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RealMoney.com : FaceOff - Chris Edmonds 
When you're shopping at a factory outlet center, you've got to be careful, because sometimes what appears to be a deal isn't a deal at all. The same goes for at least one factory outlet center chain itself: Tanger Factory Outlets (SKT:NYSE - news - commentary - research - analysis), which runs 29 outlet stores around the country. Its shares may look cheap but they're anything but!
Retail investors may be attracted by the nearly 12% yield, but if you dive into the details, you'll find little else to like. The company's real estate portfolio consists largely of second-tier outlet malls, in many cases located near other centers with better amenities. "Tanger has pursued a 'me-too' strategy of building outlets near existing centers," notes one real estate fund analyst. "This leaves Tanger in a constant level of intense competition for a declining universe of [tenants] ." One can point to Tanger's center near Missouri's Lake of the Ozarks to refute the quality argument, but that is the exception in Tanger's portfolio. In fact, Tanger's sales per square foot of $284 in the third quarter are paltry compared with the over $400 per square foot that competitor and industry leader Chelsea Property Group (CPG:NYSE - news - commentary - research - analysis) averages. Tanger won't be improving on that number anytime soon, either. In its third-quarter earnings release, the company noted that it is dependent on "seasonal tenants that open during the second half of each year, and certain high-volume tenants that pay rent based on a percentage of their monthly sales." As a result, company chairman Stanley Tanger was cautious on the outlook. "We remain cautious regarding the effect lower consumer confidence may have on our tenants' sales through the holiday season," he noted in the earnings announcement. Revenues from tenants that pay Tanger a percentage of their monthly sales are already weak, dropping nearly 24% in the first nine months of 2001 when compared with the prior year, from $1.9 million to $1.4 million. And as the economy slows, retailers will choose not to renew leases on less productive locations, and that could leave Tanger vulnerable. Seventeen percent of Tanger's tenant leases are scheduled for renewal in both 2002 and 2003, and another 18% expire in 2004. "If you are a second-tier retailer with mediocre locations, lease rollovers are not a good thing," notes the fund analyst. The balance sheet doesn't provide good news, either. Including preferred stock, Tanger's debt-to-market-cap ratio is about 70%, compared with under 50% for companies such as Chelsea. And while Tanger does not provide a calculation of its funds available for distribution, or FAD, a measure of free cash flow, the fund analyst calculated third-quarter FAD to be near 43 cents a share, well below the 61-cents-a-share dividend the company pays. Even if you take an aggressive approach to calculating Tanger's annual FAD, you only get to $2.65 a share, which makes the current annual dividend a plump 92% of available cash. Income growth is also stagnant. The company reported flat third-quarter funds from operations, or FFO, a measure of performance for REITs, and an FFO decline of 6% in the first nine months of the year, if you exclude the extraordinary gains from property sales and insurance booked last year. That leads to the last and most important reason I would shun Tanger: transparency. The company reported FFO in the third quarter last year of 84 cents with no mention of the 4-cent gain from property sales, because it aided in prior-year comparisons. Now, because the 4 cents would have caused Tanger to post yet another quarter of declining growth, it backed out the 4 cents for the first time ever as extraordinary gains. If you can't trust management to shoot straight with basic numbers, what can you trust them to be upfront about? As investors, you don't need that any more than you need a "discount" sweater with holes in the sleeves.
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