Don't discount outlets.

• Author: Gurley, Margot Lester
• Position: Real estate investment trusts - Money Matters

Given North Carolina's reputation as outlet-shopping heaven, it makes sense that the state has spawned the first real-estate investment trusts devoted exclusively to that form of specialty retailing. But whether Greensboro-based Tanger Factory Outlet Stores (SKT-NYSE) and Smithfield-based Factory Stores of America (FAC-NYSE) are bargains remains to be seen.

REITs have been red-hot on Wall Street the past three years because of high yields and a strengthening real-estate market. By law, REITs pay at least 95% of net income to stockholders in dividends. The result is hefty yields, now averaging TABULAR DATA OMITTED 5% to 6%, compared with the S&P 500 average of 2.7%. Tanger plans to pay an annual dividend of $1.68, for a 6% yield at recent prices, while Factory Stores expects to pay $1.80 a share, or a 6.67% yield.

"Limited liability, relative liquidity and the glamour of real-estate holdings are attracting a lot of investors |to REITs~," says David Hartzell, director of the real-estate program at UNC Chapel Hill's Kenan-Flagler Business School.

But the newness of the outlet-mall concept and intense competition from department stores, discounters and others may make these two new companies more speculative than REITs that invest in apartments, nursing homes or office buildings. "I've never seen such a polarization," says Jon Fosheim, a principal with Greenstreet Advisors, an institutional REIT research firm in Newport Beach, Calif. "Half of my clients say outlet REITs are the wave of the future. The other half says they're a flash in the pan."

So far, Fosheim says, "they've been selling to the right half." Tanger raised about $104 million with its May offering of 4.7 million shares at an initial price of $22.50. By late October, the stock was trading at $28. In June, Factory Stores raised $140 million, selling 6.1 million shares at $23 a share. By late October, it was trading at $27. The offerings left Tanger with debt totaling 21% of its market capitalization, while Factory Stores became debt-free. Tanger says it won't take on debt exceeding 40% of its market capitalization; Factory Stores will limit its debt to 30%.

Stanley Tanger, after selling shirt maker Tanger/Creighton Inc. of Reidsville in 1979, opened his first outlet center in Burlington in 1981 as a joint venture. By the end of this year, Tanger expects to have 19 centers open, mostly on busy interstates from Arizona to Oregon, from Maine to Georgia. The 64,000-square-foot...