Inland Real Estate (NYSE:IRC) is a real estate investment trust (REIT) specializing in shopping center properties. With high occupancy rates, dominant market positions in certain big cities, and national tenants, the company definitely looks like a good combination of stability and growth.
And, Inland Real Estate pays a pretty nice 5.5% dividend yield on a monthly basis, which is a nice perk for both income-seekers and long-term investors. Let's take a closer look at Inland and see if it might be a good fit for your portfolio.
A little about Inland Real Estate
As I mentioned, Inland Real Estate is an REIT that specializes in shopping centers. As of this writing, the company has 135 properties worth about $2.9 billion with a total of about 15 million square feet of leasable space.
Inland is geographically concentrated, which can be both a positive and negative factor. The company has a commanding market position in the Chicago and Minneapolis metropolitan areas, which are both diverse economies with high barriers to entry.
However, the only concern here is if the economy of either of these cities goes sour (think Detroit), not only could Inland lose substantial rental income if tenants decide to leave but the values of the underlying properties could fall as well. Now, I don't think either of those cities has any realistic chance of becoming the next Detroit anytime soon, but it's worth mentioning the extra risk that comes with a lack of geographical diversity.
And, it is also worth noting that the company's footprint could grow substantially in the coming years. Currently, the company is actively expanding into other Midwest areas, as well as certain parts of the Southeast.
Diversity and stable, national tenants mean safety
Just under 80% of Inland Real Estate's tenants are large, national brand retailers.
However, no more than 3.9% of Inland's rental income is dependent on any single tenant. So, not only is the majority of the portfolio made of national retailers with long histories, but even if one of them were to go out of business, the potential impact on the company's bottom line is very limited.
For example, if Best Buy were to go out of business and close the seven stores it rents from Inland, it would only mean a 2.5% reduction in the trust's rental income.
Two ways to grow can mean strong returns over time
Property-owning REITs like Inland have two main ways of growing: rent increases and property appreciation.
Generally, retail tenants are on relatively long-term leases (five to ten years), with annual rent increases included in the lease agreement. This produces a stable, increasing stream of income for the shareholders. So, not only does the company pay 5.5% today, but the dividend should increase over time as the company collects more rent.
And, the value of commercial properties is mainly based on the potential rental income they can bring in. Of course, there are other factors such as the condition of the property, how much land it sits on, and the particular location, but the value is very strongly correlated with income potential. So, as rental income increases, the value of the company's portfolio of properties also rises.
There are other ways REITs like Inland can boost returns. For example, Inland recently sold some of its assets and plans to use the proceeds to acquire more assets with higher growth potential.
And, the company uses debt strategically in order to maximize returns. As of the most recent quarter, Inland had debt equal to about 48% of its gross assets. And, while debt is normally considered a negative by investors, it can be a very useful tool in commercial real estate.
Let's say that Inland can earn about 8% returns on its investment properties, after all expenses. Well, if the company uses debt in order to double its assets, it will still earn that 8% on the half that it owns outright, and will also earn the difference between the 8% returns and its cost of borrowing money to finance the rest. And as we all know, the cost of borrowing money is relatively cheap right now, so it can be very lucrative for REITs.
Is it worth a look?
Inland Real Estate is definitely worth a look for any investor who wants REIT exposure in their portfolio. The company has delivered pretty solid performance, handily beating the Morgan Stanley REIT index and the SNL US REIT Shopping Centers index over the past two years.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.