InvenTrust Properties Corp.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

InvenTrust Properties Corp. (IVT) is a real estate investment trust (REIT) focused on the ownership, management, and redevelopment of open-air shopping centers and retail properties, primarily in Sun Belt states.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

IVT’s business model is relatively straightforward: it acquires, manages, and leases retail properties, generating revenue from rental income. However, they are not a simple real estate play. They are in the business of curating shopping centers that can attract tenants and consumers in the face of growing competition.

Business Overview

IVT operates primarily in the Sun Belt region of the United States, emphasizing properties in high-growth suburban markets. This regional focus provides a geographic concentration, which can be both an advantage and risk. The company’s properties primarily consist of multi-tenant shopping centers that offer a mix of necessity and discretionary based retail options, a crucial point to understand their competitive dynamics.

  • Revenue Distribution: IVT derives the majority of its revenue from rent, including base rent, recovery income (from tenants for operating expenses) and other income, such as property management, leasing and tenant services. The occupancy rate is a key driver for rental revenue.
  • Trends in the Industry: The retail real estate industry is undergoing a significant transformation, with e-commerce continuing to disrupt the traditional model. Open-air shopping centers have shown resilience compared to enclosed malls because of the mixed tenant base (grocery, restaurants, gym, etc.) and their convenience. However, they are also facing competition from alternative formats and retail sales continue to move online which poses some long-term risks.
  • Margins: IVT’s operating margins are a function of occupancy, rental rates, operating costs, and property-level expenses. REITs tend to have high operating margins due to the nature of real estate assets, but margins may be depressed if the company needs to offer significant incentives or lower rental rates to maintain occupancy or if occupancy rates declines significantly.
  • Competitive Landscape: The retail real estate sector is fragmented. IVT faces competition from other REITs, private real estate companies, and institutional investors and has to compete on location, quality of assets, tenant mix, and pricing. The ability to attract and retain high-quality tenants is a major differentiator for successful REITs.
  • What Makes IVT Different: IVT’s main differentiating factor is its focus on high-growth Sun Belt markets and their focus on high quality properties, as well as their efforts at “right-sizing” tenant mix for the communities. The company focuses on properties with grocery anchors, which tend to be more resilient to economic downturns. Management is also focused on upgrading facilities and developing stronger relationships with its tenants.

Financial Analysis

A deep dive into the financials can help understand the health and future prospects of the company.

  • Income Statement:
    • IVT’s revenues are primarily from lease income.
    • The most important factors affecting NOI and FFO are occupancy, rent increase, and occupancy driven expenses.
    • Interest expenses are generally fixed but may increase if they add more debt.
    • Nonrecurring income is present and must be considered when forecasting.
    • Depreciation will increase slowly as new assets and capex is spent.
    • Key metrics to track are same property NOI, occupancy rates, and retention rates.
  • Balance Sheet:
    • The primary assets are investment properties (real estate), and they are valued at fair value as it is a REIT. The fair value of the assets will have the biggest impact on the value of the company.
    • Intangibles also appear in the balance sheet, and the value and amortization of these intangibles need to be tracked.
    • The company’s debt levels appear reasonable and are within their peer group. The debt to capitalization is about 45 to 50% with a mix of fixed rate and floating rates, so there could be interest rate risk.
    • There are minority stake in other companies, which need to be evaluated seperately and will form part of the asset value.
  • Cash Flow:
    • Cash flow from operations is the primary metric to watch as real estate has high non-cash charges. Cash flow from operations should be compared with operating income.
    • Capital expenditures (maintenance as well as some improvements) are another metric to track.
    • Free cash flow will be calculated by subtracting total capital expenditures from operating cash flows.

Moat Analysis

Moat Rating: 2 / 5 The company has some characteristics of a moat, but nothing to make it a wide moat:

  • Geographic Focus: IVT’s focus on high-growth Sun Belt markets provides a niche. The real estate business tends to be local, and some geographic areas are more valuable than others. If IVT manages to focus on the right geographies it will have the ability to dominate the area which increases its ability to retain tenants.
  • Tenant Mix: The company focus on grocery-anchored properties which tend to be more resilient to economic down-turns than other types of retail. This gives them a structural base in the market that makes their assets more valuable.
  • Barriers to Entry: Real estate as an industry has some barriers to entry due to the high cost of land and zoning laws. These barriers could be interpreted as a limited moat. However, there is substantial competition in the industry from larger players.
  • Lack of Brand: Unlike other REIT segments such as hotels or malls, where brand can matter, IVT does not have a meaningful brand advantage. This makes them more exposed to changes in consumer preferences and local competition.
  • Low Switching Costs: There are not too many switching costs for tenants and consumers alike which makes it easier for them to switch to other players.
  • Limited Pricing Power: The company’s pricing power is limited by the competition and market dynamics. While they can try to optimize occupancy and pricing, they have limited control over their rates.

Risks to the Moat and Business Resilience

Several risks can impact IVT’s business:

  • Economic Downturn: Consumer spending decline could lead to a drop in occupancy and tenant demand, which could lead to decreased income for the company.
  • Rising Interest Rates: Because IVT is highly leveraged, an increase in interest expenses will reduce the margins.
  • Competition: The local nature of the business puts IVT against new players and other companies which have better positioned themselves in their local areas.
  • E-commerce: The continued growth of e-commerce poses a long-term risk to all physical retail and open air shopping centers are not exempt.
  • Tenant concentration risk: Having large tenant concentrations may create significant problems if one of those tenants goes bankrupt or closes operations.

IVT’s business model has some inherent resilience through necessity-based tenants, but external factors present a large degree of risk. Management has recognized these risks and is actively trying to mitigate them.

Understandability

Understandability: 2/5 IVT’s business model seems simple, however, the real estate industry is complex to grasp. The valuation requires a deep understanding of real estate and the company’s financials which makes it a bit complex to understand.

Balance Sheet Health

Balance Sheet Health: 4/5 The balance sheet of the company seems healthy and they have manageable amounts of debt with diversified maturities, although, a debt refinancing at higher rates will impact profitability, and should be tracked. Overall, IVT’s debt-to-total assets ratio is around 50% which is a little leveraged for our tastes. A significant drop in their asset value would impact equity severely.

Recent Concerns and Management Outlook

The recent earnings call (November 2023) highlighted ongoing positive demand and favorable leasing spreads, leading to increased occupancy and net operating income. Management is focused on improving the overall quality of their portfolio, increasing the leased space in the existing properties. The company is also undertaking active measures to mitigate some of their debt in the face of rising interest rates.

  • Positive Outlook: Management emphasized the positive trends in leasing spreads, demand, and occupancy. They emphasized that it’s important for them to improve the long-term income through organic growth and that’s what they are focusing on.
  • Focus on improving tenant mix: Management is focused on ensuring that they have right mix of tenants in the properties and that there is very minimal overlap to ensure a well diversified and stable occupancy.
  • Capital Allocations: In their earnings call management has stated that they have a strong pipeline for acquisitions that fit their long term plans.
  • Debt Management: The company is trying to utilize free cash flow to pay down a lot of its debt which will help them in the long run.
  • Macroeconomic concerns: Management has stated in their earnings call that interest rates are a concern for them, even though they are relatively insulated. It is also important to note that the current property values have not been tested since the rise in interest rates and that remains an open question for all REITs.
  • Occupancy goals: The company plans to increase the overall occupancy rate to around 95% by 2026.
  • Long term projections: The company is using a very long time horizon for operations and valuations of assets in the portfolio which seems reasonable for real estate.

Overall Conclusion

InvenTrust is a REIT focused on open air retail real estate. It has some characteristics of a moat including a focus on necessity based tenants in Sun-Belt states. However, it faces substantial competition in its industry. Its ability to create value depends on effective portfolio management, and increasing occupancy and lease rates. The company’s financials are decent and they are taking a proactive approach in addressing some of the major risks. The company also has many properties with multiple tenants and thus is a very complicated business to understand. In total, the company presents itself as a good investment but has significant risks involved. You should consider if the benefits outweigh the risks before investing.