After experiencing a rough year in 2020, retail in the U.S. has largely recovered in 2021 — that’s good news for companies like Tanger Factory Outlet Centers (NYSE: SKT). This real estate investment trust (REIT) has a large retail footprint and some tenants had to stop paying during the height of the pandemic. But as retail has recovered, so have Tanger’s financial results.
In this video clip from Motley Fool Backstage Pass, recorded on Sept. 16, Fool contributor Jason Hall explains that once Tanger Factory Outlet fully recovers, its dividend could nearly double from where it is right now, based on its historical payout. It’s the kind of useful investing information you won’t find by just using a stock screener.
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Jason Hall owns shares of Tanger Factory Outlet Centers. Jon Quast owns shares of Five Below. The Motley Fool recommends Five Below and Tanger Factory Outlet Centers and recommends the following options: long January 2022 $115 calls on Five Below and short January 2022 $120 calls on Five Below. The Motley Fool has a disclosure policy.
Jason Hall: I’m going to do what I tend to do with these ideas and I’m going to talk about, a real estate investment you can make in retail and the company I will talk about is Tanger Factory Outlet, the ticker is, SKT. This is a really interesting business that caught my eye, really three or four years ago as a turnaround play. Because it owned a number of retail assets that weren’t really great assets, was going through a process of turning its book and selling off properties that weren’t really part of its core, they didn’t think they had the best monetization opportunities, weren’t great for driving great traffic and growth to capture those premium rents.
The company started that process probably five years ago or so and was making great progress. Frankly, it probably saved the company from having to go bankrupt by starting that process when it did. Because, like a lot of companies that are tied to retail, man did these guys take it on the chin last March when all of their customers were told by governments in their areas, “You have to close, you can’t open for business.”
The company pivoted really quickly, cut off their dividend as quickly as they could. It’s a real estate investment trust so they are required to pay at least 90% of their GAAP [generally accepted accounting principles] earnings in dividends. But they knew, they could project they were going to take some big GAAP losses, so they cut off that dividend very quickly to preserve cash. It was a very smart move. Also, looked at all of their lines of credit, took out as much cash as they could to get it on their balance sheet, to bolster their balance sheet, to ride out this period of time and it worked out really well because the company was positioned to ride out that three or four months where so many of its customers were in a cash crunch.
The good news is that the vast majority of its customers were able to continue paying at least a portion of the rents. They had some renegotiations. They did have a couple of tenants that went through bankruptcies and were liquidated and that affected the revenues.
But fast-forward to today and this is a business that has largely recovered and there’s a couple of reasons why. No. 1, management moved quickly to position the business to get through this period. No. 2, retail, as we’ve just talked about with Five Below and with Best Buy, retail has recovered. The numbers are there, people are shopping again, people are spending. Tanger Factory Outlets retail locations are generally outdoors. I think every single facility they own is outdoors so people feel comfortable and more safe. The spaces are perfect for rerenting. There tend to be pretty uniform in size so it’s not like a big mall where you have a JCPenney or a Sears that was this massive anchor tenant and now you have to figure out how to retenant this giant space. This is not how most of their spaces are laid out, so their ability to rerent is proven to be very good.
Now, what makes this stock really compelling to me right now? I think it’s a great opportunity at the valuation, at the price you can buy this business for. You buy the stock today, it’s around $17 and change — it’s down about 15% from its high, which was reached late this spring. A lot of anticipation this spring, everything was going to reopening. This was one of the reopening trade stocks. You see where it went from the beginning of the year through the spring just absolutely skyrocketed, has given up some since then, and I think that’s created an opportunity for investors. You think about the dividend yield today on their reimplemented dividend, it’s about 3%.
Here’s the thing, you don’t have to go back that far to when the dividend was $0.355 a share. At today’s stock price, today’s price, that’s a 9.6% yield on today’s price. Obviously, they’re not paying this dividend yet. They’re still paying a lower dividend rate but this will be the dividend sooner rather than later. There’s a little bit of a bet by buying now that you’re going to lock in a substantial amount of dividend growth over the next two or three years, yield a really impressive yield on cost. That’s going to make it a wonderful investment to hold and then their strategy on their turnaround has paid off. The balance sheet’s in quite good shape considering everything that’s happened and it’s the kind of retail that I think is going to prove to be not just resilient, but the retail that’s going to have staying power. I really think that’s going to be the case, so love this business.