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Inland Real Estate Diversifying Geographic, Tenant Exposure

02/04/2014 | By Sarah Borchersen-Keto

Inland Real Estate Diversifying Geographic, Tenant Exposure

Inland Real Estate Corp. (NYSE: IRC) marks a double anniversary in 2014: 20 years since the company’s founding and 10 years as a publicly traded company. During that time it has not strayed from its original model of concentrating on retail properties that are well positioned to withstand economic uncertainty.

The company plans to spend 2014 focusing on the task of diversifying its tenant and geographic exposure  as it expands its portfolio of value-oriented retail centers.

Inland Real Estate’s portfolio is predominantly concentrated in the Chicago metropolitan and Minneapolis-St. Paul areas, but the company is also expanding into the central and southeastern regions of the United States.

Last year, the Oak Brook, Ill.-based REIT posted a total return of 32.7 percent, compared with a total return of 32.4 percent for the S&P 500 Index and a 2.5 percent total return for the FTSE NAREIT Equity REITs Index. Inland Real Estate President and CEO Mark Zalatoris said in an interview with REIT.com that he believes Inland Real Estate’s stock performance in 2013 reflects recognition by the investment community of the company’s progress toward achieving its goals, which include improving the performance and quality of its portfolio and strengthening the balance sheet.

“We feel we’re on a good growth path, but a controlled growth path,” Zalatoris said.   

Early Focus on Necessity-Based Retail Centers

Zalatoris said Inland Real Estate decided early on that in order to weather economic cycles it would target well-located, open-air retail centers with a grocer, drug store or discount component.

“We’ve definitely seen a secular change in consumer tastes toward discount value retailers. That’s been gratifying – we identified it early and stuck to that,” he said.

Inland Real Estate was not immune to fallout from the financial crisis. However, Zalatoris explained that while IRC did have some tenant bankruptcies, the recession actually created opportunities for stronger tenants that wanted to locate into the company’s in-fill locations in the Chicago and Minneapolis-St. Paul metropolitan areas.

One such retailer, Ross Dress for Less, saw the opportunity of entering an established market that it had been unable to penetrate. To date, the retailer has leased eight locations in the Chicago metropolitan area from Inland Real Estate.  “We did things in a proactive manner not only to help the retailers expanding in our markets, but also those tenants, particularly nationals, that were reconfiguring their business plan and their space needs,” Zalatoris said.

Zalatoris points to office supply retailers as an example of companies that are “rightsizing their store sizes to accommodate the type of shopping that customers do now,”  as a result of the Internet.

“It’s very apparent that having a decent critical mass of properties in the marketplace allows you to offer the ultimate in flexibility to tenants,” Zalatoris said.

Inland Real Estate, meanwhile, is looking to recycle capital by selling off centers that have reached their maximum potential. That group includes small, unanchored centers that are adjacent to larger centers. “Now is the time to harvest gains from those,” Zalatoris said.

Active in Joint Venture Partnerships

One way in which Inland Real Estate is looking to accelerate growth is through joint ventures.  Last year the company bought out one JV partner, the New York State Teachers’ Retirement System.  The move added 2.3 million square feet of retail space to its consolidated portfolio. Now Inland Real Estate is involved in a similar arrangement with Dutch pension fund advisor PGGM.

Zalatoris explained that Inland Real Estate and PGGM are assembling assets together that are more broadly dispersed geographically, including assets in the Cleveland and Cincinnati markets.  Inland Real Estate can start buying out PGGM’s joint-venture stake in annual increments of 20 percent starting in 2016.

Inland Real Estate has also entered into a joint venture with MAB American Retail Partners, LLC. The five-year development program will target areas in the Carolinas, Georgia, Florida, Virginia and Washington, D.C. It could result in the construction of as many as 20 new grocery-anchored shopping centers with a total market value of as much as $325 million, according to Inland Real Estate.

Zalatoris emphasized that the JV gives Inland Real Estate the right to purchase assets at a discount to fair market value after stabilization, plus it will be sharing in any development profits with MAB.  Inland Real Estate will have a sharper focus on acquiring assets at better-than-market pricing going forward, Zalatoris noted.

Meanwhile, Zalatoris said he believes Inland Real Estate’s ongoing work to strengthen its balance sheet will help it reach a  longer-term strategic objective of achieving investment-grade status.  Zalatoris believes such a step  may only be a couple of years away.

“We pretty much know the metrics that we need to be at to have that, and every year we make strides toward that,” he said.