Tanger Factory Outlet Center (SKT 2.58% )is a Real Estate Investment Trust (REIT) operating in the heart of the retail sector. Retail was among industries devastated by the global health crisis amid store closures and dashed hopes for a recovery. But now there is optimism that COVID could recede. So let’s examine if Tanger is a buy now.
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Catch the disease
For those unfamiliar, Tangier operates a chain of malls staffed by discounters. Many of them are cheap outlets of well-known brands (Ralph Lauren, Vans, Nike etc.). By the end of 2021, the company either owned or held an interest in 36 such facilities. These could be found in 20 US states and in Canada with more than 2,700 individual stores.
Like many retail businesses, Tangier was hit hard by widespread store closures early in the pandemic. Revenue, profitability and free cash flow crumbled as the REIT was forced to launch a rent deferral program for its struggling tenants. It even did the unthinkable for a REIT, cutting its quarterly dividend by more than 50%.
Aside from free cash flow, none of these key items have fully recovered from the hardships of the coronavirus.
Funds from operations (FFO, the key profitability metric for REITs) declined year-on-year in both the fourth quarter and full-year 2021 (down 6% and 11%, respectively), while total revenues increased slightly during the quarter.
FFO and revenue, meanwhile, for the quarter and full year were still below the comparative periods of 2019. So was occupancy, which was 95.3% at the end of 2021, compared to 97% two years earlier.
The bargain hunters return
And yet there are some very encouraging signs. In its latest earnings report, the company said domestic traffic at its stores in the final quarter of 2021 exceeded 2019 levels. Meanwhile, the REIT’s tenants booked record sales of $468 per square foot in 2021 (which, by the way, was 18% higher than before the 2019 pandemic).
Better yet, the company was projecting 2021 FFO per share of between $1.68 and $1.76, which would be at least 6% higher than 2019 earnings. That’s certainly not bad for a company that’s been in dire straits in the recent past.
And although the dividend isn’t — surprise! — Having been restored to 2019 levels, the company picked it up slightly late last year and is now yielding a very respectable 4.4%. That’s about in league with top retail REITs, inclusive real estate income, and not far from the traditional mall REIT Simon real estate groupare 4.8%.
Foot traffic is sure to increase across the retail sector if the recent downward trend in COVID cases and deaths continues. Within the sector, Tangier’s discount malls will always be attractive due to the perceived bargains there. So we shouldn’t be surprised if the company exceeds its expected growth targets.
This recovery could be quicker than expected, so I think Tanger stock is a compelling buy for those who believe in the future of retail — especially if they’re happy to post a handsome dividend.
This article represents the opinion of the author, who may disagree with the “official” endorsement position of a Motley Fool premium advisory service. We are colourful! Challenging an investing thesis — including one of our own — helps us all think critically about investing and make decisions that help us be smarter, happier, and wealthier.
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