I've been following this company for over a year, liking the business, management, and steady cashflows. But every time I'm tempted to buy, I take another look at the balance sheet and roll my eyes at the debt/equity ratio. How do you all reason around this?
You need to look more closely at SKT to understand why it sells at the yield/price. They don't have the NOI growth possibilities that would justify a higher price/lower yield.
Unfortunately and this is true CPG is the big dog and when analysts compare and contrast CPG to SKT this results in an overvaluation for CPG simply because CPG will get the vast majority of primo assets next year as the consolidation process moves further forward.
Example, SKT took down an outlet mall at a 12 CAP and that is great for SKT but CPG is taking down prime assets at 11 CAPs and changing them to premium outlet centers that are attracting much higher rents than SKT can command. On top of that you have a 300 basis point difference in dividend payout. Finally, CPG borrows at 150-250 basis points less than SKT.
I'm not here priming a pump for CPG. I do own CPG having bought at much lower levels. Bottom line is greater growth of income and capital will be at CPG. I think this will be more clear in 03 when CPG flexes their muscles and takes down the last of PRT's prime outlet malls. I suspect SKT will get in on the act but the best will go to CPG not because PRT wants it that way but the tenants will demand CPG in return for waiving litigation against PRT for f ing up the malls that need more and more capex dollars to tidy up.
Re: <<< . . every time I'm tempted to buy, I take another look at the balance sheet and roll my eyes at the debt/equity ratio. How do you all reason around this?>>>
The books greatly understate the value of Tanger's equity. If you added back the accumulated depreciation (remember, real estate usually does not depreciate -- it appreciates), you would triple the book value, which is $8.87 per share, according to Yahoo. Better still, put the equity in at market value, and the debt to equity ratio would look much better.
Simply put, debt/equity based on book value is not a useful indicator. Better to look at the TIE (times interest earned). See next message.
Here's what S&P has to say about the TIE ratio:
"Profitability measures continue to be solid at both the corporate and the property level. Debt service and fixed-charge coverage measures improved to 2.1 times (x) and 2.0x, respectively, through June 2002, from year-end 2001 lows, reversing a steady four year decline. Coverage measures are expected to continue to increase modestly over the next year, supported by the contribution of new cash flow generated by recently developed and expanded space, the recent acquisition and the common equity issuance."
Jimmy, that's a very good question, and one that I have asked myself. I've been in this stock for most of the last eight years, and have worried about the same things.
Ferdiefor is our best poster on this stock....I hope that he will give his opinions.
This REIT - and others - base their dividends upon both their profit as well as the depreciation that they use. They have to pay out 95% of earnings to keep REIT status, so they don't have the chance to accumulate much in the way of retained earnings. Therefore, debt is a fact of life with these companies.
To buy this stock, you will have to be comfortable with the management. The Tanger family owns about 25% of the company. They have been at this for a long time, and have managed the firm pretty well. They pay themselves moderate salaries, and do not tend toward excesses like we have seen elsewhere. They have shown that they are not afraid to bail out when they have made a bad deal.
I think that the idea of shopping at discount malls is going to be around for a long time. The risk comes from other operators that will adopt the concept and become competitors. There's been no shortage of those, and this is a worry that will always hang over this stock.
Tanger has good firms in their locations. Their occupancy percentage is good, as is their renewal rate with existing tenants. I think it is fair to say that their tenants are happy, and that's important.
A few years ago, I adopted the policy of buying this stock at $20, and selling at $25. It worked for a while. We seem to have plateaued up this year, so I'm going to revise my numbers to sell at 30, buy at 25.
I would think that buying on dips to 25-26 would be a safe thing, but I am also the guy that thought LU was a steal at 10.
I sold my position at $29 & change having bought at $24.50 for a nice profit in a short period of time.
Jimrat's post is very on. The Tanger family is indeed first rate in terms of mgmt. The problems Tanger has had really is none of their making. Outlet malls have definitely gone upscale where CPG is the undisputed leader. Tanger has had to do a lot of repositioning from weaker no draw tenants to stronger tenants. They have paid the price and by all appearances they have succeeded for the most part. They still have a lot of drag-ass tenants that will not be big draws. At the same time CPG has locked up the best outlet retailers from their ppties.
All this being said I believe CPG is the better long term bet. OK you have to go in accepting 300 basis points (that's 3% for all of you in Yorba Linda) less in yield up front but my belief is that will be made up to all of us in significant long term growth rates that CPG can easily achieve given its aggressive developmt pipeline. If CPG's dividend grows 5%/year which I believe is a distinct possibility and Tanger continues its much smaller dividend growth rate in time CPG will surpass SKT in the yield to cost department too.
Keep in mind that SKT's NAV at one point was over $30 and it will be quite sometime before SKT can achieve that again. They have a lot of redevelopmt work ahead of them over the years to attract the upscale retailers that fall right into CPG's lap.
My conclusion is that SKT's higher yield should not cover for the fact that we all should be buying reits on a total return basis (assuming you are a long term investor) otherwise yield can in fact distort the reality that a slower growing reit has to provide its entire return to investors up front in yield. Such is the case with GRT now that it is fully valued.