May 2, 2017 | 10:11 AM by Fahad Khalid | fkhalid@jaguaranalytics.com

Unlock: Tanger Factory Outlet (SKT) – Bearish View Before Earnings

It pays to do fundamental research. Since October 2016 when we first wrote about cracks forming in Mall REITs, we have issued 16 bearish notes to clients discussing many stocks in the sector. Here is one on SKT from last Friday. Stock is crashing today by -8% after posting terrible quarter. To learn more about our approach and how you can become a successful trader, sign up for 4 week trial and test drive live chat room with some of the best traders: SUBSCRIBE

April 28, 2017

Tanger Factor Outlet (SKT) – Back on December 8, the biggest bear in option chain bought the following bearish risk reversal. Since then he/she has closed the short calls but still holding entire position in June 30 puts and earnings are coming out next week on Monday, May 1, after market close and stock is threatening to breakdown like the rest of mall REITs.

On December 8, 2016:
– 5,000 June 40 calls sold to open for $1.00 credit
– 5,000 June 30 puts bought to open for $0.80 debit

Short Interest Rising – Below is short interest chart. At the start of year it was 4.8%. In past 4 months it has more than doubled now 10.3%, highest level in 3 years. The bears are quietly piling into shorts looking for crash.

AFFO Payout Ratio Declining – The key behind all mall REITs is expectations of dividend income and probabilities associated with whether it is sustainable. That depends on Adjusted Funds From Operations (AFFO), which is similar calculation as Free Cash Flow with small variations. On February 22, JP Morgan cut AFFO estimate and thus reduced price target on expectations of lower rental income. On March 24, BAML followed and cut AFFO estimate as well.

Past vs. Future – This is where like a surgeon or an artist, ignore the headlines and focus on details. On the surface it would appears last earnings report on February 16 things were just fine. Look deeper. In 2016, SKT saw 105,000 square foot of retail space go vacant from bankruptcies and store closures. Management guided in 2017 it would increase to 125,000 square foot, but of this about 54,000 has already booked YTD, meaning the amount of closures are rising faster than expectations. That’s a negative. Stifel research points out SKT will also have drag from the re-tenanting of underperforming retailers and creating space by shifting some tenants around a center for the addition of some larger format retailers at its centers. This mix shift will result in Net Operating Income growth of only +2.5% vs. +8.4% growth they experienced in 2016. At this rate I wouldn’t be surprised if NOI turns negative by the end of 2017.

SKT

SKT Chart

#SKT

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