We're shopping in the real world again, and Tanger Factory Outlet Centers (SKT -0.54%) is in the best shape it's been in a long time. The operator of 36 open-air outlet shopping centers is naturally faring better than it was a year ago when we were sheltering in place, stunned into inactivity during the early days of the COVID-19 crisis. However, Tanger is starting to compare favorably to where it was two years ago.

Tanger reported encouraging financial results earlier this month. Some of the metrics still have a way to go before returning to peak Tanger, but shoppers have come storming back. Traffic to its outlet malls reached 97% of where the foot traffic was during the first three months of 2019. In April traffic actually exceeded where Tanger was two years earlier. 

Tanger is turning things around. It has resumed a quarterly dividend that should go even higher later this year. Things are looking up, so where will the outlet center landlord be a year from now? Let's take a closer look.

A Tanger Factory Outlet Center in Fort Worth, buzzing with pre-pandemic crowds.

Image source: Tanger Factory Outlet Centers.

More than window shopping

Even if you are concerned about the long-term sustainability of brick-and-mortar mall operators it's easy to see the upside of factory outlet centers through at least the next couple of years. Many leading retail chains have inventory that they need to clear out, and they don't want drastic markdowns within their namesake stores gnawing away at the value proposition of the full-priced merchandise.

Factory outlet centers aggregate leading retail concepts that create new stores dedicated to moving closeouts and clearance items. This is still a small market. Factory centers account for just 1% of all retail, Tanger itself pointed out in this month earnings call. However, as a hotbed of deep discounts Tanger Factory Outlet Centers offers immediate gratification at price points that are hard to find even online. 

The problem for Tanger right now is that customers are just part of the equation. A lot of retailers have buckled over the past year, and occupancy levels have yet to turn around. Tanger's consolidated portfolio had an occupancy rate of 91.7% at the end of March, below the 91.9% it was at three months earlier and well below the 94.3% it was at a year ago. Tenants are also paying less, as blended average rental rates have declined over the past year. 

The good news here is that Tanger is no longer going to provide quarterly updates on its rent collections. A lack of transparency may seem problematic at first, but with rent collections back near the normalized 95% rate it's now a non-event. 

It's easy to predict that a year from now Tanger's occupancy rate and rental rates will be closer to where there were before the pandemic -- if not higher. The quarterly distributions should also be higher, something that will likely find the shares higher than they are now. 

As a real estate investment trust (REIT) Tanger is required to distribute at least 90% of its taxable income to investors. Tanger's guidance calls for earnings per share of $0.13 to $0.23 in 2021, and that's not a lot. However, the real number to watch here is what you get after you add back the depreciation and amortization of its real estate assets along with one-time hits for a loss on a joint venture property sale, costs related to early extinguishment of debt, and compensation costs that were part of a voluntary retirement plan. The end result of those exclusions is the core funds from operation that typically guide a REIT's distributions, and Tanger sees that clocking in between $1.47 and $1.57 a share. After back-to-back quarterly distributions of $0.1775 a share it would be a surprise if Tanger doesn't boost its dividend this summer. 

Tanger's current yield of 4.2% is more than respectable in today's climate, but the levers are there for improving the payouts if the turnaround continues to play out here. Head out to your nearest Tanger next weekend and see for yourself why this is a good place to be in the reopening of the economy.

Occupancy rates should be bottoming out now, and the vacancies will be filled by a new breed of merchants that will be more attractive than the ones that they will be replacing. A stock's yield will move lower as a stock moves higher, but Tanger has the right combo of improving fundamentals so that a year from now the stock and yield will be higher because of the inevitable distribution hike. Tanger is a bargain for shoppers, but right now it's also a bargain for investors.