Tanger Factory Outlet Centers: On Sale?

02/11/2020 5:00 am EST

Focus: REITS

Stephen Mauzy

Income-Investing Specialist, Wyatt Investment Research

Tanger Factory Outlet Centers (STK) is the largest owner of outlet centers in the United States and Canada; its portfolio consists of 36 outlet centers that comprise 2,600 stores representing approximately 400 store brands, observes Stephen Mauzy, contributing editor to Personal Wealth Advisor.

Tanger is formed as a real estate investment trust, which promotes dividend payments. Most REITs lease space and collect rent on the buildings they own. The income generated, in turn, is paid to shareholders as dividends. REITs must pay at least 90% of their taxable income to shareholders.

Tanger is lumped into the wallflower mall-REIT category. The segment has lost favor with investors over the past year, and for good reason. Many malls are anchored by tenants whose business outlook is precarious at best. Tanger is considered a mall REIT, but mall REITs are hardly photocopies of each other.

Pronounced differences exist. Tanger differs consciously from its mall brethren. It owns outlet centers and only outlet centers. These outlet centers are less costly to build and operate. Its tenant costs are roughly 9.9% lower than those of the enclosed mall REITs.

Unlike many mall REITs, Tanger continues to attract occupants. Thanks to strong leasing program last year, its consolidated portfolio occupancy rate rose to 97.0% for 2019.

Tanger offers 27 years of annual dividend growth. It offers that growth with a 9.3% starting yield.  And like with Altria Group, the record should be maintained well into the future.

The all-important dividend is supported by funds from operations (FFO) — the key cash-flow metric investors vet. Tanger generates plenty of FFO.

Management guided for 2020 FFO per share of $1.96-to-$2.04. The dividend this yield will consume only 70% of projected FFO.  Most mall REIT investors will find that it takes 80% or more of FFO to support the dividend.

Tanger shares trade at 7.5 times the expected FFO for 2019. The long-term average is near 10. While we wait for mean reversion to occur, I recommend hanging your hat on an enviable record of annual dividend growth and a 9.3% starting dividend yield.

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