Plenty of stocks doubled in 2020 as the COVID-19 pandemic roiled the markets. Work from home, learn from home, shop from home, and exercise from home were the big trends. Stocks like Zoom, Shopify, and Peloton delivered impressive gains as investors chased big returns. Valuations for the hottest stocks became stretched, with investors willing to pay dozens of times annual sales for a piece of the action…
Many stocks that fared well in 2020 may not do so going forward. Financial results could deteriorate as the world goes back to normal after COVID-19 vaccines are widely available. Even if growth rates remain strong, sky-high valuations will make outperformance difficult to achieve. Price didn’t matter at all in 2020, but it always matters in the end.
As some stocks soared last year, other stocks were hammered. Much of the carnage was certainly justified. It may take years for airlines to fully recover from the pandemic, for example, and the movie theater industry may never be the same again. There were a few cases, though, where investors threw out the baby with the bathwater.
One such case was Tanger Factory Outlet Centers (NYSE:SKT). Tanger is a real estate investment trust that operates a few dozen largely open-air outlet malls across the U.S. and Canada. The mall industry wasn’t doing well before the pandemic, thanks to big-box stores and online retail. The situation got much worse as retail foot traffic dried up during the pandemic. Two major mall operators, CBL and PREIT, filed for bankruptcy in November. But Tanger is a different story.
On the road to recovery
Tanger doesn’t operate traditional, run-of-the-mill malls that are anchored by failing department stores that can’t compete with big-box stores and Amazon. Tanger’s outlet centers offer shoppers bargains. The REIT also doesn’t depend on any single tenant for an outsized portion of rent payments. At the end of the third quarter, Gap was Tanger’s largest tenant, accounting for just 6.3% of annualized base rent. About two-thirds of Tanger’s base rent comes from tenants outside of the top 10.
Tanger is still exposed to the turmoil going on in the retail industry, and retailer bankruptcies have hurt its results. But rent collections have strengthened, and foot traffic has mostly recovered. Rent collections topped 90% in the fourth quarter, and 40% of the rent Tanger allowed tenants to defer early in the pandemic has now been repaid. Traffic at its outlet centers in the fourth quarter of 2020 was at 90% of 2019 levels — not a bad result during a raging pandemic.
Tanger’s balance sheet gives the company breathing room as it navigates the current environment. Tanger now has $80 million of cash and $600 million of untapped lines of credit available. The company stopped paying its dividend last year to preserve liquidity. It will likely restart the dividend this year.
How pessimistic is the market on Tanger? The company reported adjusted funds from operations (AFFO) of $2.31 in 2019, and its quarterly dividend prior to the pandemic worked out to $1.43 per year. At the current stock price, Tanger trades for just 5 times 2019’s AFFO and sports a pre-pandemic dividend yield of 12.5%.
Of course, we shouldn’t count our chickens before they hatch. It may take a while for…
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