Tanger Factory: 'Best-in-breed' retail REIT

by Louis Basenese, editor Wall Street Daily

Even if the United States heads for another recession, Tanger Factory Outlet Centers (SKT) remains a  safe investment.

Indeed, the company has a track record of weathering downturns and keeping its commitment to shareholders. So shrug off all the recession fears and consider adding it to your portfolio.

Structured as a REIT, Tanger pioneered the concept of the retail outlet shopping center in 1981. Today, it owns 38 outlet centers in 25 states.

And more than 175 million shoppers visit its centers annually to get discounts on wares from popular retailers, including The Gap, Adidas, Nike, Polo Ralph Lauren, Coach, Kenneth Cole and Carter's.

I know. The retail sector isn't exactly the first one that comes to mind as a safe haven during a possible economic downturn.

After all, consumer spending makes up more than 40% of U.S. GDP. But any such weakness actually plays right into Tanger's hands.

You see, high unemployment brings out the penny-pincher in all of us. And no one can match Tanger in terms of providing a one-stop shop for bargain hunters.

A quick look at the company's results proves the resiliency of Tanger's business model.

In the last year, tenants reported comparable sales growth of 4.6%. Even more impressive, tenants have enjoyed average annual sales growth of 3% since 1995. (Keep in mind, that timeframe includes two recessions.)

Here's a full rundown on the rest of the fundamentals that make Tanger a safe income investment in this market.

Geographic Diversification. Tanger is not heavily exposed to any single state or major metropolitan area.

In fact, with the exception of South Carolina (15%), no more than 8% of its total available square footage is in any one state. Such diversity insulates Tanger from any isolated and protracted regional downturns.

Solid Occupancy History. Retailers are closing up shop everywhere else, littering many strip malls with vacancies.

However, Tanger's occupancy rate stands tall at 98%. Don't expect it to change much, either. For the last three decades, Tanger's occupancy rate topped 95%.

Solid Lease Structure. Tenants sign long-term leases that include annual rent bumps. And lease expirations are staggered, with only 10% up for renewal this year. Add it all up and the company boasts a solid and reliable income stream.

Raising the Roof on Rents. Despite the economic slowdown, Tanger's succeeding in raising rents, which in turn increases shareholder value.

Base rents on leases renewed this year increased by an average of 14.9%. And rental rates on released space increased by an average of 51.5%.

All-Around Bargain. Shoppers aren't the only ones that save with Tanger. Tenants save about 33% off the going rental rate for space in traditional malls.

Such savings often make the outlet store the tenant's most profitable location. Ultimately, a tenant flush with profits is much more likely to pay the rent.

Disciplined Growth Strategy. Management refuses to build a new center until it gets commitments on at least 75% of the space.

And it sticks to the policy. In fact, it mothballed two potential projects in 2008 that failed to meet the threshold.

Low Interest Rate Risk. The majority (63%) of Tanger's debt is fixed-rate, with maturities staggered between now and 2020. So even if interest rates unexpectedly rise, Tanger's financing costs won't jump suddenly.

Dividend Yield and Reliability. Tanger pays an annual dividend of $0.80. At current prices, that's equivalent to a respectable 3.1% yield. What's more, the company has raised its dividend for 18 years (and counting).

The bottom line is that during challenging economic times, consumers flock to outlet stores. And Tanger represents a best-in-breed play.

Learn more about this financial newsletter at Louis Basenese's Wall Street Daily.