Tanger Factory Outlet Centers (SKT 3.43%)is a real estate investment trust (REIT) that operates smack dab in the middle of the retail sector. Retail was among the industries devastated by the global health crisis amid store closures and dashed hopes for recovery. But now there's optimism that COVID may be receding. So let's explore whether Tanger is a buy now.
Catching the illness
For those unfamiliar, Tanger operates a chain of shopping centers occupied by discount stores. Many of these are low-priced outlets of famous brands (Ralph Lauren, Vans, Nike, etc.). As of the end of 2021, it either owned or held an ownership interest in 36 such facilities. These could be found in 20 U.S. states and in Canada, with more than 2,700 individual stores.
Like many companies in retail, Tanger was hit hard by widespread store closures at the start of the pandemic. Revenue, profitability, and free cash flow crumbled as the REIT was forced to launch a rent deferral program for its beleaguered tenants. It even did the unthinkable for a REIT, cutting its quarterly dividend by more than 50%.
Save for free cash flow, none of those key line items have fully recovered from the privations of the coronavirus.
Funds from operations (FFO, the most important profitability measure for REITS) fell on a year-over-year basis in both the fourth quarter and in full-year 2021 (by a respective 6% and 11%), while total revenue inched up only marginally during the quarter.
FFO and revenue, meanwhile, for the quarter and the full year were still short of their comparable periods in 2019. The same goes for occupancy, which at the end of 2021 was 95.3%, compared with 97% two years earlier.
The bargain hunters return
And yet, there are some very encouraging signs. In its latest earnings report, the company said that domestic traffic at its outlets during the final quarter of 2021 exceeded 2019 levels. Meanwhile during 2021, the REIT's tenants booked record sales of $468 per square foot (which, by the way, was a sturdy 18% higher than pre-pandemic 2019).
Better yet, the company projected 2021 FFO per share of $1.68 to $1.76, which at a minimum would be 6% higher than the 2019 result. That sure isn't bad for a company that was in dire straits in the very recent past.
And while the dividend hasn't -- surprise! -- been restored to 2019 levels yet, the company bumped it up slightly late last year, and it now yields a very respectable 4.4%. That's roughly in league with top retail REITs, including Realty Income, and not far from traditional mall REIT Simon Property Group's 4.8%.
Foot traffic will surely pick up throughout the retail sector if the recent falling trend of COVID cases and fatalities continues. Within the sector, Tanger's discount shopping centers will always be attractive due to the perceived bargains available there. So we shouldn't be surprised to see the company exceed its anticipated growth targets.
That recovery might be faster than expected, so I think Tanger stock is a compelling buy for believers in the future of retail -- particularly if they like clocking a handsome dividend.