Things are starting to look up for Tanger Factory Outlet Centers (NYSE:SKT) investors. Shares of the outlet mall operator recently hit a 10-month high, and that's saying something since it's been that long since the country was paralyzed by the COVID-19 crisis. 

Things haven't been easy for the operator of 38 upscale outlet shopping centers. It suspended its beefy quarterly distributions in May. Some of its tenants have gone out of business. However, with shoppers starting to come back and a value proposition that makes sense in the new normal it's just a matter of time before the payouts return. Tanger Factory Outlet Centers is starting to win back investors, too -- but where will it be a year from now? Let's take a closer look to see where the company and the stock should be in early 2022. 

A couple holds shopping bags while walking outside.

Image source: Getty Images.

Shop until the dividend drops

Let's start with the distributions, since that's naturally a big part of this story for income investors. Tanger Factory Outlet Centers is structured as a real estate investment trust or REIT, distributing at least 90% of its taxable income to investors. It returned to profitability in its latest quarter, but the payouts didn't come back. Tanger Factory Outlet Centers already distributed enough in the January and April payments to cover the REIT payout requirements for 2020. This new year will be interesting.

Tanger Factory Outlet Centers recently reaffirmed that it will continue to operate as a REIT. If it remains profitable in 2021 the distributions will come back. Based on its last quarterly dividend of $0.358 a share -- and Tuesday's close of $11.15 -- this would translate into a juicy yield of 12.8%. Let's not get too excited. Tanger Factory Outlet Centers will take some time to get back to where it was before the pandemic. The quarterly disbursements should be back barring another months-long lockdown. The real question is how much lower the dividends will be. 

Outlet centers play a pivotal role for chains. When things don't sell as well as they should they need to clear space for fresh inventory that stands a better shot at ringing the register bell. Outlet stores allow brands to clear out merchandise to value-conscious shoppers. If you're going to be buying a mall operator, looking for a landlord that specializes in outlet centers makes sense. We're in a recession, and even when the coast is clear on the economic front, shoppers love a good deal. 

The problem with Tanger Factory Outlet Centers and other outlet shopping hubs is that some chains are failing, and when a company declares bankruptcy it stinks all the way down to the companies collecting rent at the outlet center. The consolidated portfolio occupancy rate at Tanger Factory Outlet Centers has fallen from 97% at the end of 2019 to 91.9% at the end of 2020.

We may not have hit bottom on that front. Some of the parent companies of its current tenants are also still a bit wobbly. Tanger Factory Outlet Centers only collected a little more than 90% of the fourth-quarter rents it has billed according to a financial update it offered up on Monday. This is actually pretty decent all things considered, but it's a reminder that there may be more shoes -- or in this case more shoe retailers -- to drop before the recovery is complete. 

There are some encouraging signs out there. Customer traffic during the holiday-containing fourth quarter is at 90% of where it was a year earlier when nobody saw a pandemic comping. Holding off on dividends and a return to profitability in the third quarter has also helped boost the REIT's liquidity. It now has $80 million in cash on hand and another $600 million in unused capacity through its unsecured lines of credit. 

There's a rosy scenario where Tanger Factory Outlet Centers emerges from the pandemic in better shape than where it was when before the COVID-19 crisis. This is a chance for it to refresh its portfolio with more relevant tenants and brands, shaking some of the dead weight. The rattled retail landscape may also send more shoppers to outlet centers over traditional shopping malls. 

For now it's probably best to play it safe. Tanger is generating a healthy flow of funds from operations. A healthy rate of distributions should return later this year. Decent dividend income coupled with continuing capital appreciation should help Tanger Factory Outlet Centers beat the market in 2021. It's time to go shopping.