Vornado (VNO) is the largest commercial landlord in New York City — perhaps the best real esta...
Tanger: Is This Outlet REIT Trading at a Discount?
07/29/2019 5:00 am EST
It operates and owns, or has a stake in, a portfolio of 40 upscale outlet shopping centers, totaling 14.4 million square feet across 20 states and Canada. The company leases over 2,900 stores that are operated by over 500 different tenants and frequented by more than 181 million shoppers every year.
SKT outlets are known for their tenant mix of leading designer and brand-name manufacturers. The outlet centers allow customers to purchase a variety of brand-name products directly from the manufacturer —eliminating the third-party retailer.
SKT’s main focus this year is on leasing and marketing their properties as they attempt to offset the impacts on announced funds from operations (AFFO) from previous rent adjustments and tenant bankruptcies.
We estimate that AFFO/share growth will slow slightly from its 5.7% half-decade average, given the current trend towards e-commerce; and compound instead at 4.0% over the next 5 years.
Similarly, we estimate that dividend growth will slow, coming in at 5% over the next 5 years, with the low payout ratio (63%) and flexible balance sheet (BBB+ credit rating) leave plenty of room for payout growth.
Additionally, given management’s track record of success spanning nearly four decades that SKT went through the Great Recession virtually unscathed (AFFO fell only 2.2% from 2008 to 2010 and the dividend continued to grow each year), we view it as recession resistant.
Over the last 5 years, SKT traded at an average P/AFFO of 13.5, and the 10-year average multiple is 15.9. The current P/AFFO of 7.2 based on 2019’s estimated AFFO ($2.25 per share), represents a 47% discount to the 5-year average P/AFFO and an even larger one relative to the past decade.
We believe that, over time, SKT’s multiple will expand closer to its average, but remain a bit lower at ~12 times AFFO. Expansion of the valuation multiple to our fair value estimate is expected to add 10.8% annually to shareholder returns, indicating that the stock is significantly undervalued right now.
The dividend yield, meanwhile, has been pushed to highs lately as the stock price has fallen, and now stands at 8.7%. The dividend yield is significantly higher than its 5-year average yield.
Combined with our projected AFFO/share growth rate of 4%, we estimate that SKT will generate extremely high annualized total returns of 23.5% over the next 5 years.
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