InvenTrust Properties Q3 2024 Earnings Call Transcript

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Provided by Quartr
October 30, 2024

There are 9 speakers on the call.

Operator

Thank you for standing by, and welcome to Inventrust's Third Quarter 2024 Earnings Conference Call. My name is Elliot, and I'll 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. Now I'd like to turn the call over to Mr. Dan Lombardo, Vice President of Investor Relations.

Operator

Please go ahead, sir.

Speaker 1

Thank you, operator. Good morning, everyone, and thank you for attending our call today. Joining me from the Inventrust team is D. J. Bush, President and Chief Executive Officer Mike Phillips, Chief Financial Officer Christy David, Chief Operating Officer and Dave Heimberger, Chief Investment Officer.

Speaker 1

Following the team's prepared remarks, we will open the line 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.

Speaker 1

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 D. J.

Speaker 2

Thank you, Dan, and good morning to everyone joining us today. I'm going to provide some highlights regarding our Q3 results, including our inaugural follow on equity offering that was executed in September and the opportunities that lie ahead for Inventrust. Mike will discuss our financial results and provide some color regarding yet another increase to our 2024 guidance. And Christy will end our prepared remarks with additional commentary regarding our leasing efforts and operations. Since listing the company in October of 2021, Inventrus has executed on all fronts of its simple and focused strategy.

Speaker 2

The company has delivered above sector average same property NOI growth, above average FFO per share growth, acquired nearly $500,000,000 of assets, including the consolidation of our only joint venture, resulting in the entire IVT portfolio being wholly owned, received an investment grade credit rating and completed a private placement debt offering. As many of you may recall, the company did not raise equity at the time of the listing. Simply put, our estimated cost of equity through an IPO was not going to be optimally aligned with external growth opportunities. Therefore, we chose to be patient, self fund our growth with our low levered balance sheet, prove to the public market that our simple and focused strategy in the Sunbelt can deliver above sector average cash flow growth over a multi year period and wait for our cost of capital to improve. After 3 years, we took advantage of a stronger capital market backdrop and raised roughly $250,000,000 during the quarter through a follow on equity offering.

Speaker 2

The offering was extremely well received by both existing and new shareholders. In addition to the equity offering, following the end of the quarter, the company increased the capacity on its unsecured credit facility by $150,000,000 to $500,000,000 while extending the maturity to January of 2029. Through the equity raise and the upsized facility, Inventor has effectively added nearly $400,000,000 of additional liquidity, replenishing an already conservative balance sheet and we're putting the fresh capital work in an accretive manner. To that end on the investment front, in the Q3, we closed on our 2nd property in the Phoenix MSA, Scottsdale North marketplace for $23,000,000 Subsequent to the quarter, we closed on our 2nd property in the Richmond, Virginia market, a Wegmans Anchored Community Center for $62,100,000 Due to our increased optimism surrounding the improving transaction market, coupled with our additional capital, we have increased our net investment activity guidance for the year accordingly to a range of $159,000,000 to $215,000,000 Moving to operations, less bad debt and higher retention rates are once again feeling better than expected results. Leased occupancy climbed to 97% during the quarter, up both sequentially and on a year over year basis, setting another new high watermark for the portfolio.

Speaker 2

Blended spreads remained healthy in this high single digits with a retention rate of 93%. Strong operating results across the portfolio are driving the increase to both same property NOI growth and FFO per share for 2024. Internal growth remains remarkably healthy and now will be supported by additional external growth efforts as we move from 2024 to 2025. With that, I'm going to turn the call over to Mike to discuss our financial results in greater detail. Mike?

Speaker 3

Thank you, DJ. Same property NOI for the quarter was $45,500,000 growing 6.5% over the Q3 of last year. The quarter to date increases were primarily driven by an increase in base rent of over 300 basis points, of which 150 basis points were embedded rent bumps. Net expense reimbursement contributed approximately 170 basis points to the increase for the quarter with better collections from revenues deemed uncollectible adding 150 basis points. Year to date, same property NOI was $123,800,000 growing 4.2% over the 1st 9 months of 2023.

Speaker 3

NAREIT FFO for the 1st 9 months of the year was $91,800,000 or $1.34 per diluted share, an increase of 7.2% over the same time period last year. Year to date core FFO grew 4.8% to $1.30 per share compared to the same time period of 2023. Components of FFO growth are primarily driven by same property NOI of $0.07 and NOI from acquisitions of $0.06 offset by interest expense, G and A and lower interest income of approximately $0.06 As DJ discussed, the successful capital raise strengthened and reloaded our balance sheet providing us additional capital and flexibility to execute on our long term strategy. Imitrust's net leverage ratio dropped to 20% and our net debt to adjusted EBITDA is 3.6 times on a trailing 12 month basis. Our $72,500,000 in variable rate debt was paid off, bringing our weighted average interest rate to 4% at the end of the quarter and our weighted average maturity to 3.6 years.

Speaker 3

Our remaining debt is now 100% fixed. Finally, we declared an annualized dividend payment of $0.91 per share, a 5% increase over last year. Moving to guidance. Due to our strong operating fundamentals, we are raising our full year guidance again this quarter. The new guidance range for the company's 2024 full year same property NOI growth is 4.25 percent to 5 percent.

Speaker 3

Our new NAREIT FFO guidance is now $1.74 to $1.77 per share and our core FFO guidance is up to $1.70 to $1.73 per share. Full year details on our guidance assumptions are provided in our supplemental disclosure filed yesterday. And with that, I'm going to turn the call over to Kristi to discuss our portfolio activity. Kristi?

Speaker 4

Thanks, Mike. Our portfolio continues to benefit from the positive fundamentals in the strip center space and the migration to and growth in the Sunbelt market. As a reminder, 97% of our ABR is generated from Sunbelt assets with the goal of getting to 100% in the future. Additionally, supply remains limited, creating increased demand for high quality retail space. As retailers struggle to find new space to satisfy their internal growth plans, they continue to look for creative ways as it relates to store size and location within our centers.

Speaker 4

All of these conditions allow the Inventrust team to remain focused on transforming retailer leasing demand into increased ABR and additional portfolio occupancy at our properties. For the 9 months ending in September, our total portfolio leased occupancy ended at 97%, up 60 basis points from last quarter and at an all time high. Our anchor space leased occupancy finished at 99.8%, an increase of 70 basis points from last quarter, also at an all time high. And our small shop leased occupancy ended the quarter at 92%. Our signed not open pipeline is 280 basis points that equates to about $7,200,000 of additional income coming online into our portfolio over the next several quarters.

Speaker 4

As of September 30, Inventrust total portfolio ABR was $19.83 an increase of 2.4% compared to 2023. For the quarter, we posted blended comparable leasing spreads of 9.8%. Spreads for new leases were 14.2 percent and renewals were 9.2%. The retention rate was 93% and 90% of our renewals have embedded rent escalators of 3% or higher. Year to date, our blended comparable leasing spreads were 10.4%.

Speaker 4

We signed 160 leases for over 1,094,000 square feet so far this year with additional leases in our pipeline at various stages of negotiation. Tenants signed during the quarter include Alta and Skechers. Currently, our portfolio is nearly at 100% occupancy for anchor tenants with only one available space being kept offline for redevelopment and re tenanting opportunity in the future. These opportunities exist throughout our portfolio and we will be focused on executing these accretive strategic remerchandising and redevelopment projects for the next several years. In closing, I would like to take an opportunity to update you on recent weather events.

Speaker 4

As many of you are aware, we have had several hurricanes and significant storms in the south over the past several weeks. Thankfully, all Inventrust employees in the affected area made it through the storm safely. IVT was fortunate that our assets only sustained minimal damage and debris cleanup. We continue to provide aid and stand by our communities and tenants to support their needs and help them recover. Operator, that concludes our prepared remarks and you can open the line for questions.

Operator

Thank you. First question comes from Andrew Rehle with Bank of America. Your line is open. Please go ahead.

Speaker 5

Hi, good morning everyone. Thanks for taking our questions. Just one on the acquisition market and external opportunities. Just curious if the reversal in interest rates since the time of your equity issuance has put a damper on the number of external opportunities you're seeing? And also curious in your view, has he elected or installed any potential sellers?

Speaker 6

Yes. Thanks, Andrew. Good morning. Our acquisition pipeline and what you see that's implied in the guidance is things that we've been working on for quite some time. So the reversal interest rates hasn't had really certainly didn't have an impact on what we're currently chasing from an acquisition standpoint.

Speaker 6

And really, to be honest, in our markets, with the type of product that we're looking at, we haven't seen much change given the recent movements. Going into this week or next with the election, it tends to traditionally has been more quiet. I would expect that transaction market to open back up after there's a little bit more certainty, but that's just speculation. But going back to what I said, the types of markets and the types of product that we're looking at, we've actually seen more product hit the market, but also more potential buyers as well, which totally to us is a pretty healthy environment. And I would expect that to continue in 2025, which is why you saw the changes that we made as it relates to our expectations.

Speaker 5

Okay. And just another one for me. Bad debt overall been trending favorably, but would be curious if you could just talk a bit about your tenants in more discretionary categories, home goods, hobby, maybe full service restaurants too. Just curious on how sales and traffic are holding up and do you think about renewals in some of those categories if consumers continue to pull back on discretionary spend?

Speaker 6

No, it's a great question. Anically, through our portfolio, we haven't seen much of a change. There's I think sales certainly have stabilized from some pretty impressive growth over the last couple of years, no doubt. The value areas continue to do very well. Hobby, quite honestly, that had many of those banners have been looking to grow their footprints.

Speaker 6

And as it relates to food service and even full service restaurants, The types of restaurants that are in our portfolio tend to be that still, even if they're full service, tend to be that kind of middle income, lower price point, if you will, even if price points are higher. But we don't do a whole lot of Whiteland and DevOprah types of restaurants. So big, well capitalized chain restaurants that are still doing quite well. Fast food, quick service continues to do really well and quite and is still one of the better performers in our portfolio. There's very, very healthy occupancy cost ratios across that category.

Speaker 6

And if there has been some restaurants that have struggled and some franchises have changed, but the most valuable space that we have that's in the most demand in the portfolio, our operations team would tell you that is that 2nd generation restaurant space because it tends to be lower capital going in.

Speaker 5

Okay. Thanks very much.

Speaker 6

Thank you.

Operator

We now turn to Dori Kaston with Wells Fargo. Your line is open. Please go ahead.

Speaker 7

Thanks. Good morning. A few of your peers have started to put up some guardrails around 25 same store NOI growth. Do you have any interest in adding your early thoughts to that?

Speaker 6

We noticed that, Doreen. Thanks for the question. Look, one of the things that we've tried to one of the things we've tried to do over the last couple of years is everything that the operations team and Chrissy's team has done is trying to build a sustainable model where we can drive consistent growth both in same property NOI, but most importantly in cash flow. And we think we're at a really nice level. So what I will tell you is we have nearly 70% of our leasing efforts done next year.

Speaker 6

Notwithstanding any material changes as we see in bad debt, but maybe a more normalized run rate bad debt, We're expecting a very similar type of cadence in growth that we're seeing that we've seen in the last 2 years.

Speaker 7

So with the current portfolio, where do you put that more normalized bad debt? Is that closer to 75 basis points?

Speaker 6

Yes. The 75 basis points is usually where we is kind of the starting benchmark. And then obviously, we'll move that. Obviously, in our portfolio, we're not benefiting as much from like out of period adjustments or anything like that to offset it. But the bad debt, our reserve continues to approve to be conservative as with many of our peers.

Speaker 6

75% is always a is the benchmark that we tend to anchor to as we go into the year and then we adjust accordingly.

Speaker 7

Okay. And then regarding your non core assets, can you give us an update on where you see the aggregate value there and if your definition of non core has widened as your acquisition pipeline has grown?

Speaker 6

Yes. It's a good question. I think one of the things that we've always talked about is being exclusively in the Sunbelt, right? So we do have 2 assets that sit in the Mid Atlantic Corridor, just north of in Maryland. Those assets are phenomenal assets.

Speaker 6

One's anchored by Safeway, one's anchored by Trader Joe's. They'd only be non core in the light of not being in the sun belt for InventTrust, but certainly core properties for anybody else. But we're not for sellers either. What we're going to be looking to do over the next couple of years is to methodically recycle capital when we feel like the time is right and we have a use for that capital. And if there are more opportunities in markets that fit the InventRUs world better, we'll accelerate those non core asset recycling.

Speaker 6

As it relates to being wider, one of the things that we've discussed is our view on California. California is still a phenomenal market. And it's always priced that way. It's one of those things that we'll continue to consider over time. But again, we have a really, really strong California portfolio and presence.

Speaker 6

So it just depends on where we can reallocate that capital in an accretive manner.

Operator

We now turn to Daniel Perpeira with Green Street. Your line is open. Please go ahead.

Speaker 8

Good morning. The retail environment has been strong recently. Have you seen any changes to this environment or do you expect continuation of these same trends?

Speaker 6

As far as what do you mean by Daniel? Hey, good morning. What do you mean by the retail market? Are you talking about the transaction market or the underlying fundamentals?

Speaker 8

The underlying fundamentals, demand for space, things like that?

Speaker 6

Yes, yes. No, so the demand for space continues to be very robust. I mean, look, we're at an all time high as it relates to leased occupancy at 97%. Behind that 97%, we have an additional 100 plus basis points of things that are in the works. Now not everything is going to obviously show up in occupancy.

Speaker 6

Some deals do fall in and out. But there's a lot of demand even behind the current occupancy levels, which is something that we haven't had in the past. And we have and because of the level of occupancy we're at, we're actually filling spaces that we haven't filled in quite some time. So, and it's broad based across categories. To my earlier comments, food service continues to be a very strong category for us, even though there has been probably a little bit of a slowdown in sales, perhaps some of that is due to the change in inflation.

Speaker 6

But healthcare continues to be strong services. So we're seeing a pretty broad based level of demand in our small shop both in our small shop and in our anchor space, which is effectively fully occupied at this point.

Speaker 8

Got you. And then if I could ask one more, with a curb line going public at the beginning of this month, you had any interest in looking at convenience centers or any non anchored centers?

Speaker 6

Yes. No. So we do own a couple non anchored or I guess what you guys would consider non anchored centers. Look, at the end of the day, we're a little bit more property agnostic. We're just looking for the right retail that has a necessity based component primarily in a market that we know we can grow rents.

Speaker 6

And most of those markets we're already in. We do have a handful of markets that we're trying to get a foothold in as well. But if you look across if you look at our portfolio, we own small unanchored community centers all the way up to some power centers. And it just depends on what market and what retail note they're in. And we've been able to be successful in growing rents in all formats.

Speaker 8

Got it. Thank you.

Operator

We have no further questions. I'll now hand back to DJ Busch for any final remarks.

Speaker 6

Thank you, everyone, for joining us. We look forward to seeing hopefully many of you next month, I guess, in Las Vegas. Until then, have a great day.

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InvenTrust Properties Q3 2024
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