Mall REIT (real estate investment trust) Tanger Factory Outlet Centers (NYSE: SKT), like its peers, got hammered by the efforts to slow the spread of the coronavirus in 2020. One of the biggest questions on investors' minds has been how to tell when the worst is truly behind the company. Tanger just answered that question. Here's how.
A terrible time for all
One of the interesting things about Tanger is that the vast majority of its malls remained open throughout the pandemic. That's because this mall REIT is focused on the outlet center space, which is largely made up of outdoor facilities. It is the only mall REIT that has such a focus.
That, however, didn't help last year, given that the government effectively shut down the stores within Tanger's centers, given that they were nonessential businesses. And the request that people practice social distancing, which restricted occupancy in stores when they were allowed to reopen, didn't help either.
Tanger took quick, decisive action to help its tenants, offering complete deferral of rent (for a limited time) to anyone who asked. The goal was to give its lessees some breathing room and ensure that occupancy remained as high as possible when the restrictions were eventually loosened. It's pretty simple logic: Consumers don't like walking around empty malls. The company's 2020 occupancy number was 92%, so this effort appears to have worked. The occupancy number in the second quarter of 2021 was 93%.
The problem here is that collecting a drastically lower level of rent because of the rent deferral plan led Tanger to suspend its dividend in 2020. That was a hard pill to swallow all around, given that the REIT had decades of annual dividend increases under its belt before the cut.
Still, for the company, ensuring that it had adequate liquidity in a very uncertain time was the right move. Indeed, it was not the only mall REIT to go down the dividend cut path, with industry giants Simon Property Group and Macerich both following suit. To be fair, neither of those competitors suspended their dividends, but the trend was directionally the same.
Turning things around
Today, however, business is much better. In the second quarter, Tanger highlighted that customer traffic exceeded the same period in 2019. And, perhaps more important, sales per square foot for the year ended June 30 increased 7.3% over 2019 levels during that same time period. In other words, consumers were coming back and spending more than before the pandemic hit. This is truly great news, likely helped by the fact that Tanger's properties are largely outdoor structures, where airflow isn't an issue.
But as a REIT investor, how do you know when things are really getting better? The quick and dirty answer is to track the dividend. REITs are special corporate structures designed to pass income to shareholders via dividends. When a dividend is cut or suspended, it is a statement about what management is seeing in its business. Tanger's dividend suspension speaks to the great uncertainty in 2020.
That said, Tanger brought the payment back in January 2021. That is good news, but the wrinkle is that the reinstated dividend was half of what it was before the pandemic. Indeed, business is still not back to normal in many ways, noting that Tanger's portfolio went from 39 properties at the end of 2019 to 36 "well-positioned locations" in the second quarter of 2021. It is probably best to look at the past year as a reset of the business, noting that it also included a new CEO taking over at the helm.
Still, the REIT is clearly getting back on track. And the biggest statement of that was the just announced dividend increase. Now, the hike was small, at just 2.8%, but the statement was the more important issue here. Reading into the move, Tanger is likely telling investors that the future is improving, and it plans to reward shareholders as that improvement unfolds. Macerich has yet to follow suit with a dividend hike of its own, so don't underestimate the importance of Tanger's dividend increase.
Time to buy it?
Before you jump on board here, note that industry giant Simon has now hiked its dividend twice, for a total increase of around 15%. So it wouldn't be fair to suggest that Tanger is the best-performing name in the mall REIT sector. If you are looking for a mall REIT, Simon is probably a better name to look at.
However, if you are looking for a turnaround play in the mall sector, Tanger's business appears to be turning an important corner. And, given that its shares are off by around 55% over the past five years while Simon's are "only" down 37% or so, there's a chance that Tanger's shares can close that gap if it keeps putting up strong financial results and continues to increase shareholder dividends.
In other words, for the right investor, Tanger could be a perfect fit. The next big step to watch, if you do step in here, is the company's currently on-hold construction project in Tennessee. When that project gets the green light, Tanger will have finally gotten itself from recovery mode all the way back to growth mode.