Tanger Factory Outlet Centers (SKT): Another Fallen Dividend Champion

The coronavirus is making it challenging for those relying on dividends for income or trying to build wealth by dividend growth investing. As of my last update, there are now 250 companies on my coronavirus dividend cut and suspensions list. This is a little over 8% of all companies that pay dividends in the U.S. Not a small number at all. This past week Tanger Factory Outlet Centers (SKT) suspended its dividend. This makes Tanger another fallen Dividend Champion. To date, two other Dividend Champions have either cut or suspended their dividends. The first was Helmerich & Payne (HP), which was only a few years from becoming a Dividend King. The other stock was Meredith Corporation (MDP), which was impacted by a decline in advertising and increase in debt. You can read my analysis of Helmerich & Payne’s dividend cut.

Tanger was a favorite amongst investors seeking income and dividend growth. The company has over 39,000 followers on Seeking Alpha attesting to its popularity. The dividend was raised for 27 consecutive years before the suspension. Before the suspension the forward dividend was $1.43 per share. The dividend yield reached as high roughly 25%. Yields this high typically signal companies in distress. So, in hindsight the dividend suspension was not surprising. In general, real estate investment trusts or ‘REITs’ focusing on retail have struggled mightily due to the coronavirus. Despite efforts by Tanger to maintain liquidity the decline in rent revenue from its portfolio was probably too much. In the end, Tanger is another fallen Dividend Champion.

Overview of Tanger Factory Outlet Centers

Tanger is a REIT that is publically traded on the NYSE. The company owns and operates 39 outlet shopping centers or malls in the U.S. and Canada. The company has approximately 14.3 million square feet, with over 2,800 stores operated by 510 brands. In general, Tanger’s outlet malls are located outside of urban areas and away from traditional malls.

Tanger Dividend Suspension – Fallen Dividend Champion

Tanger paid a growing dividend for 27 consecutive years going back to 1993 according to the website. This put the REIT in a select crowd. Recall that there are only 29 Dividend Kings or stocks that have raised their dividend consecutively for 50+ years. There are only 110 Dividend Champions (not including the Dividend Kings) or stocks that have raised their dividend for 25+ years in a row. So, from the perspective of a dividend growth investor the suspension is a fairly big deal.

Interestingly, Tanger had announced in January 2020 that the regular quarterly cash dividend would be raised. Specifically, the quarterly cash dividend was increased by only 0.7% to $0.3575 per share from $0.355 per share. Of course, that was before COVID-19. With that said, Tanger still intends to pay the dividend declared in January 2020 on May 15, 2020 to holders of record on April 30, 2020. It is future dividends that are suspended. Specifically, the company stated:

Tanger intends to pay the dividend of $0.3575 per share declared in January 2020 as scheduled on May 15, 2020 to holders of record on April 30, 2020.  Going forward, given the current uncertainty related to the pandemic’s near and potential long-term impact, the Company’s Board of Directors will temporarily suspend dividend distributions to conserve approximately $35 million in cash per quarter and preserve the Company’s balance sheet strength and flexibility. The Board will continue to evaluate the potential for future dividend distributions on a quarterly basis. Tanger intends to remain in compliance with REIT taxable income distribution requirements for the 2020 tax year.

Tanger’s Rent Collections Have Declined Due to COVID-19

The main issue in the near-term for Tanger was the lack of rent collections. Reportedly, in April 2020 Tanger only collected 12% of the amount billed. However, some of this is probably by design, and to be expected. At the end of March, Tanger offered all tenants in its portfolio the option to defer 100% of April and May rents interest free. The rents for these months are payable in installments due in January and February 2021. My guess is that many of Tanger’s tenants made use of the ability to defer rent payments in order to preserve liquidity.

The important point here is that the rent payments were deferred into the future. So, this is cash flow that Tanger should see early next year. There is, however, the possibility that some retailers and tenants will close between now and January. So, I do not expect Tanger to see 100% of the rent deferrals. The exact amount is of course uncertain at this point.

The lack of rent payment by Tanger’s tenants is not surprising. The REIT has 39 outlet malls in the U.S. and Canada. Stores reportedly started closing in mid-March. By early April most states had restrictions in place for non-essential businesses. Tanger has stated that on April 6, 2020, only 6% of stores in its portfolio were open and this represented 2% of the annual rent base. Since most of Tanger’s portfolio consists of retailers and many are considered non-essential they were closed and were not generating sales.

Tanger’s Occupancy Is Declining

Tanger has second long-term problem. Its occupancy rate is slowly declining. In general, malls have struggled the past several years due to the onslaught of online retail. As consumers became used to purchasing online there was less reason to travel to a regular mall or an outlet mall. This has led to lower occupancy rates as stores close. 

Tanger is no exception to this trend. In 2012, Tanger’s occupancy rate was nearly 99%. It fell to a range of 94% to 95% in 2019. In the Q1 2020 earnings release occupancy was reportedly 94.3% in March 2020. This value is compared to 97.0% in December 2019, 95.9% in September 2019, 95.4% in March 2019, and 96.8% in December 2018. The occupancy uptick at end of 2019 may be seasonal. At end of January 2020, Tanger guided for average occupancy rates of 92% – 93% due to projected store closures resulting from tenant bankruptcies and restructurings. In response Moody’s downgraded Tanger’s credit rating to ‘Baa2’ from ‘Baa1’ with negative outlook.

Tanger Has Ample Liquidity

Despite the current hardship Tanger has of plenty liquidity. The company drew down its line of credit and at end of April, the balance sheet had $594 million of cash. There is no long-term debt due until December 2023. The company has stated:

Based on Tanger’s estimated pre-COVID-19 cash expenditures of approximately $25 million per month, the Company expects to have sufficient liquidity to meet its obligations, even under its most conservative rent collection scenario of not receiving any rent, for approximately two years (assuming no dividend distributions or debt maturities and the Company remains in compliance with its debt covenants).

So that provides some confidence that Tanger can survive the pandemic in decent shape provided that the effects are not drawn out. Granted, occupancy rates may trend lower as 2020 progresses, but eventually consumers will start shopping again.

Final Thoughts on Tanger Dividend Suspension – A Fallen Dividend Champion

The question of when will Tanger restore its dividend will likely weigh on most investors’ minds. That is largely uncertain at this point. Tanger is a Fallen Dividend Champion. My expectation is that Q2 2020 will be a tough one for retailers and Tanger. Yes, restrictions are easing, but it will take many months for consumers to return to stores at the same level as before the pandemic. Too many people have lost jobs or were furloughed in a relatively short period of time. In my opinion companies will bring their people back incrementally rather than all at once. This will keep consumers from shopping. For this reason, I think it is more likely that the dividend will be restored at a lower level than before the suspension.

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