Tanger Factory Outlet (SKT): Continued Upside Exists Despite Its Meteoric Rise

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Modern exteriors of the store building at sunset

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Due to their stability and strong cash flows, REITs can offer some of the best investment opportunities on the market. Of course, it all comes down to finding a quality operator and keeping the patient. A company that has an extraordinarily good performance over the last two years is Tangier Factory Outlet Centers (NYSE: SKT). This player, who has a consolidated wallet of 30 outlets with a total of 11.5 million square feet of gross leasable area, plus a stake in six unconsolidated outlets totaling 2.1 million square feet, has been a real winner for long-term investors time limit. Even after seeing stocks rise significantly, the exciting thing is that the company seems to offer even more advantages to move forward. That’s why, for now, I’ve decided to keep my “buy” rating on the company.

A good recovery

In March 2020, I wrote an article about Tangier Factory Outlet Centers. In this article, I said that the company looked quite attractive. But at the time, we were still in the early stages of the COVID-19 pandemic. I warned that the company could experience a downturn as a result. Sure, that did happen, but the company, so far, has done quite well to recover. Ultimately, I felt that the stocks were cheap enough and the quality of the company was high enough to warrant a “buy” rating, meaning I felt I would outperform the wider market for an extended period of time. . From the data provided, this has happened. Including distributions paid to shareholders, the company has generated a return since the publication of this article of 170.3%. This compares to the 70.6% performance achieved by the S&P 500 over the same time period.

Financial history

Author – SEC SECGAR Data

To be clear, fiscal year 2020 was quite difficult for Tangier Factory Outlet Centers. After seeing revenue reach $ 478.3 million in 2019, the metric dropped to $ 390 million last year. This occurred when the occupancy rate of their malls dropped from 97% to 92%. In addition to this, the company was also affected by a fall in average annual base income per square foot. This metric decreased from $ 25.35 in 2019 to $ 21.10 in 2020. This led to a decrease in profitability. Operating cash flow, for example, dropped from $ 220.5 million to $ 164.7 million. As the graph above illustrates, other company profitability metrics also suffered.

The good news for investors is that this fall was short-lived. During fiscal year 2021, revenue recovered slightly, amounting to $ 426.5 million. This occurred when the occupancy rate on the company’s properties increased to 95% and the average annual rent per square foot grew to $ 23.79. While revenue had not yet returned to pre-pandemic levels, it is worth noting that the company unloaded one of its 31 malls to this point. This would have had an impact on the company’s top line, even if it fully recovered to pre-pandemic levels. Operating cash flow amounted to $ 217.7 million during the year. The FFO, or operations fund, continued to decline, from $ 154.1 million in 2020 to $ 138.1 million last year. But if we make certain adjustments, that metric would have increased from $ 153.7 million to $ 188.4 million. Net operating income, also known as NOI, increased from $ 248.7 million in 2020 to $ 286.3 million last year. And EBITDA rose from $ 203.8 million to $ 233.6 million.

Financial history

Author – SEC SECGAR Data

The company’s growth has continued during fiscal year 2022. Revenue rose from $ 100.7 million in the first quarter of last year to $ 108.9 million in the same period this year. This has been largely due to the increase in the company’s employment rate from 92% to 94.3%. Operating cash flow suffered, going from $ 31.3 million last year to $ 18.9 million this year. However, other profitability metrics have shown year-over-year improvements. For example, if we adjust to changes in working capital, operating cash flow would have increased from $ 41.2 million to $ 52.8 million. The FFO went from $ 38.2 million to $ 49.4 million. Meanwhile, the figure adjusted for this increased from $ 40.6 million to $ 49.4 million. The NOI also increased, with the metric eventually going from $ 65.1 million to $ 71.2 million. And finally, EBITDA also showed an improvement, going from $ 53 million to $ 59.3 million.

Trade multiples

Author – SEC SECGAR Data

For the current fiscal year, management forecast an FFO per share of between $ 1.71 and $ 1.79. Halfway through, that would translate into a $ 193.4 million reading. Assuming other profitability metrics change at the same rate as they should, we should anticipate an adjusted FFO of $ 263.8 million. Operating cash flow is expected to be around $ 304.9 million, while the NOI is expected to be $ 400.9 million. Meanwhile, EBITDA is expected to be around $ 327.1 million for the year. With these figures, the company’s shares seem rather cheap. The price at the multiple of the operating cash flow, in the long run, is 5.3. This compares with the 7.4 and 7.3 readings we get if we use the 2021 and 2019 figures, respectively. The price of the multiple FFO should be 8.4. The price of the adjusted FFO multiple would be about 6.1, while the price of the NOI multiple should be only 4. Finally, the EV multiple in EBITDA should be around 8.8 . As with the price at the multiple operating cash flow, each of them is cheaper than the company figures if we were to rely on 2021 results or 2019 results.

In addition to the stocks being low in absolute terms, they are also low relative to similar players. Using our 2021 results, I decided to compare Tangier Factory Outlet Centers with five similar companies. Depending on the price in the operating cash flow, these companies ranged from a minimum of 8.9 to a maximum of 18.8. And using the EV approach to EBITDA, the range was from 13.8 to 22.2. In both cases, Tanger Factory Outlet Centers was the cheapest of the group.

Company Price / Operating cash flow EV / EBITDA
Tangier Factory Outlet Centers 7.4 12.4
Acadia Realty Trust (AKR) 14.0 15.5
Saul Centers (BFS) 8.9 17.5
Properties of InventTrust (IVT) 18.8 22.2
Urban edge properties (EU) 12.9 13.8
Getty Realty Trust (GTY) 13.6 13.9

Take away

Although shares of Tangier Factory Outlet Centers have risen enormously over the past two years, the data suggest the company could still have more advantages going forward. Even if the company doesn’t get the financial return I estimated for fiscal year 2022, the shares still seem cheap in absolute terms and relative to similar players. That’s why I decided to keep my “buy” rating on the company.

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