Tanger: Bargain of the Year?
06/21/2017 2:52 am EST
One of the hardest things about being a value investor is to recognize that buying stocks in the face of adversity requires significant courage, even risking being called a dummy, says Brad Thomas, editor of Forbes Real Estate Investor.
Some would argue that only a fool believes that investing in Retail REITs will lead to rewards in the stock market. Based upon the industry-wide headwinds the risks appear elevated. The retail sector is in a period of unprecedented secular change that is disruptive to traditional brick and mortar models.
Many department store chains are struggling to survive and some of the specialty chains are underperforming; the media hype suggesting “malls are dying” continues to weigh on shares of the Mall REITs.
Although classified as a Mall REIT, Tanger Factory Outlets (SKT) has also been beaten down by Mr. Market, even though the Greensboro-based REIT owns no department stores whatsoever.
Actually, Tanger’s business model is not even similar to the Mall REITs, the average outlet center costs around $25 million to $50 million to build, and Malls are twice the cost. In addition, outlet tenants pay significantly less rent than Mall tenants, making the stores highly profitable.
While Tanger does not have the distressed department store exposure like the traditional Mall REITs, this outlet REIT leases to many of the top retailers [like Coach (COH) and Michael Kors (KORS)] that you can also find in the department stores.
Uncommon to malls that are costly to build (upwards of $100 million) and with significantly higher operating costs, Tanger has created a differentiated retail model that provides both scale and low-price brand recognition, aimed to meet the demands of the bargain-hunting consumer.
One key competitive advantage that Tanger enjoys is the company's ability to leverage its track record and brand by scaling the business model. The outlet industry is small and Tanger estimates that there is less than 70 million square feet of quality outlet space, which is smaller than the retail space in the city of Chicago.
One other differentiator for Tanger is the fact that the company has never cut its dividend since going public in 1993. In fact, Tanger is the only Mall REIT that has increased its dividend during the last recession (TCO actually maintained a flat dividend and the others cut it) and since going public. The dividend yield is 5.2%.
In order to maintain this level of dividend success, Tanger has maintained extreme discipline as evidenced by the company’s coveted balance sheet (BBB+ stable with S&P and Baa1 stable with Moody's). In addition, Tanger has maintained consistent occupancy levels, never dropping below 95% since going public.
Tanger recently announced a $125 million stock buy back that would be enough to repurchase nearly 5M shares, or 5% of the float. The company will be able to fund some of that buyback thanks to the closing of the recent sale of Westbrook, CT center for $40M, or a cap rate of 10%.
That center was 90% occupied, but generating average tenant sales per square foot 44% below the Tanger portfolio average (FFO per share this year is expected to take a $0.025 hit thanks to the sale).
My approach is to invest in deep value, while I have always espoused buying the best of breed. Both approaches will continue to exhibit elevated risk, and investors should be aware of the risks and the causes of risk. Tanger Factory Outlets could be the quintessential “bargain of the year”.