All is not bleak in retail. As many retailers struggle with overstocking and rapidly changing consumer behavior, Tangier Factory Outlet Centers (NYSE: SKT) is confident enough to distribute more cash to shareholders.
Tangier increased its dividend by 10% on Tuesday, raising the quarterly payout to $0.22 per share. This is equivalent to a dividend yield about 5.7%.
A retail stock for a recession
Tangier is a real estate investment confidence which operates 37 premium outlet centers in the United States and Canada. These centers are mostly open air and 90% of them are either in one of the top 50 metropolitan statistical areas or near a major tourist destination. Many of them are in the south and southwest, where winter weather isn’t much of an issue.
Tangier is certainly not recession-proof, but the company offers the kind of value proposition that resonates with consumers when the economy deteriorates. And for retailers, outlets in Tangier offer a way to sell discounted merchandise without tarnishing brands.
Here is a table of Tangier’s income over the past decades:
A sharp decline in 2020 stands out, but that was due to store closings and closures at the start of the pandemic. It is more useful to look at how Tangier behaved during the financial crisis of 2007 and 2008.
There was no noticeable impact on Tangier’s revenue during the biggest economic upheaval since the Great Depression, and funds from operations remained healthy. Part of the reason for Tangier’s success during this period was its diverse base of financially resilient retailers. Unlike a mall anchored by struggling department stores, Tangier doesn’t put all its eggs in one basket.
Today, Tangier’s largest tenant accounts for just 5.9% of its annualized rent, and about two-thirds of rent comes from tenants outside the top 10. The top 10 includes brands like The hole, Nikeand under protection.
Given this performance, Tangier’s confidence in its ability to safely pay out a larger dividend seems well placed. Even if the US economy goes through a severe recession, Tangier’s results should hold up reasonably well.
A cheap REIT
Tangier will probably feel pain if a recession goes on strike, but the share price is already pessimistic. The company expects to generate adjusted funds from operations of up to $1.79 per share this year, putting the price to FFO ratio below 9. FFO is still recovering from the pandemic as Tangier s strives to drive up occupancy rates, so there’s plenty of opportunity to increase this profit metric over time. Tangier’s occupancy rate sits just below 95% right now, a few percentage points below historical levels.
Tangier is turning to non-commercial tenants to further diversify its rental base and make its points of sale more attractive to consumers. This includes adding food, entertainment, and digital native concepts. The company is also looking to increase non-rental revenue generated from marketing partnerships. A recession may slow these efforts, but it should make the company even more resilient in the long run.
Retail and recessions don’t usually mix, but Tangier is an exception. With a larger dividend and a history of weathering severe economic storms by delivering branded deals to consumers, Tangier should be on every value and dividend investor’s radar.
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