IVT - InvenTrust Properties: A Fantastic REIT I Bet You Didn't Know About

2024-01-07 07:00:00 ET

Summary

• InvenTrust Properties is a small-cap REIT with a market cap of $1.7 billion.
• The company focuses on essential retail in high-growth Sunbelt markets, with 60% of its income coming from reliable tenants.
• Despite challenges, InvenTrust has shown resilient growth in same-property net operating income and has a strong balance sheet, making it a compelling investment opportunity with strong upside.

This article was coproduced with Leo Nelissen.

First of all, we wish everyone a Happy New Year!

What better way to start the first month of a new year than by diving into a relatively young real estate investment trust ("REIT") that deserves way more attention than it is currently getting?

With a market cap of $1.7 billion, the InvenTrust Properties ( IVT ) is one of the smallest REITs on our radar.

Generally speaking, we've been recommending larger "blue chip" recommendations, but we're happy to point you to these so called "diamonds in the rough" ... but keep in mind, these small cap gems have certain risks tend to be larger.

For example:

• Limited Diversification: Smaller REITs may have a more limited portfolio of properties compared to larger ones. This lack of diversification could expose them to higher risks if a specific sector or region faces economic challenges.
• Capital Access: Smaller REITs might face difficulties in accessing capital, whether for property acquisitions, developments, or debt refinancing. This could hinder their growth potential and ability to compete with larger players.
• Market Sensitivity: Smaller REITs may be more susceptible to market fluctuations and economic downturns. They might experience higher volatility in their stock prices and face challenges in maintaining consistent income streams during tough economic times.
• Management Expertise: Larger REITs often have more resources and experienced management teams. Smaller REITs may struggle to attract and retain top talent, impacting their ability to make strategic decisions and navigate complex market conditions effectively.

Nonetheless, IVT is different.

It may be one of the most promising small-cap REITs on the market, as it combines safety, income, and growth potential.

So, let's dive into the details!

Essential Retail - With A Capital "E"

Founded in 2004 as Inland American Real Estate Trust, Inc., the company underwent a significant transformation in April 2015, rebranding itself as InvenTrust Properties Corp.

From its inception, the company has operated as a REIT for federal tax purposes. It's a REIT operating in the retail industry, to be specific, where it competes with strip mall REITs like Kimco ( KIM ).

The company's common stock made its debut on the New York Stock Exchange on October 12, 2021.

Going into 2023, the company had ownership or interest in 62 retail properties, covering a gross leasable area ("GLA") of approximately 10.3 million square feet.

This portfolio includes the assets from a joint venture partnership with IAGM Retail Fund I, LLC. On January 18, 2023, the company acquired the remaining four retail properties from IAGM in a deal worth roughly $222 million.

As we can see in the overview below, the company is focused on Sunbelt assets.

The biggest five markets for the company are Austin, Southern California, Houston, Atlanta, and Miami, which means the company is operating in some of the biggest growth markets in the United States.

These markets are expected to have robust long-term population growth. A big part of its portfolio is expected to witness annual population growth of more than 3% through 2027.

Bear in mind that in the 20th century, the population in the U.S. rose about 1.3% per year.

On top of that, while these areas are highly popular for new developments, which brings new supply risks, during the third quarter, the company noted that it currently benefits from favorable supply and demand dynamics, with new retail construction remaining below historical averages.

Meanwhile, shopping center vacancy is at its lowest level since the global financial crisis, which contributes to positive leasing results, especially in the markets where the company operates.

Even better, not only is the company focused on the Sunbelt, but it also has an emphasis on low-risk retail assets - essential retail, to be precise.

60% of its annual rent is generated from essential retail tenants, which include grocery stores operated by Kroger ( KR ), Publix, Albertsons, Whole Foods, Costco ( COST ), and Trader Joe's.

Its largest 15 tenants account for 27% of its total annual revenue. Almost every single one of these tenants has an investment-grade balance sheet.

When it decides to investing in assets, the company looks for four key factors:

• Essential retail with customer goods and services needed for our day-to-day activities that tend to be recession-resistant.
• Last-mile solutions allow its tenants to benefit from the increasing trend where brick-and-mortar stores are focusing on convenience. This includes curbside pickup and a trend where retailers are accelerating investments for in-store order fulfillment (mini-warehouses).
• Strong traffic , as consumers visit grocery stores roughly 2x per week. This also includes the secular benefits of people moving to the suburbs, which benefits strip malls and regional grocery chains.
• Consumer convenience is almost a no-brainer, as the company focuses on accessible parking lots that make quick trips more convenient. Even more important, retailers are increasingly creative with common area spaces to improve customer experiences.

I have spent a lot of time looking up the company's assets and truly like most of their assets. They have a habit of finding a sweet spot in high-demand areas where not only their tenants are strong but also the businesses in the area.

After all, even if you have the strongest tenant imaginable, if surrounding businesses leave the area, you will likely end up losing money as well in the long term.

In general, the company is extremely strong.

Small But Very Strong

Despite elevated rates, sticky inflation, and consumer weakness, InvenTrust remains rock-solid.

For example, in the third quarter, the company experienced a notable 5.3% growth in same-property net operating income ("NOI") compared to the same period last year.

Year-to-date, the same-property NOI reached $106.3 million, marking a 4.4% increase over the first nine months of 2022. The growth was attributed to higher occupancy, contractual rent bumps, and favorable leasing spreads.

Related, the company reported NAREIT funds from operations ("FFO") of $27.6 million or $0.41 per diluted share for the third quarter of 2023.

This represents a 5.1% increase compared to the same period in 2022.

Year-to-date NAREIT FFO came in at $84.7 million or $1.25 per diluted share, showing a decrease of $0.06 per share.

This decline was primarily driven by private placement debt funding in the third quarter of the previous year and GAAP adjustments related to the PGGM acquisition in 2023.

The core FFO for the quarter was $27.6 million or $0.41 per diluted share, indicating an 11% increase from the previous year. The 9-month core FFO also showed a 1% growth compared to 2022.

Moreover, while anchor space lease occupancy declined to 96.6%, small shop leased occupancy increased to 92.4%. The total portfolio lease occupancy finished at 95.1%.

Related to that, while it is seeing some headwinds from bankruptcies (like Rite Aid), it is very upbeat about being able to re-lease spaces and replace weaker tenants with stronger tenants.

For now, the company has managed headwinds very efficiently, as it is benefiting from its ability to rent to better tenants at higher rents.

As a result of strong results, the company raised its guidance for 2023, with the core FFO midpoint increased to $1.64 per share (range $1.63 to $1.65) and the NAREIT FFO midpoint raised to $1.68 per share (range $1.66 to $1.69).

Additionally, the same-property NOI growth guidance midpoint was increased to 4.63% (range 4.25% to 5%).

It also has a terrific balance sheet.

As of the end of the third quarter, the company's total liquidity stood at $457 million, with a full $350 million borrowing capacity on the revolving line of credit.

The net leverage ratio was reported at 27%, and the net debt to adjusted EBITDA ratio was 5.2x on a trailing 12-month basis.

The weighted average interest rate was 3.9%, and the weighted average maturity of debt was 4.1 years. It has no major maturities until 2026, which buys the company a lot of time in this environment of elevated rates.

With these numbers, the company can compete with some of the best-rated companies in its sector. It currently has a BBB- credit rating from Fitch, which is an investment-grade rating.

On a longer-term basis, I expect this rating to be hiked to BBB.

So, what about the dividend?

In the third quarter, the company distributed a dividend of $0.2155 per share. This is 5% higher compared to the prior-year quarter.

The current quarterly dividend translates to a dividend yield of 3.4%.

In 2024, the company is expected to generate $1.39 in adjusted FFO. This implies a current payout ratio of 62%, which is very low.

Even a 70% to 75% payout ratio would be safe, which indicates that the company has a lot of room to hike its dividend in the years ahead, even if its AFFO were to remain unchanged.

However, AFFO is not expected to remain unchanged, which brings me to the valuation.

Valuation

Using the data in the chart below:

• IVT is expected to grow AFFO by 20.5% in 2023.
• In 2024, AFFO is expected to grow by 3.0%, followed by 15.5% growth in 2025.
• The company is currently trading at a blended P/AFFO ratio of 18.8x.
• The normalized valuation is 21.1x, which, I believe, fits the company's growth profile quite well.
• A 21.1x valuation multiple on top of expected AFFO growth could pave the road for a fair stock price of roughly $34. The current price is $25.3, which implies roughly 30% to 35% upside.

All things considered, IVT is a great "newcomer" in the REIT space. I am very upbeat about its future and expect the stock to offer great income growth opportunities for long-term investors.

Takeaway

InvenTrust Properties, a $1.7 billion market cap REIT, emerges as a standout in the small-cap realm.

Its strategic focus on essential retail in high-growth Sunbelt markets sets it apart, with 60% of its income coming from reliable tenants like Kroger, Costco, and Trader Joe's.

Financially robust, IVT recorded a resilient 5.3% growth in same-property net operating income in Q3. Despite challenges, the company's adept leasing strategies show its ability to replace weaker tenants.

With a strong balance sheet, a BBB- credit rating, and a 3.4% dividend yield, IVT offers a compelling investment opportunity.

Meanwhile, projected AFFO growth and an attractive valuation suggest a potential 30% to 35% upside, making IVT a hidden gem poised for remarkable income growth.

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