This article was coproduced with Leo Nelissen.
Happy New Year to everyone!
What better way to kick off the first month of the year than by delving into a relatively young real estate investment trust (“REIT”) that deserves more attention?
With a market cap of $1.7 billion, InvenTrust Properties (NYSE:IVT) is one of the smaller REITs on our radar.
We generally lean towards larger “blue chip” recommendations, but these small cap gems have potential, despite greater risks.
- Limited Diversification
- Capital Access
- Market Sensitivity
- Management Expertise
Nonetheless, IVT stands out as one of the most promising small-cap REITs on the market, offering safety, income, and growth potential.
So, let’s dive into the details!
The Evolution of InvenTrust Properties
Founded in 2004 as Inland American Real Estate Trust, Inc., the company rebranded itself as InvenTrust Properties Corp. in April 2015.
From its outset, the company has operated as a REIT in the retail industry, competing with strip mall REITs like Kimco (KIM).
The company’s common stock debuted on the New York Stock Exchange on October 12, 2021.
By 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 assets from a joint venture partnership with IAGM Retail Fund I, LLC. It acquired the remaining four retail properties from IAGM in a deal worth roughly $222 million.
The company’s focus lies in Sunbelt assets, notably in Austin, Southern California, Houston, Atlanta, and Miami – some of the fastest growing markets in the United States.
These markets are expected to have robust long-term population growth, with a big part of its portfolio projected to witness annual population growth of more than 3% through 2027.
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.
Shopping center vacancy is at its lowest level since the global financial crisis, contributing to positive leasing results, especially in the markets where the company operates.
The company’s focus on low-risk retail assets, predominantly essential retail, sets it apart. 60% of its annual rent is generated from essential retail tenants, including 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, with almost every single one of these tenants having an investment-grade balance sheet. When investing in assets, the company looks for four key factors:
- Essential retail
- Last-mile solutions
- Strong traffic
- Consumer convenience
InvenTrust Properties: A Small But Mighty Force in the REIT Space
Retail real estate investment trusts, often overlooked in the investment landscape, are like the smaller, unassuming actors in a blockbuster film. They may not command the spotlight, but their performance can be nothing short of remarkable. InvenTrust Properties, a $1.7 billion market cap REIT, is one such standout in the small-cap realm. It has been quietly but consistently carving out its place, primarily attributed to its strategic focus on essential retail in high-growth Sunbelt markets, where 60% of its income is derived from reliable tenants like Kroger, Costco, and Trader Joe’s.
InvenTrust’s Robust Performance
In a sea of challenges including elevated rates, sticky inflation, and consumer weakness, InvenTrust has emerged as a rock-solid player. The company showcased its resilience with a notable 5.3% growth in same-property net operating income (“NOI”) in the third quarter, underpinning its strong foundation in a turbulent market. Furthermore, the year-to-date same-property NOI reached $106.3 million, marking a 4.4% increase over the first nine months of 2022. This growth was fueled by higher occupancy, contractual rent bumps, and favorable leasing spreads, signaling a forward trajectory for the company.
InvenTrust’s NAREIT funds from operations (“FFO”) for the third quarter of 2023 stood at $27.6 million or $0.41 per diluted share, representing a 5.1% increase compared to the same period in 2022. The company’s ability to navigate headwinds efficiently has been demonstrated by its 11% increase in core FFO for the quarter, with a 1% growth in the 9-month core FFO compared to 2022.
The company’s occupancy metrics also tell a compelling story. While anchor space lease occupancy declined to 96.6%, small shop leased occupancy saw an uptick to 92.4%, culminating in a robust total portfolio lease occupancy of 95.1%. This ability to adapt and enhance occupancy even in the face of headwinds indicates the company’s operational prowess.
Evidently, InvenTrust’s performance has not only defied industry challenges but has also positioned it as a force to be reckoned with in the retail real estate sector.
As a result of its strong results, InvenTrust raised its guidance for 2023, with the core FFO midpoint increased to $1.64 per share and the NAREIT FFO midpoint raised to $1.68 per share. Additionally, the same-property NOI growth guidance midpoint was increased to 4.63%, further bolstering investor confidence in the company’s growth trajectory.
Furthermore, the company’s sturdy balance sheet and investment-grade credit rating provide a solid foundation for its future endeavors. With total liquidity standing at $457 million and a robust 3.4% dividend yield, InvenTrust is not only weathering the storm but also paving the way for remarkable income growth opportunities.
Valuation and Future Outlook
Looking at the valuation data, InvenTrust is expected to propel its AFFO by 20.5% in 2023, followed by growth rates of 3.0% in 2024 and 15.5% in 2025. This, combined with its current blended P/AFFO ratio of 18.8x and a projected fair stock price of roughly $34, implies a substantial 30% to 35% upside potential from the current price of $25.3. InvenTrust’s attractive valuation suggests that it is a hidden gem poised for remarkable income growth, making it an enticing prospect for long-term investors.
This small but mighty force in the REIT space is not only defying odds but emerging as an exemplary player that offers investors an opportunity for substantial income growth. In an environment where the landscape is crowded with larger, more widely recognized players, InvenTrust Properties is quietly but assuredly making its mark, setting the stage for not only robust financial performance but a promising future in the realm of retail real estate investment trusts.
