Overall, I would consider myself a fan of REITs. But I’ve historically not been a fan of companies, REIT or otherwise, whose core business is the ownership and leasing of traditional retail outlets. However, every once in a while, I will find a firm that operates in a market I don’t like, which actually makes sense to be bullish. An example in this space that focuses on the ownership of outlet centers is Tanger Inc. (NYSE:SKT).
Come back when I last wrote about business in February of this year, I mentioned that its strong financial performance and affordability of its share price from a valuation perspective made it a still compelling opportunity. Up to that point, I had already been optimistic about the firm, having initially evaluated is a ‘buy’ in August 2019. From at that time through the February 2023 article, the stock had generated a return to investors of 109.8% compared to the 53.3% gain seen by the S&P 500. For many investors, the prospect of additional growth may have seemed ludicrous. But even so, my decision to keep the business rated as a ‘buy’ played out well.
Since the publication of my February 2023 article, the stock has generated a return for investors of 43.1%. That’s much higher than the 13.6% increase seen by the S&P 500 over the same time period. The main question now is where do we go from here? Based on my assessment, the company is far from a bad operator. But I think all the easy money is made. Because of this, I am finally downgrading the enterprise to a “hold”. But if the performance picks up stronger and/or the stock falls from here, I can see myself becoming bullish on it again.
Performance continues to impress
Basically, Tanger is doing pretty well for itself. Consider, for example, how the firm performed for the first nine months of fiscal year 2023. Revenue for that time amounted to $336.9 million. This is 3.3% over the $326.2 million generated a year ago. Working in the company’s favor was the rental income. It managed to grow by $7.4 million from $311.6 million to $319 million. The firm benefited in this regard from an increase in the utilization rate from 96.4% to 97.9%. Positive rental spreads from tenants renewing their leases and re-leasing activity helped boost this.
Of course there were other drivers behind this growth. Management, leasing and other services income increased by $1.3 million due to the addition of property management responsibilities for a center located in West Palm Beach, Florida. The company also took in just over $2 million from other revenue streams, such as electric vehicle charging, paid media, sponsorships, on-site signage and other factors.
Ultimately, the picture was positive across the board. Operating cash flow, for example, managed to go from $122.7 million to $152.1 million. FFO, or funds from operations, increased from $149.9 million to $160.2 million, while core FFO increased from $149.9 million to $159.4 million. Another important profitability metric is NOI, also known as net operating income. It rose from $219.6 million to $233.6 million, while EBITDA for the company rose from $178 million to $183.4 million.
When it comes to 2023 as a whole, management has given some guidance. The current expectation is for FFO per share to be between $1.91 and $1.95, while core FFO per share should be between $1.90 and $1.94. At the midpoint, this implies FFO of $204.6 million and underlying FFO of $213.1 million. If we assume other profitability metrics will grow year-over-year at the same rate as projected, we should expect operating cash flow of $265.3 million, NOI of $318.5 million and EBITDA of $245.5 million.
In the chart above, you can see how the company’s stock is valued on a forward basis and how it is valued using data from 2022. As you can see, the stock is slightly cheaper on a forward basis than if we were to use data from last year. But that makes sense when you consider that the business is continuing to expand. In the table below, I took two of the five price metrics and compared them to five similar firms. What I found was that two of the five companies ended up being cheaper than Tanger on an operating cash flow basis. However, when it comes to the EV to EBITDA approach, I found that our perspective ended up being the most expensive of the bunch.
|company||Price / Operating Cash Flow||EV / EBITDA|
|Acadia Realty Trust (NAK)||9.2||15.8|
|Saul Centers (BFS)||9.7||15.4|
|Features of InvenTrust (IVT)||13.2||16.0|
|Characteristics of the urban edge (wa)||13.3||15.4|
|Getty Realty Corp. (GTY)||13.6||14.7|
This mixed price is not ideal. I’d also like to point out that while the stock doesn’t look overvalued on an absolute basis, it’s slightly more expensive than when I last wrote about the firm. This can be seen by comparing the price chart now with what it was in February. This particular table can be seen below. I would like to highlight a few other factors. For starters, I understand that some investors may be concerned about debt. After all, leverage can be very risky, especially in a high interest rate environment. It’s true that Tanger has a net leverage ratio of about 5. But that’s not ridiculously high. Regarding the impact of interest rates, it is worth noting that only 5% of the company’s debt is currently variable in nature. Add on top of that the fact that only 0.5% of the company’s debt is due between now and fiscal 2026, and I’m not too worried about interest rates right now.
Another thing to mention is that management seems satisfied enough with the state of the company to continue buying other assets. In fact, on November 13, management announced that the company had purchased its 38th shopping center, which is located in North Carolina. That particular acquisition cost shareholders $70 million. It is 95% occupied and comprises 382,000 square meters of space. There are 70 stores located within it, including major clothing and footwear brands. And there’s also a catalyst that should help fuel further growth there. This is the Asheville Regional Airport expansion, which is a $400 million project that includes the passenger terminal at the airport that is expected to increase capacity by 150%. Buying high quality assets, especially when there is a catalyst to fuel further growth, is rarely a bad thing.
From what I can see at the moment, Tanger is doing a good job. All things considered, I wouldn’t go so far as to call the stock expensive. But it seems to be more or less correctly priced at this time. I have a history of selling stocks too quickly and, as such, tend to miss some of the advantages they offer. It is entirely possible that this will happen again. But even knowing this risk, I feel like a downgrade to a ‘hold’ makes more sense at this time.