As inflation, rising interest rates, and fears of a potential recession grip the markets, Tanger Factory Outlet Centers (SKT +1.62%) might seem like a good safe-haven investment. Its outlet centers are popular shopping destinations for bargain hunters during economic downturns, and it's a landlord instead of a retailer, so it only needs to ensure that its centers stay occupied by tenants instead of fretting over individual businesses.
As a real estate investment trust (REIT), Tanger is resistant to inflation because its property values remain fairly stable. REITs are also required to pay out most of their profits as dividends to maintain a favorable tax rate.
Image source: Getty Images.
Tanger's high forward yield of 5.4% makes it an attractive alternative to most bonds -- even as interest rates rise -- and it trades at a reasonable 23 times forward earnings. So should investors buy Tanger's stock today?
Understanding Tanger's business model
Tanger's outlet centers fared better than traditional malls over the past decade because they target discount shoppers. Retailers that sell full-price products at malls often unload their excess inventories at their off-price outlet stores, which attracts a steady stream of bargain hunters.
To gauge Tanger's growth, investors should focus on its occupancy rates, its same-center net operating income (NOI), and its core funds from operations (FFO), which REITs use to measure their profitability.
|
Metric |
FY 2017 |
FY 2018 |
FY 2019 |
FY 2020 |
FY 2021 |
|---|---|---|---|---|---|
|
Occupancy rate |
97.3% |
96.8% |
97% |
92.2% |
95.3% |
|
Same-center NOI growth |
0.5% |
(1.3%) |
(0.7%) |
(19.5%) |
16% |
|
Core FFO per share growth |
3.8% |
0.8% |
(6.9%) |
(32%) |
12.1% |
Data source: Tanger Factory Outlet Centers.
Up until 2019, Tanger had maintained an occupancy rate of more than 95% for 38 consecutive years. That streak ended in 2020 as the pandemic forced retailers to close their stores. Many retailers also went bankrupt.
Tanger deferred its rental payments for struggling retailers throughout the year, which caused its same-center NOI and core FFO to decline sharply. It was also forced to offer shorter-term and variable leases to keep its centers occupied.
Will Tanger's business continue to stabilize?
Tanger's business recovered quickly in 2021 as the pandemic-related headwinds waned, but its occupancy rate slipped again to 94.3% in the first quarter of 2022. However, Tanger's same-center NOI still rose 9.9% during the period, which suggests its top retailers are sticking around.
During the conference call in early May, Tanger CEO Stephen Yalof attributed its lower occupancy rate to seasonal headwinds, as well as "shuffles" across its portfolio to make room for higher-quality tenants.
Simon Property Group (SPG +2.48%), which owns a mix of malls and outlet centers, ended the first quarter with a lower occupancy rate of 93.3%. Brixmor Property Group (BRX +1.78%), which operates open-air shopping centers, ended its Q1 with an even lower occupancy rate of 92.1%.
NYSE: SKT
Key Data Points
For the full year, Tanger expects its same-center NOI to rise 2.5%-4.5%, but for its core FFO to dip about 1% at the midpoint. Based on that forecast, Tanger's stock looks even cheaper (relative to its P/E ratio) at just nine times its estimated core FFO for the full year.
That outlook seems stable, but Tanger won't be completely immune to a slowdown in consumer spending during a deep recession. Bargain-hunting shoppers will likely still visit its centers, but many major retailers could struggle -- or even go bankrupt -- as their full-price sales dry up.
Furthermore, Tanger's recent abrupt dismissal of CFO James Williams, a 22-year veteran of the company, raises additional red flags. Investors should probably wait for Tanger's next earnings release on Aug. 8 for more clarity regarding the macro headwinds and its CFO's departure.
Is Tanger's stock still worth buying?
Tanger is one of the most resilient stocks in the retail sector, but it shouldn't be considered a safe-haven stock yet. It could struggle again if the retail apocalypse claims even more victims, and its high debt-to-equity ratio of 3.2 could make it difficult to secure fresh funds at favorable rates.
Tanger isn't a bad investment, but its occupancy rates are still shaky and it continues to face unpredictable headwinds. Simply put, it probably isn't the ideal investment for value-seeking investors right now.
