Post on 28-Jan-2017
transcript
Important disclosures appear on the last page of this report.
The Henry Fund
Henry B. Tippie School of Management
Stuart Hemesath [stuart-hemesath@uiowa.edu]
Tanger Factory Outlet Centers Inc. (SKT) November 18, 2015
Financial Services – Retail Real Estate Investment Trust (REIT) Stock Rating Hold
Investment Thesis Target Price $38
This pure play on retail outlet centers capitalizes on both improving economic
conditions and appreciating real estate values. Tanger has exceeded growth
expectations and increase guidance as it expands its retail presence. While
there is still upside left, we feel it is limited and recommend a hold.
Drivers of Thesis
• Improving unemployment rates and increased consumer confidence will
drive retail demand over the next two years pushing growth within current
outlets as well as future developments, maintaining strong occupancy
within the company’s wide distribution of retail outlet centers.
• Tanger’s history of producing increased dividends since going public
continues to strengthen as the company provides consistent growth
through both wholly owned and joint venture outlet centers.
• Relative multiples value the company with a 30% premium compared to
industry peers suggesting Tanger is currently trading at a significant
discount.
• Tanger remains well diversified both geographically and within its mix of
retail clients, minimizing non-systemic risk.
Risks to Thesis
• As a yield oriented investment, REITs will face pressure from investors in a
rising rate environment. Higher rates may also provide a catalyst for a
compression in real estate values, further impacting the company.
• The continued growth of REITs as an alternative asset class increases
competition for prime development opportunities, driven by a new wave
of investor cash flows.
Henry Fund DCF $38.48
Henry Fund DDM $34.66
Relative Multiple $43.77
Price Data
Current Price $33.67
52wk Range $30.30 – 40.80
Consensus 1yr Target $36.00
Key Statistics
Market Cap (B) $3.12
Shares Outstanding (M) 94.74
Institutional Ownership 96.9%
Five Year Beta 0.63
Dividend Yield 3.52%
Est. 5yr Growth 8.4%
Price/Earnings (TTM) 31.8
Price/Earnings (FY1) 29.0
Price/Sales (TTM) 6.87
Price/Book (mrq) 5.96
Profitability
Operating Margin 34.6%
Profit Margin 22.8%
Return on Assets (TTM) 4.44%
Return on Equity (TTM) 19.3%
Earnings Estimates
Year 2012 2013 2014 2015E 2016E 2017E
EPS $0.57 $1.14 $0.77 $1.06 $1.10 $1.10
growth 7.9% 99.5% -32.6% 38.4% 3.6% -0.13%
12 Month Performance Company Description
Tanger Factory Outlet Centers, founded in 1981
and headquartered in Greensboro, North
Carolina, is one of the largest retail real estate
investment trusts (REIT) that develops, acquires,
owns, operates, and leases space within its 36
outlet shopping centers. These 36 shopping
centers, as of year-end 2014, represent over 11
million square feet of retail shopping space
containing over 2,400 stores and approximately
380 store brands.
Cover Sheet Data Source: FactSet13, Bloomberg14
31.4
19.317.6
16.013.2
18.5
14.1
10.4
17.5
0
5
10
15
20
25
30
35
P/E ROE EV/EBITDA
SKT REITs Financials
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
S O N D J F M A M J J A
SKT S&P 500
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EXECUTIVE SUMMARY
Our recommendation is to hold Tanger Factory Outlet
Centers in our current portfolio. This decision is based on
the company’s strong fundamentals as a market leader in
the retail outlet industry, consistent organic growth since
the company went public in the 1990s, and economic
forecasts which will bolster occupancy rates and drive
consumer spending. Tanger has also delivered 22
consecutive years of dividend increase, one of few major
REITs to delivered increased dividends during and
following the financial crisis. We do, however, feel the
upside is too limited to recommend a buy at this time.
Our valuation models also support a hold
recommendation. We had consistency across all models
showing premiums with our valuations. Our key relative
industry metrics, FFO and AFFO price multiples, indicate
that the market continues to assess Tanger as a value play.
We rely most heavy on our dividend discount model given
the focus investors have on payouts when analyzing REITs.
This model also supports a premium based on our growth
expectations.
COMPANY DESCRIPTION
Real estate investment trusts, or REITs, were created in the
1960’s as a means for retail investors to own real estate.
They are mandated to maintain a dividend payout ratio of
at least 90% of GAAP earnings and must have at least 75%
of their assets invested in real estate, cash, or treasuries
and must also derive at least 75% of their gross income
from real estate activities. There are three categories of
REITs; equity REITs, which invest in properties, mortgage
REITs, which invest in mortgages, and hybrids, which
invest in both.2
Tanger Factory Outlet Centers is an equity retail REIT
which develops, acquires, owns and operates 36 shopping
centers across the US, as of yearend 2014, as well as joint
ventures in Canada. Tanger is one of the largest retail
REITs, having over 11 million square feet of leasable retail
space which represents over 2,400 stores and
approximately 380 store brands.1 By year end 2015, the
company intends on adding four additional retail centers
within the US.
Map of US Retail Center Locations
Source: Seeking Alpha
The Outlet Mall Concept
Outlet stores are operated directly by the brand
manufacturer which sell first quality merchandise as well
as merchandise created specifically for outlet centers.
Because they are operated by the brand manufacturer,
they are often able to offer significant discounts when
compared by prices offered at third party retailers.
Tanger’s role is to create a retail shopping center
environment where these third party retailers can thrive
and end customers will come to shop.
There is also a relationship management role that Tanger
plays to attract and retain the strongest retailers in the
marketplace. Some of these retailers include American
Eagle, Ann Taylor, Banana Republic, etc. The success and
attractiveness of these independent retails is crucial in
drawing end customers to the shopping center. As these
retailers succeed, Tanger shares a portion of the revenues
and also strengthens its case in lease negotiations both for
future retailers and current retailers in the releasing
process at more favorable rates to Tanger. Within the
retail industry, we saw a high rate of store closures in late
2014 and early 2015. Tanger was impacted, seeing
occupancy rates below historical averages, but we believe
this was an opportunity for the company, forward looking,
as it replaces struggling retailers with higher grossing and
higher volume retailers at many of its locations.
Revenue Streams
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The company earns the majority of its revenue through
leasing operations, which accounted for 68% of its total
revenue in 2014. The second largest revenue stream is
simply reimbursement for marketing campaigns funded by
Tanger. The majority of the marketing expenses incurred
by the company are reimbursed by tenants, accounting for
29.3% of total revenues in 2014. Other income streams,
such as management and other services, accounted for the
remaining 2.7% of total revenue.
Data Source: Tanger Outlet Centers Annual Report1
Leasing Operations
Leasing revenue is received in two forms, base rent and
percentage rent. Base rent is the contractual rate at which
is retailer is charged to occupy the property. The main
drivers behind this rate include occupancy rates, increased
renewal rates, and expansion. Occupancy rates have
remained extremely high for Tanger, in comparison to
industry averages, ending the year with occupancy rates at
98% or greater since 2010. There have been interim dips,
as previously mentioned, which have impacted the
company in 2014 and year to date.
Tenant Rate Increases
The company’s ability to increase tenant rates has been
strong, averaging a 36% increase on new tenants signed
this year. This is off of recent highs of 54% in 2012, but an
increase from five year lows of 26% in 2010. The ability to
increase base leasing rates is primarily driven by the
economic environment and expected spending habits of
end consumers.
Expansion
The company’s ability to expand clearly plays an integral
role in its ability to increase leasing income. The company
has engaged in recent expansions with existing sites as
well as expansions for new locations within the US. In
2015, new locations are expected to increase the
company’s retail space by about 10% of its current
capacity. New location developments remain the key
driver for increase leasing revenue and drive our estimates
of future base leasing growth of 6% and 7% in 2015 and
2016, respectively.
Percentage Rental Income
Percentage rentals, which accounted for 2.5% of total
income, is income received on a percentage of tenants’
sales volume above their contractual breakpoint. There
was a slight decline in percentage rent in 2014 which the
company attributed to renewals with current tenants at
higher base rates, but also high breakpoint rates. There
has been limited guidance but we believe as expansion
activities continue and consumer spending remains
strong, percentage rent will also continue to grow at rates
comparable to base rent.
Revenue Breakdown 2014-2016 Estimates
Revenues 2014 2015E 2016E
Base Rent 274.5 291.9 312.4
Expense reimbursements 122.5 127.8 136.7
Percentage Rent 10.3 12.4 13.3
Income from REO 3.6 3.5 3.8
Other Operating Income 7.6 8.0 8.5
Total Revenue 418.6 443.7 474.7
Data Source: Tanger Outlet Centers Annual Report1
Joint Ventures
Unconsolidated joint ventures account for slightly under
10% of the company’s total assets. These include six jointly
owned centers within the US and four in Canada as of year-
end 2014. The domestic centers are in cooperation with
REIT giant and frequent collaborator Simon Property
Group, which also announced an additional collaboration
in June for a center outside of Columbus, OH. The
Canadian ventures include a partnership with Canadian
REIT RioCan Real Estate Investment Trust. Despite only
having 50% ownership in these centers, they still operate
under the Tanger Outlet brand.
65.6%
29.3%
2.5%1.8%
0.9%
Total Revenue Sources - Year End 2014
Base Rent
Expense Reimbursements
Percentage Rent
Other Income
Mgmt, Leasing and Other
Services
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Company Analysis
Tanger is the only publicly traded pure play for retail outlet
REIT exposure. This could play as an advantage to the
company if consumer sentiment and spending continue to
gain traction over the next 12 months, which we believe
will be the case. Tanger also benefits from strong
diversification in both its geographic footprint, which we
saw earlier, as well as within its retailers. Tanger’s largest
client, The Gap, occupies just 7.7% of the company’s total
square footage and accounts for only 4.8% of its operating
income. The company’s top 10 retailers account for 36.4%
of the company’s available leasing space.1
Top 10 Retail Leasers by Square Footage
Tenant % of Total
Square Feet
The Gap, Inc. (GAP, Old Navy, Banana Republic) 7.7%
Ascena Retail Group, Inc. (Dress Barn, Lane Bryant) 4.4%
PVH Corp. (Tommy Hilfiger, Van Heusen, C. Klein) 3.9%
V. F. Corporation (Nautica, Timberland, N. Face) 3.3%
Nike, Inc. (Nike, Converse, Hurley) 3.3%
Ralph Lauren Corporation (Ralph Lauren, Chaps) 3.0%
ANN Inc. (Loft, Ann Taylor) 2.9%
G-III Apparel Group, Ltd. (Bass, Wilson's Leather) 2.9%
Adidas AG (Adidas, Reebok) 2.6%
Carter's Inc. (Carter's, OshKock B'Gosh) 2.4%
Total of all tenants listed in table 36.4%
Data Source: Tanger Outlet Centers Annual Report1
The company is also investment grade rated (BBB+) with a
decreasing debt ratio since 2010. This allows the company
to more favorably raise capital for future development
projects.
RECENT DEVELOPMENTS
Despite the underperformance year to date, recent events
surround Tanger have been positive overall. Both Q2
results and future guidance have been positive, exceeding
analyst expectations.
Second Quarter Earnings
Second quarter earnings were released on August 5th and
were received positively by analysts and the market. The
main component was strong 2Q15 earnings through
organic growth, as expected. The company had a 4.6%
increase in same store net operating income year-over-
year which shows the strength of the company as a retail
distribution channel for the retail industry. Guidance for
year-end NOI was also increased to 3.5% to 4%, an
increase of 50 basis points since the first quarter call this
year. The release and conference to follow also
strengthened expectations for the future performance of
projects in the pipeline which are now presumed to drive
double digit returns.
Interestingly, the quarterly release also provided analysts
some additional clarity on per store basis metrics such as
sales per square foot, information previously unavailable
to investors, and stack ranked each of the 36 shopping
centers in operation. This showed that the top 5 retail
centers accounted for nearly a quarter of the company’s
NOI. Expectations for the developments in the pipeline are
now that the new shopping centers will rank among the
top tiers once they are in operation. These results will not
be seen in the financial statements until the centers have
been in operation for at least 12 months, due to a mandate
established by management.9
New Store Openings
Tanger is projected to open four new shopping centers in
2015 including a Mashantucket, CT location, which
recently opened, focusing on selling high end designer
merchandise. The location occupies the second story of a
Foxwoods Resort Casino and is expected to be a high traffic
location for casino guests. Three of the four retail centers
are in full operation with the fourth coming online this
November in Memphis, TN. These four locations will add
an additional 1.4 million square feet of real estate,
increasing the total portfolio by 10%.10
Guidance for future developments remained conservative
on the quarterly call. Steve Tanger, the CEO, proposed that
the company expects to open one to two locations each
year over the next two to three years despite bringing four
locations online this calendar year.10 Given the demand
from retailers and strength in consumer spending, we
believe the company will exceed this guidance by bringing
on an additional location over each of the next two to
three years.
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New Store Openings by Year-End 2015
Location Square Feet
(in 000's)
Est. Total Cost
(in millions)
Projected
Opening
Savannah, GA 337 - Open
Foxwoods, CT 313 125.9 Open
Grand Rapids, MI 350 77.2 3Q15
Memphis, TN 310 67.8 4Q15
Total 1310 270.9
Data Source: Tanger Quarterly Report (Q2)8
Removal of Held for Sale Securities
On July 15th of this year Tanger moved 4 retail centers from
their “held for sale” portfolio to “no longer actively seeking
a sale” after a second company failed to secure the
necessary financing. Analysts believe the sale may have
fallen through due to an uptick in rates shortly before the
third party company was required to have the secured
financing. In a statement, Tanger stated that all four
properties being considered in the sale remain profitable.
The four make up about 5% of the company’s operating
income.7 The fall out of this deal was viewed as a negative
by the market due to the expectation that the sale would
drive a higher cash dividend as well as remove lower
performing retail centers from the company’s holdings. In
the long run, we do not feel this event will play a significant
role in the company’s valuation.
INDUSTRY TRENDS
Industry Performance
As previously mentioned, REITs are required by law to
payout the majority of their earnings through dividend
payments and, since 1994, have paid about 71.6% of their
funds from operations (FFO) on average. FFO is calculated
by adding depreciation back to net income, removing any
gains or losses from the sale of any properties as well as
the gains or losses from unconsolidated partnerships and
joint ventures. That measure dipped to about 60%
following the financial crises in 2009 as REITs, as well as
most companies within the financial sector, made an effort
to hoard cash. Payouts increased to 75% in 2013 but have
since declined to about 64% as of year-end 2014. Many
REITs have paid out over 100% of their taxable earnings at
times to drive total returns and investor interest.2
Revenue growth, on average, has been higher than the
greater financial sector in recent years. FFO grew by 13.8%
in 2014, following larger growth of 25% in 2013. The
industry has also seen a decline in debt ratios since
peaking at 53% in 2008.2 Part of that is due to the
appreciation of property values which account for the
majority of a REIT’s total assets. REITs, which returned
28.4% in 2014, have given back some of those gains in
2015, losing about 8.6% year to date and underperforming
our benchmark, the S&P 500. Tanger is no exception to
these losses, losing about 12% year to date.
While looming interest rate hikes have clouded REIT
valuations, a strong economy could offset those factors as
we see high occupancy rates and increased consumer
spending. This could drive higher earnings, which would in
turn drive higher dividend payments. The average REIT had
a dividend yield of 3.6% as of May 2015.2
M&A Activity
M&A activity over the past two years has remained steady
in the REIT industry with total public deals totaling $53.4
and $58.5 billion in 2014 and 2013, respectively. The
largest deal announced year to date was valued at nearly
$21 billion by Simon Property Group, the largest US REIT
which Tanger has several joint venture partnerships with.2
While Tanger remains fairly large as a retail REIT, with a
market cap slightly above $3 billion, it is much smaller than
many diversified REITs within the US and not entirely
inconceivable as a takeover target. One differentiator from
most REITs in the broader industry is its name brand and
recognition as a retail outlet center, but that of course
could be retained following being acquired.
Looking at average metrics from deals completed in 2014,
the average revenue multiple was 23.9x revenue and the
average EBITDA multiple was 14.9x EBITDA. The revenue
multiple would value Tanger near $100 per share while the
EBITDA multiple would value the company around $37 per
share, just 14% above its current trading price. While we
are not expecting any M&A activity to transpire over our
holding period, it remains a possibility while borrowing
costs remain low.
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REIT M&A Transactions in 2014
*Data only includes companies listed in the S&P 1500 as buyer or seller
Source: S&P Capital IQ2
The Real Estate Cycle
The predictability of future cash flows associated with
REITs is one of the benefits to this asset class. In the case
of Tanger, future revenue streams are fairly predictable
given the long nature of most of their leasing contracts,
which are also fixed contracts. Renewal terms for Tanger
are often made for a 7 to 10 year duration. Dividends are
then derived from at least 90% of the earnings for that
year. What’s unknown is the future value of the underlying
real estate held by the REIT. Outside of the interest rate
cycle, which we are monitoring, we also have the real
estate cycle.
The real estate cycle is generally much longer than the
business cycle, which is primarily driven by economic data.
One reason for the longer duration of the cycle is the time
required to develop and construct properties and then find
occupants for the properties. It typically takes four years
to go from site planning to rent check within the industry.6
In the case of Tanger, they have reduced this period to
about one year from breaking ground to grand opening.1
Looking at the Hoyt real estate market cycle, we believe
we are just entering phase two, the expansion period. We
saw phase 4, the recession, following the 2008-2009
financial crisis. We believe the years following were part of
the recovery stage, which is now ending as we enter the
expansion phase as evidenced by the recent conversations
happening within the Fed. We also see low vacancy, or
high occupancy, rates within the industry, especially with
Tanger which has had 98% occupancy since 2010. For this
reason, we believe there are still several more years of
growth before we see our next peak in real estate prices.
Hoyt Real Estate Market Cycle
Source: Forbes6
MARKETS AND COMPETITION
Competition
Due to the requirements by many client retailers to remain
away from large shopping centers which may contain their
parent company’s stores, Tanger does not see its major
competition as other malls or retail centers. Its primary
competitors, as discussed in their annual report, include
pension funds, private equity investors, and other REITs
which compete for the acquisition of land or existing outlet
centers which Tanger may target for future development.1
The amount of retail REITs, and overall REITs registered
within the industry, have increased rapidly within recent
years, adding to the competitive landscape to acquire the
best development opportunities. This could impact the
rate at which future developments are added to the
company’s portfolio. In regards to retail REITs specifically,
few players in the industry have the relationships with
retailers that Tanger has built since the 1990s. For this
reason, we believe there is a barrier, to some extent,
within the industry for discount retail outlets.
Other Retail REITs
There is not a high level of competition for retail REITs
operating as separated, or unanchored, outlet centers.
While Tanger is not the largest in the US, lagging behind
Simon Property Group, the list drops sharply thereafter.
Page 7
While Simon may be viewed as its lone competitor, the
two’s frequent joint ventures would suggest otherwise.
These collaborations have been created, to some extent,
to avoid competing against one another. In the case of the
Charlotte, NC center in 2014, the pair each bid for the
same greenspace for future development prior to the
equal split.12 While not official, similar agreements could
have been made to strike their 2015 announcement in the
Columbus, OH center.
Source: ISCS11
Peer Comparisons
Market Dividend Debt/ P/E P/ Company Cap (B) Yield Equity (ttm) Book
Simon Property Group 56.75 3.10% 38.9% 38.2 12.5
CBL & Associates Props 2.50 7.34% 193.6% 14.9 1.8
General Growth Props 22.58 2.89% 61.9% 17.3 2.7
Equity Residential 26.34 3.12% 41.1% 29.2 2.5
Host Hotels & Resorts 13.08 4.51% 31.0% 18.6 1.8
Boston Properties Inc. 18.08 2.28% 55.6% 32.6 3.1
Vornado Realty Trust 17.15 2.84% 57.7% 19.3 3.1
CBRE Group, Inc. 11.09 - 22.5% 21.1 4.4
Average 15.83 3.73% 44.1% 23.9 2.8
Tanger Factory Outlets 3.12 3.52% 48.7% 31.8 4.5
Data Source: FactSet13 & Yahoo Finance15
Market Cap
As mentioned earlier, while Tanger is large for an outlet
retail REIT, it is still fairly small in comparison to many
diversified REITs. At a market cap of $3.12 billion, it is
significantly smaller than its closest publicly traded peer
comparisons, which average a market cap of nearly $16
billion. It’s worth noting its size in comparison to Simon
Property ($57 billion), a diversified REIT which it has
several joint venture retail centers with.
Dividend Yield
Tanger has a comparable dividend yield to its peer group.
This average decreases to 3.12% removing CBL, a potential
outlier at 7.34%. Tanger prides itself on its dividend yield,
particularly that it has raised its dividend for 22
consecutive years, going back to when the company
initially went public. This feat was particularly impressive
during and following the financial crisis.
Debt Leverage Ratio (D/E)
Tanger is again in line with its peers when assessing is debt
to equity, or leverage ratio, when removing CBL as an
outlier. This ratio, along with industry peers, has been on
the decline since 2010 as underlying properties values
began to regain value and equity values returned to
previous levels. There has been significant refinancing of
debt over this time period as well as firms look to capitalize
on the recent rate environment.
Price to Earnings (P/E) and Price to Book (P/B)
These two relative metrics, while widely used within the
financial sector, do not hold quite as strong when
assessing REIT valuations. Both measures would suggest
that Tanger is overvalued in comparison to this peer group.
Price to book, in particular, is nearly double this peer group
for Tanger.
Funds from Operations (FFO) & Adjusted FFO (AFFO)
Ticker Company Price P/FFO P/AFFO
SPG Simon Property Group $183.42 17.4 19.5
CBL CBL & Associates Props $14.32 6.3 8.9
GGP General Growth Props $24.48 16.4 20.9
EQR Equity Residential $72.36 19.8 22.1
HST Host Hotels & Resorts $17.41 10.5 10.5
BXP Boston Properties Inc. $117.72 20.7 29.4
VNO Vornado Realty Trust $90.99 17.6 28.2
Average 15.5 19.9
SKT Tanger Factory Outlets $33.67 11.4 15.7
Data Source: FactSet13
The two key industry metrics for comparing REITs are
funds from operations (FFO) and adjusted funds from
operations (AFFO). FFO is calculated by adding
depreciation back to net income, removing any gains or
Page 8
losses from the sales of any properties as well as the gains
or losses from sales on unconsolidated partnerships and
joint ventures. AFFO goes a step further and adjusts for
capital expenditures, or expenses related to the upkeep of
managed properties. Accounting for the additional cash
outflow, AFFO is used as a better predictor for a REITs
ability to pay future dividends. These are converted to
relative multiples by adding the company’s current trading
price as the numerator.
Looking at the same set of comparables, we can see that
Tanger trades at a multiple 36% lower than the industry
average using this sample set. We will revisit FFO and AFFO
in our relative valuation discussion.
ECONOMIC OUTLOOK
REITs are largely driven by macroeconomic factors in the
marketplace including the interest rate environment,
consumer spending, and overall growth of the economy.
Low unemployment rates and job creations are key drivers
for consumer spending.
Unemployment Rate
At 5.1%, unemployment is at its lowest level since early
2008. This drop, from 5.3% in July, reflects employment
conditions before the financial crisis. Rates of
unemployment at this level may be a concern for some
who believe we may run the risk of creating an overheating
economy if rates fell much below 5%, a mark often
considered to be full employment. September job growth
data, however, was disappointing, adding fewer jobs in
August than expected. We believe that unemployment will
increase, but still remain relatively low at 5.4% over the
next two years. Wage growth has been relatively positive
with the employment cost index increasing 2.8% in the
first quarter of the year.2 We also see consumer
confidence neutral to increasing over both the short and
intermediate terms.
Source: USA Today4
A healthy economy has both positive and negative impacts
to Tanger as a retail REIT. As consumer spending increases,
the amount of revenue Tanger receives through
percentage rent increases. However, as the economy
strengthens, the likelihood of that the Federal Reserve
makes moves to increase interest rates also increases
which impacts Tanger’s cost of capital for future projects.
Interest Rates
With favorable unemployment data, the debate to
increase rates when the Fed meets in mid-September has
sharpened. There are counterarguments, however,
suggesting the Fed should delay any rate hikes. Significant
wage pressure still has yet to be seen and wage growth has
slowed over the summer months. Some Fed officials have
also suggested that the decisions should be more risk-
adverse and delay an immediate rate increase due to the
recent market volatility both domestically and globally.
The Greek debt crisis and recent growth disappointments
in China have shown us the fragility of global markets and
analysts believe emerging markets, which have struggled
in recent years, are too sensitive to handle any global
increases in rates. This has prompted the IMF to raise
concern about a potential global crisis if the fed were to
increase interest rates during a time of uncertainty and
volatility.
Regardless, the market has been on a prolonged bull run
which is believed to be fed by cheap money. The
immobility of the near zero rates have now created a
Page 9
scenario where, we believe, markets will create an initial
overreaction to whatever decision is made by the Fed.
REITs, as well as other financial firms tied to interest rates,
will likewise see an overreaction in their stock prices which
could lead to a brief decline in Tanger’s value. Once the
Fed decides to raise the federal funds rate, the increase is
likely to be small, presumably a quarter point at most. Our
consensus is that the Fed will increase the Fed funds rate
to 0.25% in the next 6 months and to 1.0% over the next
two years. This will represent the first Fed funds rate
increase since 2006.
The Fed funds rate and accompanying monetary policy are
key drivers for domestic lending rates. The 10 year
treasury yield has remained relatively steady, currently at
2.19%, an increase from 12 month lows of 1.64% in
February but short of 12 month highs of 2.66% last
September. Many REITs, including Tanger, are sensitive
toward higher rates as it will inherently increase the cost
of capital for future operations. In the case of Tanger, the
internal rate of return for future retail developments will
be directly impacted. I believe the company can weather a
slow and steady rising rate environment, but if rates rise
quickly we should expect to see a pullback in value. Our
consensus is to see the 10 year treasury rate rise to 2.5%
over the next 6 months and continue toward 3.25% over
the next two years.
US 10 Year Treasury Yield
Source: MarketWatch5
CATALYSTS FOR GROWTH
Positive macro-economic factors play a significant role in
driving growth within the retail REIT industry. With GDP at
2.3%, our consensus is to see this number grow at a 2.45%
annualized rate over the next 6 months and continue
upward to 3% annualized over the next two years,
providing the backdrop to drive our increasing consumer
confidence estimates and consumer spending within the
economy.
Recent location expansions also provide a catalyst for
growth. Tanger has plans for four new locations coming
online by year end with two already opening over the
summer months. These new locations exceed the average
size of centers currently held within its portfolio and we
believe management was overly conservative on their
impact on future growth. Once a new location goes
through its grand opening, management estimates that it
takes about 12 months to be fully operational at capacity,
a reason why they do not immediately include new store
data into the current portfolio data. This growth also came
at a timely manner as the company was able to raise the
necessary capital for above average annual growth prior to
any expected rate hikes in the coming month(s).
INVESTMENT POSITIVES
• With our consensus of an improving economic
environment and increased consumer confidence,
the best position to take is a pure play retail REIT
when looking at alternative REIT investment
options. As the only pure play REIT in the industry,
Tanger is also the outlet center of choice by many
retailers as evidenced by their exceptionally high
occupancy rates.
• While higher dividend yielding REITs exist in the
marketplace, none have the track record of Tanger,
increasing dividends for 22 consecutive years.
Future growth outlooks suggest there is no reason
for this streak to end anytime soon.
• The company remains well diversified both in
geographical presence and selection of retailers. The
company’s footprint stretches coast to coast and no
individual retailer accounts for more than 8% of its
available retail space. The top 10 retailers account
Page 10
for less than 40% of its retail space. This minimizes
the company’s non-systemic risk for uncontrollable
future events with retailers.
• As we will see in valuations, Tanger trades at a
discount to the market when looking at price to FFO
and AFFO metrics, the industry standard in relative
REIT multiples. This suggests that, despite its
positive growth outlooks, the market has not
overvalued the company in comparison to its peer
group.
• We also believe it is noteworthy to look at the joint
venture history with Simon Property Group. While
Simon could be considered Tanger’s only real threat
in the retail outlet arena, and only a fraction of the
size, the company has managed to turn bidding wars
into mutually beneficial opportunities. We continue
to see these opportunities emerge as recent as July
of this year demonstrating a strong industry
partnership.
INVESTMENT NEGATIVES
• The impact of a rising rate environment could prove
difficult for Tanger as it continues to raise capital for
future development. It may also negatively impact
the underlying property values of its portfolio. If
rates move at a rapid pace, we can expect to see a
pullback in Tanger’s stock price. Additionally, as a
yield oriented investment, REITs will face pressure
from investors who seek higher yielding
opportunities.
• The emergence of REITs as an asset class continues
to gain steam for investors seeking real estate
exposure. This has resulted in increased competition
for land in prime development areas regardless of
property purpose. If this threat continues it could
hamper future growth expectations for the
company.
• As e-commerce continues to increase, closing many
brick and mortar retailers, outlet retailers have yet
to feel an impact. If online or other distribution
channels prove to be more efficient for retailers,
Tanger’s record of above average occupancy rates
could be affected.
VALUATION
Based on our industry and company research up to this
point, we looked at several valuation models relative
performance metrics.
Dividend Discount Model (DDM)
The dividend discount model is essential in REIT valuation
as dividends represent a substantial portion of the total
return a REIT delivers. Our valuation of future dividend
payments have 2015 and 2016 payouts increasing roughly
5% for both years. This, however, represents a decline in
payout from earnings, which has averaged 115% over the
past three years, to the mid 90% range. REITs are able to
payout dividends in excess of GAAP earnings due to the
addback of depreciation.
This expectation is based on the company’s need to retain
capital and bring equity to the table in the multiple centers
the company has in development and planned
development over the next two years. As the company’s
guidance beyond that period slows, we have our dividend
payout ratio returning to a more stable 100-115% range
throughout the remainder of our investment horizon.
These payout expectations, accompanied with a
continuous growth expectation of 3%, derive a DDM value
of $34.66. This represents a premium of 3% beyond the
company’s current trading price. Adjustments to our cost
of equity and return on equity within range of our current
values give us a range of $31.23 on the low end and $38.20
on the high end. Further sensitivity analysis can be found
later in the report.
Relative Price to FFO & AFFO
Ticker Company Price P/FFO P/AFFO
SPG Simon Property Group $183.42 17.4 19.5
CBL CBL & Associates Props $14.32 6.3 8.9
GGP General Growth Props $24.48 16.4 20.9
EQR Equity Residential $72.36 19.8 22.1
HST Host Hotels & Resorts $17.41 10.5 10.5
BXP Boston Properties Inc. $117.72 20.7 29.4
VNO Vornado Realty Trust $90.99 17.6 28.2
Average 15.5 19.9
SKT Tanger Factory Outlets $33.67 11.4 15.7
Data Source: FactSet13
Page 11
Implied Value:
Relative Price/FFO: $42.82
Relative Price/AFFO: $42.74
Blended Relative FFO/AFFO: $43.77
As mentioned previously, Price to FFO and AFFO are the
industry standard when using multiples to derive relative
valuations. Using seven of Tanger’s closest publicly traded
REIT comparables, we can assess a relative valuation using
these key industry metrics to their peers. The average FFO
and AFFO, ttm, using these peers yields industry multiples
of 15.5 and 19.9, respectively. Applying these multiples to
Tanger’s current trading price we see relative values of
$42.82 using FFO and $42.74 using AFFO. To derive a single
valuation, we used a blend of the two metrics, placing a
two-thirds weight on AFFO. This yielded a FFO/AFFO value
of $43.77, a 30% premium to the company’s trading price
as of the time of this report.
Equity Discounted Cash Flow (DCF) &
Economic Profit (EP) Models
While equity discounted cash flow (DCF) and economic
profit (EP) models can be useful when assessing a financial
institution, we believe they are less effective when valuing
REITs. One reason for this is that the industry is forecasting
payout expectations, either through dividends or share
repurchases, and less focused on the company’s actual
earnings. We are not, however, disregarding these
valuation results.
Our results from both of these traditional models resulted
in positive findings. Our equity DCF model derived a value
of $38.48, a 14% premium on its current trading price and
our equity EP model derived a value of $38.71,
representing a 15% premium. Both valuation methods
align with our buy recommendation. Our sensitivity
analysis following the report tested continuous growth
rates, continuous ROE, beta, cost of equity, and the impact
of increasing revenue estimates by varying percentages
each year throughout our horizon. The results, within an
interval adjustment, were found to be within range of our
targeted values.
Price to Earnings (P/E)
EPS EPS P/E P/E
Company Price 2015E 2016E 2015 2016
Simon Property Group $183.42 $10.07 $10.73 18.2 17.1
CBL & Associates Props $14.32 $2.29 $2.29 6.3 6.3
General Growth Props $24.48 $1.43 $1.58 17.1 15.5
Equity Residential $72.36 $3.44 $3.73 21.0 19.4
Host Hotels & Resorts $17.41 $1.54 $1.71 11.3 10.2
Boston Properties Inc. $117.72 $5.42 $5.82 21.7 20.2
Vornado Realty Trust $90.99 $5.18 $5.21 17.6 17.5
CBRE Group, Inc. $31.79 $1.97 $2.28 16.1 13.9
Average 16.2 15.0
Tanger Factory Outlets $33.67 $1.06 $1.10 31.0 29.9
Data Source: FactSet13
Implied Value:
Relative P/E (EPS ’15): $17.21
Relative P/E (EPS ’16): $16.55
Blended Forward P/E: $16.88
While P/E ratios remain an equity valuation standard, this
metric is often avoided in REIT valuation. We used forward
P/E’s for our peer group with earnings estimates from
FactSet. Our relative valuation model did not yield positive
results, deriving values at nearly half the company’s
trading price. Given the REIT industry’s lack of use for this
metric, we did not include its results in our relative
valuation model, instead sticking with FFO and AFFO
metrics.
Asset Class Correlation
10 Year Note S&P 500 REIT Index
1 Year -0.621 0.101 0.735
2 Year -0.665 0.528 0.741
3 Year -0.169 0.564 0.776
5 Year -0.390 0.851 0.920
Data Source: Bloomberg14
When adding REITs to a portfolio, we should also
understand its decorrelation to our benchmark. The chart
above shows Tanger’s daily return correlations to the 10
year T-note, S&P 500, and Vanguard’s total REIT index
across 1 to 5 year time horizons. While naturally the
strongest correlation in this set is the REIT index, Tanger,
as well as many REITs, also has relatively strong inverse
correlation to interest rates. That is to say as rates rise, we
should naturally expect compression in Tanger’s valuation,
Page 12
all else equal. We can also see how weak the correlation
has been to the S&P 500. In recent years in particular, we
can see how the correlation has dramatically shifted from
broader markets to rate fixations for future estimates.
Summary
Value Premium
Equity DCF 38.48 14.3%
Equity EP 38.71 15.0%
DDM 34.66 34.66%
Relative Value 43.77 30.0%
Target Price 38.00 12.9%
To derive a target price, we assed all valuation metrics and
emphasized those we felt best represented the industry
and how analysts would price REIT securities. With that,
our strongest valuations are our relative valuation and
DDM. Our relative valuation included our blended P/FFO
and P/AFFO multiples, while removing P/E, P/E/G, and P/B,
which did not produce consistent results within the peer
group and are not well regarded multiples within the
industry. These two valuations methods also focus on cash
flows to the end investor, a main focal point for REIT
analysts. Our second tier of valuations include both the
equity DCF and EP models. While not as strong as the prior
valuations, earnings driven models play a significant role is
future payout expectations. With that, we set our target
price at $38, representing a 13% upside for Tanger.
KEYS TO MONITOR
The interest rate environment will play the largest role in
directing Tanger’s equity valuation. While strong growth
factors will foreseeably drive Tanger to outperform within
the sector, any event that drives interest rates higher at a
rapid pace will ultimately lead this sector to underperform
broader markets. Keys to monitor include economic data
driving Fed decisions (GDP, unemployment, jobs data) and
announcements directly or indirectly providing guidance
on future rate expectations.
For non-systemic indicators, the largest growth driver for
the company is its expansion projects. With four scheduled
to open this year and announcements made for following
years, any early signs of lackluster results will be a red flag.
Analysts have priced in expectations for these new
locations to rival their current top five retail centers.
Guidance will be provided through quarterly releases,
however we will not see more detailed results until the
locations have been active for a 12 month period.
REFERENCES
1. Tanger Factory Outlet Centers, Inc. Annual Report (10-
K), EDGAR SEC, February 24, 2015
2. “Industry Overview: Real Estate Investment Trusts,”
S&P Capital IQ, July 2015
3. "Jobs Report Gives Ammunition to Both Sides of Fed
Rate Debate,” New York Times, September 5, 2015,
http://www.nytimes.com/2015/09/05/business/econ
omy/jobs-report-hiring-unemployment-wages-
interest-rates.html?_r=0
4. “Dow tumbles on jobs report,” USA Today, September
4, 2015
http://www.usatoday.com/story/money/markets/20
15/09/04/dow-falls--wall-street-awaits-job-report-
and-fed-impact/71692114/
5. “U.S. 10 Year Treasury Note,” MarketWatch,
September 13, 2015,
http://www.marketwatch.com/investing/bond/tmub
musd10y?countrycode=bx
6. “Predicting REIT Profits That Help You Sleep Well At
Night,” Forbes, August 31, 2015,
http://www.forbes.com/sites/bradthomas/2015/08/
31/predicting-reit-profits-that-help-you-sleep-well-at-
night/2/
7. “Bulletin: Tanger Factory Outlet Center, Inc,” Evercore
ISI Equity Research, July 15, 2015
8. Tanger Factory Outlet Centers, Inc. Quarterly Report
(10-Q), EDGAR SEC, August 5, 2015
9. “Tanger Factory Outlet Centers, Inc. Briefing,” RBC
Equity Research, August 6, 2015
10. “Edited Transcript of SKT earnings conference call,”
Yahoo Finance, August 5, 2015
http://finance.yahoo.com/news/edited-transcript-
skt-earnings-conference-035605240.html
11. “2014 Outlet Tenant Report,” ICSC, 2014,
http://www.icsc.org/vrn/uploads/2014stateoftheoutl
etindustry.pdf
12. “Simon, Tanger Factory JV Opens $90M Outlet Mall,
Charlotte’s First in 10 Years,” Commercial Property
Executive, August 1, 2014,
http://www.cpexecutive.com/cities/charlotte/simon-
tanger-factory-jv-opens-90m-outlet-mall-charlottes-
first-in-10-years/1004101631.html
13. FactSet
Page 13
14. Bloomberg
15. Yahoo Finance
IMPORTANT DISCLAIMER
Henry Fund reports are created by student enrolled in the
Applied Securities Management (Henry Fund) program at
the University of Iowa’s Tippie School of Management.
These reports are intended to provide potential employers
and other interested parties an example of the analytical
skills, investment knowledge, and communication abilities
of Henry Fund students. Henry Fund analysts are not
registered investment advisors, brokers or officially
licensed financial professionals. The investment opinion
contained in this report does not represent an offer or
solicitation to buy or sell any of the aforementioned
securities. Unless otherwise noted, facts and figures
included in this report are from publicly available sources.
This report is not a complete compilation of data, and its
accuracy is not guaranteed. From time to time, the
University of Iowa, its faculty, staff, students, or the Henry
Fund may hold a financial interest in the companies
mentioned in this report.
Tanger Factory Outlet Centers
Key Assumptions of Valuation Model
Ticker Symbol SKT
Current Share Price $33.67
Current Model Date 11/18/2015
Fiscal Year End Dec. 31
Pre-Tax Cost of Debt 3.93%
Cost of Equity (CAPM) 5.73%
Beta 0.622
Risk-Free Rate 2.71%
Equity Risk Premium 4.85%
CV Growth 3.00%
CV ROE 19.97%
Current Dividend Yield 3.12%
Beta:
2y 5y 10y Avg
Daily 0.599 0.844 1.147 0.863
Weekly 0.345 0.696 1.026 0.689
Monthly -0.049 0.357 0.636 0.315
Average 0.298 0.632 0.936 0.622
2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Forecast Figures
Balance Sheet
Gross RE Property 1.63% 15.53% 0.61% 8.50% 6.00% 7.00% 6.50% 6.00%
Real Estate Equity Interests 344.62% 10.73% 48.38% 18.00% 16.00% 10.00% 8.00% 8.00%
Cash & Near Cash Items (% of TRE) 0.69% 0.88% 0.91% 0.90% 0.90% 0.90% 0.90% 0.90%
Other Assets -2.50% 44.25% -11.90% 0.00% 0.00% 0.00% 0.00% 0.00%
Total Debt 5.91% 21.55% 7.88% 7.00% 3.00% 10.00% 5.00% 5.00%
Minority Interest -53.93% 13.02% -23.40% -2.00% -2.00% -2.00% -2.00% -2.00%
Common Stock and APIC 6.39% 2.99% 0.33% 5.00% 5.00% 5.00% 5.00% 5.00%
Income Statement
Total Rent Revenues 13.25% 7.79% 8.77% 6.00% 7.00% 6.00% 4.00% 4.00%
Interest Expense (% Ttl Debt) 5.19% 4.29% 4.01% 3.90% 3.80% 3.70% 3.60% 3.50%
Weighted Shares Outstanding 10.52% 1.72% 0.49% 4.00% 4.00% 4.00% 4.00% 4.00%
Property Operating Expenses (% ttl rev) 31.14% 31.46% 32.83% 32.00% 33.00% 32.40% 32.40% 32.40%
Tanger Factory Outlet Centers
Revenue Decomposition (in millions)
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Revenue
Base Rentals 235.2 253.4 274.5 291.9 312.4 331.1 344.4 358.1
Expense Reimbursements 100.1 109.7 122.5 127.8 136.7 144.9 150.7 156.8
Percentage Rentals 11.2 11.3 10.3 12.4 13.3 14.1 14.7 15.2
Other Income 10.5 7.4 7.6 3.5 3.8 4.0 4.2 4.4
Mgmt, Leasing and Other Services -- 3.1 3.6 8.0 8.5 9.1 9.4 9.8
Total Revenue 357.0 384.8 418.6 443.7 474.7 503.2 523.3 544.3
Growth Rate 13.3% 7.8% 8.8% 6.0% 7.0% 6.0% 4.0% 4.0%
Tanger Factory Outlet Centers
Income Statement (in millions)
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Revenues
Base Rent 235.2 253.4 274.5 291.9 312.4 331.1 344.4 358.1
Expense reimbursements 101.1 109.7 122.5 127.8 136.7 144.9 150.7 156.8
Percentage Rent 11.2 11.3 10.3 12.4 13.3 14.1 14.7 15.2
Income from REO 0.0 3.1 3.6 3.5 3.8 4.0 4.2 4.4
Other Operating Income 9.5 7.4 7.6 8.0 8.5 9.1 9.4 9.8
Total Revenue 357.0 384.8 418.6 443.7 474.7 503.2 523.3 544.3
Expenses
Property Operating Expenses 111.2 121.0 137.4 142.0 156.7 163.0 169.6 176.3
General & Administrative 37.5 39.1 44.5 44.8 47.9 50.8 52.9 55.0
Other Operating Expenses 0.0 1.2 2.4 0.2 0.7 0.8 0.9 1.0
Depreciation and amortization 98.7 95.7 102.4 97.6 104.4 110.7 115.1 119.7
Total Expenses 247.3 257.1 286.7 284.6 309.8 325.3 338.4 352.1
Operating Income (Loss) 109.7 127.7 131.9 159.1 165.0 177.9 184.9 192.2
Other Income (Expense)
Interest Expense, Net -57.1 -57.3 -57.9 -60.2 -60.4 -64.7 -66.1 -67.5
Abnormal Losses (Gains) -0.1 0.0 -13.1 0.2 2.8 -2.0 -2.1 -2.1
Sale Of Property 0.0 26.0 7.5 0.0 0.0 0.0 0.0 0.0
Other Non-Op (Income) Loss 0.0 0.2 0.8 0.0 0.0 0.0 0.0 0.0
Income (Loss) from Affiliates/JV -3.3 11.0 9.1 10.0 10.0 10.0 10.0 10.0
Total Other Income (Expense) -60.5 -20.1 -53.7 -50.0 -47.6 -56.8 -58.3 -59.6
Net Income before minority int. 49.2 107.6 78.2 109.1 117.3 121.1 126.6 132.6
Minority Interest -3.2 -5.8 -4.1 -5.3 -5.5 -4.9 -5.0 -4.8
Net Income 45.9 101.8 74.0 103.8 111.9 116.2 121.6 127.8
Funds from Operations (FFO)
Net Income 45.9 101.8 74.0 103.8 111.9 116.2 121.6 127.8
Depreciation and amortization 98.7 95.7 102.4 97.6 104.4 110.7 115.1 119.7
Minority interest -3.2 -5.8 -4.1 -5.3 -5.5 -4.9 -5.0 -4.8
Other Adjustments 19.5 0.2 7.7 15.2 13.1 15.0 14.1 12.1
Funds from Operations 160.9 192.0 180.0 211.3 223.9 237.0 245.8 254.8
Adjustments for AFFO 0.12 -6.01 14.96 2.8 1.9 2.9 2.4 2.7
Adj. Funds from Operations (AFFO) 161.00 186.01 194.94 214.10 225.85 239.95 248.20 257.54
Net income available to shareholders
Basic earnings per share (EPS) 0.57 1.14 0.77 1.06 1.10 1.10 1.11 1.12
Dividends declared per common share 0.83 0.89 0.95 0.99 1.04 1.09 1.15 1.21
FFO per share 1.76 1.99 2.08 2.20 2.23 2.27 2.26 2.26
Weighted avgerage shares outstanding 91.73 93.31 93.77 97.5 101.4 105.5 109.7 114.1
Tanger Factory Outlet Centers
Balance Sheet (in millions)
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Assets
Gross Real Estate Property 1,947.4 2,249.8 2,263.6 2,456.0 2,603.4 2,785.6 2,966.7 3,144.7
Accumulated Depreciation -582.9 -654.6 -662.2 -761.4 -807.0 -863.5 -919.7 -974.8
Real Estate Held for Sale 0.0 0.0 46.0 0.0 0.0 0.0 0.0 0.0
Net Real Estate Property 1,364.5 1,595.2 1,647.4 1,694.6 1,796.3 1,922.1 2,047.0 2,169.8
Real Estate Equity Interests 126.6 140.2 208.1 245.5 284.8 313.3 338.3 365.4
Total Real Estate Investments 1,491.1 1,735.4 1,855.4 1,940.1 2,081.1 2,235.3 2,385.3 2,535.2
Cash & Near Cash Items 10.3 15.2 16.9 5.9 2.1 6.6 3.1 4.1
Other Assets 177.3 255.8 225.4 225.4 225.4 225.4 225.4 225.4
Total Assets 1,678.8 2,006.5 2,097.7 2,171.4 2,308.6 2,467.3 2,613.8 2,764.7
Liabilities & Shareholders' Equity
Unsecured Debt 985.8 1,077.6 1,171.8 1,250.8 1,288.3 1,417.2 1,488.0 1,562.4
Secured Debt 114.8 260.3 271.4 293.4 302.2 332.4 349.0 366.5
Total Debt 1,100.6 1,337.8 1,443.2 1,544.2 1,590.5 1,749.6 1,837.1 1,928.9
Accounts Payable 41.1 49.7 69.6 65.5 67.4 74.2 77.9 81.8
Other Long-Term Liabilities 23.2 61.4 61.0 49.4 50.9 56.0 58.8 61.7
Total Liabilities 1,164.9 1,448.9 1,573.8 1,659.1 1,708.9 1,879.8 1,973.8 2,072.4
Minority Interest 31.3 35.3 27.1 26.5 26.0 25.5 25.0 24.5
Share Capital & APIC 767.0 789.9 792.5 832.1 873.8 917.4 963.3 1,011.5
Retained Earnings & Other Equity -284.4 -267.7 -295.7 -346.4 -300.1 -355.4 -348.2 -343.7
Total Equity 513.9 557.6 523.9 512.3 599.7 587.5 640.1 692.2
Total Liabilities & Equity 1,678.8 2,006.5 2,097.7 2,171.4 2,308.6 2,467.3 2,613.8 2,764.7
Tanger Factory Outlet Centers
Cash Flow Statement (in millions)
Fiscal Years Ending Dec. 31 2012 2013 2014
Cash From Operating Activities
Net Income 53.2 107.6 74.0
Depreciation & Amortization 98.7 95.7 102.4
Other Non-Cash Adjustments 15.5 -17.1 11.8
Changes in Non-Cash Capital -1.7 1.3 0.5
Cash From Operating Activities 165.8 187.5 188.8
Cash From Investing Activities
Disposal of Fixed Assets 0.0 0.0 39.0
Property Additions -41.3 -55.2 -149.0
Change in Real Estate Interest -101.6 -103.7 -76.9
Other Investing Activities -5.1 -15.3 -3.7
Cash from Investing Activities -147.9 -174.2 -190.7
Cash from Financing Activities
Dividends Paid -76.9 -87.2 -90.4
Preferred Dividends Other Distributions -4.9 -4.9 -5.0
Change in Secured Debt 68.5 88.4 115.9
Increase in Capital Stocks 0.5 0.6 3.0
Decrease in Capital Stocks 0.0 0.0 0.0
Other Financing Activities -2.6 -5.3 -20.0
Cash from Financing Activities -15.4 -8.4 3.5
Net Changes in Cash 2.4 4.9 1.6
Tanger Factory Outlet Centers
Cash Flow Statement (in millions)
Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E
Cash Flows from Operating Activities
Net income (loss) 103.8 111.9 116.2 121.6 127.8
Increase (decrease) in Accounts Payable -4.1 2.0 6.7 3.7 3.9
Increase (decrease) in Accumulated Depreciation 99.1 85.7 62.5 86.1 105.2
Net cash provided by operating activities 198.8 199.5 185.4 211.4 236.9
Cash Flows from Investing Activities
(Increase) decrease in Gross Real Estate Property -192.4 -147.4 -182.2 -181.1 -178.0
(Increase) decrease in Real Estate Held for Sale 46.0 0.0 0.0 0.0 0.0
(Increase) decrease in Real Estate Equity Interests -37.4 -39.3 -28.5 -25.1 -27.1
(Increase) decrease in Minority Interest 0.5 0.5 0.5 0.5 0.5
(Increase) decrease in Other Assets/Liabilities -11.6 1.5 5.1 2.8 2.9
Net cash used for investing activities -194.9 -184.6 -205.1 -202.8 -201.6
Cash Flows from Financing Activities
Proceeds from issuing Long-Term Debt 101.0 106.3 159.1 133.5 122.9
Payment of Dividends -77.4 -84.5 -92.3 -100.8 -110.1
Proceeds from issuance of Common Stock 1.1 1.1 1.1 1.1 1.1
(Increase) decrease in Share Capital & APIC -39.6 -41.6 -43.7 -45.9 -48.2
Net cash provided by financing activities -14.9 -18.7 24.2 -12.1 -34.3
Net increase (decrease) in cash -11.0 -3.8 4.5 -3.4 1.0
Cash, beginning of year 16.9 5.9 2.1 6.6 3.1
Cash, end of year 5.9 2.1 6.6 3.1 4.1
Tanger Factory Outlet Centers
Common Size Income Statement (as a % of Assets)
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Income Statement
Revenues
Base Rent 20.97% 21.50% 22.56% 18.00% 18.61% 16.50% 16.42% 16.49%
Expense reimbursements 9.01% 9.30% 10.07% 7.88% 8.14% 7.22% 7.19% 7.22%
Percentage Rent 1.00% 0.95% 0.85% 0.77% 0.79% 0.70% 0.70% 0.70%
Income from REO 0.00% 0.26% 0.30% 0.22% 0.23% 0.20% 0.20% 0.20%
Other Operating Income 0.85% 0.63% 0.63% 0.49% 0.51% 0.45% 0.45% 0.45%
Total Revenue 31.82% 32.64% 34.39% 27.36% 28.28% 25.08% 24.95% 25.07%
Expenses
Property Operating Expenses 9.91% 10.27% 11.29% 8.75% 9.33% 8.13% 8.08% 8.12%
General & Administrative 3.34% 3.32% 3.65% 2.76% 2.86% 2.53% 2.52% 2.53%
Other Operating Expenses 0.00% 0.10% 0.19% 0.01% 0.04% 0.04% 0.04% 0.05%
Depreciation and amortization 8.80% 8.12% 8.42% 6.02% 6.22% 5.52% 5.49% 5.51%
Total Expenses 22.04% 21.81% 23.56% 17.55% 18.45% 16.21% 16.13% 16.21%
Operating Income (Loss) 9.78% 10.83% 10.84% 9.81% 9.83% 8.86% 8.81% 8.85%
Other Income (Expense)
Interest Expense, Net -5.09% -4.86% -4.76% -3.71% -3.60% -3.23% -3.15% -3.11%
Abnormal Losses (Gains) -0.01% 0.00% -1.08% 0.01% 0.17% -0.10% -0.10% -0.09%
Sale Of Property 0.00% 2.21% 0.62% 0.00% 0.00% 0.00% 0.00% 0.00%
Other Non-Op (Income) Loss 0.00% 0.02% 0.07% 0.00% 0.00% 0.00% 0.00% 0.00%
Income (Loss) from Affiliates -0.29% 0.94% 0.74% 0.62% 0.60% 0.50% 0.48% 0.46%
Total Other Income (Expense) -5.40% -1.70% -4.41% -3.08% -2.84% -2.83% -2.78% -2.74%
Net Income before minority int. 4.38% 9.13% 6.42% 6.73% 6.99% 6.03% 6.04% 6.11%
Minority Interest -0.29% -0.49% -0.34% -0.33% -0.33% -0.24% -0.24% -0.22%
Net Income 4.09% 8.64% 6.08% 6.40% 6.66% 5.79% 5.80% 5.89%
Net income available to shareholders
Basic earnings per share (EPS) 0.05% 0.10% 0.06% 0.07% 0.07% 0.05% 0.05% 0.05%
Dividends declared per common share 0.07% 0.08% 0.08% 0.06% 0.06% 0.05% 0.05% 0.06%
Tanger Factory Outlet Centers
Common Size Balance Sheet (as a % of Assets)
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Assets
Gross Real Estate Property 116.00% 112.13% 107.91% 113.11% 112.77% 112.90% 113.50% 113.74%
Accumulated Depreciation -34.72% -32.63% -31.57% -35.06% -34.96% -35.00% -35.18% -35.26%
Real Estate Held for Sale 0.00% 0.00% 2.19% 0.00% 0.00% 0.00% 0.00% 0.00%
Net Real Estate Property 81.28% 79.50% 78.53% 78.04% 77.81% 77.90% 78.31% 78.48%
Real Estate Equity Interests 7.54% 6.99% 9.92% 11.31% 12.34% 12.70% 12.94% 13.22%
Total Real Estate Investments 88.82% 86.49% 88.45% 89.35% 90.15% 90.60% 91.26% 91.70%
Cash & Near Cash Items 0.62% 0.76% 0.80% 0.27% 0.09% 0.27% 0.12% 0.15%
Other Assets 10.56% 12.75% 10.74% 10.38% 9.76% 9.13% 8.62% 8.15%
Total Assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Liabilities & Shareholders' Equity
Unsecured Debt 58.72% 53.70% 55.86% 57.60% 55.81% 57.44% 56.93% 56.51%
Secured Debt 6.84% 12.97% 12.94% 13.51% 13.09% 13.47% 13.35% 13.26%
Total Debt 65.56% 66.68% 68.80% 71.12% 68.90% 70.91% 70.28% 69.77%
Accounts Payable 2.45% 2.48% 3.32% 3.02% 2.92% 3.01% 2.98% 2.96%
Other Long-Term Liabilities 1.38% 3.06% 2.91% 2.28% 2.20% 2.27% 2.25% 2.23%
Total Liabilities 69.39% 72.21% 75.03% 76.41% 74.02% 76.19% 75.51% 74.96%
Total Preferred Equity 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Minority Interest 1.86% 1.76% 1.29% 1.22% 1.13% 1.03% 0.96% 0.88%
Share Capital & APIC 45.69% 39.37% 37.78% 38.32% 37.85% 37.18% 36.85% 36.59%
Retained Earnings & Other Equity -16.94% -13.34% -14.10% -15.95% -13.00% -14.41% -13.32% -12.43%
Total Equity 30.61% 27.79% 24.97% 23.59% 25.98% 23.81% 24.49% 25.04%
Total Liabilities & Equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Tanger Factory Outlet Centers
Value Driver Estimation
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Net Income 45.9 101.8 74.0 103.8 111.9 116.2 121.6 127.8
Total Shareholder's Equity 513.9 557.6 523.9 512.3 599.7 587.5 640.1 692.2
Return on Equity (ROE) 8.69% 19.82% 13.27% 19.81% 21.83% 19.38% 20.70% 19.97%
Equity Economic Profit (EEP) 15.6 72.4 42.1 73.8 82.5 81.8 88.0 91.1
Free Cash Flow to Equity (FCFE) - Easy
Net income 45.9 101.8 74.0 103.8 111.9 116.2 121.6 127.8
Change in total assets 57.0 327.7 91.2 73.8 137.1 158.7 146.5 150.9
Change in total liabilities 71.5 283.9 124.9 85.3 49.8 170.9 94.0 98.7
Free Cash Flow to Equity 60.5 58.1 107.7 115.4 24.5 128.4 69.1 75.6
Free Cash Flow to Equity (FCFE) - Formal
Cash from operations
Net income 45.9 101.8 74.0 103.8 111.9 116.2 121.6 127.8
- Minority interest 3.2 5.8 4.1 5.3 5.5 4.9 5.0 4.8
Cash from operations 42.7 96.1 69.9 98.5 106.4 111.3 116.6 123.0
Sources of Cash
Increase in unsecured debt 71.6 91.8 94.3 79.0 37.5 128.8 70.9 74.4
+ Increase in secured debt -10.2 145.4 11.1 22.0 8.8 30.2 16.6 17.5
+ Increase in accounts payable 3.4 8.5 19.9 -4.1 2.0 6.7 3.7 3.9
+ Increase in other liabilities 6.7 38.2 -0.3 -11.6 1.5 5.1 2.8 2.9
Sources of Cash 71.5 283.9 124.9 85.3 49.8 170.9 94.0 98.7
Uses of Cash
Increase in net real estate property -39.1 230.7 52.2 47.3 101.7 125.7 124.9 122.8
+ Increase in real estate equity interest 98.2 13.6 67.8 37.4 39.3 28.5 25.1 27.1
+ Increase in cash and equivalents 2.4 4.9 1.6 -11.0 -3.8 4.5 -3.4 1.0
+ Increase in other assets -4.5 78.5 -30.5 0.0 0.0 0.0 0.0 0.0
Uses of cash 57.0 327.7 91.2 73.8 137.1 158.7 146.5 150.9
Free Cash Flow to Equity 57.2 52.4 103.6 110.1 19.0 123.5 64.0 70.8
Tanger Factory Outlet Centers
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs:
CV Growth 3.00%
CV ROE 19.97%
Cost of Equity 5.73%
Beta 0.622
Risk Free 2.71%
Equity Risk Premium 4.85%
Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E
Equity DCF Model
Free Cash Flow to Equity 110.1 19.0 123.5 64.0 70.8
Terminal Value 4,174.4
Discount Factor 1.01 1.06 1.13 1.19 1.26
Discounted FCFE 109.4 17.9 109.7 53.8
Discounted Terminal Value 3318.8
Equity DCF Value 3609.7
- ESOP 1.8
Net Value 3607.9
Shares Outstanding 93.8
Value per Share 38.48
Equity EP Model
Equity Economic Profit 73.8 82.5 81.8 88.0 91.1
Terminal Value 3,534.4
Discount Factor 1.01 1.06 1.13 1.19 1.26
Discounted EEP 73.3 77.5 72.7 73.9
Discounted Terminal Value 2809.9
Equity EP Value 3107.5
+ Beg. TSE 523.9
- ESOP 1.8
Net Value 3629.6
Shares Outstanding 93.8
Value per Share 38.71
*Discount factors include partial year adjustments
Tanger Factory Outlet Centers
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E
Key Assumptions
CV growth 3.00%
CV ROE 19.97%
Cost of Equity 5.73%
Beta 0.622
Risk Free 2.71%
Equity Risk Premium 4.85%
Future Cash Flows
Dividends Per Share 0.99 1.04 1.09 1.15
Continuous Value 36.59
Discount Factor 1.01 1.06 1.13 1.19 1.19
Discounted Dividends 0.99 0.98 0.97 0.97
Discounted Terminal Value 30.76
Present Value DDM 34.66
*Discount factors include partial year adjustments
Tanger Factory Outlet Centers
Relative Valuation Models
EPS EPS Est. 5yr
Ticker Company Price 2015E 2016E P/E '15 P/E '16 EPS gr. PEG 15 PEG 16 P/FFO P/AFFO P/TBV P/Book
SPG Simon Property Group Inc. $183.42 $10.07 $10.73 18.2 17.1 8.3 2.20 2.07 17.4 19.5 - -
CBL CBL & Associates Properties Inc.$14.32 $2.29 $2.29 6.3 6.3 1.7 3.61 3.61 6.3 8.9 2.12 1.82
GGP General Growth Properties $24.48 $1.43 $1.58 17.1 15.5 8.7 1.96 1.77 16.4 20.9 2.66 2.74
EQR Equity Residential $72.36 $3.44 $3.73 21.0 19.4 8.1 2.61 2.40 19.8 22.1 2.52 2.45
HST Host Hotels & Resorts, Inc. $17.41 $1.54 $1.71 11.3 10.2 5.7 1.98 1.79 10.5 10.5 1.81 1.82
BXP Boston Properties Inc. $117.72 $5.42 $5.82 21.7 20.2 6.7 3.23 3.01 20.7 29.4 3.23 3.08
VNO Vornado Realty Trust $90.99 $5.18 $5.21 17.6 17.5 4.3 4.13 4.11 17.6 28.2 3.42 3.13
CBG CBRE Group, Inc. $31.79 $1.97 $2.28 16.1 13.9 14.0 1.15 1.00 - - - 4.42
Average 16.2 15.0 2.61 2.47 15.5 19.93 2.63 2.78
SKT Tanger Factory Outlet Centers $33.67 $1.06 $1.10 31.6 30.5 7.8 4.05 3.91 11.4 15.70 6.40 4.54
Implied Value:
Relative P/E (EPS15) $ 17.21
Relative P/E (EPS16) 16.55$
Relative PEG Ratio (EPS15) 21.68$
Relative PEG Ratio (EPS16) 21.26$
Relative Price/FFO $ 45.82
Relative Price/AFFO $ 42.74
Relative Price/Tangible Book $ 13.81
Relative Price/Book 8.20
Relative Value $ 25.58
Relative FFO/AFFO Value $ 43.77
P/BV Source: Ycharts
P/TBV Source: GuruFocus
Tanger Factory Outlet Centers
Key Management Ratios
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Liquidity Ratios
Cash & Cash Equivalents 10.3 15.2 16.9 5.9 2.1 6.6 3.1 4.1
Current Liabilities 41.1 49.7 69.6 65.5 67.4 74.2 77.9 81.8
Cash Ratio 25.1% 30.7% 24.3% 9.0% 3.1% 8.9% 4.0% 5.0%
Activity or Asset-Management Ratios
Net Income 45.9 101.8 74.0 103.8 111.9 116.2 121.6 127.8
Average Total Assets 1,650.3 1,842.6 2,052.1 2,134.5 2,240.0 2,387.9 2,540.5 2,689.2
Return on Assets 2.8% 5.5% 3.6% 4.9% 5.0% 4.9% 4.8% 4.8%
Net Income 45.9 101.8 74.0 103.8 111.9 116.2 121.6 127.8
Beg. Shareholders Equity 528.4 513.9 557.6 523.9 512.3 599.7 587.5 640.1
Return on Equity 8.7% 19.8% 13.3% 19.8% 21.8% 19.4% 20.7% 20.0%
Financial Leverage Ratios
Total Debt 1,100.6 1,337.8 1,443.2 1,544.2 1,590.5 1,749.6 1,837.1 1,928.9
Total Assets 1,678.8 2,006.5 2,097.7 2,171.4 2,308.6 2,467.3 2,613.8 2,764.7
Debt Ratio 65.6% 66.7% 68.8% 71.1% 68.9% 70.9% 70.3% 69.8%
Total Liabilities 1,164.9 1,448.9 1,573.8 1,659.1 1,708.9 1,879.8 1,973.8 2,072.4
Shareholders' Equity 513.9 557.6 523.9 512.3 599.7 587.5 640.1 692.2
Debt-to-Equity Ratio 2.3 2.6 3.0 3.2 2.8 3.2 3.1 3.0
Long-Term Debt 1,100.6 1,337.8 1,443.2 1,544.2 1,590.5 1,749.6 1,837.1 1,928.9
Long-Term Debt & TSE 1,614.5 1,895.4 1,967.1 2,056.5 2,190.2 2,337.1 2,477.1 2,621.2
Capitalization Ratio 68.2% 70.6% 73.4% 75.1% 72.6% 74.9% 74.2% 73.6%
Profitability Ratios
Price (appreciated at CV growth) 34.35 32.02 36.96 38.96 40.19 41.46 42.76 44.11
Funds from Operations/Share 1.76 1.99 2.08 2.20 2.23 2.27 2.26 2.26
Price/FFO 19.6 16.1 17.8 17.7 18.0 18.2 18.9 19.5
Payout Policy Ratios
Dividends per Share 0.83 0.89 0.95 0.99 1.04 1.09 1.15 1.21
Earnings per Share 0.57 1.14 0.77 1.06 1.10 1.10 1.11 1.12
Dividend Payout Ratio 145.2% 77.6% 122.8% 93.2% 94.5% 99.3% 103.6% 107.7%
Dividends per Share 0.83 0.89 0.95 0.99 1.04 1.09 1.15 1.21
Earnings per Share 0.57 1.14 0.77 1.06 1.10 1.10 1.11 1.12
Retention Ratio -45.2% 22.4% -22.8% 6.8% 5.5% 0.7% -3.6% -7.7%
DuPont Analysis
Net Income 45.9 101.8 74.0 103.8 111.9 116.2 121.6 127.8
Gross Revenue 357.0 384.8 418.6 443.7 474.7 503.2 523.3 544.3
Profit Margin 12.9% 26.5% 17.7% 23.4% 23.6% 23.1% 23.2% 23.5%
Gross Revenue 357.0 384.8 418.6 443.7 474.7 503.2 523.3 544.3
Total Assets 1,678.8 2,006.5 2,097.7 2,171.4 2,308.6 2,467.3 2,613.8 2,764.7
Total Asset Turnover 21.3% 19.2% 20.0% 20.4% 20.6% 20.4% 20.0% 19.7%
Total Assets 1,678.8 2,006.5 2,097.7 2,171.4 2,308.6 2,467.3 2,613.8 2,764.7
Shareholders Equity 513.9 557.6 523.9 512.3 599.7 587.5 640.1 692.2
Equity Multiplier 3.27 3.60 4.00 4.24 3.85 4.20 4.08 3.99
Profit Margin 12.9% 26.5% 17.7% 23.4% 23.6% 23.1% 23.2% 23.5%
x Total Asset Turnover 21.3% 19.2% 20.0% 20.4% 20.6% 20.4% 20.0% 19.7%
x Equity Multiplier 3.27 3.60 4.00 4.24 3.85 4.20 4.08 3.99
Return on Equity (alternative) 8.93% 18.27% 14.13% 20.26% 18.65% 19.78% 19.00% 18.46%
Tanger Factory Outlet Centers
Sensitivity and Scenario Analysis
CV Growth Rate
Impact on Equity DCF Value 38.48$ 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0%
0.500 34.94 39.92 47.24 59.04 81.24 138.38 618.81
0.550 32.36 36.49 42.36 51.35 66.86 100.06 221.20
0.600 30.13 33.60 38.38 45.41 56.80 78.34 134.63
Beta 0.622 29.25 32.46 36.85 43.21 53.26 71.51 114.85
0.650 28.19 31.12 35.07 40.70 49.35 64.36 96.75
0.700 26.47 28.98 32.29 36.87 43.63 54.60 75.50
0.750 24.95 27.11 29.91 33.69 39.09 47.41 61.90
CV Return on Equity
Impact on Dividend Discount Model 34.66$ 15.0% 17.0% 19.0% 20.0% 21.0% 23.0% 25.0%
4.50% 61.12 62.91 64.32 64.90 65.46 66.40 67.20
5.00% 45.03 46.31 47.33 47.75 48.15 48.83 49.40
5.50% 35.78 36.78 37.57 37.89 38.20 38.73 39.17
Cost of Equity 5.73% 32.73 33.63 34.35 34.64 34.92 35.40 35.80
6.00% 29.78 30.59 31.23 31.49 31.74 32.17 32.53
6.50% 25.56 26.24 26.78 27.00 27.21 27.57 27.87
7.00% 22.44 23.02 23.48 23.67 23.86 24.16 24.42
Gross Revenue Increase 2015-2019
Impact on Equity DCF Value 38.48$ -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5%
3.0% -595.07 -620.97 -647.38 -674.31 -701.78 -729.78 -758.34
4.0% 104.62 109.01 113.49 118.06 122.72 127.47 132.31
5.0% 47.93 49.87 51.85 53.87 55.92 58.02 60.16
Cost of Equity 5.7% 34.31 35.67 37.04 38.45 39.88 41.35 42.84
6.0% 31.05 32.26 33.49 34.75 36.04 37.35 38.68
7.0% 22.95 23.82 24.70 25.59 26.51 27.44 28.39
8.0% 18.21 18.87 19.54 20.23 20.92 21.64 22.36
Beta
Impact on Equity EP Value 38.71$ 0.50 0.55 0.60 0.62 0.65 0.70 0.75
3.35% 81.27 71.51 63.83 60.95 57.63 52.53 48.25
3.85% 67.51 59.71 53.52 51.18 48.49 44.31 40.80
4.35% 57.72 51.24 46.06 44.10 41.83 38.31 35.33
Equity Risk Premium 4.85% 50.40 44.86 40.42 38.73 36.77 33.73 31.14
5.35% 44.71 39.89 36.00 34.52 32.80 30.12 27.84
5.85% 40.18 35.91 32.45 31.13 29.60 27.20 25.16
6.35% 36.47 32.64 29.53 28.34 26.96 24.80 22.95
Weight of DDM
Impact on Target Price 38.96$ 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%
(remainder: relative valuation) 5.00% 43.25 42.34 41.43 40.52 39.61 38.70 37.79
10.00% 42.73 41.82 40.91 40.00 39.09 38.18 37.27
15.00% 42.21 41.30 40.39 39.48 38.57 37.66 36.75
Weight of Equity EP and DCF 20.00% 41.70 40.79 39.88 38.96 38.05 37.14 36.23
25.00% 41.18 40.27 39.36 38.45 37.54 36.63 -
30.00% 40.66 39.75 38.84 37.93 37.02 - -
35.00% 40.14 39.23 38.32 37.41 - - -