Tanger Outlets: Goldman Is Wrong

NEW YORK ( TheStreet) -- On Friday, Tanger Factory Outlet Centers ( SKT) was downgraded by analysts at Goldman Sachs from a neutral to a sell rating. In a research report on Tanger, analysts mentioned:

  • A broader lowering of our retail REIT coverage view to neutral from Attractive as SKT is our third retail downgrade in the last three weeks.
  • Valuation: Our $30 price target implies -10% total return vs. 13% average upside for our coverage universe.
  • Less earnings dynamism than peers, despite strong current fundamentals as a large amount of floating-rate debt limits refinance potential and reduces the sensitivity to top-line growth.

Tanger and the company's exceptional dividend record have been the subject of a number of recent research reports, so it should not surprise anyone that Goldman's recent downgrade is similar to "a raised nail getting hammered."

In the case of Tanger, the only raised nail that I hear (and see) is the sound of high-quality growth in the outlet sector. First off, let's look at Tanger's incredible record of paying out dividends; after all, that is the reason Tanger is so often in the news.

Twenty years is an incredible record and later this year, Tanger will be admitted to the prestigious group of companies hand selected from the S&P 500. That means that Tanger will join other S&P 500 Dividend Aristocrats such as Lowes ( LOW), AFLAC ( AFL) and T. Rowe Price ( TROW) in the broad equally weighted index that measures the performance of large cap, blue chip companies within the S&P 500 -- notably, the ones that have followed a policy of increasing dividends every year for at least 20 consecutive years.

So why is Goldman hammering nails at Tanger while other analysts are continuing to buy the "pure play" outlet REIT?

Analysts at Citigroup upgraded Tanger shares from a neutral rating to a buy rating (Dec. 17). They now have a $37.50 price target on the stock, up previously from $31.75. Also analysts at Jefferies Group upgraded shares of Tanger from a hold to a buy (Nov. 2). They now have a $37.00 price target on the stock, up previously from $34.00. Finally, analysts at Evercore Partners initiated coverage on shares of Tanger in October. They set an equal weight rating on the stock.

I know one good reason that Tanger shares are continuing to climb. Just take a look at the parking lots of the outlet centers. Not only are the customers lining up but the tenants are lining up to rent space at Tanger's high-quality outlets.

Take a look at the latest occupancy trends.

Wow. 99% occupancy. That means there are actually retailers standing in line to rent space to the namesake Tanger brand. Why then would Goldman paint Tanger by the same brush as the broader "retail" landscape when the stalwart outlet brand is simply in a class of its own?

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 (Goldman: 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.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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