One of the biggest reasons to like Tanger Factory Outlet Centers (NYSE:SKT) was its steadfast commitment to its dividend. Even the deep 2007-to-2009 recession, which led many of its mall peers to trim their payouts, didn't see this real estate investment trust's (REIT) annual dividend increase streak come to an end. But after 27 years, COVID-19 has taken out Tanger's dividend. Here's the ugly environment that led management to this decision, and what the future may hold from here.

A tough period gets tougher

At the start of the year, Tanger, like all of the mall real estate investment trusts, was dealing with the so-called retail apocalypse. The headline was that shoppers were increasingly shifting online, leading to falling sales at brick-and-mortar stores. That, in turn, was leading to bankruptcies and store closures throughout the retail sector.

But that's just one piece of the picture. In reality, many of the most troubled retailers hadn't built out their online capability, hadn't kept up with trends, or had leveraged up their balance sheets. The failure to adjust with the times was putting them out of business. Tanger, meanwhile, was muddling through this difficult time as best it could.

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In fact, the outlet mall owner was struggling, but it was still holding up relatively well. There were concerns about the dividend, but it didn't appear to be in any imminent risk. In fact, the company gave investors a token dividend increase in early 2020. Management had worked through tough periods before, and it believed that it just required more time to replace closing stores.

That was before COVID-19, which has proven to be a game changer for malls. In an effort to slow the spread of the coronavirus, non-essential businesses have been shut down. It would be hard to call a mall essential, so all of Tanger's outlet centers ended up getting shuttered. All of its tenants were, by extension, forced to close too. Recognizing the problem here, Tanger offered its tenants the opportunity to defer April and May rents. It only collected 12% of April rents. With states only just starting to reopen their economies again, May's rent collection will be ugly, too. 

Only bad options

With little money coming in the door, Tanger had few choices. It decided to suspend the dividend, with the goal of paying out its taxable income for the year. That's effectively the base requirement for it to remain a REIT, and is a fairly low bar. To give you some perspective, it paid $1.415 per share in dividends in 2019, but had net income of only $0.93 per share. The reason it can do this is that non-cash charges like depreciation provide cash flow that can be used for dividends. It's why funds from operations (FFO), which adds back such items, is the key metric to watch for REITs. First-quarter FFO, for reference, was $0.50 per share, down from $0.57 a year ago -- but that only included a short period of shut down. The second quarter will be much worse based on the rent collection rate in April. 

Regardless of the math, Tanger is struggling right now, and it's going to get worse before it gets better. The recovery, meanwhile, could take a long time to work out. Notably, the process of reopening the states is expected to be slow so COVID-19 infections can be monitored. It may take some time before non-essential stores are allowed to open again and shoppers are willing to venture into stores even after they are open. Cutting the dividend was the right move for the REIT, and is exactly what most of its peers have done.

That said, Tanger has some positive attributes. For example, the vast majority of its outlet centers are open air, so customers won't have to enter into an enclosed space that might make transmission of the coronavirus easier. Second, its properties are specifically intended to provide "deals" to customers, which could become more important shortly since the economic shutdown is likely to push the nation into a recession. This isn't to suggest that Tanger's business is headed for a quick recovery, only that it may be better positioned than enclosed mall focused peers.

And Tanger has one of the strongest balance sheets in the mall REIT niche. In fact, Tanger believes that it has enough liquidity to survive for as long as two years without receiving any rental income. That's an unlikely outcome, and there are probably debt covenants tied to its revenue that would get breached in such a scenario, but it provides an idea of how well prepared Tanger is to deal with a storm -- even one like COVID-19. 

Tough to stick around

To put it simply: It's bad right now, it's going to be worse, but it's not the end of the world. Mall REITs like Tanger are not an appropriate option for conservative types at this point, as they are clearly turnaround stories. Tanger's dividend is just one more example of how bad it is in this REIT niche.

More aggressive investors shouldn't leave Tanger for dead. It's not "that" bad at this point, and the future is likely to slowly brighten. However, there's probably no rush to jump aboard here until there are more concrete signs of improvement. In other words, for most investors, Tanger is one for the watch list, not the buy list.