InvenTrust Properties Corp. Q1 FY2024 Earnings Call

Thank you for standing by, and welcome to InvenTrust First Quarter 2024 Earnings Conference Call. My name is Harry, and I will be your conference call operator today. Before we begin, I would like to remind our listeners that today’s presentation is being recorded, and a replay will be available on the Investors Section of the company’s website at inventrustproperties.com. I would now like to turn the call over to Mr. Dan Lombardo, Vice President of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, everyone and thank you for your attendance on today’s call. 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 this quarter’s earnings materials, which are posted on our Investor Relations website. With that, I will turn the call over to DJ.

Thanks, Dan, and thank you to everyone joining us this morning. Today, I’ll start with some brief commentary on our first quarter results, the overall operating environment, and how InvenTrust continues to be positioned to grow sustainable cash flow long-term. Mike will discuss our financial results and provide color around our updated 2024 guidance, and Christy will conclude with additional commentary regarding the leasing and operating landscape. 2024 is off to a solid start following an excellent 2023, where operating fundamentals in the open-air retail sector continue to benefit from the supply and demand dynamics not seen in several real estate cycles in our property type. We have discussed in previous updates that the tenant demand continues to remain very robust for all of our properties. Some of that demand is due to the nature of the necessity-based property type that has not only withstood but validated the importance of our offerings to the communities in which we serve. The balance of the demand we at InvenTrust are specifically experiencing is due to the markets in which we operate. As we have said since becoming a public company, we expect the concentration we’ve aggregated within the portfolio that is major cities in some markets should outpace the national average from a market rent growth perspective. We believe that our past performance, but equally as important, our future expectations will continue to prove out that thesis. Our simple and focused strategy to own and operate essential open-air retail centers exclusively in the Sun Belt region of the U.S. is playing out. Our straightforward and low-levered capital structure will allow us to continue to deploy capital in an appropriate manner, if and when we can do so in an accretive way for our shareholders. Leasing activity continues to meet or exceed expectations. Our leased occupancy rate finished the quarter at 96.3%, both up slightly sequentially and on a year-over-year basis, all while delivering double-digit blended leasing spreads. Importantly, we are retaining high-quality tenants across the portfolio, negotiating rates that are favorable for our tenants' continued success, but with better annual escalations, specifically for small shop tenants with minimal cash outlay. We are retaining proven tenants that are integral to the merchandise mix of our centers while preserving capital, which will drive higher free cash flow for the portfolio into the future. Small Shop leasing continues to be strong. While we saw a more normal first quarter of arbitration, small shop occupancy remained above 92%. We continue to replace underperforming tenants and bring in higher credit and quality operators that will better serve their community constituents. To finish on the operating environment, I felt it’s important to highlight how underappreciated the lack of new institutional quality supply exists in open-air retail. This cannot be understated, as very few development starts are materializing. Given the lead time from start to stabilization in retail real estate, landlords should benefit for the next few years before supply, if ever, begins to emerge in a material way in our sector. Coupled with the demand drivers in the Sun Belt, InvenTrust feels uniquely positioned to appropriately take advantage of this imbalance. On the capital allocation front, the opportunity set of new deals has improved, but we remain selective in deploying capital, adhering to our cost of capital, ensuring that we are growing in an appropriately accretive manner. Obviously, the capital market environment has been frustratingly volatile. As much as we would like to accelerate our external growth to complement our internal operations, we will continue to be prudent in our approach. Our balance sheet remains one of the lowest levered in the sector, which allows us to be patient, yet opportunistic and we keep a robust pipeline to be at the ready when the markets open up in our favor. As discussed on last quarter’s call, we secured our first acquisition in the Phoenix market in the first quarter of 2024. We also had another property subsequent to the quarter in the Upper West Side of Atlanta. Moores Mill is a neighborhood Publix-anchored center that boasts powerful grocery sales, growth-oriented supporting tenants, and is situated on a generational piece of infill real estate. With that, I’m going to turn the call over to Mike to discuss our financial results.

Thank you, DJ, and good morning, everyone. I will start with our results for the quarter, then discuss our balance sheet position and end with an update to our 2024 full year guidance. InvenTrust reported strong same property NOI of $41.5 million, an increase of 4.1% over the same time period last year. The increase was driven by growth from base rent, including 170 basis points from embedded rent bumps and net expense reimbursements of 280 basis points. NAREIT FFO for the quarter was $30.8 million or $0.45 per diluted share for the three months ending March 31, 2024, an increase of 9.8% over last year. For the quarter, core FFO grew 10% to $0.44 per share compared to the same time period in 2023. Components of FFO growth for the quarter are primarily driven by same-property NOI and NOI from acquisitions. As DJ mentioned earlier, our balance sheet remains strong and provides us the ability to remain flexible as we navigate a challenging capital markets environment. We finished the first quarter with $421 million of total liquidity, including a full $350 million of borrowing capacity available on our revolving line of credit. Our net leverage ratio was 28%. Our net debt to adjusted EBITDA is 5.1x on a trailing 12-month basis. Our weighted average interest rate ended the quarter at 4.3% with a weighted average maturity of 3.7 years. Our debt maturities are manageable, and we are comfortable with the limited amount maturing over the next two years. We will continue to observe markets as we evaluate our options for the $72 million pool of loan that matures in November. As a reminder, we do have a one-year extension option. Finally, we declared an annualized dividend payment of $0.91 per share, a 5% increase over last year. I will conclude my remarks by updating InvenTrust's 2024 guidance. With our strong start to 2024, we are raising our same-property NOI growth guidance by 50 basis points at the midpoint which is now expected to be in the range of 2.75% to 3.75%. We’re increasing NAREIT FFO to $1.71 to $1.77 per share, and finally, we are moving core FFO guidance up to $1.67 to $1.71 per share. Our bad debt reserve will remain at 50 to 100 basis points of total revenue, and our net investment activity for the year remains unchanged at $75 million. As we mentioned last quarter, we continue to anticipate a headwind in the second quarter due to the impact of the bankruptcies of Bed Bath & Beyond and Christmas Tree Shops that took place in 2023, and NOI growth should reaccelerate after the second quarter. 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.

Thanks, Mike. As DJ mentioned, demand continues to be strong and is coming equally from local, regional, and national tenants looking to expand their footprint. On the tenant side, store openings outpaced closings in 2023 by 2:1, and that trend is continuing into 2024. Given the favorable demand dynamics in the strip center space, we are committed to adding to our organic growth profile by securing annual contractual rent bumps and converting tenants to fixed CAM, both key factors to achieving stable long-term cash flow. Turning to our operating results. We started 2024 by signing 41 leases for over 180,000 square feet with additional leases in our pipeline at various stages of negotiation. We executed leases with tenants such as 7 Brew, Sephora, and Cavender’s, which backfill at Bed Bath & Beyond space. We have one remaining Bed Bath & Beyond space with the replacement tenant identified and lease negotiations underway. Our total portfolio lease occupancy ended the quarter at an all-time high of 96.3%, up 10 basis points from last quarter. Our anchor space leased occupancy finished at 98.6%, an increase of 40 basis points from last quarter, and our small shop leased occupancy ended the quarter at 92.1%. As of March 31, InvenTrust's total portfolio ABR is $19.61, an increase of 2.6% compared to the first quarter of 2023. For the quarter, we posted blended comparable leasing spreads of 11.2%, and spreads for new leases were 24.3% with renewals at 9.4% for the quarter. Our retention rate remains at 90% as we continue to see tenants renew their existing leases at meaningful increases. Our signed, not-open pipeline remains at 290 basis points as of the first quarter, representing nearly $8 million of annual base rent, with 75% expected to come online at some point this year. In closing, leasing demand has never been stronger. Our portfolio has and continues to prove its resiliency and ability to drive results. That concludes our prepared remarks, and you can open the line for questions.

Thank you. Our first question today is from Dori Kesten of Wells Fargo. Dori, your line is open. Please go ahead.

Thanks. Good morning, guys. You made good headway today on your net acquisition guide. Can you talk generally about the kind of deals you’re underwriting today, the amount that you’re seeing versus maybe three months ago? And then just any shifts in pricing or competition you’ve seen of late.

Yes, sure. Good morning, Dori. I’m going to let Dave start, and then I’ll add some color maybe at the end. Go ahead, Dave.

Yes, sure. So I’ll start with volume. It’s improved. There are more options for us to underwrite. At any point in time, we look at the pipeline, it could have $300 million or $500 million of options. It’s more towards the higher end at the moment. So we’ve been really active underwriting, obviously, being very sensitive and observing our cost of capital, trying to make sure we’re targeting appropriate IRRs. On the two deals that we mentioned in the press release, those fit that mold again: one in Phoenix, we talked about last quarter, but just to recap, again, Chandler, a great wedge of growth – Phoenix Sprouts-anchored, so again, has that specialty grocer component to it. And then Moores Mill, very unique piece of real estate in Atlanta that is very complementary to what we already own there, with a very high-performing Publix, and we continue to see what we think will be significant rent growth over time. So, again, two deals were added. The pipeline is full. We’re very active. We’re closing on that $75 million goal. Obviously, that’s a marker that we want to achieve this year. There are more options, but obviously sensitive to our cost of capital before exercising any more external growth levers.

And I think, Dori, it’s DJ. The most important part is the way we think about the $75 million; it’s a point in time based on where our cost of capital is. Obviously, we would hope, as most people in the sector, that it was a little bit stronger today because there are some opportunities out there. So I wouldn’t expect, if the environment stays the same, for us to go materially over that. What we could see is if there are opportunities out there, we could use perhaps, and we’ve talked about it a lot. There are a couple of properties we could use as a rotation of capital and use those as a source of proceeds if we find some other interesting opportunities in our markets.

Okay. And are you able to give the cap rate for the Atlanta acquisition?

No. So without giving the specific cap rates, I would just tell you that we’re still able to get to our unlevered IRR targets, which is anywhere in the low to mid-7s. So that’s kind of how we’re looking at it from an underwriting perspective. Both Atlanta and Phoenix, we were able to get to that level.

Alright. And the last one is, can you just walk through what the key drivers were of the guidance range?

Yes, the guidance range for the same property?

Yes, the guidance range.

Yes. Base rent drove most of it, that’s 220 basis points, and that’s heavily influenced by 170 basis points of contractual rent bumps, which we still continue to be successful in getting, up to 4%, especially in the Small Shops within where we’re executing new deals. Additionally, we did have 280 basis points of contribution from net expense reimbursements. Our expenses were a little late this quarter compared to Q1 of 2023. What you’ll see throughout the year is that increase a little bit in the subsequent quarters and get us to an operating expense comparable year-to-date last year, maybe slightly lower.

Okay. Great. Thanks so much.

Our next question today is from the line of Jeff Spector of Bank of America. Please go ahead. Your line is open.

Hi, this is Andrew Reale on for Jeff. Thanks for taking our questions. First, just with an insubstantial amount of uncollectible rent and recoveries reported in the quarter. Just wondering why reaffirm 50 to 100 basis points of bad debt within guidance. And then just wondering, what do you have assumed for reserves in terms of Small Shop as well as your bigger box exposure to Rite Aid at this point in the year? Thanks.

Hi, Andrew. I’m happy to provide a little bit more color. Obviously, we’re trending at the lower end of that bad debt range. The way we think about it, as most of our peers have explained, it is on a net basis. You do have some unforeseen fallout that you’re capturing within that bad debt, which is 50 to 100 basis points. It can be offset by some surprises as it relates to out-of-period collection of rents, mostly from tenants that are on a cash basis. What happened in the first quarter is we had the expected fallout that was implied in our guidance, but we actually achieved a couple of wins as it relates to prior period collection of rents. We’re not expecting much more out-of-period rents throughout the balance of the year, which is why we felt comfortable maintaining that range. To your point, we have one Rite Aid and one Jo-Ann Fabric. These are the primary retailers that have been in the news, which consist of about 25 basis points, if you will. So far, the news has been good as it relates to those tenants for InvenTrust specifically; however, there’s still a process to be run through the bankruptcy. If those tenants were to stay in, you could expect us to probably end the year at the low end of that range. Being appropriately conservative, or pragmatic as it relates to our Small Shop tenants throughout the year, we felt okay keeping that 50 to 100 basis points range.

Okay. That’s helpful. Thank you. And then just on the Small Shop leased occupancy, I saw that sequential decline after reaching a record high last quarter. It's still healthy, and we understand it’s getting harder to push occupancy with the lack of available space, but just hoping to get a little more color on what drove the decline in the quarter? And then maybe what are you hearing from your latest leasing discussions with Small Shop tenants in particular?

Yes. Let me start, and I’ll hand it over to Christy to talk a little bit about the discussions we’ve been having. If you think about quarter one, it was a more typical level of fallout for our portfolio. It was about 60,000 square feet in tenant departures, as you can see in the changes between Economic and Leased Occupancy. We’ve already released 30% of that space, and another 50% of that space already has replacements at spreads that are healthily in the double digits. We’re working on a minimal amount of space left. That’s why you saw a contraction between the Economic and Leased Occupancy. But we do expect, if the leasing environment holds and given that we are still seeing some great activity on the Small Shop side, even with the minimal amount of space, we expect to surpass our high watermark by the end of the year. Christy, do you want to talk about some categories that we’re seeing activity in?

Sure. I would just add that, in general, our Small Shop pipeline remains very healthy. We are actively taking opportunities where we observe some Small Shop failing or struggling, proactively trying to release those with tenants that would add to the mix at our centers. We’re primarily seeing demand driven by the quick-service restaurant category, personal health and services, and of course, the full-service segments, but those are the main drivers of what’s in our pipeline today.

Okay, great. Thank you.

Our next question today is from Paulina Rojas of Green Street. Please go ahead. Your line is open.

Good morning. And DJ, this sector is today in a sweet spot, where supply is very limited, demand is strong, and then you hear a lot of emphasis on your end. How bullish are you about the ability of landlords to push rents aggressively in the next five years? And in your answer, if you could somehow frame this level of enthusiasm, whether it’s talking about rent growth or NOI growth trend, something to help us compare for what is ahead.

No, Paulina, it’s a great question. I tried to allude to it anecdotally, and I think we have discussed in several quarters that the lack of supply—there are minimal new construction starts in retail because the construction cost for new developments remains much too high. Because of the long lead times in multi-tenant, open-air retail, the amount of time it takes to get these built takes about 2 to 3 years at least, which sets up for strong fundamentals from our perspective for the coming years. In the next two to three years, unless there’s an environment where developers are encouraged to initiate new constructions, we simply don’t see that changing soon. Therefore, we’re very bullish on the supply side, particularly in the institutional quality segment. We are not seeing tenants trade down for lower quality spaces. Most players in the institutional or public market feel strong about their portfolio positioning in the markets they are operating in. The one caveat to that is inflation and where the economy is going. We need to ensure that we are not pushing rents to set our tenants up for failure. That’s why InvenTrust and many of our peers have been careful in capital growth into spaces. We’re pushing rents appropriately, while ensuring sustainable growth through better escalations, both on the base rent side and the CAM expense side. These two ingredients set us up very well for sustained NOI growth. Therefore, it falls on us, out of our control to finance our businesses appropriately. Interest rate headwinds, at least on the short end of the curve, will probably curtail cash flow growth a little, but I would expect same-property NOI growth to remain more robust than what we’ve seen in the past in this space. Moreover, the better companies will be able to pass through our free cash flow growth as well.

Okay. And how do you think about retailer cyclicality within this discussion about demand? Since demand is strong, this business is cyclical, and regular tenant failure could address that lack of supply.

It’s a good question. That’s why we continuously try to perfect the merchandise mix; however, that merchandise mix is always going to change. There are structural changes in shopping habits due to COVID and the hybrid work environment. Categories like QSR, full-service restaurants, and medical services have improved fundamentally due to increased frequencies in visits. While there will always be a cyclical nature of our business, we acknowledge that some tenants may fail due to unexpected circumstances. We closely monitor those tenants. However, certain categories are structurally benefiting and should continue to thrive in the future.

And the last question. During the quarter, if I am correct, I noticed that you had a mature benefit from net expenses. I think we were expecting some of that because of fixed CAM, but it was more than we thought. Is there any expectation of this normalizing and any seasonality in these numbers that I am observing?

Yes. Some of it—this is Mike, Paulina. Some of it is timing. I would expect that throughout the year to flatten out in subsequent quarters, and our expenses will end slightly lower or about where we ended in 2023.

Okay. But in terms of the full year, this should be a contribution to same-property NOI growth?

Yes, it won’t be the 280 basis points that we had in Q1, but it will be closer to 150 basis points. A lot of that is due to a higher tenant recovery this year since our expenses will be down a bit. We also have between 40% and 45% of our portfolio on fixed CAM now. So, we are achieving 4% to 5% bumps on our fixed CAM from new tenants.

Okay. Thank you.

We have no further questions at this time. I would now like to turn it over to DJ Busch for any closing remarks.

Thank you everyone for joining us. If you have any additional questions, please feel free to reach out to Dan Lombardo. Otherwise, we look forward to seeing you in the coming months, either at ICSC or in New York City. Have a great rest of your day.

This concludes today’s conference call. Thank you all for joining. You may now disconnect your lines.