"Warren Buffett, you mentioned, is a great investor. I don't know if you realize this, but in 1999, in the height of the tech bubble, he called and said he now owned 5.3% of our business."
--Steve Tanger, CEO, Tanger Factory Outlets
Last year, The Motley Fool's co-founder and CEO, Tom Gardner, sat down with Steve Tanger and discussed the company, as well as Tanger's business philosophy. About midway through the conversation, the fact that Buffett was once a major shareholder of Tanger Factory Outlets (NYSE:SKT) came up.
Most interestingly, Tanger mentioned that "he bought it in his personal account, not through GEICO, and not through Berkshire [Hathaway]." Tanger is not sure whether Buffett still owns the stock today, but it does bring up some questions: What did Buffett see in the business back in 1999, and could that make Tanger a good buy today?
The business model
Tanger Factory Outlets is a real estate investment trust, or REIT. It owns and manage real estate properties (outlet malls), leases the space to businesses, and pays out 90% of its taxable income to shareholders in dividends -- but Tanger is much more than the sum of its parts.
By pioneering the outlet industry in 1981, the late Stanely K. Tanger was solving a significant problem for retailers. Each year retailers launch new fashions, but they had no way to dispose of last year's merchandise. By renting space in Tanger Outlets, these retailers could efficiently turn out-of-date or overflow merchandise into cash. Further, by cutting out the middle man (distribution) and selling directly to customers, retailers could unload their products at significant discounts and create bargains that would attract customers.
It's easy to see what Buffett may have liked: Tanger Outlets has a fairly simple business model, it's a leader in its industry, and it has a significant price advantage.
Management with integrity
Stanley Tanger was 56 years old when he founded the business in 1981. The date is important, because with the 10-year Treasury yield over 11% at the time, borrowing costs were high, and it was a difficult time to start a business. To get the initial loans, Tanger would "dial for dollars," which meant picking up the yellow pages and calling banks until someone agreed to lend money.
Stanley Tanger had no interest in diversifying his net worth beyond Tanger Outlets; in fact, he owned a whopping 30% of the $166 million market cap company in 1999. That legacy of CEO ownership holds today: His son, Steve Tanger -- who has been with the company for nearly 30 years -- has a substantial portion of his wealth tied up in his 5% stake in the now $3 billion company. So it's no surprise that Buffett liked what he saw. The founder of the company was running the business at the time, and he had a tremendous amount of skin in the game.
A fair valuation
Today, many of us know Buffett for his "price is what you pay, value is what you get" approach, or his willingness to pay a slight premium for a great business, rather than settling for poorly managed businesses trading at significant discounts.
Buffett may have found the best of both worlds when he bought Tanger Outlets. It's difficult to tell exactly what happened in retrospect, but it looks like earning per share fell about 20% and the stock price plummeted. At the time, the S&P 500 was trading at 32 times earnings, while Tanger Outlets was trading at just over four times earnings. If that wasn't sweet enough already, the stock was sporting an 11% yield.
Even for the time, this is an unbelievably low valuation, and while it is unclear if Buffett held any of his shares, he would have received a total return of 1624% since January 1999 -- or an average annual return of 20%.
Should you buy Tanger today?
Trading at 20 times fund from operations (a REIT metric that adds depreciation and amortization expenses back into net income), Tanger is not a steal at today's prices, and the company's current yield of 2.7% is much lower. However, you're getting a better business.
The Tanger Factory Outlet brand, for example, is significantly stronger than it was, and this gives the company more leverage to increase rent over time. Also, Tanger Outlets has increased its dividend for 20 consecutive years -- even through the financial crisis in 2008 -- and this type of proven stability doesn't come cheap.
So the stock may not be a bargain, but I think the company's business model, proven leadership, and strong competitive position make it a quality business you can buy today and hold for a long time.