REIT Focus: Inland Real Estate Corporation

| About: Inland Real (IRC)

This REIT Focus is on Inland Real Estate Corporation (NYSE:IRC), a publicly traded REIT that is an operator of community, neighborhood, power, life-style and single-tenant retail centers located primarily in the Midwest. As of June 30, 2013, IRC owned interests in 154 properties totaling approximately 15 million square feet of gross leasable area. IRC's shopping centers are largely value and necessity-based. Retail centers with a grocer, drug or discount component comprise approximately 77% of total portfolio retail square footage. Approximately 60% of IRC's retail portfolio is concentrated in the Chicago metropolitan area with a substantial presence in the Minneapolis-St. Paul area, where approximately 18% of the assets are located. IRC also owns retail assets in downstate Illinois, Wisconsin, Indiana, Ohio, Nebraska, Kentucky and Tennessee. IRC's three largest tenants include Roundy's (supermarkets) which provides 4.0% of its annual base rent and occupies 4.1% of its square footage, AB Acquisitions (Jewel-Osco supermarkets) which represents 3.5% of annual base rent and occupies 4.0% of its square footage, and TJX Companies (off-price retailer) which provides 3.4% of annual base rent and occupies 4.0% of its square footage. IRC has two wholly owned subsidiaries, Inland Commercial Property Management, Inc. and TRS Property Management, Inc. that provide management services to IRC's owned retail centers and third party entities.

As of 6/30/13, the average occupancy of its retail portfolio was 94.5%. IRC was originally formed in May 1994 as a Maryland Corporation, is traded on the NYSE and based in Oak Brook, IL. On June 3, 2013, IRC completed a secondary offering of 9 million shares of its common stock at a price of $10.60 per share. IRC does not have any rated debt. March 31, 2013,

IRC has 99.62 million common shares outstanding and a market capitalization of approximately $1.05 billion. IRC has an experienced management team that includes Mark E. Zalatoris, President and Chief Executive Officer who has been with the company since 2000 and Brett A. Brown, Executive Vice President, Chief Financial Officer and Treasurer, who joined the company in 2004.

Select financial data for IRC as of the 6/30/13 10Q and for the period 1/1-6/30/13 is as follows (in millions where applicable):

Real Estate Assets, Gross $1,583
Total Assets $1,583
Mortgages and Unsecured Debt $831
Stockholders' Equity $596
Revenue $83
Net Income $106
Net Income Per Share $1.16
Cash Flow from Operations $25
Unsecured Credit Facility ($275 with $65 used) $210
Market Capitalization $996
Property Debt to:
Gross Real Estate Assets 52%
Market Capitalization 83%
Dividend and Yield ($.57/sh.) 5.4%
Valuation Methodology:
First Half Revenue Per Above Annualized $166
Less: Operating Expenses Annualized (excluding depreciation, amortization & interest expense, plus G&A expenses and other income) 45
Annualized Net Operating Income 2013 $121
Projected Inflation Rate at 3.5% x103.5%
Projected Forward NOI for Next Year $125
Projected Cap Rate 7.5%
Projected Value of Real Estate Assets $1,667
Add: Net Operating Working Capital 94
Add: Investment in Unconsolidated Joint Ventures (at book value) 113
Total Projected Asset Value $1,874
Less: Total Debt Per Above (831)
Less: Cumulative Series A Preferred Stock (4M shares at liquidation value of $25/sh.) (110)
Projected Net Asset Value $933
Shares Outstanding 103.13M (99.63M common stock shares, 3M convertible note shares and .5M option shares )
Projected NAV Per Share $9
Closing Market Price Per Share on 8/15/13 $10
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The gross real estate assets, property debt, net income and funds from operations for the years 2009 through Q2 2013 are shown in the table below:

(Millions) 2009 2010 2011 2012 Q2 2013
Gross Real Estate Assets $1,255 $1,345 $1,266 $1,292 $1,583
Property Debt $569 $678 $671 $717 $831
Net Income $9 $1 ($8) $9 $106
Funds From Operations $68 $51 $60 $85 $45
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As shown above, our net asset value per share for IRC is $9 per share versus a market price of $10 per share. Current average cap rates for retail properties recently purchased by IRC range from 6.5% to 8.5% depending on the location, tenancy and lease term. We have used a cap rate of 7.5% to value the company.

IRC's strengths include; attractive dividend yield of 5.4%, cheap stock price, experienced management team, diversified tenant base, stable real estate portfolio and high occupancy at 94%. Weaknesses include; limited geographic diversification of portfolio and minimal asset growth of only 18% since 2010 (excluding off-balance sheet joint ventures).

We highly recommend the purchase of this stock at the current price of $10/sh. as it is cheaply priced and provides a solid 5.4% dividend yield. IRC has maintained the $.57/sh. dividend payout since May 2009. However, management needs to get more aggressive in acquiring property to increase the asset base, growth rate, FFO and dividend. IRC may also be an attractive acquisition candidate for other retail REITs that need a solid Midwest presence.

A five-year price chart of IRC is shown below:

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.