A Rare REIT for the Ages

NEW YORK (TheStreet) --An essential ingredient for great investing is to own stocks with limited risk and steady returns. But finding those that provide a balanced risk-and-return proposition are often considered "one-hit wonders" with no strong source of differentiation.

On occasion, companies are able to transcend from the mainstream performers and become highly differentiated leaders. In some cases, these rare leaders are able to sustain differentiation by providing a highly favorable risk-and-return model that is intelligently crafted to generate durable returns and sound risk controls.

A Premium REIT Brand

As Warren Buffett has said: "Your premium brand had better be delivering something special, or it's not going to get the business." Tanger Factory Outlets ( SKT) is one such premium REIT brand that is delivering something very special for investors.

Founded in 1981 (and public since 1993), Tanger is headquartered in Greensboro, North Carolina, and this well-balanced REIT operates and owns or has ownership interests in a portfolio of 39 outlet centers in 25 states coast-to-coast (and Canada), totaling 11.9 million square feet, leased to over 2,500 stores that are operated by more than 430 different brand name companies.

The premium ingredients of the Tanger Factory Outlet brand are centered around the attractive supply-and-demand fundamentals of the retail outlet-based sector. This attraction to Tanger's exceptionally strong tenant base comprises some of the strongest retail ingredients in the retail sector, the majority of which are publicly held, high-credit retailers. Some of Tanger's core portfolio tenants include Gap, PVH, Dress Barn, Nike, Adidas, VF, Ann Taylor, Polo, Carter's and Hanes Brands.

As a result of Tanger's exceptionally strong tenant demand, the premium REIT has also maintained a consistent occupancy level over time. Currently the "best in class" brand has an occupancy rate of 97% (as of the first quarter) and the steady trends have made the Tanger brand a popular "recession-resistant" choice for investors. As explained by Tanger CEO and President Steven B. Tanger:

"In good times people love a bargain, and in tough times, people need a bargain."

Because Tanger has limited direct competition in the outlet sector, the premium REIT brand has built a powerfully recognized advantage that has resulted in sharper differentiation. Since the company's founding over 32 years ago, Tanger's retail strategies have evolved into one of the strongest outlet brands in the U.S. (and Canada).

One of the strengths of the premium brand are tenant sales. Since 2000, Tanger's long-term tenant sales have grown from $281 per square foot to $371 per square foot (March 2012), a 32% increase in 12 years.

Another Tanger strength, also related to demand, is the long runway for external growth by development. The oulet sector is small with about 50 million square feet of space (compared with less than 50 million square feet of retail space in all of Chicago). Recently, Tanger completed new projects in Hilton Head, South Carolina ($43 million cost and 177,000 square feet) and Mebane, North Carolina ($64.9 million cost and 310,000 square feet).

Tanger also has projects under construction in Houston, a joint venture with Simon and in Glendale, Arizona. Also, Tanger has proposed new projects in Washington, D.C., and Phoenix.

Premium Brand Goes International

Tanger recently entered the new frontier in Canada where the premium outlet brand has closed on several strategic joint ventures (50-50) with RioCan. That new frontier promises to be provide Tanger with multiples of success as Canada is significantly under-retailed as compared with the U.S. (Canada has 16 retail square feet per person compared with 24.5 in the U.S.)

Tanger has closed on a development project in Cookstown (Innisfil, Ontario) and the REIT has announced several other pre-development projects in Cookstown and Kanata. The strength of Tanger's Canadian pipeline is strong as the premium brand has suggested growth of 10 to 12 new projects over the next five to seven years.

Intelligent Bears Risk for Profit

One of the most important attributes for Tanger investors are the premium ingredients that distinguish the remarkably consistent returns from other REITs. These key ingredients evolve around exceptional risk management fundamentals and conservative financial stewardship practices.

Tanger is investment-grade-rated (S&P BBB and Moody's Baa2) and the premium brand has sound leverage ratios (47% debt-to-total assets) and low (5%) secured-debt-to-total assets. In addition, Tanger maintains modest interest coverage (4.3 times) and the company has significant unused capacity on its lines of credit (121.1 million outstanding and 398.9 million unused capacity).

Tanger uses limited floating rate exposure (36% variable) and the premium brand maintains manageable debt maturity expirations. Tanger's exceptional financial stewardship has resulted in a risk-control strategy that delivers investors premium performance.

Premium Performance

Tanger reported first-quarter funds from operations available to common shareholders increased 20.3% to $35.6 million, or $0.36 per share, as compared to $29.6 million, or $0.32, a year earlier. As Chief Executive Officer Steven B. Tanger said: "The first quarter was quite robust, as our industry continues to grow. This year is off to a strong start with healthy renewals and retenanting of space, as evidenced by the strong percentage gains posted in this quarter. Our expansion into the Canadian marketplace, with our joint venture partner RioCan, continues with the announcement of a strategic alliance with the Orlando Corp. to development an outlet center on land within the Heartland Town Centre, located in the western Greater Toronto Area."

According to Tanger's recent investment presentation, the premium REIT was "ranked #1 among mall REITs in total return for the five-year (81%) and 10-year (831%) categories. In addition, Tanger was "ranked #2 among all REITs in 15-year total return (as of March 31)."

Crown Jewel

Perhaps Warren Buffett was referring to his mentor Ben Graham when he spoke about a "premium brand that delivers something special." Accordingly, Graham wrote about select, high-quality brands in his classic book The Intelligent Investor:

"One of the most persuasive tests of high-quality is an uninterrupted record of dividend payments going back over many years. We think that a record of continuous dividend payments for the last 20 years or more is an important plus factor in the company's quality rating."

Tanger has not only paid consecutive dividends for over 19 years but it also consistently increased its dividend for the same period. In addition, Tanger increased its dividend by 5% in 2012 (to $.84 per share annually from $.80 per share).

As Chris Zook and James Allen, co-authors of Repeatability: Build Enduring Businesses for a World of Constant Change, wrote:

"The power of a repeatable model lies in the way it turns the sources of differentiation into routines, behaviors, and activity systems that everyone in the organization can understand and follow so that when a company sets out a particular path, it knows how to maintain differentiation that led to its initial success ... that strongest source of differentiation in a company's business are its crown jewels."

Tanger has a well-defined circle of competence. This focused retail REIT has one of the strongest sources of differentiation in the REIT industry and because of its core strategic initiatives, the "crown jewel" brand should continue to pump out consistent dividends and provide shareholders with balanced growth.

Tanger has a market cap of $2.89 billion, and the current dividend yield is 2.7%.

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