Tanger Factory Outlet Centers (SKT 0.73%) briefly halted its dividend payments during the early days of the pandemic. The company had little choice, given the immense disruption to the retail industry caused by measures to slow the spread of COVID-19. Tanger restarted its dividend in early 2021 as the situation improved, and it's been growing the dividend consistently ever since.
On Friday, Tanger announced its fifth dividend increase since early 2021. The company boosted its quarterly dividend to $0.26, a 6.1% increase compared to the previous payment. On a forward basis, Tanger stock now sports a dividend yield of about 4.5%.
A solid recovery
Historically, Tanger has enjoyed occupancy levels at its 37 properties spanning the U.S. and Canada in the range of 97% to 99%. The pandemic pushed this metric down to 92.2% in 2020, although it would have been lower had Tanger not supported its tenants. The company offered rent deferrals, allowing some tenants to stick it out that would have otherwise closed shop.
The payoff has been a strong recovery in occupancy rates. In the second quarter of this year, occupancy bounced back to 97.2%, right in line with historical levels. Tanger has also been able to push up rents for both renewing tenants and new tenants. The trailing twelve-month blended cash rent spread, which measures the change in cash rent payments in the first year of new leases versus the final year of old leases, jumped 13.2% in the second quarter. The increase was closer to 30% for new tenants.
This strong rent growth represents a major opportunity for Tanger over the next few years. Leases accounting for 21% of annual base rent come up for renewal in 2024, with another 18% coming up for renewal in 2025. The combination of occupancy improvements and rising rents is already pushing up Tanger's bottom line. Same center net operating income rose 5.9% year over year in the first half of 2023, and core funds from operations (FFO) rose 5.4%.
Based on the results from the second quarter and the latest declared dividend, Tanger's dividend eats up about 55% of the core FFO. FFO hasn't yet fully recovered since tumbling during the pandemic, but it's been steadily rising over the past three years.
Safer than it looks
The retail industry is sensitive to economic conditions, but Tanger should be better able to cope with a recession than many retailers. Tanger's outlets offer tenants a low-cost, high-margin channel for merchandise that would otherwise need to be marked down, and it offers consumers brand-name products at lower prices than otherwise available. While Tanger will still feel some pain from a recession, its appeal to both retailers and consumers should persist regardless of the economic environment.
Tanger's balance sheet also looks good. The company has $1.6 billion in debt, almost all of which has fixed interest rates attached. Just 12% of that debt is secured by assets, and there are no meaningful debt maturities until 2026. Tanger may find itself paying higher interest rates when it starts refinancing this debt, but that won't be an issue for a few years.
Based on the midpoint of Tanger's full-year guidance, the stock trades for just over 12 times core FFO. While the company's comeback could be slowed by a worsening economy, patient investors can reap a solid and growing dividend as they wait for Tanger's recovery to drive the stock higher.
