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Home / Business / Anger at Tangier: How to Know If It's Time to Sell – Tanger Factory Outlet Centers, Inc. (NYSE: SKT)

Anger at Tangier: How to Know If It's Time to Sell – Tanger Factory Outlet Centers, Inc. (NYSE: SKT)





(Source: imgflip)

I've been a professional analyst and investment journalist for five years, and one of the core principles I have is to continually improve my analysis and investment strategy through history-learning and the biggest ones Investors of all time (like Buffett, Lynch, Dodd and Graham). This not only applies to research at Simply Safe Dividends (over 200 companies per year), but also to my articles on Seeking Alpha and how I run my age portfolio, which includes all my life savings.

Recently I ended the recession. I am reviewing my retirement portfolio and adopting a pure, Buffett-inspired "fat pitch" investment style focused exclusively on blue chips and sleeping well at night or SWAN stocks, including the 14 limited buy orders I currently have. I define blue chips and SWANs (which have nothing to do with short-term price risk, but corporate quality and dividend security) with my new proprietary Sensei Quality Score or SQS. At this scale, all companies in my watch list (now 119 companies growing during the annual SSD updates) are rated on an 11-point scale based on three criteria:

  • Dividend security (5 points) : Cash Flow, Balance Sheet, Cash Flow Stability
  • Business model (3 points): "Degree of moisture", ability to return capital above cost of capital, long-term growth potential
  • Management quality (3 points): Success of capital allocation, including dividend-friendliness

All dividend stocks can be rated at 3 to 11 on this scale, but I personally just think of recommending readers to invest in those with values ​​of 7 or above.

  • 7: "Dirty Value" only buys a low discount on fair values. Value: Hold positions to 2.5% of the portfolio or less.
  • 8: Blue Chip: Looking for a modest discount on fair value, hold the positions at 5% or less.
  • 9+: SWAN Share: Buy at Fair Value or Better. Limit positions to 5% to 10%

You will find that even for level 9 or above SWAN stocks, I continue to recommend good risk management across a diversified portfolio. These include position caps (5% to 10% for most people), sector limits (15% to 20% is a good rule of thumb), and proper asset allocation (sufficient cash / bonds to avoid selling stocks during a bear market) Paying bills.)

The reason why risk management is so important is that all investments are probabilistic and even the best blue chips can fail. The legendary investor Peter Lynch, who scored a total of 29% CAGR total returns from 1977 to 1990 with the Fidelity Magellan Fund,

said: "In this business if you're good, you're right six out of ten You will never be right nine out of ten … All you have to invest successfully for a lifetime are a few big winners and the benefits of that will overwhelm the negatives of the stocks, which does not work … The typical big winner … in general takes three to ten years. "- Peter Lynch (emphasis added) [19659014] Lynch, who also said That some of his best ideas took up to four years to pay off is an example of the best long-term investment approach, which involves tight risk management, a strong focus on fundamentals, and good diversification contains portfolio (the Magellan Fund had at times up to 700 positions).

The more I learn and grow as an analyst (and focus more and more) The better the risk management, the better my recommendations and the returns on the provisioning portfolio.



(Source: Tipranks)

It will only be Over time, if my good analyst success rate is above Lynch's 60% salary mark, my constant quest to continually improve my work, methodology, and recommendations will ultimately be extremely lucrative for both me and my readers however, the important reason for my growing success rate is the focus on risk, especially in terms of dividend security and valuation.

When I explained the three reasons, I had invested $ 7,000 of my retirement portfolio in Tanger Factory Outlet Centers (SKT). At $ 20.25 per share, I warned readers that a company, no matter how valuable a business, never to put on a farm by taking a too big position.

With all companies there is the risk that they break their investment thesis. When that happens, you can best sell instead of potentially ripping a broken company to zero (like Sears, once the largest retailer in the world).

Last week, I made my annual deep dive at Tangier for Simply Safe, part of our annual blue-chip test, which also applies when I update my quality ratings to minimize the likelihood that a broken company will be recommended to readers will (or it will be bought for my own portfolio).

Unfortunately, I have to report that Tangier is downgraded from a level 9 SWAN to a level 8 blue chip due to the ongoing battles with the third turnaround. Let's take a look at how my SQS assesses Tangier, what high-yielding investment opportunities this currently represents, and most importantly, what it would mean for Tangier's thesis to break completely, and that I need to downgrade it to a sale.

Dividend Security 4/5: Still Safe, But High Dividend Development for Now

The first thing I see about equity securities is the safety of the payout. After all, my goal, and that of most of my readers, is to earn a steady and growing income over time, regardless of what the market, the economy, or interest rates do. That's why 45% of my Quality Score is based on the security of dividends.

Share Yield AFFO payout ratio of 2019 Sensei Dividend Safety Score (Out of 100) Sensei Dividend Safety Score (Out , 0% 75% 72 (Safe) 4/5 (Safe)
S & P 500 1.9% 33% ] NA [19659029] NA

(Sources: Simply Safe Dividends, Management Guidance, Analyst Estimates, Yardeni Research)

Tangier retains a 4/5 on my dividend safety metric, and the Simply Safe Dividends algorithm also scores highly and considers it one secure payout. This is even the case when management announced on April 1 that it is selling four of its oldest and below-average stores.

Tangier is collecting $ 129 million for these four centers, which represents $ 44 million in capital gains, representing 6.5% of the total and 5.1% of total net operating income. CEO Steven Tangier explains that this sale is a strategic decision to improve the overall quality profile of the REIT as part of the overall turnaround.

"By completing these asset sales we are strengthening the overall quality and lowering the average age and improving the longer-term growth profile of the portfolio .We believe that the benefits of these disposals over time are the expected short-term Earnings dilution will more than make up for these assets are not expected to generate long-term cash flow growth that we expect from our core portfolio. Our dividend remains well covered by the sale of these assets. "- Steven Tangier Emphasis added)



(Source: Sales of the Center of Tangier) Press release)

The sale will significantly improve Tangier's portfolio quality, as you can see that the four centers sold

  • 23% less turnover per square foot [19659005] in 201 had a negative turnover per square foot 8
  • ger lower occupancy rate
  • Horrible leasing spreads of -10.2%

Leasing spreads are one of the two key quality metrics that Tangier pays attention to, as it shows how much more can be said to exist for existing leases replaced by new ones. 10% leasing spreads are considered a good benchmark for ensuring that the property portfolio of a REIT is of high quality and can attract strong and thriving tenants.

The proceeds from the sale of the assets will repay the debt, in particular the revolving credit facility.

19659050]

(Source: Investor Presentation)

This $ 129 million will repay 7.5% of Tangier debt and help improve an already strong second half of the safe dividend equation , Leverage Ratio

Interest coverage ratio

[

] S & P Credit Rating

Avg. Interest rate

19659030]

5.9

5.2

BBB (stable)

[19659029]

3.7%

[194590120] [1945900120] Sector Average

5.8

3.4

[19456501]

] NA

NA [19659068] (Sources: Winner's Supplement, Gurufocus, Morningstar, FastGraphs Conference Call)

Prior to the sale of assets, Tangier's leverage ratio was on average in the REIT sector average, but the interest coverage ratio was much higher. After the sale, Tanger's leverage will fall to around 5.5 and interest coverage will even increase (and is already among the highest in the sector).

Tangier was historically very conservative, with the debt considerably exceeding Covenant's.



(Source: Investor Presentation)

Covenants are important credit metrics that allow creditors to borrow immediately. Fearing breaches of the Alliance, 87% of all REITs were cut or exposed to dividends during the financial crisis. Tangier was one of twelve equity REITs to avoid this fate, and actually increased the dividend, albeit at a low interest rate.



(Source: Investor Presentation)

As a result, Tangier has just raised its dividend (by 1.4% for 2019) for the 26th time in a row. That makes him a dividend champion and, if he's big enough to be in the S & P 500, a dividend aristocrat.

If Tangers record is strong, the payout ratio is good and the record at the Elite of REITdom, why it has no 5/5 payout security? And why did I just downgrade it from a Level 9 SWAN to a Level 8 blue chip?

Here the problem with the business model came into play.

Business Model 1/3: High Uncertainty Regarding the Business Model

The CEO of Tangier has a quote about why Tangier has been so successful over time. "In good times everyone likes a bargain, in bad times you need a bargain."

(Source: Investor Presentation)

As a result, Tangier was likely to maintain remarkably high and stable occupancy over various business cycles.

This also explains why the Tangier guidelines for 2019 are so worrying and that stocks have fallen 5% since their release.

  • 2019 FFO / Share: $ 2.34 (-6%) now -9% after asset sales
  • Average Occupancy 94.3%
  • Same Center Store NOI: -2,4 %

Note that after the sale of assets, the FFO / share forecast for 2019 drops to $ 2.25, a 9% decrease in cash flow per share. The growth forecast of SS NOI remains unaffected.

Since its IPO in 1993, Tangier's annual capacity utilization has never fallen below 95%, even during the Great Recession. However, after a record number of store closures in 2017 and 2018 and several tenant bankruptcies, Tangier will record the weakest financial results of all time in 2019.

Here's the explanation from Steven Tangier of the Citi Global Property Conference

Another Big Disruptor Our business was private equity, which fell in love with specialty retail a great deal of great brand names, which were led by real traders, and their destruction by an enormous debt. That caused at least 20 bankruptcies in the last 3 years. Bankruptcies have room for us overnight whereas if we had a normal, orderly process of working with our tenants a year, if we knew their plans and knew our plans, we could Change room if they would not continue. "- Steven Tangier (emphasis added).

Essentially, Tangier says that an unprecedented amount of bankruptcies, as well as difficult clothing companies (many of which are their biggest tenants) are causing these unprecedented financial difficulties.



(Source: Investor Presentation)

Due to many unexpected closures of branches, Tangier will have to use short-term leases at discounted prices to maintain good occupancy and uninterrupted foot traffic ( the center is healthy and full of private customers).



(Source: Investor Presentation)

However, this has had a significant impact on total leasing spreads, which were 6% in 2018, even for the just-announced asset sales. That's less than half the levels seen during the Great Recession.

The good news is that Tangier is confident that it will be able to adapt and overcome these current tenant issues, which in his opinion are only temporary.

I would also like to point out that are the main tenants 10 years ago and 15 years ago our real estate was just a distant memory and we could always find new names . That's what we do … We look for new tenants and talk to them wherever we can find them – find them. "- Steven Tangier (emphasis added).

For Tangier to make a turnaround The company needs to maintain quality assets with heavy traffic and increasing sales in the same stores to provide good value for retailers without that organic growth of SKT is no longer normalized.



(Source: Investor Presentation)

Tangier's turnover per square foot reached its peak in 2015. After that, it declined for two years, rising to $ 392 (near the dollar) all-time high in the fourth quarter. As a result of these four divestments, revenue per square foot of the remaining properties was also $ 392 per year. This highlights an important part of the Tangier bullish thesis on which my recommendation was based (and my investment of $ 7,000).



(Source: Hoya Capital Real Estate)

While it is certainly true that there have been a record number of closures and bankruptcies in recent years, this is no sign of stationary trade dies. The industry as a whole is actually thriving, but certain retailers who can not compete in this dismal business are rising.

And even though clothing is undoubtedly challenged by the rise of e-commerce, this is not the case of the dodo.



(Source: Hoya Capital Real Estate)

Apparel purchases as a whole also show a strong upswing, suggesting that Tangier is optimistic restless tenants by healthier, as it always does, it seems justified.

This explains why Tangier went ahead and announced it was preparing to build a new 280,000-square-meter Nashville center, a 1.9 million square-foot subway area that would receive 14.5 million visitors annually. Although this center has not been completed, management would probably have announced no plans for completion in 2021 or 2022 unless it was confident that it could secure the required 75% pre-leases before the construction of a new center was completed has been. [19659101] In other words, the management of Tangier is confident that "this time around is not different" and that the current growing pains are only temporary.

The other important metric that I see as proof that the business model remains intact is the long age of the REIT. Lease premiums.



(Source: Investor Presentation)

The thriving tenants of Tangier want to save costs over time and therefore prefer long-term leases. The linear REIT item 2018 (taking into account the total rents, including the annual escalators) amounts to renewed long-term leases, amounting to 11.1%. Although this is a decrease of 13.2% in 2017, it is still a strong figure. Above this quality threshold of 10% I oversee the feasibility of the basic business model of this REIT.

Basically, Tangier's revenue per square foot is doubling The long-term lease-long spreads tell me that the underlying business is challenged but not broken, as management has said in recent years.

But not only me and Tangier believe in it. On March 12, Moody's stably downgraded Baa1's outlook for Tangier's debt to Baa1. Baa1 is the S & P equivalent of BBB +. Moody & # 39; s stated in its downgrade note that it is about the deterioration of REIT's operational fundamentals, but also that it affirms the BBB + rating equally.

Moody's confirmation of Tangier's high unsecured rating includes his good financial flexibility . with no significant debt maturities until 2023 when $ 250 million of senior unsecured debt becomes due … The negative outlook reflects . Moody's expectation that Tangier's operating results will be questioned and without a sustainable turnaround with positive growth from SS NOI, the current rating threatens a downgrade . Any downward revision of the earnings forecasts would also lead to a downgrade. Any positive rating action would require an improvement in SS NOI operating trends and sustainability (at least 95%) . It would also be necessary to maintain current credit metrics with net debt to EBITDA of less than 6.0 and a fixed fee overlap of over 4.0. "- Moody's (emphasis added)

Basically, Moody's says that Tangier's credit will be considered BBB + worthy IF it can stop its negative SS-NOI crash and keep its credit metrics stable: The payment of $ 129 million in debt after $ 50 million as of 2018 is Tangier's aim to ensure that Moody's rating is not downgraded to the same investment-grade rating, the S & P just did.

But as far as S & P is concerned, what we have to say about its downgrading from BBB + to BBB stable was

The Stable Outlook reflects S's conviction & P reflected that Tangier can successfully control the renter's interruptions while maintained stable credit protection measures for the next two years despite the challenging operating environment . "- ​​S & P (emphasis added) [19659116] In other words, if Moody's and S & P had declared that Tangier's business model was cursed, they would have lowered their ratings and given negative prospects for further cuts.

Ok, so management can finally return to historic growth rates, and the big rating agencies do not think Tangier is a sinking ship. Is there any other evidence that Tangier is a potentially attractive high-value blue chip at these near-ten-year lows?

There is actually one. Analysts revised their recent growth projections to consider the sale of Tangier assets and management's statements at the recent analysts' conference.



(Source: FAST Graphs)

In 2019, they believe management will record a -9% lead for FFO / share, and a growth in 2020 of -1% expects growth of 3% in 2021. Over the past 20 years, Tangier's cash flow per share has increased to 3.1% (CAGR). This means that despite all the headwinds and challenges Tangier faces, Wall Street still believes that management will succeed.

But if Tanger's thesis is not broken and analysts, management, and rating agencies think the REIT will eventually get back in shape, why did I downgrade Tangier's business outlook and set a point in my quality score? Two words "recession risk".



In February, the New York Fed updated its estimate of a recession, which began in January 2020, to about 50%, the highest level in a decade. The Cleveland Fed has its own recession probability model, which is based on the most accurate recession predictor in history, the 10y-3m yield curve.



(Source: Cleveland Federal Reserve)

The Cleveland Fed's monthly recession probability model estimates the 33% chance of recession within one year. And no less than Steven Tangier told analysts at the Citi Property Conference that he believes a recession is likely to begin in 2021.

Given Tangier's great success story, which has gone through no less than two recessions since its IPO, including the worst downturn since the Great Depression, why did I downgrade Tangier's business model by one point? Since the business model value is based on long-term growth potential, it is invested over a period of five years.

Tangier's record today is more than ever a fortress, and the dividend is secure thanks to a low payout ratio. and a self-financing business model that does not depend on stock markets.

However, we can not forget what Steven Tanger said about the current tenant mix, which is completely different than the one 10 or 15 years ago. In other words, the business model value must take into account the risks that "this time may be different". In the case of Tangier, this means that the current tenant mix may not prove as resilient in a future recession as in the past two years.

In addition, analysts believe that Tangier's growth will decline to a historic 3% by 2021 (if this recession is likely to occur, according to CEO), it is expected that Tangier will not face unexpected store closures in the last two years Years ago.

The downgrade from 2/3 to 1/3 isn There is no indication that I think Tangier is condemned to the ash heap of history. Rather, it is taken into account that Tangers turnaround time line is delayed further and further. In fact, if there is a recession in 2020, there is a real danger that Tangier will face many more short-term lease challenges by reducing its leasing rates or potentially negating them.

This is unlikely Following a dividend cut, Tangier could extend the turnaround beyond 2021 to cover the entire next five years. This, in turn, could lead to flat cash flow growth by 2024, which is much less growth than I had anticipated. This is not to say that such a scenario is likely, only that the risk has increased compared to a few months ago.

But while Tangers risks have increased, the reason why I do not sell or commend the stock is the quality of the management team, which I absolutely trust to manage my hard earned money well.

Management Quality 3/3: If anyone can adapt to the harsh industry conditions, it is Tangier

Tangier was founded by Stanley Tangier in 1981 and literally pioneered the Premium Outlet Center model Today, it is run by CEO Steven Tangier , the son of the founder, headed. Steven has been with the REIT since its IPO in 1993 for 26 years. For 24 of these years, he was either CEO or COO, which meant he was in charge of day-to-day operations. In the outlet center industry, there are few people who have more experience of adapting to the changing tastes and risks of consumers than Steven Tangier.

In the past 38 years and 1945, we have proven ourselves to effectively master the ever-changing retail landscape and we expect to overcome the challenges we face today as we aggressively seeking new tenants and opportunities to enhance Tangier's performance. We value maintaining a fortress record and the stability of our well-covered dividend. "- Steven Tangier (emphasis added)

This is the point that Tangier made at the Citi Property Conference, and I love that my money is being managed by someone who is not just about the turnaround of the long term future but focused on the balance and security of dividends, after all, I bought Tangier at a yield of 7% I am paid almost like the historical return of the market (9.1% since 1871) for dividends. [19659131] If Tangier is immovable for several years, I will not be too disappointed as long as management can ultimately do so through my thesis of a return to 3% historical cash flow and dividend growth.



(Source: Investor's presentation)

Ultimately, good management is all about capital allocation, especially when you know when and where to start investing in a timely manner egt hard. Tangier was very disciplined with his approach of growing organic by building new centers. It is not overbuilt and never allows its growth ambitions to create a dangerous debt that could jeopardize the dividend.

Of course, a good management team can not just be a Rockstar CEO. Fortunately, Tangers Bank is deep and includes

  • Thomas McDonough: COO, 35 years industry experience and a degree in Stanford and an MBA from Harvard
  • CFO James Williams: Who has been with Tangier since the 1993 IPO
  • The Directors Thomas Robinson, Bridget Ryan-Burman and Susan Skerritt, both with over 90 years of experience in Tanger relevant industries.

Unter dem Strich gehen alle Blue-Chip-Unternehmen auf harte Pfade, sogar auf Dividenden-Champions wie Tanger. Während Turnarounds nie zum Erfolg führen werden, besteht die Chance, dass ein Unternehmen zu historischer Größe zurückkehrt, mit einem großartigen Managementteam und einer soliden finanziellen Basis, die es ihm ermöglicht, sich anzupassen und den unvermeidlichen Wachstumswind zu überwinden.

Tanger behält mein Vertrauen Es reicht aus, es nicht nur für Anleger zu empfehlen, die mit tiefen Wertewandelkursen zufrieden sind, sondern auch viele der Aktien selbst zu besitzen (3% meiner gesamten Lebensersparnis).

Der Schlüssel für eine gute Wertschöpfung ist die Anerkennung der fundamentalen Qualität (dargestellt) durch einen Qualitätsfaktor von 8 oder höher) und um eine Aktie zu kaufen, die am meisten gehasst ist, wenn die Sicherheitsmarge hoch genug ist, um Sie für die Risiken des Brechens der These zu entschädigen.

Da es sich bei guten Investitionen jedoch um gutes Risikomanagement handelt, Sie müssen auch definieren, was "Thesenbrechen" eigentlich bedeutet. So vermeiden Sie es, den nächsten General Electric (GE) zu besitzen und eine Dividendenaktie mit riesigen Verlusten zu fahren, da die Räder vollständig aus dem Bus geraten.

Wie Sie wissen, ob es Zeit ist, Tanger zu verkaufen



(Quelle: imgflip)

Ich kaufte Tanger wegen der langfristigen Dividendenwachstumsthese, die auf drei Dingen beruhte

  • einer sicheren 7% -Dividende
  • deren langfristiges Wachstum letztendlich zu einem historischen Vielfachen von 3%
  • zurückkehrte Ausweitung auf eine etwa historische Norm (großer Bewertungsschub, der ein sehr starkes Gesamtrenditepotenzial schafft) nach erfolgreichem Abschluss der Trendwende

Damit dies geschehen kann, beobachte ich insbesondere zwei Metriken am genauesten. Das sind

  • Verkäufe pro Quadratfuß: Sie sollten weiter steigen, wenn das Management seine Arbeit richtig macht.
  • Langfristige Mietspreads: Sollte zweistellig bleiben, so dass wohlhabende Mieter immer noch einen Wert in den Eigenschaften von Tanger finden

Solange diese Dinge zutreffen, bin ich zuversichtlich, dass Tangers Wende letztendlich gelingen wird und geduldige langfristige Anleger reich belohnt werden. In einer Rezession könnte jedoch das Risiko dieser beiden Metriken, des Kanarienvogels in der Zeche in Bezug auf die Tragfähigkeit des Geschäftsmodells von Tanger, rot blinken.

Wenn sich diese beiden kritischen Metriken gegen Tanger wenden, dann werde ich es tun Ich muss mein Ranking des Management-Teams neu bewerten und es möglicherweise von einer 3 auf eine 2 herabstufen, was den Qualitätsfaktor von Tanger auf 7 herabsetzen und eine "schmutzige" Aktie bilden würde, die nur für risikotolerante Anleger und nur bis zu einer angemessenen Bewertung geeignet ist 2,5% Position in einem diversifizierten Portfolio. Wenn sich diese Metriken in zwei aufeinanderfolgenden Jahren in die falsche Richtung bewegen, muss ich Tangers These für gebrochen erklären und kann sie nicht mehr empfehlen (oder besitzen).

Ok, also haben wir uns jetzt mit Tanger befasst Ich riskiere, warum ich immer noch an diesen erstklassigen Blue-Chip der Stufe 8 glaube und was mich dazu veranlassen würde, ihn zu verkaufen. Ich halte Tanger für absolut wert.

Total Return-Profil / Bewertung: Verschlechterung der Fundamentals bedeutet potenziell niedrigere Gesamtrendite Potenzial über fünf Jahre, aber zehnjähriges Potenzial bleibt bestehen



(Quelle: YCharts)

Ich verstehe voll und ganz die Wut, die viele Investoren von Tanger empfinden, wenn jemand einen positiven Artikel über den REIT schreibt. Seit dem Höchststand von Mitte 2016 hat Tanger sowohl REITs im Allgemeinen als auch den breiteren Markt massiv hinter sich gelassen.

Die Bewertung ist deshalb so wichtig. Bei seinem 2016-Hoch (während der REIT-Blase) notierte Tanger bei 18,1-mal dem FFO, verglichen mit einem 20-jährigen Durchschnitt von 14,8. Das bedeutet, dass die Aktie zu etwa 20% historisch überbewertet war. Es ist nie eine gute Idee, einen fast 20-fachen Cashflow für einen REIT zu zahlen, der im Laufe der Zeit in der Regel um 3% wächst.

Im Gegensatz dazu handelt Tanger heute mit nur 9-facher Prognose des Managements für 2019 FFO, was einen erheblichen Abschlag gegenüber dem historischen Wert darstellt fairer Wert. Wenn Analysten Recht haben und Tanger schließlich auf ein Wachstum von 3% (2021 und darüber hinaus) zurückkehrt, ist die Aktie heute wahrscheinlich um 38% unterbewertet.

P / FFO

Durchschnittlicher 20-Jahres-P / FFO

Implizierter langfristiger FFO / Aktienwachstumsrate

Analyst Expected Growth Rate

9.0

14.8

0.7%

0.5% to 3.0 %

(Sources: management guidance, FAST Graphs, Benjamin Graham)

The biggest risk to owning Tanger, other than the business model totally breaking, is how long the turnaround takes. Today, shares are priced for about 0.7% long-term growth. Due to 2019 and 2020's negative growth expectations that could result in several more years of weak returns.

That's because the stock is currently priced for roughly the same growth rate analysts expect over the next five years. But since stock multiples are generally a function of future growth expectations, Tanger's multiple should start increasing rapidly if management can deliver on that 2021 3% growth expectation.

If the turnaround drags on for several years beyond that, say due to a recession, then Tanger's dirt cheap multiple might persist, resulting in total returns in the high single or low double-digits.

Stock Yield Long-Term Expected Cash Flow Growth Total Return Expected (No Valuation Change) Valuation-Adjusted Total Return Potential
Tanger 7.0% 0.5% to 3.0% 7.5% to 10.0% 15.4% to 20.4%
S&P 500 1.9% 6.5% 8.4% 1% to 7%

(Sources: Simply Safe Dividends, Multp.com, F.A.S.T. Graphs, analyst estimates, Morningstar, Gordon Dividend Growth Model, Moneychimp)

Ultimately, Tanger is likely to still make a good investment, even if the valuat i on doesn't return to historical norms for a decade. That's courtesy of that 7% dividend that could outperform the market all on its own (based on Morningstar's 2019 survey of leading asset managers).

What does that mean for anyone considering Tanger today? Well, at a 38% historical discount to fair value, I still consider this a firesale price. But just remember that as a turnaround stock, only those comfortable with the risk profile (which is complex, to say the least) and the patience to let management work on its plan for several years should consider investing in this REIT.

Bottom Line: Tanger Remains A Solid Deep Value High-Yield Opportunity But Is No Longer A SWAN Stock Until We See Progress On The Turnaround

I'm sure I'm going to take a lot of flak for this article, especially from Tanger bears who have been predicting the REIT is doomed. I don't consider the thesis broken, just weakened, enough to warrant a downgrade from SWAN status (per my quality score metrics).

Let me be very clear that I never said that Tanger or any dividend stock was a "sure thing" because all stocks are risk assets, which is why literally every company specific article I write includes a risk-section (sometimes up to 33% of the entire article).

The job of a good analyst is to not try to be popular in the short term (such as by pumping "hot" stocks) or blindly ignore changing fundamentals (contrarians that refuse to admit they are wrong). Not even the greatest investors in history avoid making some mistakes and the risk with any deep value turnaround stock, which Tanger most certainly is, is that the turnaround fails.

Tanger's hasn't yet, but the evidence piling up is now pointing to the REIT not returning to positive cash flow growth until 2021, and even that analyst forecast comes with a lot of uncertainty. If Steven Tanger is right and a recession comes in 2021, it's possible that the REIT's tenant and occupancy troubles will persist for far longer than I (and all bulls) initially anticipated.

While the dividend is likely to remain safe even through a recession, the long-term thesis under which I bought and recommended Tanger is not just based on a safe 7% yield, but a return to a 3% historical growth rates.

In order to accomplish that there are two crucial metrics that I'll be watching, that will tell me whether or not the stock's thesis has broken.

  • sales per square foot: if they begin dropping long-term lease spreads will probably decline
  • long-term lease spreads: if they fall below 10% then organic growth won't be able to generate good long-term cash flow and dividend growth

For now, Tanger remains a good potential deep value buy BUT only for those who are comfortable with turnaround stocks like this, and who owns it as p art of a well-divers ified portfolio. For me, Tanger is 3% of my life savings, and given the quality of the management team, strong balance sheet, and safe dividend, plus the valuation I bought it at (near a 10 year low), I'm not losing sleep over Tanger's downgrade.

But if the turnaround struggles continue for long enough and fundamentals keep deteriorating, I'll be forced to downgrade the stock and eventually sell it. In that case, I'll likely be looking at a small loss of capital (under 0.5% including dividends).

This highlights the importance of good risk management, no matter what you buy. Never forget that all companies have the potential to fail, which is why analyzing a stock's fundamentals on an annual basis is a good idea. That allows you to spot trouble early enough to avoid owning the next General Electric when the wheels totally fall off the bus and long before a dividend cut sends the stock plunging to once unimaginable lows.

Disclosure: I am/we are long SKT. I wrote this article myself, and it expresses my own opinions. Ich bekomme keine Entschädigung dafür (außer von Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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