Real Estate Investment Trusts (REITs) are an appealing way for income investors to benefit from rental properties without any of the liquidity or landlord hassles that come with actually owning physical properties.

Many REITs are generally far less volatile than the rest of the stock market as well, making certain REITs a reasonable way to help you live off dividends during retirement.

Tanger Factory Outlet Centers (SKT) is arguably one of the highest quality retail REITs in America. However, SKT’s stock has slumped by nearly 40% since mid-2016 and now offers a 5.2% yield.

With a 24-year dividend growth streak and a healthy outlook for continued payout growth, let’s see if Tanger Factor Outlet Centers deserves a place in a low-risk, high-yield income portfolio.

Business Description

Founded in 1981 in Greensboro, North Carolina, Tanger Factory Outlet Centers is America’s largest REIT specializing in discount outlet centers. It owns or has 50% stakes in 44 centers in 22 states and Canada, representing 15.1 million square feet of leasable retail space (21% of all outlet center space in the U.S.).

It leases its 3,100 premium store locations to over 500 high-end retailers, including Coach, Brooks Brothers, Michael Kors, and Ralph Lauren. No tenant accounted for more than 6.2% of Tanger’s 2016 rental revenues.

Tanger Factory Outlet Centers

Source: Tanger Factory Outlet Center Investor Presentation

Business Analysis

It’s no secret that many big U.S. mall-based retailers, such as Sears (SHLD), JC Penny (JCP), and Macy’s (M), are facing an existential crisis thanks to the rise of e-commerce and changing consumer shopping preferences. In fact, the number of U.S. store closures is currently on track to hit an all-time record this year, worse than even during the Great Recession.

US store closures over time

Sources: Credit Suisse, Bloomberg

However, the spike in store closures and continued shift from brick-and-mortar shopping to e-commerce doesn’t mean that all malls are equally at risk. Tanger Factory Outlet Centers has several competitive advantages that provide it with a moat. For example, the REIT focuses exclusively on premium outlet centers, where high-end retailers offer deeply discounted clearance items.

In addition, the company has invested into turning its malls into experience centers, via embracing the latest in technology, the creation of a loyalty program, and upscale lounges that offer customers a luxury experience that Amazon (AMZN) can’t match.

SKT technological innovations

SKT VIP Lounges

Source: Tanger Factor Outlet Investor Presentation

This focus on a premium customer experience, combined with the tantalizing allure of discounted luxury items, has made Tanger Factory Outlet far more recession resistant than many other mall retailers, resulting in impressive steady growth over the years. Even the most recent spate of mall retail troubles haven’t stopped Tanger from continuing to generate solid top line results.

SKT revenue growth over time

SKT quarterly sales growth

Source: Simply Safe Dividends

Even more impressive, Tanger’s luxury moat has helped the company maintain one of the industry’s best occupancy rates while consistently raising rent on expiring leases. This has helped Tanger generate strong same center net operating income (NOI) growth.

SKT rental increases over time

SKT occupance over time

Source: SKT Investor Presentation

The combination of rental increases, high occupancy rates, and continued same center NOI growth has helped Tanger generate high and consistently rising margins and returns on shareholder capital, a testament to the company’s experienced management team.

SKT profitability over time

Another aspect to Tanger’s competitive moat is the fact that management is highly disciplined in its growth efforts. For example, unlike traditional mall retailers, which are suffering through a massive oversupply in retail space, Tanger has been slow to open new factory outlet center locations.

SKT center openings over time

Source: Tanger Factor Outlet Investor Presentation

That’s because management doesn’t invest shareholder capital unless it’s very confident that it can maintain very high occupancy, with long-term leases that make for both high profitability and very stable cash flow.

In fact, thanks to the small size of the factory discount outlet industry (70 million square feet, less than the retail space in Chicago), this niche retail industry continues to be able to generate very high profitability.

And Tanger, as the best-in-breed operator, is able to generate even more impressive returns, including a a very high adjusted funds from operation (AFFO) margin that has allowed it to grow its dividend at one of the best rates of any REIT.

SKY profitability vs peers

Source: Morningstar, Earning Release

SKT dividend growth since IPO

This long-term focus on highly disciplined and profitable growth has in turn resulted in some very impressive total returns, far better than its industry peers, the REIT industry as a whole, and the S&P 500.

SKT total returns since IPO

Tanger also continues to invest in its future growth, with one center under construction and another being renovated and expanded. The high cash yields (8-11%) on these investments are further evidence that Tanger remains committed to its “quality over quantity” approach to growth, which bodes very well for future dividend growth.

Investors will also be happy to know that Tanger’s liquidity (cash + remaining borrowing power) position remains excellent, with $455 million available; likely enough to fund growth for the next two to three years.