Investing in REITs? Here's What to Look For

Steven Tanger reveals the three things investors should keep in mind when evaluating a real-estate investment trust.

Motley Fool Staff
Motley Fool Staff and Tom Gardner
Apr 14, 2014 at 6:34PM

Steven Tanger joined Tanger Factory Outlet Centers (NYSE:SKT), founded by his father in 1981, as the company's fourth employee. The company grew to 13 outlet centers by 1992, and the following year it became the first outlet-center developer to be listed on the NYSE as a publicly traded REIT, under the ticker symbol SKT. Tanger has been president and CEO since 2009, and the company's portfolio, growing steadily, now includes over 40 outlet centers across the U.S. and in Canada.

In this video segment, Tanger lists the three qualities he would look for when considering a real estate investment trust such as Tanger Outlets. He also explains how investors could have spotted Tanger's potential when it first went public in 1993, before it met the criteria applied to more established REITs.

Tom Gardner: Last couple of questions: For investors who have never invested in a real estate investment trust, can you just give the basic dynamics -- the basic distribution of 90% of net income, the restriction on total inside ownership of the business -- just any of the factors that are true about a real estate investment trust, and then maybe one or two things that you would look for as an investor in those types of companies.

Steve Tanger: Let me take it in reverse order.

Gardner: Yeah, great.

Tanger: One thing I look for as an investor is stability -- a balance sheet that's a fortress. We just raised $250 million of unsecured 10-year money at 3-7/8 on Monday.

Gardner: Wow.

Tanger: We are the only REIT to have been upgraded by both Moody's and Standard & Poor's this year. We are one notch below an "A" rating, which is pretty impressive for a company our size.

I would look for a company that has provided a steady stream of income. We have, since the day we went public 20 years ago, every year raised our dividend -- consistently, every year, through the good times and bad years.

Gardner: Always a good indicator.

Tanger: There is a group, I'm told, called the Dividend Aristocrats, which is a group that's raised their dividends in each of 20 consecutive years -- and there are not many companies that have that consistency.

So, I look for a long track record of raising dividends and paying dividends that are well-covered, a balance sheet that's a fortress to get through good times and bad times, and a seasoned management team. Those are the three things I'd look for.

Gardner: For the fun of it, I'm going to jump in and ask, what would you look for to find Tanger in 1993, where you didn't have all of that full evidence of dividends being raised. Let's say a REIT that has just come public, or has one or two years in the public markets, and is showing the dynamics, the factors and traits, that Tanger did back in '93.

Tanger: We went public, and our dividend yield the day we went public was 7.47%. It's a 747, that's how I remember it! Our initial public offering was 30 times oversold, because we had a long runway to grow, which we did.

The public markets embraced the growth story and the higher dividend to attract people. We went public and we raised $100 million, and paid off $100 million in debt. It's been a long ride since '93 to today, at about a $4.7 billion enterprise value. People are attracted to various things, but in 1993, I think they were attracted as an initial public offering to the growth story.

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