Tanger Factory Outlet: 6 Reasons to Buy, 3 Reasons to Avoid

Shares of Tanger Factory Outlet (NYSE: SKT) have dropped 15% year to date as the S&P 500 has inched up 2%. That weak performance owes to ongoing concerns about brick-and-mortar retailers, as well as concerns that inflation, and ensuing interest rate hikes, will ding the share prices of real estate investment trusts (REITs).

Tanger also stumbled 7% after its recent fourth-quarter earnings report, although the company beat analyst estimates on both the top and bottom lines. Are investors unfairly punishing Tanger, or are they right to avoid it? Let's examine six reasons to buy Tanger and three reasons to avoid it.

Six reasons to buy Tanger

1. Tanger isn't a retailer; it's a landlord that rents out stores at its outlet centers. Therefore the best gauge of its business's strength is its consolidated occupancy rate, which hit 97.3% last quarter. That's a slight dip from 97.7% in the prior-year quarter, but it's also a sequential improvement from its 96.9% rate in the third quarter. It also represents its 37th straight year of maintaining a year-end occupancy rate of 95% or greater. For comparison, Tanger's peer Brixmor (NYSE: BRX), which owns a mix of malls and outlets, reported an occupancy rate of just 92.2% last quarter.
2. Tanger's blended average rental rates rose 12.1% annually over the past 12 months (excluding nine centers that were undergoing remerchandising projects last year). This indicates that demand for its outlet storefronts remains strong, despite the unpredictable headwinds facing brick-and-mortar retailers.
3. High occupancy rates and rising rents boosted Tanger's revenue 1.5% annually to $126.5 million during the quarter, which beat expectations by about $1 million. For comparison, Brixmor's revenue fell 1% last quarter. Analysts expect Tanger's revenue to rise 1% this year.
4. Tanger's same-center tenant sales grew 1%. That growth may seem anemic, but it indicates that most of its tenants won't go out of business anytime soon. Tanger noted during its conference call that it offered the "lowest cost of occupancy among all public mall REITs, and many of the company's tenants report that outlet stores remain one of their most profitable and important retail distribution channels."
5. Tanger's funds from operations (FFO), which is comparable to its operating cash flow, rose 11% annually to $67.5 million, or $0.68 per share -- which beat analyst estimates by a nickel. Its net income also climbed 32% to $0.33 per diluted share.
6. As a REIT, Tanger pays out most of its profits as dividends. It currently pays a forward yield of 6.1%, which was inflated by the stock's decline over the past year, and it has raised its dividend for 24 straight years.

Three reasons to avoid Tanger

1. In 2018, Tanger expects its net income per diluted share to rise between 44% and 52%, which falls slightly short of analyst expectations for 54% growth.
2. That lower estimate is based on the assumption that Tanger's same-center net operating income will be between flat and down 1% for the year thanks to expectations for lower occupancy rates and additional store closures throughout the year. This would break Tanger's 14-year streak of same-center net operating income growth, indicating that its outlets are gradually becoming less profitable.
3. Lastly, the potential double whammy of rising interest rates and inflation remains a dangerous headwind. Higher interest rates would make Tanger's dividend less attractive relative to bonds, while runaway inflation could cause retailers' prices to spike.

The bottom line

My shares of Tanger are about 7% below my average purchase price. I'm not thrilled about Tanger's expected drop in same-center net operating income, but the company still occupies one of the most well-insulated niches in brick-and-mortar retail.

As long as Tanger's occupancy rates remain high and it keeps raising the rent, renewing leases, and upgrading its existing locations, I believe the stock should remain a solid income play, even as interest rates and inflation fears punish retail REITs.

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Leo Sun owns shares of Tanger Factory Outlet Centers. The Motley Fool recommends Tanger Factory Outlet Centers. The Motley Fool has a disclosure policy.