Tanger Outlets: Goldman Is Wrong
Why also would Goldman value Tanger shares at $30.00 when there is such an incredible runway for growth in the sector? Tanger, founded in 1981 (and public since 1993) operates a portfolio of 40 upscale outlet shopping centers in 25 states in the U.S. and in Canada, spanning 12.3 million square feet.
The outlet industry is small -- about 50 million square feet -- which is smaller than the retail space in the city of Chicago. Maybe Goldman does not factor in the attractive supply dynamics and strong tenant demand that makes Tanger one of the most significant REIT-doms.
Tanger's value proposition is sound as the BBB-rated (by S&P) REIT has been busy growing its brand across the U.S. and Canada. New Tanger projects under way are in Houston (recently opened) and Glendale as well as projects in Washington, D.C., Scottsdale (AZ) and Mashantucket (CT). Also, Tanger has begun to tap into the Canadian pipeline with announced projects north of Toronto in Cookstown.
There is compelling reason for growth north of the U.S. border as Canadians are driving the demand (16 retail sf/person in Canada) fueled by limited retail outlet options (the U.S. market has 24.5 retail sf/person).
With such a favorable supply/demand platform, rising earnings estimates, robust growth projections and a decent dividend yield, Tanger offers an enticing upside potential going forward. Tanger reported a strong third quarter with a 10.6% rise in funds from operations, to $41.9 million. On a per-share basis, FFO increased 7.7% year over year.
Tanger has the lowest leverage of its closest peer group. According to Tanger's CEO, low leverage is simply a "way of life" as the company's "stellar balance sheet has supported generally smart historical capital choices."
At $34.35, I am not arguing that Tanger is a bargain. It's not. With a P/AFFO multiple of 20.27, the blue-chip REIT is what I would consider moderately expensive. However, selling a blue-chip REIT that has been throwing off and increasing dividends for 20 years in a row is foolish -- especially when the business model seems bullet proof (31 consecutive quarters of NOI increases).
Tanger, with one of the most well-positioned balance sheets in REITdom, has built not only an intelligently aligned growth strategy but also a recession-resilient brand. Furthermore, Tanger's extraordinarily strong sources of cash flow with limited competition ( This is what Warren Buffett calls a "wide moat" brand) is highly sustainable and the essence of the stalwart REIT's repeatable platform is best summed up by the company's CEO and president Steven B. Tanger, according to SNL Financial :
In good times, people love a bargain, and in tough times, people need a bargain.
My Recommendation: Don't Sell. Tanger shares should grow by 15% in 2013 and combined with a durable 2.45% dividend, I expect the company to outperform and provide total returns of at least 15%. This is an "intelligent REIT pick" and a sell of the stock today is simply foolish.