these figures are in free-fall, and the company lacks any financial flexibility or experience to mitigate them.
However, the facts – including who’s running those facts – suggest otherwise.
Taubman Centers Inc.
“Taubman creates extraordinary retail environments for shoppers, merchants, communities, and investors. Our portfolio of regional and super-regional malls located in major markets across the U.S. is the most productive in the nation. We build shareholder value through the intense management of our existing properties and the highly selective development of new shopping destinations. The company extends its reach internationally through its Taubman Asia subsidiary.”
Taubman just reported its Q2 earnings, but let's start with the company's history to get an initial feel for it.
Founded in 1950, Taubman has been around for nearly 70 years though it didn’t IPO until 1992. Since then, it has achieved a current total and market capitalization of approximately $10 billion and $2.5 billion, respectively.
Since 2001, its CEO has been Robert S. Taubman, who has dedicated over 40 years total to the REIT. As with Steven Tanger, he’s the son of the company's founder, A. Alfred Taubman. So, once again, we have a legacy at work here.
Taubman is among the best and most experienced mall operators in the U.S., with its 26 asset portfolio ranking as the most productive mall portfolio out there. Also, like Tanger, its geographic diversification is strong and includes properties in China and South Korea, which makes it unique.
The company does have an overweight position in Florida, though the distribution to the Gulf Coast and Atlantic helps offset any weather-related risk.
Source: Q2 Taubman Presentation
As we’ve already acknowledged, it’s true that brick and mortar retail has issues. Investors who deny this aren’t facing reality. But investors who think all brick and mortar retail is doomed are equally confused, if not more so.
Class B and below malls have struggled, particularly so since the Great Recession, due to the collapse of the weaker big-box department stores. But Class A malls and above (the "best" malls with better designs, better upkeep and better tenants in better locations) have actually had substantial success in recent years. Per Green Street Advisors, Class A, A+, and A++ malls represent only 3.7% of the segment yet 28% of all value.
And Taubman's malls fall squarely into the A to A+ category.
Let's see how Taubman stacks up to a mixed peer group, including Tanger, Washington Prime Group (WPG), The Macerich Company (MAC), Simon Property Group (SPG), Pennsylvania Real Estate Trust (PEI), and CBL & Associates Properties Inc. (CBL).
MAC and SPG are arguably the best peers to evaluate against TCO in this regard. Both own and develop Class A malls all around the U.S. and are larger than Taubman by total market capitalization. Though MAC in particular also owns some outlet centers, which tend to have lower sales per square foot.
MAC is more concentrated in higher-dollar states like California and New York (27.5% and 22.9%, respectively). Yet Taubman's portfolio sales per square foot at the end of Q1-19 of $919 is far ahead of the competition.
Consequently, it can derive the highest average rent per square foot of any large mall operator.
Taubman, MAC, and SPG all have at least 74% of their asset values in the top 50 U.S. markets, which tend to perform best over long periods of time. In comparison, weaker REITs such as WPG and CBL have respective 53% and 23% allocations to the top markets.
Moving right along, although SPG comes in a close second in several categories, Taubman's ability to position its retail assets in prime locations by demographics is unmatched. Perhaps even more important is its ability to avoid troubled department stores which have decimated the financial condition of many REITs. They’re very difficult to replace and often require heavy capital expenditures to transform into properties suitable for other tenant types.
Hey, you can only fit so many Gold’s Gyms in one town.
Source: BofA Merrill Lynch Global Research, “1Q19: As store closings continue, refilling vacant space remains biggest challenge,” May 17, 2019.
Source: Taubman July 2019 Report
Unlike Tanger, Taubman's sales per square foot have increased meaningfully almost every year. Average rent also has increased, though much more modestly. And occupancy remains very strong and consistent at above 94%.
Source: Taubman July 2019 Report
On a portfolio level, NOI has increased in most years since the Great Recession, rising 31.2% since 2015 alone. That sounds phenomenal, I know, but let’s verify that those profits are filtering down to the investor level.
Source: Taubman July 2019 Report
Despite a decline in total centers owned, AFFO has steadily increased over time, with 2018's $3.83 being an all-time high. So far.
So much for retail brick and mortar being dead.
Source: Taubman July 2019 Report
It's not dead in Asia either apparently, considering how this company is creating significant shareholder value through its international operations. This was an area of concern for several years, and justifiably so, as Taubman had not yet shown significant value creation.
But that changed with the recent Blackstone (BX) deal. Profitable asset sales in Asia have helped the firm improve its balance sheet metrics to the 8.0-8.3 debt-to-EBTIDA (earnings before taxes, interest, depreciation, and amortization) range.
This isn’t what we’d consider to be “risk averse,” but it's manageable nonetheless.
Source: Taubman July 2019 Report
Its balance sheet isn’t as robust as Tanger's, admittedly, given its higher percentage of floating rate exposure along with its lower interest coverage ratio of 3x after the Blackstone deal.
Source: Taubman July 2019 Report
That $2.62 compares to $3.83 in actual AFFO per share in 2018, or a payout ratio of 68.4%. Like Tanger, this is quite strong, even among top-quality REITs.
Going forward, due to asset dispositions and other factors, Taubman is guiding for $3.62-3.74 in AFFO per share and a $2.70-2.75 dividend… using midpoints, that makes for a payout ratio of 74%.
Taubman's debt profile, balance sheet, and payout ratios are all inferior to Tanger's, though its operating performance is stronger with upward momentum. Even so, the market appears to favor Class A malls and better operating performance over a rock-solid balance sheet and low dividend payout ratios. That much is evidenced by Taubman’s yield of 6.11% compared to Tanger's 8.94%.
Taubman is trading at a discounted but richer 10.7x AFFO multiple. Both REITs are attractive at current levels, but Tanger appears better valued for those indifferent between outlet centers and malls.
And, of course, not to belabor the point, but both have the name game in their favor.
Simon Property Group
“Simon is a global leader in the ownership of premier shopping, dining, entertainment and mixed-use destinations, and an S&P 100 company… (Its) properties across North America, Europe, and Asia provide community gathering places for millions of people every day and generate billions in annual sales.”
Simon is the largest REIT and largest shopping mall operator in the U.S., though – like Taubman – it has exposure to Asia.
Though the company’s history technically goes back to 1960, brothers Marvin and Herbert Simon are credited with founding the firm in 1993. Today, its CEO is David Simon, Melvin’s son.
Starting at the company as CFO at the precursor firm in 1990, David Simon led efforts to bring the firm public in the following years. When he succeeded, he got to be part of what was then the largest real estate IPO in history. He's served as CEO since 1995 and became chairman of the board in 2007.
It’s true that David spooked the markets earlier in the year by mentioning continued weakness and, in some cases, bankruptcies in the retail sector in 2019. However, he never mentioned these perceived issues would impact SPG's portfolio…
Let's see what, if anything, has changed since Simon’s Q2 release.
For one, FFO rose slightly from $1.064 billion or $2.99 per diluted share for the quarter. More notably, adjusting for a non-cash investment gain in the prior period, it actually increased 4.9%.
That’s not so much of an anomaly either. For the last six months, FFO was $2.146 billion or $6.04 per diluted share, representing an increase of 3.2%. Adjusting for the same non-cash gain, higher income related to distributions from an international investment and the $22.3 million impact from the adoption of ASC 842, the new lease-accounting standard, its FFO per diluted share increased an impressive 7.3%.
Other stats looked good too, including sales per square foot, which were up 3.5% to $669 for the 12-month period ending June 30. And leasing spreads saw the largest gain at 32.3% in the last year.
We know comparable property and same-store sales have been consistent issues in the retail sector. Yet comparable property NOI rose 2% last quarter and a similar 1.8% for the last half.
All added up, the board declared a 5% increase in the distribution rate year over year.
In addition, Simon has maintained favorable credit metrics, including net debt-to-NOI of 5.1x and a fixed charge coverage ratio of 5.1x. Its credit metrics are comparable, if slightly inferior, to Tanger's, but considerably stronger than Taubman's. And its growth in terms of its tenant and portfolio metrics fall in the middle of the two as well.
As a result, we now know why the market is only providing us a 5% yield from Simon vs. an almost 9% from Tanger and 6.1% from Taubman. Using the first half of 2018's data, SPG trades at a 13.0x multiple, which is nearly double that of Tanger and 20% richer than Taubman.
In aggregate, this makes SPG a better risk-adjusted value than Taubman… and almost as attractive to Tanger.
Once again, there’s no change in the legacy factor. So far, that namesake pride and commitment remain the same.
Urstadt Biddle Properties
If you go to Urstadt Biddle Properties’ (UBA) website, you’ll find this description:
“Urstadt Biddle… is a self-administered equity real estate investment trust founded in 1969. We provide investors with a means of participating in the ownership of income-producing properties with ready liquidity. We are a proven leader in the ownership, operation, and redevelopment of high-quality retail shopping centers predominantly located in the suburban, high demographic, high barrier to entry communities surrounding New York City. We take a disciplined, conservative approach to every aspect of commercial retail real estate. Whether it’s redevelopment, property management, or acquisitions, we make sound, strategic decisions based on solid demographics, broad experience, and stable resources.”
Charles J. Urstadt is the company's chairman and has been since 1989, while Willing L. Biddle is the president and CEO. Charles helped spin the company out of Merrill Lynch and is also responsible for its specialization in neighborhood shopping centers.
Willing, meanwhile, joined the company in 1993 as a lowly vice president but worked his way to the top over the next 25 years. By 1997, he had contributed so much that they renamed the company to its current designation in his honor.
Neither of them has parents’ shoes to fill. But they do still have their names right there on the letterhead. Which means they still have plenty of skin in the game worth mentioning.
UBA is relatively small, with 85 properties totaling 5.3 million square feet in terms of gross living area (or GLA). Its strategy is unique compared to the others we've discussed, with 82% of its portfolio allocated to supermarkets, pharmacy, and wholesale club-anchored properties.
Grocery-anchored real estate has been a favorite of institutional investors for many decades due to its simplicity and durability. Technological change, fluctuations in political regimes, and shifts in the overall economy have little impact on consumer behavior related to grocery shopping.
As for its size, don't let that or its simpler business model fool you. The REIT has performed well over a long period of time.
Given its size, it's no surprise that UBA concentrates in one area: The U.S. Northeast, with most of its assets in the New York tri-state area outside of NYC. Part of its strategy is to focus in areas with above-average incomes, with the average within a three-mile radius of its properties being $105,800, which is 71% higher than the national average.
These expensive areas have limited new supply, giving UBA stores a competitive advantage. The 93% portfolio occupancy is strong for this segment, with an annualized base rent of $23.45 per square foot. That's a small fraction of the other REITs included in this article, demonstrating the dispersion in strategy and asset type.
Impressively, UBA manages to diversify its small and nearly single strategy portfolio very well by tenant. This is no easy task, given the REIT's focused geographic footprint.
Lease expirations are a little high in the next few years compared to the other REITs we've discussed, but that's normal in this segment. Large stores like Walmart (WMT) and BJ’s Whole Sale Club (BJ) can't easily move to new locations like a traditional retailer can. So, the relationships with the landlord are generally much deeper, as both parties have more at stake.
Plus, UBA is fairly internet resistant as outlined by its portfolio below.
Though some people might practically live off of services such as Hello Fresh, the fast-growing $5 billion U.S. meal-kit market is peanuts compared to grocery store sales of $641 billion as of 2017. And the total food services market is $5.75 trillion annually, for additional context.
Still, let’s check out how UBA has been holding up during the "retail apocalypse."
In fact, 2018's full-year FFO was extremely strong.
This powerful performance has permitted the company to increase its dividend for 25 straight years. And it's allowed for dramatically lowered payout ratios in recent years.
(Note, however, that the dividend growth has slowed dramatically in the last 10 to 15 to about 1.5% annualized. So, don’t expect this stock to become a high flier any time soon.)
The payout ratio declined to 73% on an annualized basis in 2018.
UBA's credit profile is closer to that of Tanger's, with total debt to total assets of only 33%. Its debt-to-EBITDA of 4.1x also is strong and far better than its peer average of 6.8x.
In fact, that’s the best metric among shopping center REITs. The same goes for its debt as a percentage of gross assets.
I have no doubt UBA would be investment grade if it was large enough to receive a rating from the major agencies. Its FFO growth of over 28.7% since 2017 is among the highest in the REIT sector. And while its fixed-charge coverage ratio of 3.6x isn’t quite as strong as Tanger or Simon's, it's better than Taubman's.
The debt maturity schedule is well structured, with only a medium tranche of $55 million due in 2022 and essentially all the rest ($188 million) in 2024 and after. Outside of Federal Realty Investment Trust (FRT), we don't know of another shopping center REIT with a higher percentage of total capitalization in common and preferred equity.
As its numbers imply, UBA has avoided the sharp share price declines of its peers. This is one of the few times the market has successfully differentiated between retail-oriented REITs.
Given its 2018 and more recent performances, you wouldn’t anticipate the REIT to be 16.8% off of its all-time highs. Yet here we are.
Overall, we'd suggest waiting for a modestly better entry point closer to $20 if possible or an FFO multiple below 14.5 for a 5.5% yield.
To be sure, you aren't likely to see a repeat of 2018's performance. After all, this REIT owns grocery stores, not exciting Class A++ malls with the newest wood accents or industrial warehouses full of marijuana farms. But as we said in the beginning of this article, long-term discipline is the key, not fads and trends.
Besides, this conservatively-managed supermarket REIT has tripled the turn of the S&P 500 over the last 20 years.
Maybe that has a little something to do with name associations. When there’s “skin in the game,” the namesake owners are going to do everything in their power to deliver on their promise. When you’re investing in Tanger, Taubman, Simon, and Urstadt Biddle, you are not only investing in the horse but also their family-sponsored jockeys, at least that’s how I think about it.
Skin in the Game
|Skin in the Game||Shares Owned||Price||Amount Owned||Source|
|Steve Tanger||1,183,890||15.80||18,705,462||Yahoo Finance|
|Bobby Taubman||951,392||40.00||38,055,680||Yahoo Finance|
|Willing Biddle (NYSE:UBA)||45,824||21.49||984,758||Yahoo Finance|
|Charles Biddle (UBA)||176,767||21.49||3,798,723||Yahoo Finance|
|Charles Biddle (NYSE:UBP)||4,438,200||16.55||73,452,210||Yahoo Finance|
Author's note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: written and distributed only to assist in research while also providing a forum for second-level thinking.
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Disclosure: I am/we are long SKT, SPG, TCO, UBA. 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.