Thank you for waiting, and welcome to the InvenTrust Second Quarter 2023 Earnings Conference Call. My name is Carla, and I will be your operator for today's conference call. Before we start, I want to remind everyone that this presentation is being recorded, and a replay will be accessible in the Investors section of the company website at inventrustproperties.com. I will now pass the call to Mr. Dan Lombardo, Vice President of Investor Relations. Please proceed, sir.

Thank you, operator. Good morning, everyone, and thank you for attending our call today. Joining me from the InvenTrust team is DJ Busch, President and Chief Executive Officer; Mike Phillips, Chief Financial Officer; Christy David, Chief Operating Officer; and Dave Heimberger, Chief Investment Officer. Following the team's prepared remarks, we will open the lines for questions. As a reminder, some of today's comments may contain forward-looking statements about the company's views on the future of our business and financial performance, including forward-looking earnings guidance and future market conditions. These are based on management's current beliefs and expectations and are subject to various risks and uncertainties. Any forward-looking statements speak only as of today's date, and we assume no obligation to update any forward-looking statements made on today's call or that are in the quarterly financial supplemental or press release. In addition, we will also reference certain non-GAAP financial measures. The comparable GAAP financial measures are included in the quarterly earnings materials, which are posted on our Investor Relations website. With that, I will turn the call over to DJ.

Thanks, Dan. And good morning, everyone. The InvenTrust portfolio continues to deliver solid operating results, highlighted by strong leasing activity and record occupancy. Our consistent performance is indicative of our simple and focused strategy, owning and operating premier necessity-based shopping centers in growing Sunbelt markets. Significant demographic trends continue to be an important tailwind in the Sunbelt, which is experiencing some of the healthiest market rent growth across the US. A major catalyst is the lack of institutional quality retail space across the sector and the absence of meaningful new development. Inflated construction and labor costs continue to be a hurdle to any new projects, creating a compelling backdrop for our business. Our strong internal growth prospects are complemented by our low levered balance sheet, which allows us to look for external growth opportunities without having to access the capital markets. We are comfortable with our capital position to support future acquisitions while still maintaining a prudent and low levered balance sheet with a net-debt-to-EBITDA target of around 6 times on a forward-looking basis and net leverage ratio of around 35%. That said, an uncertain rate environment continues to keep deal volume relatively low, and we'll remain disciplined and patient in our capital allocation plan. InvenTrust closed on one acquisition in the quarter, the Shoppes at Davis Lake, located in our target MSA of Charlotte, which is approximately 90,000 square feet anchored by Harris Teeter in a strong retail corridor experiencing population and income growth with significant residential development in the immediate area. Finally, InvenTrust published its annual ESG report in June. We have set five-year energy, greenhouse gas, waste, and water reduction goals for areas under our operational control and are working with our tenants to optimize operations through our green leases. Investing in our properties is a fundamental part of our business plan as we strive to create best-in-class shopping experiences and improve our communities. We believe that our investment in sustainability will continue to provide appropriate returns and position our company and assets for the future. With that, I'm going to turn it over to Mike to walk everyone through our financials and guidance for the quarter.

Thanks, DJ. InvenTrust had another solid quarter of results, and we are positioned for a strong finish for the remainder of 2023. Same-property NOI for the quarter was $38 million, growing 3.7% over the second quarter of last year. Year to date, same-property NOI was $71.8 million, growing 3.5% over the first six months of 2022. The year-to-date increases were primarily driven by base rent and spread equally between rent bumps, occupancy, and spreads. Stripping out the prior-period collections headwind of 100 basis points from cash-basis tenants, same-property NOI growth would have been 4.5%. We reported a NAREIT FFO of $57.2 million or $0.84 per diluted share and core FFO of $56.4 million or $0.83 per diluted share for the first six months of the year. This anticipated decline for the first half of the year is primarily due to higher interest rate expense from the private placement debt funded in the third quarter of last year at a blended interest rate of 5.12%. InvenTrust continues to maintain a strong and flexible balance sheet. We ended the quarter with a net leverage ratio of 28%. Net debt to adjusted EBITDA is 5.4 times on a trailing 12-month basis, which we do expect to decline as we benefit from the income generated by the acquisition of our joint venture in January. Our weighted average interest rate is 3.9% with a weighted average maturity of 4.3 years and only 2% variable rate debt. One important note, InvenTrust has $92 million of debt that expires in November of 2023. This debt has two one-year extension options, which we plan to exercise. This debt will roll to a variable rate upon initial maturity in November, increasing our total variable rate debt to approximately 10%. At quarter end, we had approximately $434 million of total liquidity, including a full $350 million of borrowing capacity available on our revolving line of credit. With one of the lowest levered balance sheets in the shopping center space, we remain prepared for the challenges and opportunities that may arise. And finally, we declared a dividend payment of $0.215 per share, which is a 5% increase over last year. Turning to guidance, we're revising our 2023 core FFO range to $1.61 to $1.64 per share. This increase is due to stronger-than-expected first-half same-property NOI. Our NAREIT FFO range will remain at $1.64 to $1.69, driven primarily by non-cash GAAP adjustments related to the acquisition of our joint venture in Q1 of 2023. We are also raising our same-property NOI growth guidance by 25 basis points at the midpoint and narrowing the range to 4% to 5%, mostly driven by higher-than-expected occupancy and recovery rates. Our full-year guidance assumptions are provided in our supplemental disclosure filed yesterday. And with that, I'm going to turn the call over to Christy to discuss our portfolio activity.

Good morning, everyone. For the first six months of 2023, our leasing team stayed busy as we leased 601,000 square feet with a multitude of additional leases in our pipeline in various stages of negotiation and discussion. Our anchor space leased occupancy finished at 98.6% and our small shop increased to 92%. As of June 30, InvenTrust's same-property portfolio ABR was $19.18, an increase of 2% compared to June 30, 2022. Our leasing spreads year to date were 6.3%, and our retention rate remains high at 92%, driven by increases in small-shop retention, which continues to be one of our most effective strategies to grow rent while limiting our capital commitments and downtime. We should note that overall occupancy, which stands at 96.2%, will fluctuate as the process of taking back and releasing Bed Bath & Beyond space continues to unfold. That said, the uptick in recent bankruptcies is providing us with a unique opportunity to upgrade our tenant mix at favorable rates. As I mentioned last quarter, retail is and always will be an evolution of new exciting concepts coming in and others falling out of favor as we are seeing with a few troubled tenants in our portfolio. Starting with Bed Bath & Beyond, the team has been working on backfilling these locations and had multiple offers for each of the five locations. While the Bed Bath & Beyond bankruptcy is still very fluid. We have recently received clarity on each space. In late June, one lease was acquired at auction by a known national retailer. One location was rejected as of July first, and we immediately identified the replacement tenant and proceeded to finalize lease terms. For the remaining three locations, we received notice last week that we would regain possession of those boxes as of today. We are currently selecting the best tenant to complement each center and moving each deal towards lease execution. As for Party City, the bankruptcy is ongoing, but we anticipate that both of our locations will be assumed by the tenant. Our results this quarter highlight the proven ability of our centers to attract tenants as well as our team's ability to capitalize on the opportunities presented during this high demand, low supply leasing environment. The current market dynamics bode well for our business as is shown by the occupancy levels and the broader operational performance throughout the sector. Operator, this concludes our prepared remarks. Please open the line for any questions.

Our first question comes from Paulina Rojas from Green Street. Your line is now open. Please go ahead.

Good morning. My question is about bad debt. So it seems you're running below what we expected at the beginning of the year that provided. So do you have updated expectations at this point for the year?

Hi, Paulina. It's Mike. Good morning. We do feel comfortable in the range. We haven't updated our range of bad debt. And you're right, we've only taken about 15 to 20 basis points of bad debt year to date. But most of that you'll see in the back half of the year with the Bed Bath & Beyond fallout, and that will take up most of it in the second half.

Good morning, this is DJ. The majority of the bad debt that we're still reserving for is really already spoken for. It's just you're looking forward to the back half of the year with the Bed Bath & Beyond spaces. We do have a small contingent though of just small shop. I wouldn't call it conservative, but we have seen a couple of small tenants that we've had our eye on that we want to just make sure we're accounting for as well.

How would you frame or help us understand how much buffer you're including guidance for potential tenant disruption that hasn't occurred yet?

I'm sorry, Paulina. I was having trouble hearing you. Can you repeat the question?

I am wondering if you could help us understand how much buffer you have included in your guidance for potential tenant disruption.

Yes, based on my last comment, I would estimate that there is about 25 basis points of unforeseen fallout, while the rest is information we already know will be imminent in the second half, primarily due to bankruptcies, particularly Bed Bath Beyond. I wouldn't describe it as a buffer; it's more about normal operations. The smaller shops have performed below expectations. However, considering the overall environment, we are simply trying to be cautious.

Perfect. And then one last one, if I may. Regarding the properties you acquired, can you provide some color about the circumstances, the level of competition and pricing, and also interest by the lease rate. It's a pretty highly leased center. So where do you see the potential to squeeze more juice from these assets?

Yes. Maybe I'll let Dave add a little bit more color as far as the competition because although deal volumes have been lower for obvious reasons, the properties that we like to try and acquire, obviously, in our markets, there is still a decent level of competition. Obviously, Charlotte is a target market for us. This is our fourth asset in that market in the broader MSA. It's a market that we've really enjoyed the rent growth at our other properties. We were excited to find one with a very strong anchor in a corridor that we had liked and able to get it done. But maybe Dave can give you a little bit more color around the competitive process at that asset.

Yes, sure. So I think with anything you see, Sunbelt grocery anchored under $25 million can be healthy competition. It runs the gamut of different buyers or capital sources from other REITs to private buyers, even 1031 exchange money. So it's pretty competitive with this one. I definitely see it as an opportunity for us to re-merchandise the mix, grow some rents, and kind of get ahead of where the market's going. There's a lot of residential development in the immediate area. It also clusters nicely with our other assets in the north side of Charlotte. So we really like the deal, but it is competitive out there. With lower volume comes more attention to certain attractive deals. But we're happy to get this one.

Paulina, I want to add that regarding the high occupancy levels already in place, when we evaluate these deals, we will definitely consider some value-add opportunities that can quickly increase our net operating income. However, it’s not a requirement. Many of our recent acquisitions have been fully leased, which we view positively because we believe in the asset's potential for long-term rent growth. If we see that it’s in a location where market rent growth is likely to surpass the national average, we will pursue it even if it is already fully leased. Although it may take longer to adjust some of those leases, we have confidence in the underlying real estate.

Thank you.

Our next question comes from Cesar Bracho from Wells Fargo. Your line is now open. Please go ahead.

Hey, good morning. Thanks for taking the question. One follow up from Paulina's questions on the property acquisition. Can you talk a little bit about the economics of the deal, what may be the going-in cap rate and what kind of NOI growth you see for an asset like this that it's more fully leased?

Hey, Cesar. This is DJ. Good morning. We’re not going to provide the initial going-in yield, but in today’s environment, our targeted unlevered returns are in the high sixes and low sevens. This asset fits within that range. We feel comfortable with the underlying growth and believe the going-in cap rate reflects the current environment. We are ready to move forward, having completed our underwriting and being confident in the long-term growth prospects. We have taken a more cautious approach in this process. This is just one of many deals that come through our transactions team's pipeline, and many of them do not meet our standards due to aggressive pricing or misalignment with our core competencies. That’s how we evaluate it. Additionally, this is a fully leased asset, but as I mentioned earlier, we see some embedded growth opportunities as we plan to re-merchandise the space over the next couple of years.

Yes, thank you for the information. I have a question regarding Bed Bath & Beyond. I believe you mentioned in your prepared remarks that three locations will be reopening in the third quarter. Could you provide some details about the interest in those locations, specifically regarding the type of users? Additionally, can you share any insights from the lease acquired during the auction, particularly concerning pricing or any other relevant comments?

I want to address your last point regarding the property that was acquired through the auction. The auction process is quite fascinating, but ultimately, it boils down to the financial aspects involved. With a long-term lease already established, a retailer can step in and take advantage of a below-market lease, allowing them to make the financials work based on their investment plans. This is where we observed significant interest. Additionally, some retailers were focused on securing locations to align with their expansion strategies. Throughout the auction process, lease negotiations will likely take place widely. We were satisfied with the retailer who acquired the property. Chris, could you elaborate on the opportunities we encountered?

Sure. We acquired one location at auction, and we also have four other sites, one of which was returned to us as of July 1, and three more that we took possession of today. For the one we received in July, we have identified a new tenant and are finalizing the lease terms. Regarding the three locations we are taking back today, we have multiple letters of intent for each site, and our team is focused on securing the best deal with the most suitable tenant mix for each asset. We aim to complete the lease execution for these by the end of the year.

Okay. Yes, thanks. And then one more comment. It sounds like from the prepared remarks that in the raise in same-store NOI growth, guidance is really driven by higher occupancy than you expected as the bad debt seems to be unchanged. Is that right? Or what can you comment on what's the key driver of the guidance raise in NOI?

No, I think that's exactly right. If you reflect on last quarter, we are still uncertain about what will happen with Bed Bath & Beyond, Party City, and Tuesday Morning, although our exposure to Party City and Tuesday Morning is quite minimal. However, as Christy mentioned in her prepared remarks, it appears that the two Party City locations will be taken over by the company itself. Additionally, there were some timelines concerning Bed Bath & Beyond. Compared to some of our competitors, many of their leases were rejected earlier in the year, while we just received all of ours back now. It's a mixed blessing; we had a bit more income, but we would have preferred to have those leases returned to us sooner due to the high demand we are experiencing. Fortunately, our locations are in prime areas, and we are pleased with the interest we have seen so far. The key factors are timing and a slightly improved outcome regarding some of these bankruptcies.

Got it. Thank you.

Our next question comes from Floris van Dijkum from Compass Point. Your line is now open. Please go ahead.

Hey, good morning. I guess a quick question. It looks like you're somewhat unique in the sector that you see accelerating same-store NOI growth in the second half of this year based on your guidance. Is that because you've got your coming online? Is that's what's causing it? Because presumably there's going to be a drag in terms of occupancy and in terms of rents from the Bed Bath space. And maybe if you can touch on the timing for that for the new leases commencing in your numbers based on your latest discussions on those four spaces that haven't been assumed or haven't been bought out of bankruptcy.

Yes, good morning, Floris, that's a great point. I would like to frame it this way. Our pipeline is quite steady, and we feel very confident about it.

We have about $5 million in our pipeline right now, and about 60% of that will come online in the second half of the year.

We expect around $3 million to come online in the second half of the year, which will certainly provide a boost. However, the main factor contributing to this is that, as you may recall, in the latter half of last year, we incurred higher expenses due to a significant amount of pre-leasing activity aimed at strengthening our leasing pipeline for future acceleration. Now we are reaping the benefits from that, as we continue to sign new leases and see our expenses return to a more typical level. These two factors will significantly help mitigate the increase in same-store performance in the latter half of the year.

And then if you can maybe comment on the $75 million of mortgage debt that's coming due at the end of this year and talk about where that's going to get refinanced at, and what kind of potential insight do you have on the debt markets maybe as well?

Yes, I believe Mike mentioned it in his prepared comments. We have two one-year extension options available. We plan to extend for at least one year while we keep an eye on the debt markets. Our swap will expire in November, which will lead to a variable rate that is already factored into this year’s guidance. This will result in approximately 10% variable rate debt. We feel comfortable with this as it provides us the flexibility to pay down some of the debt if we don't identify other uses for our cash flow as we grow. We are considering all these factors, but due to the current state of the debt markets and the shape of the curve, we are inclined to adopt a wait-and-see strategy, and we feel fortunate to be in this position.

Thanks. That's it for me.

Thanks, Floris.

Our next question comes from Lizzy Doykan from Bank of America. Your line is now open. Please go ahead.

Hey, good morning, everyone. I just have a question on the maintenance CapEx this quarter. It seems like it picked up a bit, just that $6.6 million amount. I just want to see what kind of drove that pickup.

Yes, I believe it was primarily due to landlord work, and there’s really nothing significant to interpret from it. It mainly relates to the timing of various projects in our pipeline, and it also connects to our leasing pipeline.

Okay, great. And how will you?

I would add that our capital spending will be higher as our signed but not yet opened pipeline becomes operational. You'll notice those capitalized costs reflected in other areas, such as landlord or tenant capital. This growth is expected to be consistent across the industry due to the significant leasing activity anticipated in the upcoming quarters.

Great. That's helpful. I wanted to ask about the blended rent spread achieved this quarter. It seems to have settled more in the mid-single-digit range, along with continued leasing activity. The rent growth remains strong and steady. I would like to know if we should expect a slowdown here or if you could share more about your confidence in maintaining the level of pricing power you mentioned last quarter.

No, It's a great question and I'll tell you. So the primary driver of that settling closer to the mid-single digits as opposed to kind of our target, longer-term target, which is high single, low double-digit blended spreads is we had three large anchor leases that were options. Those options were lower than the average that you see. So just three big leases on a small sample set pulls that number down. Otherwise, the leases that were true renewals without that option were more in line with what you've seen in the past.

I wanted to confirm the average rent escalators you achieved in the last quarter. Previously, you mentioned they were around 3% to 4%. Is this figure representative of the overall portfolio, or is it higher for small shops? I'm curious about how aggressive you're being with rent escalators.

Yes, our target is definitely 3% to 4%, which applies to our small-shop segment. The anchors usually follow a steadier pattern and typically experience rent increases every five years. This process hasn't shifted as rapidly. We have made progress with some of them, but many of the larger junior anchor tenants are still on that slower pace. The small shops have been where we've seen significant success, and that 3% to 4% is translating into an annual increase of about 150 to 200 basis points in our same-property NOI growth.

Great. Thanks for the time.

Thank you.

Thanks, Lizzy. We have no further questions registered at this time, so I'll now hand back to your host, Dan Lombardo, for final remarks.

Thank you, operator. In the first half of 2023, we've continued to execute on our focused Sunbelt strategy, producing strong operating results. Our investment grade balance sheet provides us the flexibility to be both patient and opportunistic when we look to continue to grow our asset base. InvenTrust is a unique investment opportunity for folks that are looking for a concentrated strip center portfolio with a geographical focus in the Sunbelt. So as always, if you have any questions, please feel free to reach out to our IR team. Have a wonderful rest of your day.

This concludes today's call. Thank you for your participation. You may now disconnect your lines.