InvenTrust: Interesting New Idea For REIT Investors

Summary

• InvenTrust went public to little fanfare; even many REIT investors might have missed it.
• The corporate business model is solid, but realistically there is little growth differences between shopping center REITs.
• InvenTrust skews cheap and has several catalysts to propel it higher (buybacks, property acquisitions). It trades at a discount to NAV.
• The value proposition is not enough to get me interested, but for some here this might be tantalizing enough to pick up.
• This idea was discussed in more depth with members of my private investing community, Energy Income Authority. Learn More »

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Consolidation has been a long time coming in the shopping center submarket of REITs. The number of publicly-traded players are too numerous, with many firms competing for investor dollars. To me, it was inevitable that mergers would begin just based on synergy savings alone. We saw that finally happen in earnest in 2021, with Kite Realty Group (KRG) absorbing Retail Properties of America and Kimco (KIM) picking up Weingarten Realty. It is great to see, and a long time coming in my view. However, during all of this multi-billion dollar M&A that has taken the attention of most observers in the space, a new player recently went public.

InvenTrust Properties (NYSE:IVT) is a small shopping center REIT that began trading just a little over one month ago. Once privately held, it was brought public via direct listing and tender to provide liquidity for its private owners. However, it is not just a way for private investors and management to have an avenue to shed their shares. Unlike most of its peers that have been cutting assets outside of business combinations and downsizing, InvenTrust has $500mm of available liquidity. It wants to buy new properties and grow, and that provides significant opportunity in this market given the still-healthy spread between its cost to borrow and demanded cap rates in its core properties. While I don't think the upside is all that high because I really do not to gamble on further cap rate strengthening (20.0% or so), InvenTrust has the best upside story in this area of the market right now.

InvenTrust Business Overview, Shopping Center Malaise

InvenTrust owns 63 properties at the moment with nearly 10mm square feet in gross leasable area. These are shopping centers that are classified as either neighborhood centers (roughly two thirds of its assets) or power centers (one third). Neighborhood centers are smaller in leasable area, having many small shop tenants; they are often anchored by a grocer. Power centers are larger, and typically multiple large anchors, generally big box discount stores like Target (TGT) or retailers like Bed, Bath, and Beyond (BBBY) and Best Buy (BBY). In general, neighborhood centers fetch better valuations because of the opportunity for higher rents per square foot and easier time on turnover. Importantly, over 85.0% of shopping centers on a net operating income ("NOI") basis at InvenTrust are either directly or indirectly anchored by a grocer, which is one of the highest percentages among its peer group.

Most of its properties are located in the Sun Belt, which includes hot markets like Austin, Atlanta, Miami, and Raleigh-Durham. Job growth, lower taxes, home affordability, and better weather have all combined to tempt Americans to move to these areas. The pandemic only accelerated these trends, especially as work from home and remote work opportunities expand. Migration trends are expected to continue out of areas in the Northeast and California to the Sun Belt, and because of that consensus expectations are that owners of commercial assets in these areas might have stronger staying power and ability to increase rents on tenants.

*Source: InvenTrust, November 2021 Investor Presentation, Slide 11

The flip side of this is commercial land availability. Construction and multi-family housing starts are notoriously volatile, but some of the biggest growers over the past several years are the Sun Belt cities. Nationwide, 2018 starts are forecast to be pretty similar to 2021, but these cities have seen commercial construction growth of between 20 and 80% today versus 2018 levels. Out of favor areas seeing population exodus do at least have the benefit of weaker land availability on their side, and potential new shopping center supply (especially on a population-adjusted basis) in Sun Belt markets is an offset to all their positives. While every market is going to have top tier locales that will see more foot traffic and have better demographics, it is the darker side of the story that isn't discussed as much.

For all the noise shopping centers make on differentiation within their portfolios - local household income, population growth within a range of the center, education levels - there has not really been large differences in same store net operating income ("SSNOI") over the past several years. Shown below is a small sampling of publicly-traded shopping center REITs. Using 2017 as a benchmark and with my forecasts for year-end results, the top performer has improved SSNOI by 6.2% in the aggregate; the worst by 2.4%.

To put this in perspective, a company operating with 50 / 50 debt to equity in a steady 6.0% cap rate environment would have seen its net asset value increase by 12.5% over four years by posting 2.4% cumulative growth in its SSNOI; it would have been 20.3% with 6.2% aggregate comp. Assuming that SSNOI growth continues to be tightly correlated going forward, picking a shopping center REIT based on its better demographics is likely just a small factor in potential upside or downside versus other factors.

Rather than focus there, in my view there are a few things that are important to investing well in this area of the market, and often can be applied to REITs in general:

1. The longer term SSNOI growth average of the entire subsector
2. Discount / premium to net asset value (private versus public)
3. Discount to the peer group as a whole on a risk-adjusted basis
4. Catalysts for value creation outside property performance

Relative Valuation, Capital Allocation

It is pretty easy to get into the trap of buying shopping center REITs that are the cheapest based on implied cap rate or the lowest funds from operations ("FFO") multiple, but fair valuations can vary by the quality of the property, its type, and its location. What I've done below is walked through every major property for InvenTrust below, estimated the net operating income for next year, valued each property using independent CBRE valuation ranges in each metro.

*Source: Author Calculations. Numbers in millions.

This works out to $31.43 per share in net asset value, which is not all that different from the Green Street estimate of $32.75 per share that InvenTrust cites in its most recent Investor Presentation (Slide 19). If we split the difference between my own estimate and Green Street, InvenTrust is trading at 83% of its net asset value ("NAV"), indicating roughly 20.0% upside.

Caveat here, I have not done a thorough such a line-by-line, independent look at all of the competitor properties. That's a heck of an undertaking, and I think most members here would be a bit disappointed if I dumped dozens of hours into shopping centers versus energy. Keeping that in mind, most peers like RPT Realty (RPT), Brixmor Property Group (BRX), SITE Centers (SITC), and others trade at between 90 and 105% of net asset value based on Green Street and independent sell-side estimates of NAV. That's a big positive for InvenTrust compared to its peer group.

This is not the only catalyst for value for InvenTrust. While it will not theoretically impact its discount to net asset value, the company currently has a pristine balance sheet by REIT standards: 3.6x debt to EBITDA. Most of its peers have leverage of around 6.5x on a trailing twelve-month basis, and about 6.0x using 2022 figures. Management teams feel that 5.5 - 6.0x is easy to maintain and well supported, and InvenTrust itself has targeted 5.0 - 6.0x as its long term target.

This means that InvenTrust has between $250 and 400mm in liquidity depending on how it allocates that capital and, if it does buy more properties, at what cap rates it acquires properties at. Most shopping center REITs have not found themselves in this position in recent years, with nearly everyone being net sellers, high grading their assets outside of recent stock for stock merger activity. Great positive here in my view.

*Source: Inventrust, November 2021 Investor Presentation, Slide 19

There are a couple of options that InvenTrust management might undertake in order to create shareholder value:

• Dutch tender. With shares trading at roughly 80% of NAV, buying back shares is likely the best way to create per share value. Management is contemplating buying back up to $100mm of shares (5.0% of what is outstanding). Buybacks are extremely rare in the REIT space, so I find it compelling that management is starting off on the right foot with capital allocation.
• Buying out joint venture properties. InvenTrust has held ten properties in a joint venture with PGGM since 2013. It controls 55.0% of the assets and can acquire remaining stakes in these properties (which it knows well) with buyout options. It recently bought Prestonwood Town Center from the PGGM venture, so if its partner is willing to exit at reasonable prices, this is a great source of properties it knows well to become wholly owned.
• Third party acquisitions. Expect the firm to continue to target high quality assets within the Sun Belt region. Management often has sold high quality, fully leased properties at great prices ($1,600mm over the past five years) and recycled that capital into properties that are in great locales but have some meat on the bone to improve. Expect more of this.

Takeaways

This was just a quick look into a new REIT, which really only crossed my desk because a few EIA members actually owned this one on the private side into the public offering. Quick glance does not really see massive upside, but for a lot of readers here 20% upside to NAV plus the dividend (3.0% yield, but a lot of room to grow) is enough to get them interested. At least at a base level, I'd recommend anyone that has a REIT portfolio to give it a look, as it might be worth consideration.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.