tanger factory outlet centers inc. (skt)

Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie School of Management

Stuart Hemesath [[email protected]]

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

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

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


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

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%


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.

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.

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.

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

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

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

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


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


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,

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

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%


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%


Income Statement (in millions)


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


Balance Sheet (in millions)


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


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


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


Common Size Income Statement (as a % of Assets)


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%


Common Size Balance Sheet (as a % of Assets)


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%


Value Driver Estimation


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


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 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


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


Dividend Discount Model (DDM) or Fundamental P/E Valuation Model


Key Assumptions

CV growth 3.00%

CV ROE 19.97%

Cost of Equity 5.73%

Beta 0.622

Risk Free 2.71%


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


Present Value DDM 34.66

*Discount factors include partial year adjustments


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


Key Management Ratios


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%


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 - - -

tanger factory outlet centers inc. (skt)

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