Tanger Factory Outlet Centers (SKT), which owns and operates outlet shopping complexes in the U.S. and Canada, has had a very difficult 2019. The stock has declined more than 32% over the last year due to a combination of fears of e-commerce hurting the business and recent quarterly results that have showed declines.

This drop in share price has caused the dividend yield to spike to more than 9%. For those who own the stock for income purposes, the dividend does occur to be safe. For those looking for more capital gains returns inn addition to the dividend, I feel that fears about current business conditions might be overblown.

Business Overview and Recent Financial Results

Tanger has 39 outlet centers and more than 14 million total square feet spread out over 20 U.S. states and western Canada. Outlet centers are popular amongst consumers because they offer discounted prices on top brands.

Source: Third Quarter Earnings Presentation, slide 21.

Tanger leases to well-known brands like Nike (NKE), Under Armour (UA), Lulelemon (LULU) and Ralph Lauren (RL). The trust welcomes more than 181 million visitors spread across different generations to its complexes each year. The trust’s clientele has a higher average annual income. This is important as these consumers can afford to continue to shop at outlet centers during a recession. Consumers like deals, especially during a recession. This helps to make Tanger fairly recession proof. Helping to illustrate this fact is that the trust suffered a decline in adjusted funds-from-operation, or AFFO, of a little more than 2% during the depths of the last recession.

Tanger reported third quarter results on 10/30/2019. Revenue of $119 million was $1.5 million higher than expected, but a 4% decline from the previous year. The trust produced AFFO of $0.58, which topped consensus estimates by $0.02, but was an 8% decrease from the same quarter a year ago.

Tanger’s occupancy rate was 95.9% in the third quarter, which was a decline of 10 bps sequentially and 50 bps year-over-year. Much of these declines was due to tenant bankruptcy.

Source: Third Quarter Earnings Presentation, slide 17.

The trust hasn’t had an occupancy rate below 95% in more than 25 years, showing that the business model is quite effective during all portions of the economic cycle.

Same-center net operating income, or NOI, was lower by 1.8%, mostly on account of tenant bankruptcies and store closures. On the other hand, tenant sales per square foot increased $12 to $395 for the twelve-month period ending 9/30/2019 compared to the previous year. Same-center tenant sales were up 1.7% year-over-year. Tanger has renewed or re-leased 345 leases that cover more than 1.7 million square feet. The trust has renewed 74.2% of space set to expire this year. Tanger has repurchased $20 million worth of stock in 2019.

Tanger’s debt situation is solid as well. The trust has $1.6 billion in debt on its balance sheet and a weighted average term to maturity of outstanding debt of 5.7 years. The weighted average interest rate was 3.5% and interest coverage stood at 4.3 for the first nine months of 2019. Roughly 94% of Tanger’s square footage has no mortgage attached to it.

Tanger raised the low end of its guidance. The trust now expects AFFO in a range of $2.27 to $2.31, up from $2.25 to $2.31 previously. This is above consensus estimates for AFFO of $2.23.

Dividend Analysis – Dividend Champion That Offers A High Yield That Is Safe

Tanger increased its dividend by just 1.4% for the 5/15/2019 payment. This is lower than the typical raise as the trust has increased its dividend by an average of:

• 8.3% per year over the past three years
• 9.5% per year over the past five years
• 6.4% per year over the past 10 years

Even with a smaller than usual increase, Tanger has now increased its dividend for 26 consecutive years. This qualifies the company as a Dividend Champion. Only four other REITs have at least this many years of dividend growth as Tanger.

Shares of Tanger also yield 9.2% today, which is significantly higher than the 3.7% yield that the trust has averaged over the last decade. This is also nearly five times the average yield of the S&P 500.

Just as important as income is dividend safety. Using Tanger’s annualized dividend of $1.42 and expected AFFO of $2.29 for the year, the payout ratio is just 62%. This is low for a REIT, but above the trust’s average payout ratio of 54%.

This payout ratio should reassure investors that Tanger’s dividend is safe, though dividend increases may slow as the trust works its payout ratio back towards the long-term average.

Valuation and Price Target

The growth in online and digital shopping has made it easier for consumers to find the products they desire, often without leaving the comforts of home. Still, outlets are popular with consumers because of the discounts they receive on name brand clothing, shoes and other goods. Tanger appears priced as if e-commerce is going to change that. This doesn’t seem very likely due to the number of customers that visit Tanger properties each year.

Also benefiting the trust is that outlets centers have not been as aggressively built as other retailers, partly because they are more of niche business.

Source: Third Quarter Earnings Presentation, slide 12.

Just 44 new outlet centers have been opened since 2011, with Tanger adding 12 of these new properties. This means that there isn’t an oversupply of outlets, which is prudent given the struggles of other brick-and-mortar retailers.

Shares of Tanger currently trade for $15.50. Using the midpoint for AFFO of $2.29 for the year, the stock has a price-to-AFFO of 6.8. The stock has traded with a multiple of almost 16x AFFO for the last 10 years.

A multiple on par with its historical average seems unlikely with the current sentiment regarding the trust, but even a attaining a price-to-AFFO ratio in the range of 8 to 10 would lead to significant share price appreciation.

Delivering on the midpoint for updated guidance would offer a price range of $18 to $23, which would be an improvement of 16% to 48% from the most recent closing price.

Added to this, of course, would be the dividend yield, which at those prices would be 7.9% to 6.2%.

Any positive news on the trust (unexpected quarter improvements, analyst upgrade, etc) could cause Tanger’s share price to move higher and the multiple to expand.

Final Thoughts

Tanger’s most recent quarter showed the trust’s business has some weakness. Investors have responded by sending shares lower. This has helped give the stock a very high, and I feel sustainable, dividend yield.

With so much negative sentiment surrounding the stock, shareholders of Tanger could see sizeable returns if the trust delivers on its guidance and the valuation improves slightly.