Are Tangier factory centers a buy?

The last year has been terrible for the retail industry, at least for brick and mortar stores. Right in the middle of the storm were mall owners like Tangier factory centers (NYSE: SKT). That said, you can’t lump all the Shopping Mall Real Estate Investment Trusts (REITs) into one stack and be done with it. Some, like Tangier, are just different, a fact that was fully on display in 2020. Here are some things to consider before deciding whether this REIT is a buy or not.

It was, and still is, bad enough

Before the coronavirus pandemic, shopping mall real estate investment trusts were already dealing with the so-called “retail apocalypse”. While this “apocalypse” was generally blamed on the increasing use of online shopping, there was more to that. Retailers who were lagging behind consumer trends and who had increased their balance sheets simply couldn’t compete and were closing stores or, worse, falling behind.

Image source: Getty Images.

The coronavirus pandemic has simply accelerated the trend, as economic shutdowns and social distancing have dramatically reduced foot traffic in physical stores. Companies that had not grown their footprint online or that had excessive leverage have gone bankrupt, including iconic names like JC Penney and Brooks brothers. At the start of the pandemic, shopping center owners rent collection problems they were due.

In the end, some mall REITs couldn’t get by. CBL and associates and Penn REIT both went bankrupt in 2020. And Washington Prime it looks like it is On the ropes in early 2021, he recently withheld an interest payment as he seeks to renegotiate his debts. And yet, the Tanger Factory Outlet Centers are holding up quite well, relatively speaking.

Get back to normal

There is a good reason for this, given that the 37 sales centers that Tangier owns are largely outside structures. This allows for sufficient air circulation, which is a key factor in reducing the spread of the coronavirus. So unlike a REIT that has largely closed malls, it does not have to convince customers that it is safe to visit. In fact, the company’s pedestrian traffic was at 90% of year-earlier levels in the fourth quarter. This is quite impressive, considering that COVID-19 cases were on the rise at the end of 2020. Obviously, consumers want to shop and they believe that visiting the outdoor centers in Tangier is a good one. way to do it.

Tangier suspended its dividend at the start of the pandemic, which worried some investors. It is absolutely fair, but it was a realistic and prudent decision. In addition, as economic closures were announced, Tangier made the strategic decision to offer rent allowances to all of its tenants. Basically, Tangier was helping tenants whose stores were closed. While rent collection fell sharply, as would be expected given the reduction in rents, it collected 95% of its rents in the fourth quarter. Being a good partner for your tenants seems to have paid off. And he restored his dividend, albeit to a lower level, in January.

Meanwhile, the REIT has dramatically improved its balance sheet. In early 2020, Tangier elected to withdraw its entire revolving credit facility to ensure it had sufficient liquidity. But he has since repaid that facility, leaving him $ 84 million in cash and the entire $ 600 million credit facility available if he needs it as 2021 approaches. , its financial debt ratio is among the best in the industry, just behind the industry Simon Property Group. While leverage has caused other mall REITs to go to bankruptcy court, it just doesn’t seem as likely here.

SKT Financial Debt / Equity Chart (Quarterly)

SKT Financial debt / equity (quarterly) given by YCharts

The restored dividend, meanwhile, only represents around 50% of Tangier’s adjusted projection for 2021. funds from operations (FFO), which is a FPI metric similar to an industrial company’s earnings. So there is even room for adversity before investors have to worry about the REIT’s ability to pay dividends. And while the 4.4% return isn’t exactly generous, it’s way more than you’d get from a S&P 500 Index funds.

Buy it, right?

Should investors therefore save the truck and load Tangier shares? Well it depends. Conservative investors should probably be cautious, given that the shopping center REIT sector is still going through tough times. And, due to the nature of the sector, industry recovery will be slow (it takes time to re-let vacant spaces).

However, more aggressive investors willing to weather headwinds might want to take a look. Just be aware that Tangier is not for the faint of heart and, despite all of its positive attributes, negative industry headlines could still create some volatility in its stocks. And yet, when you step back from the news stream, it looks like the future is really starting to look a lot brighter than it did just a few months ago.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

About Marc Womack

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