It didn't take long for Tanger Factory Outlet Centers (SKT 3.61%) to go from a busted dividend stock to a profitable candidate for income investors. The operator of 38 upscale outlet shopping centers announced on Thursday that it's resuming its quarterly distributions, an important move in more ways than the obvious.
When Tanger cuts its first dividend check in a couple of weeks it will be its first payout in nine months. The cash distribution of $0.1775 a share -- or $0.71 a share on an annualized basis -- represents a yield of 6.1% when the announcement was made (or 5.5% as of Thursday's close given the pop in the shares). In this low interest rate environment it's going to turn heads despite the inherent risks that I'll dive into shortly. More importantly, as a real estate investment trust (REIT) Tanger has to distribute at least 90% of its taxable income to investors. It is telegraphing just two weeks into 2021 that it expects to be profitable this year, and that's just one of the reasons why Tanger Factory Outlet Centers is a buy right now.
Closing in on closeouts
There are plenty of risks here. Everybody loves a bargain, but Tanger is collecting rent from retailers that have a presence in its outlet centers because they're not perfect. Brand-name retailers open up clearance stores because they're not selling everything they're making at full price. They want to clear out shelf space at their full-priced stores of closeouts, overstocks, and seasonal stuff that didn't pan out.
A lot of these tenants are financially wobbly. Their flagship stores are struggling at thinning traditional malls. They're victims and future victims of the e-commerce revolution that has left them behind. Tanger still hasn't collected 10% of the fourth-quarter rents. The discount mall operator has all-weather appeal because it gives shoppers more bang for the buck, but the occupancy rate at Tanger that started last year at 97% was down to 91.9% by the end of the year.
Bulls will argue that refreshing its consolidated portfolio is a good thing. Tanger will get to fill that space with chains that aren't filing for bankruptcy, and that makes them more desirable tenants than the ones they will be replacing. Shoppers are coming back. Customer traffic is back to 90% of where it was a year earlier, and that's impressive since there wasn't a pandemic or a recession scaring away shoppers in the 2019 holiday shopping season. All of the stores are naturally enclosed, but the open-air nature of the space between the stores probably makes it a slightly safer place to be in the new normal than a traditional indoor shopping mall.
Tanger isn't a slam dunk. It's not just its tenants that aren't perfect. Last year was rough, but 2020 has company. The stock has fallen for four consecutive years. Beefy yields -- and until early 2020 rising dividend payouts -- weren't enough to make Tanger a winner. The bullish thesis here is that Tanger will carve out a thicker slice of the brick-and-mortar pie, but the pie itself is shrinking.
Thankfully Tanger has time on its side. It has $680 million in liquidity to outlast lulls and deadbeat tenants. It has proven magnetic to shoppers even in these topsy turvy times. There's also room for that payout to increase dramatically if funds from operation exceed initial projections. This is a high-risk stock, but one that can ultimately deliver big capital gains stacked on top of what should be rising distribution rates. It's the only mall operator that I'm comfortable owning right now, and that's why Tanger Factory Outlet Centers is a buy.