Looking for Oversized Dividends? Read This
If you’ve been following my writing, you’d know that real estate investment trusts (REITs) are some of my favorite income investments. Many REITs are essentially landlords with large real estate holdings. They simply collect rent from the tenants and pass the money on to shareholders in the form of dividends.
Of course, despite their solid business model, REITs are still just stocks trading in the market. That means their share price could be volatile.
And just like other dividend-paying stocks, there is an inverse relationship between a REIT’s dividend yield and stock price. That is, at a given cash dividend rate, if a REIT’s share price falls, its yield will go up.
Obviously, beaten-down high yielders are not usually known as the safest bets. But you might want to make an exception for Tanger Factory Outlet Centers Inc. (NYSE:SKT).
Allow me to explain.
Tanger Factory Outlet Centers Inc. Is a High-Yield Stock
Headquartered in Greensboro, North Carolina, Tanger is a REIT with a portfolio of 39 upscale outlet shopping centers. The properties, which are located in 20 U.S. states and Canada, total approximately 14.3 million square feet. They are leased to more than 2,800 stores operated by over 510 different brand-name companies. (Source: “Management Presentation,” Tanger Factory Outlet Centers Inc., January 27, 2020.)
Now, if you’ve been following the markets, you can probably tell where this is going just based on the description of Tanger’s business. Over the past several years, the retail industry in North America hasn’t been in the best of shape. There have been plenty of store closures at malls, and even some of the most well-known retailers have gone out of business. As a result, REITs that have retailers as tenants have been scrutinized, and mall REITs are far from being hot commodities at the moment.
Looking at Tanger Factory Outlet Centers, Inc., we see that the company’s share price has gone from $39.35 to $13.57 over the past five years, marking a drop of more than 65%. Ouch!
But as I said, there’s an inverse relationship between dividend yield and stock price. So if Tanger was maintaining its payout during this period, the stock price downturn would give a huge boost to its yield.
The thing is, Tanger not only managed to maintain its payout, but was actually increasing it. In fact, since the company completed its initial public offering (IPO) in May 1993, it has raised its dividend every single year. (Source: “Dividends & Tax Information,” Tanger Factory Outlet Centers Inc., last accessed February 10, 2020.)
The latest dividend hike arrived in January, when Tanger’s board of directors approved a 0.7% increase to the company’s annualized dividend rate to $1.43 per share. The new dividend level translates to quarterly payouts of $0.3575 per share and will begin with the May payment. (Source: “Tanger Reports Fourth Quarter And Full Year Results,” Tanger Factory Outlet Centers Inc., January 27, 2020.)
Combining a rising per-share payout with a declining share price, Tanger has become one of the highest-yielding REITs on the market. Trading at $13.57 per share, SKT stock has an annual yield of 10.5%.
Is the Dividend Safe?
As risk-averse income investors, whenever we see a high-yield stock, it’s important to check whether the company can actually afford its payout. So let’s take a look at Tanger’s business.
Given the size of SKT’s share-price tumble, you might think that business must be deteriorating at the company. But a look at some of the REIT’s key operating metrics would show that the situation might not be as bad as the critics had thought.
For instance, on December 31, 2019, Tanger Factory Outlet Centers Inc. had a consolidated portfolio occupancy rate of 97%. This represented an improvement from the 96% occupancy rate on September 30, 2019 and the 97% occupancy rate at the end of 2018.
Also, for all renewals and re-tenanted leases commenced in 2019, the blended average rental rates increased 2.7% on a straight-line basis.
But of course, it’s not all sunshine and rainbows. In particular, the same-center net operating income for Tanger’s consolidated portfolio slipped 0.4% for the fourth quarter and 0.7% for the full year. The decline was mainly due to the impact from store closures, lease modifications, and tenant bankruptcies.
And because Tanger is a REIT, one of the most-watched financial metrics is funds from operations (FFO). In the fourth quarter, the company’s FFO available to common shareholders came in at $57.5 million, or $0.59 per share. While the amount was lower than the $63.1 million, or $0.64 per share, of FFO earned in the year-ago period, it was more than enough to cover the $0.355-per-share dividend declared and paid during the quarter.
In full-year 2019, Tanger Factory Outlet Centers Inc. generated $221.7 million, or $2.27 per share, in FFO. Again, the amount was less than what the company earned in the prior year, but it still covered its total dividends of $1.415 per share paid during the year with ease.
When we analyze the dividend safety of REITs, we often calculate its payout ratio by dividing its dividend payment by its FFO in a given reporting period. But in Tanger’s earnings releases, the company also reports something called funds available for distribution, which it then uses to calculate its payout ratio.
This company calculates its funds available for distribution by taking FFO then “excluding corporate depreciation, amortization of finance costs, amortization of net debt discount (premium), amortization of equity-based compensation, straight-line rent amounts, market rent amounts, second generation tenant allowances, capital improvement expenditures, and our share of the items listed above for our unconsolidated joint ventures.” (Source: Ibid.)
In 2019, Tanger Factory Outlet Centers generated funds available for distribution of $198.2 million. That resulted in a funds available for distribution payout ratio of 70% for the year.
In other words, despite headwinds from the retail industry, the company still had a sizable margin of safety in its dividend policy.
Tanger Factory Outlet Centers Inc.: Will Retail Headwinds Persist in 2020?
Because the retail industry is yet to recover—the media is still using the phrase “retail apocalypse” in the headlines—investors have been wondering whether the situation will continue to affect retail REITs.
In the case of Tanger Factory Outlet Centers Inc., the answer is likely going to be “yes” for 2020.
According to management’s outlook, Tanger’s same-center net operating income for its consolidated portfolio is expected to decline by 6.75%–8.25% in 2020. This outlook is based on several factors, including 303,000 square feet of known closures related to all of the Dressbarn and Kitchen Collection stores, closures of certain Forever 21 and Destination Maternity Corp stores, and 322,000 to 372,000 square feet of potential additional closures that are “unknown or unresolved at this time.”
Considering the expected decrease in same-center net operating income, Tanger’s management projects that the company will generate FFO between $1.96 and $2.04 per share in full-year 2020. That would mark a sizable drop from the $2.27-per-share FFO earned in 2019.
Now, you may be wondering whether it’s a good idea for the company to increase its dividend, given its financial outlook. Well, as it turns out, one analyst asked exactly that question during Tanger’s latest earnings conference call.
Here’s the response from the REIT’s chief executive officer Steven Tanger: “The $0.01 dividend increase requires less than $1 million of our free cash flow. We maintain and have always maintained a well-covered dividend and have a strong generate – a strong balance sheet, and we anticipate generating significant free cash flow again in 2020.” (Source: “Tanger Factory Outlet Centers, Inc. (SKT) CEO Steven Tanger on Q4 2019 Results – Earnings Call Transcript,” Seeking Alpha, January 27, 2020.)
“So it’s – our Board carefully thought about and decided that it was important for the stakeholders that depend on our dividend to continue for the 28th year to increase it.”
Indeed, the company should have the resources to back its latest dividend hike. With the new dividend rate going into effect in May, Tanger is on track to pay total dividends of $1.43 per share in full-year 2020. Therefore, if the REIT reaches the midpoint of management’s guidance range and generates $2.00 per share in FFO in 2020, it would still be able to outearn its dividends by a fairly wide margin.
Bottom Line on Tanger Factory Outlet Stock
At the end of the day, while the retail industry is not in the best of shape, Tanger Factory Outlet Centers Inc. still has tenants that are doing well.
In particular, the average tenant sales productivity for Tanger’s portfolio was $395.00 per square foot in 2019, compared to $385.00 per square foot in 2018. Meanwhile, the company’s same-center tenant sales performance for the overall portfolio actually increased 1.5% year-over-year in 2019.
Bottom line: like most beaten-down high yielders, SKT stock is not perfect. But because the company has no problem backing its payout, this stock is still worth a look for income investors.