Acquisition Of Promenade At Chenal Will Strengthen Future Outlook

Key Takeaways

• Tanger's effective leasing strategy and high occupancy rates enhance revenue growth and net margins, demonstrating strong financial prospects.
  
• Strategic acquisitions and digital marketing initiatives support future earnings growth, backed by a low-leverage balance sheet and ample liquidity.
  
• Numerous risks and uncertainties, focus on new leases, and high tenant roll-over risk could adversely impact future revenues and financial performance.

Catalysts

Tanger Inc. (NYSE: SKT) is a leading owner and operator of outlet and open-air retail shopping destinations, with over 43 years of expertise in the retail and outlet shopping industries.

• The continued success in increasing same-center NOI, with a 5.1% increase for the full year, driven by higher rental revenues and strong retailer demand, suggests robust revenue growth prospects.
  
• Tanger's occupancy rate has increased to 98%, with positive rent spreads for 12 consecutive quarters. This trend is likely to result in higher revenue and improved net margins as the leasing strategy proves effective.
  
• Growth in their digital marketing initiatives and loyalty programs, such as the Tanger Shopper Club, enables targeted marketing efforts that can drive traffic and sales, ultimately boosting future revenues.
  
• The acquisition of high-yield properties like The Promenade at Chenal and Pinecrest, with anticipated first-year returns of approximately 8%, positions Tanger for increased future earnings and growth.
  
• A low-leverage balance sheet and ample liquidity provide Tanger with the financial flexibility to continue pursuing strategic acquisitions and developments, promising sustained future earnings growth.

Tanger Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tanger's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 18.2% today to 13.1% in 3 years time.
• Analysts expect earnings to reach $74.7 million (and earnings per share of $1.08) by about March 2028, down from $97.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 83.5x on those 2028 earnings, up from 37.2x today. This future PE is greater than the current PE for the US Retail REITs industry at 32.4x.
• Analysts expect the number of shares outstanding to grow by 3.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.79%, as per the Simply Wall St company report.

Tanger Future Earnings Per Share Growth

Risks

• The mention of numerous risks and uncertainties in their financial outlook suggests that there are external factors which could impact future revenues and overall financial performance adversely.
  
• The company has strategically lowered retention rates to focus on new leases which might lead to temporary downtimes and impact short-term occupancy revenue and net operating income.
  
• There is a high tenant roll-over risk with 20% of the leases expiring, representing execution risk in maintaining occupancy which could impact future net margins if not successfully re-leased on favorable terms.
  
• Increasing reliance on temp tenants to cover vacancies could indicate an underlying challenge in securing long-term leases which could impact stable rental income and therefore diminish consistent earnings growth.
  
• Potentially high capital expenditures for acquisitions and development of new centers may strain free cash flow and impact net margins if these investments do not yield high returns relative to cost.

Valuation

• The analysts have a consensus price target of $38.889 for Tanger based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $42.0, and the most bearish reporting a price target of just $35.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $571.3 million, earnings will come to $74.7 million, and it would be trading on a PE ratio of 83.5x, assuming you use a discount rate of 7.8%.
• Given the current share price of $32.21, the analyst price target of $38.89 is 17.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.