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Tanger Factory: Outlet Returns
12/03/2015 8:00 am EST
I rarely consider buying real estate investment trusts at yields under 4%, but this one is worth a look, assert Josh Peters and Todd Ludasik of Morningstar DividendInvestor.
Tanger Factory Outlet Centers (SKT) offers a retail concept that enjoys consistent consumer demand across economic cycles and a platform that offers retailers wider distribution without saturation or cannibalization of full-price stores.
Occupancy levels in the high 90s reflect retailers’ strong demand for outlet space and we think the North American outlet market may be able to support an increase in square footage of up to 60%. This provides Tanger a long runway for growth.
We expect Tanger to win its fair share of incremental developments in the United States and Canada, consistent with its current project pipeline.
While Tanger’s leases already allow it to share in tenants’ increased sales over time, we estimate that Tanger’s in-place rents are roughly 10% below current market rates, providing nice prospects for internal operating income growth as leases are renewed.
How safe is the dividend? We think Tanger is in fine financial shape. The dividend is running at about 61% of our adjusted funds from operations forecast for 2015, an ample cushion for cyclical risks.
Longer-term, we think Tanger’s cash flows can support a higher payout ratio, potentially juicing dividend growth.
Tanger’s 22-year streak of raising its dividend looks set to continue for the foreseeable future. After growth averaging 4.4% a year from 2004 through 2014, the firm raised its dividend 18.8% in April 2015, to an annualized $1.14 a share.
Management attributed the unusually large increase to rising taxable income, of which REITs are obligated to pay out at least 90%.
Though additional hikes of this magnitude are unlikely, we see mid-single-digit dividend growth or better over the next few years at least.
Though a current yield of 3.3% is modest by traditional REIT standards and eventual rises in interest rates may be a headwind for capital gains, we think the stock is attractive in light of above-average dividend growth potential and limited fundamental risk.
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