Tanger Factory Outlet Centers (NYSE:SKT) is down roughly 25% so far in 2019. I bought it before this drubbing, so I lost even more than that. At this point, I've sold the stock -- but I'm likely to buy it back in a month or so.
That might sound odd, but it's not. Here's why I sold, despite the fact that I still like the outlet center-focused real estate investment trust (REIT).
Not exactly jumping ship
When an investor sells a stock at a loss, they can actually use that loss to offset capital gains on other investments. Or, if there are no capital gains to offset, the investor can reduce their income by up to $3,000 a year until the loss is fully used up. Losing money is never a good thing, of course, but at least Uncle Sam lets you get some small benefit from the pain.
If you sell a stock to get the "benefit" of a loss, you are, in Wall Street lingo, capturing or harvesting a loss. While nobody really wants to do this, it is a way to reduce your taxes, and it can be a smart tax planning move. However, you might still like a stock from which you harvested a loss and want to buy it back. Be careful! There are rules about this, because the IRS is aware of the benefits of capturing losses. The most important rule is that you can't go out and buy the stock back again right away -- you have to wait at least 30 days (a time period during which the stock could head higher).
If you run afoul of this rule, you will have a wash sale. In that case, you don't get to use the tax losses at all. That's why I'll be waiting for at least 31 days before I consider buying any Tanger stock again. Although conceptually simple, selling to capture a loss requires a bit of thought and effort. It isn't something to bother with unless there's a material dollar figure involved. I've only used this technique once before, with VEREIT.
Unfortunately, I'll be able to "benefit" from a few years' worth of tax reduction by selling Tanger, so it was worth the effort. That said, you need to complete any tax loss sales by the end of the year, so if this sounds interesting to you, jump on this idea now -- or at least consult your accountant to talk it over.
But here's the bigger question: Why do I want to buy this losing stock back?
Nothing is going to change
Wall Street is a fickle beast, and it's impossible to tell what it's going to do, but I was pretty sure VEREIT wasn't going anywhere fast when I harvested my losses in that stock. It was dealing with lawsuits that were still years away from resolution (they are now behind the REIT). Tanger is dealing with a shifting retail landscape that also isn't going to change in the next month or so. In fact, based on expected store closings, Tanger's problems are likely to get worse before they get better. So I'm fairly confident that the stock will remain around where it is over the next month.
But if I don't expect any change, why buy it back at all? First and foremost is Tanger's over-9% dividend yield. That's high, and it is a clear sign that investors think a cut could be in the cards -- it is a mistake to ignore such a warning. So instead of just blindly planning to buy it again, I actually revisited my investing thesis here, and I think the story is still the same.
Put simply, Tanger owns outlet centers and only outlet centers. They are a different beast from enclosed malls, which are feeling the brunt of the pain from store closures (particularly the closures of anchor tenants) and overbuilding. Outlet centers don't have anchor tenants, and the sector is much, much smaller than enclosed malls -- Tanger believes that quality outlet centers make up less than 1% of U.S. retail space. It is also much less expensive to operate an outlet center, leading to lower costs for tenants (which makes it easier for them to turn a profit). Moreover, Tanger's centers are largely located in or near vacation hot spots or close to top-50 U.S. population centers. Combined, these two location types account for nearly 90% of the REIT's square footage.
Far from just a hunch, there are actual numbers to back these positives up. For example, Tanger's tenant costs are roughly 9.9%, lower than those of the enclosed mall REITs with which it is usually compared. And its occupancy was 95.9% last quarter, higher than that of any of the mall REITs. The sales per square foot at its centers also actually increased a touch year over year in the third quarter. It hardly looks like Tanger owns undesirable malls that tenants and shoppers would prefer to avoid.
That's not to suggest that Tanger isn't facing notable headwinds. It is, and it will continue to for at least another year, as the closures of stores like Dress Barn and Forever 21 aren't expected to take place until 2020 -- and both have locations in Tanger malls. The thing is, outlet centers also contain fairly uniform spaces, so the cost to bring in a new tenant is low. The real problem is finding new tenants, which simply takes time.
That's where the next big question comes in: Can Tanger muddle through this rough patch until it fills its empty storefronts? Looking at the balance sheet, the answer appears to be yes. For starters, Tanger's financial debt-to-equity ratio is lower than those of all but one of its mall peers. Debt to EBITDA is similarly strong, and so is its interest coverage. Put simply, Tanger is on solid financial ground. In fact, it recently paid down some debt and now has virtually all of a $600 million credit facility available to use. I have little fear that Tanger is at risk of going bankrupt.
But what about the dividend? A 9%-plus yield suggests Wall Street is worried the dividend will be cut. Only Tanger's funds from operations (FFO; like earnings for an industrial company) payout ratio is going to be around 65% in 2019, using the midpoint of Tanger's full-year FFO guidance. That's modest for an REIT and one of the best levels of dividend coverage in the mall peer group. Add in the fact that Tanger has increased its dividend every year since its IPO roughly 25 years ago, and there's a clear commitment from management to regularly increasing the dividend.
If the payout were higher, leverage more worrisome, or the costs of upgrading empty space more material, perhaps I'd be more concerned. But at this point, the dividend looks almost as solid as Tanger's balance sheet. Yes, a slug of new store closures in 2020 could make things tight, but it isn't unusual for a REIT to have an FFO payout ratio in the 80% to 90% range. I believe there's a fair amount of room before I would need to worry about Tanger's dividend.
A time to sell and a time to buy
All in all, I hate that I have a notable paper loss on Tanger. But I'm not going to let it go to waste -- I'm capturing it. And since I doubt anything is going to change over the next month or so, I'm confident I'll be able to buy back into Tanger at roughly the same price at which I sold it. That will allow me to reinvest the dividends while I wait for Tanger to find new tenants for the outlet centers it runs.
That said, I didn't make this decision lightly. I reexamined my thesis, and I still believe it's true: Tanger is a financially strong retail REIT with good properties that will be able to adjust to the changes taking place in the retail landscape. It's just going to take a little time.