Tanger Factory Outlet Centers (SKT 0.11%) may have exceeded expectations with its latest quarterly update in late October -- demonstrating the continued viability of the outlet-center retail channel it fosters in the process -- but that didn't stop shares of the real estate investment trust (REIT) from continuing to slide lower over the past several weeks.
If that drop wasn't enough to pique investors' interest, however, perhaps the fact that Tanger now boasts an incredible 9.2% dividend yield as of this writing will be enough to gain their attention.
To be clear, all too often an abnormally high dividend is a sign of underlying trouble for any given business. But while the market is rightly concerned about the impact of retailer bankruptcies on Tanger's chosen model, it's worth exploring whether the company remains well positioned to weather these headwinds and emerge stronger in the end. So now's a great time to take a closer look at what Tanger has accomplished over the past few months to see whether there are any big red flags.
Image source: Tanger Factory Outlet Centers.
Let's start with Tanger's latest headline numbers relative to the year-ago period:
| Metric |
Q3 2019 |
Q3 2018 |
Change |
|---|---|---|---|
|
Revenue |
$118.1 million |
$124.2 million |
(4.9%) |
|
Net income (loss) available to Tanger common shareholders |
$23.2 million |
($22.2 million) |
N/A |
|
Net income (loss) per diluted share |
$0.25 |
($0.24) |
N/A |
Data source: Tanger Factory Outlet Centers.
Digging deeper
Note Tanger's adjusted funds from operations (AFFO) -- a more useful industry metric than earnings to help measure the cash flowing into a REIT -- fell to $56.8 million, or $0.58 per share, compared to $61.9 million, or $0.63 per share a year ago. But this quarter also includes a $0.04-per-share impact related to certain strategic asset sales.
Meanwhile, Tanger's consolidated portfolio occupancy stood at a strong 95.9% at the end of the quarter, down slightly from 96% three months earlier and 96.4% a year ago. Trailing-12-month (TTM) blended average rental rates grew 2% on a cash basis, and 2.5% on a straight-line basis. And same-center net operating income (NOI) fell 1.8%, driven by tenant bankruptcies, lease modifications, and store closures.
Still, average tenant sales productivity continued to climb -- up 3.1% to $395 per square foot -- and same-center tenant sales grew a reasonable 1.7% over the past year.
As for leasing activity, Tanger commenced 345 leases totaling roughly 1.7 million square feet over the last year, and recaptured 195,000 square feet within its portfolio through the first three quarters of 2019.
CEO Steven Tanger was quick to point out Q3 results beat internal expectations for AFFO and same-center NOI, crediting the company's leasing and branding efforts to lure shoppers. He also insisted Tanger's strong occupancy rates "[reflect] the resilience and desirability of the outlet channel."
"Our dividend remains well covered"
Tanger elaborated (emphasis added):
Additionally, we have continued to increase traffic, as our targeted marketing programs and engaging on-site experiences helped to draw shoppers to our centers. Our tenant occupancy cost ratio remains lower than any of the mall REITs at 9.9%. We have also sustained a strong financial position, with no significant debt maturities in our consolidated portfolio until December 2023 and a low 3.5% weighted average interest rate. We have a 26-year historic commitment to paying a quarterly cash dividend. Our dividend remains well covered, as we expect to generate nearly $95 million of free cash flow over and above our dividend during 2019 and have nearly $600 million in unused line of credit capacity. As we move toward 2020, we remain focused on leasing to desired brands while creating the level of activity and excitement that drives shoppers to Tanger Centers.
As such, Tanger Outlets modestly increased its full-year guidance to call for 2019 earnings per share of $1.26 to $1.30 (up from $1.24 to $1.30 previously) and for adjusted FFO per share of $2.27 to $2.31 (up from $2.25 to $2.31 before).
The company says this revised guidance incorporates a combination of its relative outperformance in Q3, projected store closings this year (excluding Dressbarn locations, which should remain open through the end of 2019), and a slight increase in expected average occupancy for the year to between 95.5% and 95.8%.
All things considered, there was little not to like about Tanger's latest quarter -- which means the market's pessimism likely boils down to a trend of continued retailer bankruptcies hampering its growth. Nonetheless, with its dividend remaining "well covered" and shares now trading at a modest 6.8 times this year's expected AFFO, I think Tanger Factory Outlet stock has been more than adequately punished. Now could be a fantastic time for patient, long-term investors to open or add to a position.
