Executive Summary / Key Takeaways

• Strategic Crossroads: Inland Real Estate Income Trust (INRE) is currently undergoing a strategic review, including a potential sale, which introduces significant uncertainty but also potential for a liquidity event for stockholders. This review has halted new acquisitions and redevelopment, focusing the company on its existing, stable portfolio.
• Resilient Niche, Operational Pressures: INRE's portfolio, heavily concentrated in grocery-anchored retail (87% of ABR), demonstrates resilience with stable occupancy and positive rent growth on new and renewed leases. However, rising property operating expenses are compressing Net Operating Income (NOI), contributing to ongoing GAAP net losses.
• Imminent Debt Refinancing Risk: The company faces substantial debt maturities in the next 12 months, totaling $137.5 million, at interest rates significantly below current market levels. Refinancing at higher rates poses a material risk to cash flow and net income.
• Limited Liquidity and Capital Constraints: The suspension of the Distribution Reinvestment Plan (DRP) and Share Repurchase Program (SRP), coupled with covenant limitations on its Revolving Credit Facility, restricts INRE's capital flexibility during this critical period.
• Competitive Landscape: INRE's specialized focus provides a defensive moat in essential retail, differentiating it from broader retail REITs. However, its smaller scale and external management model may limit its ability to achieve the same growth and operational efficiencies as larger, more diversified competitors.

A Niche REIT at a Crossroads

Inland Real Estate Income Trust, Inc. (INRE) operates as a specialized real estate investment trust (REIT), primarily focused on acquiring and managing a portfolio of commercial retail properties across the United States. Since its formation in 2011 and REIT election in 2013, INRE has strategically built a portfolio heavily weighted towards grocery-anchored and necessity-based retail shopping centers. This focus positions the company in a segment often considered more resilient to economic fluctuations and the rise of e-commerce compared to other retail formats.

As of June 30, 2025, INRE owned 52 retail properties spanning 7.20 million square feet across 24 states. A significant 87% of its annualized base rent (ABR) is derived from grocery-anchored or grocery shadow-anchored shopping centers, underscoring its commitment to this defensive niche. This specialized approach forms the bedrock of INRE's competitive strategy, aiming to provide stable income streams from essential services.

The company operates under an external management model, with IREIT Business Manager Advisor, Inc., an indirect subsidiary of Inland Real Estate Investment Corporation, overseeing day-to-day operations. This structure allows for a lean internal team, with the CEO, Mark Zalatoris, compensated directly by INRE, which in turn reduces the business management fee payable to the external manager. This model prioritizes operational efficiency by leveraging the broader expertise of its sponsor's affiliates.

However, INRE finds itself at a pivotal juncture. On September 18, 2024, its board of directors initiated a comprehensive review of strategic alternatives, including a potential sale of the company. This ongoing process, without a set timeline or guaranteed outcome, casts a shadow of uncertainty over INRE's future direction. During this review, the company has paused new property acquisitions and redevelopment activities, shifting its focus to managing its existing assets and addressing upcoming financial obligations.

The Grocery-Anchored Moat: Stability in Essential Retail

INRE's core competitive advantage lies not in proprietary technology, but in the strategic composition of its real estate portfolio. By concentrating on grocery-anchored and necessity-based retail, INRE taps into a segment of the market characterized by consistent consumer demand. These properties serve as community hubs, drawing steady foot traffic that benefits co-tenants, thereby fostering stronger tenant loyalty and potentially more stable occupancy rates compared to general retail.

This focus translates into tangible benefits, such as a relatively stable occupancy profile. As of June 30, 2025, INRE reported physical occupancy of 91.6% and economic occupancy of 91.9%. While these figures represent a slight decline from 93.1% and 93.4%, respectively, at December 31, 2024, they show a modest recovery from March 31, 2025, indicating the underlying resilience of its asset base. The annualized base rent (ABR) per square foot for all owned properties averaged $20.05 as of June 30, 2025, reflecting the value of its locations.

In the broader competitive landscape, INRE's specialized strategy differentiates it from larger, more diversified retail REITs. For instance, while Simon Property Group (SPG) focuses on premium malls and broader retail experiences, INRE's necessity-based centers offer a more defensive posture against e-commerce disruption. Similarly, against Kimco Realty (KIM), which also operates open-air shopping centers, INRE's higher concentration in grocery-anchored assets may provide a more stable revenue base. Compared to Realty Income (O), a large net-lease REIT with significant retail exposure, INRE's direct ownership and management of multi-tenant centers offer a different risk-reward profile, potentially allowing for more direct influence over property-level operations and tenant mix.

INRE's lean external management structure is intended to provide operational efficiency by avoiding the overhead of a large internal employee base. This model aims to allow for agile decision-making and potentially lower general and administrative expenses, which could be a competitive advantage against larger, more bureaucratic rivals. However, this structure also introduces potential conflicts of interest with its Business Manager and Real Estate Manager, both affiliates of its Sponsor, which is a risk factor for investors to consider.

Operational Performance: Resilience Under Pressure

INRE's recent financial performance reflects a mixed picture of resilient income generation battling rising operational costs. For the three months ended June 30, 2025, total income increased by 1.67% year-over-year to $38.13 million, and for the six months, it rose by 2.62% to $76.93 million. This growth was primarily driven by increases in base rent from new leases, step-up rent on existing leases, and higher tenant recovery income.

Despite the positive top-line growth, property net operating income (NOI) experienced a slight contraction. For the three months ended June 30, 2025, property NOI decreased by 0.76% to $25.01 million, and for the six months, it saw a marginal 0.11% decrease to $50.39 million. This compression was largely due to a significant increase in property operating expenses, which rose by $500,000 in the quarter and $1.49 million year-to-date. Key drivers of these increased expenses included higher insurance costs ($187,000 in Q2, $433,000 YTD), utilities ($116,000 in Q2, $160,000 YTD), and repairs and maintenance ($112,000 in Q2, $354,000 YTD), alongside increased snow removal and legal costs.

The company continues to report GAAP net losses, though these have narrowed. Net loss for the three months ended June 30, 2025, was ($2.16 million), an improvement from ($3.20 million) in the prior year. Similarly, the six-month net loss was ($4.76 million), down from ($6.54 million) in the same period last year. This improvement is partly attributable to lower interest expense, which decreased by $594,000 in the quarter and $1.30 million year-to-date, primarily due to lower average debt outstanding and a lower average interest rate. Depreciation and amortization also decreased due to a larger amount of fully amortized assets.

Leasing activity provides a positive operational highlight. For the six months ended June 30, 2025, comparable renewal leases (43 leases, 219,383 sq ft) saw new contractual rent per square foot increase by 7.1% to $25.34. Comparable new leases (4 leases, 15,727 sq ft) achieved an even stronger 11.4% increase in new contractual rent per square foot to $36.39. This demonstrates INRE's ability to command higher rents in its target markets, reflecting the demand for its well-located, necessity-based retail spaces. However, tenant allowances for new leases, at $46.10 per square foot, indicate the capital investment required to secure new tenants.

Capital Structure and Liquidity: A Tightrope Walk

INRE's capital structure and liquidity position are under scrutiny, particularly given the current interest rate environment and its ongoing strategic review. As of June 30, 2025, the company had total debt outstanding of $834.5 million (excluding unamortized debt issuance costs), bearing a weighted average interest rate of 4.54% per annum, including the effects of interest rate swaps.

A critical challenge looms with significant debt maturities in the near term. As of August 12, 2025, INRE has four mortgage loans with an aggregate principal balance of $137.5 million maturing within the next 12 months. These loans currently bear a weighted average interest rate of 3.97%. The company explicitly states that these rates are "significantly lower than current market rates for new or refinanced indebtedness." This implies that any refinancing efforts will likely result in a substantial increase in interest expense, potentially decreasing earnings and cash flows by an estimated $1.4 million annually for every 100 basis point increase in rates on these maturing loans.

INRE's liquidity is further constrained by its Credit Facility. While the Revolving Credit Facility has a maximum availability of $78 million as of June 30, 2025, covenant limitations, particularly the leverage ratio, restrict the amount actually available for additional debt to approximately $44 million. This limited flexibility, coupled with the suspension of the DRP (which historically generated $148.1 million in proceeds through 6.76 million shares as of June 30, 2025), means INRE must rely heavily on cash flows from operations or individual property sales to manage its debt obligations.

For the remainder of 2025, INRE has budgeted approximately $16.8 million for capital expenditures and tenant improvements, to be funded by operating cash flows. While the company has been in compliance with all financial covenants under its Credit Facility as of June 30, 2025, the risk of breaching covenants, particularly the Consolidated Tangible Net Worth covenant, remains a concern, especially if tenant bankruptcies or market value declines negatively impact its asset base.

Strategic Review: The Path Forward (or Not)

The board's ongoing review of strategic alternatives, initiated in September 2024, is the dominant factor shaping INRE's near-term outlook. The lack of a set timeline and the absence of assurance regarding a liquidity event create considerable uncertainty for investors. During this period, the company has explicitly stated it does not expect to acquire new properties or engage in redevelopment activities. This effectively puts INRE in a holding pattern, focusing on portfolio management and debt servicing rather than growth.

The suspension of the DRP and SRP, effective October 1, 2024, further underscores this strategic pause. The DRP, previously a source of equity capital, is no longer available, and there is no assurance the SRP will be reinstated. This limits avenues for capital generation and shareholder liquidity outside of a potential strategic transaction. The board's decision not to publish a new Estimated Per Share NAV while the review is ongoing also leaves investors without a current independent valuation benchmark.

Risks and Competitive Headwinds

INRE faces several significant risks that could impact its investment thesis. Beyond the uncertainty of the strategic review and the challenges of debt refinancing, tenant health remains a key concern. The company has recently experienced lease rejections due to tenant bankruptcies, including four Party City locations and one American Freight location in December 2024. Additionally, Rite Aid (RAD), a tenant at one of INRE's properties, filed for bankruptcy in May 2025, though that location remains operational. Such events directly impact occupancy, revenue, and re-leasing expenses.

The company also faces substantial lease expirations in the near future, with approximately 5% of its portfolio (by ABR) expiring in the remainder of 2025 and another 8% in 2026. While recent leasing activity shows positive rent growth, there is no guarantee that expiring leases will be renewed or re-leased on equally favorable terms, or without significant tenant improvement allowances. This exposes INRE to potential re-leasing costs and revenue volatility.

Broader macroeconomic trends, including inflationary pressures and interest rate volatility, continue to pose headwinds. While INRE's leases often include tenant recovery clauses for operating expenses, the ability of tenants to absorb these increases is crucial. Inflation can also drive up INRE's own operating costs and, critically, the cost of debt. The potential for increased interest expense from refinancing maturing debt at higher rates, as well as on its variable-rate debt (a 100 bps increase could decrease annual earnings and cash flows by $1.2 million on variable debt), is a material financial risk.

In the competitive arena, INRE's smaller scale and external management model could place it at a disadvantage against larger, more integrated REITs like Realty Income and Simon Property Group. These larger players often benefit from economies of scale, greater access to capital, and potentially more robust in-house operational and technological capabilities, which could lead to superior profitability margins and faster growth trajectories. While INRE's niche focus provides a defensive moat, a lack of explicit technological differentiation or significant R&D initiatives, as not detailed in its filings, might limit its ability to innovate and adapt as quickly as some competitors in a rapidly evolving retail landscape. Indirect competition from e-commerce and the increasing demand for energy-efficient properties also present ongoing challenges that could impact INRE's long-term revenue and profitability.

Conclusion

Inland Real Estate Income Trust stands at a critical juncture, balancing the inherent stability of its grocery-anchored retail portfolio with the significant uncertainties of an ongoing strategic review and looming debt refinancing. The company's operational performance, marked by consistent revenue growth but pressured by rising expenses and persistent net losses, underscores the challenges of the current market. Its ability to secure favorable rent increases on new and renewed leases highlights the enduring value of its necessity-based assets, a key competitive strength in a dynamic retail environment.

However, the substantial debt maturities in the coming year, coupled with higher prevailing interest rates, represent a material financial headwind that could significantly impact future cash flows and profitability. The strategic review, while offering the potential for a liquidity event, has placed INRE in a holding pattern, limiting growth initiatives and capital flexibility. Investors in INRE must weigh the defensive qualities of its specialized portfolio against these considerable financial and strategic uncertainties. The outcome of the strategic review and the company's success in managing its upcoming debt obligations will be the most critical determinants of its investment thesis in the near to medium term.