Q2 2022 Inventrust Properties Corp Earnings Call

Operator: Thank you for standing by and welcome to the Inventrust's second quarter 2022 earnings conference call. My name is Joanna and I will be your conference call operator today.

My name is Joanna 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 investor 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.

Dan Lombardo: Thank you and good morning, we're happy you're joining us today. With me are DJ Busch, President and Chief Executive Officer, Mike Phillips, Chief Financial Officer, Christy David, Chief Operating Officer, and Dave Heinburger, Chief Investment Officer. Following our prepared remarks, we will open the lines and answer questions from the research analyst community.

With me are D J Busch, President and Chief Executive Officer, Mike Phillips, Chief Financial Officer, Christy, David Chief Operating Officer, and Dave Heinburger Chief Investment Officer.

Following our prepared remarks, we will open the lines and answer questions from the research analyst community.

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.

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, it's my pleasure to turn the call over to DJ.

Included in this quarter's earnings materials, which are posted on our Investor Relations website.

Daniel Joseph Busch: Thanks, Dan. Good morning, everyone and thank you for joining us. Inventrust had another solid quarter driven by our team's strong performance and our portfolio of high-quality assets and some of the most sought-after markets in the Sunbelt. Our simple and focused business plan continues to produce strong results near the top end of our sector and we believe this strategy has us well positioned to navigate any potential volatility in the economy and the capital markets. Our almost exclusive sunbelt portfolio differentiates us from our strip center peers, which continues to see strong migration and job creation patterns. From Texas to Florida, to North Carolina, the sunbelt remains desirable for business relocation.

we believe this strategy has us well positioned to navigate any potential volatility in the economy and the capital markets. Our almost exclusive sunbelt portfolio differentiates us from our strip center peers, which continues to see strong migration and job creation patterns. From Texas to Florida, to North Carolina, the sunbelt remains desirable for business relocation.

Companies, such as Apple, Tesla, Citadel, and Honeywell to name a few have all recently announced new or additional locations in one of our markets, bringing new population and high-paying jobs to our already growing communities. These factors and the high traffic patterns at our properties do not go unnoticed by retailers, which has in turn drive continued demand for leasing our space.

The Inventrust team has continued to execute on significant corporate initiatives since joining the public market last year. This quarter I want to highlight another milestone as we published our inaugural ESG report. ESG is not new to Inventrust and this report encapsulates the various activities across our company and the objectives we are motivated to pursue. These efforts align with our commitment to transparency and outlines our pledge for being an even greater corporate partner to the environment, communities we serve, and all of our stakeholders.

this report encapsulates the various activities across our company and the objectives we are motivated to pursue. These efforts align with our commitment to transparency and outlines our pledge for being an even greater corporate partner to the environment, communities we serve, and all of our stakeholders.

We invest in our properties, creating community gathering spaces and prioritizing the installation of energy management systems and electric vehicle charging stations across our portfolio. Sustainability assessments are also reviewed when performing due diligence on new acquisitions. Inventrust analyzes the center's current state of environmental practices as well as any opportunities to implement additional activities to support an environmentally friendly portfolio. Equally important to our sustainability pursuits, we are also currently in the process of adding diversity to our Board of Directors. We are conducting a search to add to the breadth of skills and competencies on our Board while further increasing diversity. Our Board's guidance, experience, and leadership, is and will continue to be an integral part of our long-term success.

<unk> to support an environmentally friendly portfolio equally important to our sustainability pursuits. We are also currently in the process of adding diversity to our board of directors. We are conducting a search to add to the breadth of skills and competencies on our board, while further increasing diversity, our board's guidance experience and leadership.

Is and will continue to be an integral part to our long term success.

Finally, let me provide you with a few comments about the current acquisition environment. Our team continues to pursue and review our robust pipeline of opportunities within our markets. While pricing for core, sunbelt assets appears resilient, we remain extremely disciplined in our evaluation of new opportunities and their corresponding contribution to our potential external growth.

While pricing for core Sunbelt assets appears resilient, we remain extremely disciplined in our evaluation of new opportunities and their corresponding contribution to our potential external growth.

During the quarter, we acquired [inaudible] landing, a grocery-anchored center just outside of Naples, which is an area seeing excellent demographic trends. In addition, we acquired the highlands of Flower Mound in suburban Dallas from our joint venture. Both deals demonstrate our ability to deploy capital in a competitive environment by coupling external opportunities in the market with the captive acquisition pipeline that sits within our JV. Our seasoned team will continue to navigate the acquisition landscape as we maintain our prudent approach to capital allocation decisions.

Both deals demonstrate our ability to deploy capital in a competitive environment by coupling external opportunities in the market with the captive acquisition pipeline that sits within our JV.

Our seasoned team will continue to navigate the acquisition landscape as we maintain our prudent approach to capital allocation decisions.

With that, I'm going to turn the call over to Mike to discuss our financial results and guidance in more detail.

Michael Douglas Phillips: Thanks, DJ. Good morning, everyone. Let me start with Inventrust's  financial performance. As we reported yesterday, our core FFO grew to $57.7 million for the first six months of 2022 or 85 cents per share representing a year-over-year increase of 33%. The increase in year-to-date core FFO for 2022 was largely driven by an increase in pro rata same property NOI contributing 10 cents per share, an additional 3 cents primarily from 2022 acquisitions.

The increase in year-to-date core FFO for 2022 was largely driven by an increase in pro rata same property NOI contributing 10 cents per share, an additional 3 cents primarily from 2022 acquisitions.

In addition, we realized G&A savings of 6 cents due to non-recurring costs of our succession planning in 2021, and we saw a positive 4 cent impact on our $100 million share repurchase in Q4 of last year. These gains were offset by an increase in interest expense of 2 cents.

Pro rata same property NOI year-to-date reached $74.8 million growing 9.9%. The increase was primarily driven by contractual rent increases, occupancy gains, and the timing of collections of cash basis tenants. We also have a favorable comparison against year-to-date 2021 of about 150 basis points related to rent relief given in 2021 that we did not experience in 2022.

The increase was primarily driven by contractual rent increases occupancy gains and the timing of collections of cash basis tenants. We also have a favorable comparison against year to date 2021 of about 150 basis points related to rent relief given in 2021 that we did not experience in 2022.

Turning to the balance sheet, InvenTrust continues to diversify its capital structure and manage its maturity schedule. In June, utilizing its investment grade rating, InvenTrust completed a $250 million private placement offering. The senior unsecured notes are broken down into a seven-year transfer of $150 million and a 10-year transfer of $100 million.

The weighted average fixed interest rate is 5.1% and weighted average maturity is 8.2 years. Using the delayed draw feature, funding will occur on August 11th and we intend to use the proceeds for general corporate purposes, including the repayment of debt and future acquisitions.

The delayed draw feature funding will occur on August 11th and we intend to use the proceeds for general corporate purposes, including the repayment of debt and future acquisitions.

Next, I would like to update our full-year 2022 guidance. We are lifting the low end of our core FFO range to $1.52 while maintaining the high end of the range at $1.56 per share. We are tightening our pro rata same property NOI growth guidance to 4% to 5%.

We are tightening our pro rata same property NOI growth guidance to 4% to 5%.

As we mentioned last quarter, we continue to expect our quarterly pro rata same property NOI and core FFO growth to decelerate in the back half of the year due to significant out-of-period rent received in Q3 of 2021, an increase in property operating expenses, and increased interest expense.

Bottom line for the full year, we expect to deliver meaningful NOI and core FFO growth and strong results will be near the top end of the sector. Our full guidance assumptions are provided in our supplemental disclosure filed yesterday. With that, I'm going to turn the call to Christy to discuss our portfolio activity.

Christy L. David: Thank you, Mike. As DJ mentioned, InvenTrust continued to experience strong operational and leasing performance. Our centers remain busy and traffic levels are in line with 2019 visits.

Our leased occupancy ended the quarter at 95.4%, 100 basis points above Q1, and 250 basis points above this period last year. Our anchor lease percentage for the first six months of the year increased to 98.2% and our small shop remained at 95%, both all-time highs, giving us significant pricing power when negotiating leases.

Giving us significant pricing power when negotiating leases.

With our occupancy levels increasing our goal is to minimize the spread between our economic and leased occupancy rates. Our team continues to be proficient in effectively turning signed leases into rent-paying tenants. Even in these times of supply chain challenges, we are finding creative ways to reduce delays and open tenants on time and on budget.

Our annual base rent as of June 30th through the pro rata same property portfolio was $19. 03, an increase of 2.7% compared to June 30th of 2021. Anchor tenant ABR was $12.53 with small shop ABR hitting $32.07.

An increase of two 7% compared to June 30 of 2021.

Anchor tenant ABR was $12.53 with small shop ABR hitting $32.07.

In the second quarter, we signed 78 leases totaling approximately 289,000 square feet of GLA.

Our leasing team continues to see interest in many retail categories with tenants signing new leases, including Total Line, Homegoods, Crunch Fitness, and Burlington. Our retention rate for the quarter was above 92%. Our expectation is that renewals will continue to make up a substantial percentage of our leasing volume. In an environment where new tenant Capex is increasing, we view our strong retention rate as a strength. It eliminates downtime while still generating positive leasing spreads.

Our retention rate for the quarter was above 92%. Our expectation is that renewables will continue to make up a substantial percentage of our leasing volume.

In an environment, where new tenant Capex is increasing we view our strong retention rate is a strength and eliminate downtime, while still generating positive leasing spreads.

The total combined rent spread for the quarter inclusive of new and renewal leases was 15.1%. These results further demonstrate our conviction around the ability of our sunbelt assets to attract new tenants, maintain occupancy, and most importantly, drive rent.

These results further demonstrate our conviction around the ability of our sunbelt assets to attract new tenants maintain occupancy and most importantly drive right.

Although we are experiencing strong demand for space, we continue to closely monitor how inflation is affecting our tenants and our consumers.

Due to the necessity-based nature of our assets, sales for our tenants remain healthy. Labor availability and wage increases are starting to cause challenges for our tenants, but currently, tenants are adjusting to mitigate risk or any significant disruption to their operations. InvenTrust will continue to partner with our tenants as needed to help them conduct their business successfully.

Labor availability and wage increases are starting to cause challenges for our tenants, but currently tenants are adjusting to mitigate risk or any significant disruption to their operations.

And then trust will continue to partner with our tenants as needed to help them conduct our business successfully.

To conclude, I wanted to highlight a redevelopment project that we are extremely proud the InvenTrust team was able to complete and hand space over to the tenant this quarter. In a time of rising costs and supply chain delays, the team was able to hit both our budget and delivery timeline in the rebuilding of our brand new Publix at our Suntrust Village property in Orlando.

In a time of rising costs and supply chain delays the team was able to hit both our budget and delivery timeline and the rebuilding of our brand new Publix at our Suntrust village property in Orlando.

On top of that, we expect this project to generate significant NOI growth for this center, a true win-win for InvenTrust and tenants at the property. This project embodies InvenTrust's approach to redevelopment. Modest investment opportunities can enhance the consumer experience while generating solid risk-adjusted returns for our stakeholders without the longer-term construction cycle typically seen on larger projects. Now I will turn the call over to DJ for some final remarks.

Drew win win for <unk> Trust and tenants at the property.

This project embodies in Ventura approach to redevelopment.

Modest investment opportunities can enhance the consumer experience, while generating solid risk adjusted returns for our stakeholders without the longer term construction cycle typically seen on larger projects now.

Now I will turn the call over to DJ for some final remarks.

Daniel Joseph Busch: Thanks, Christy. The InvenTrust team, since listing the company in October of last year, has completed an impressive array of achievements. These include: repurchasing $100 million of shares at $25 per share, moving closer to a 100% sunbelt portfolio by acquiring $190 million of assets in Austin, Texas, and selling two of our Colorado assets, putting in place an ATM program and a share repurchase program, receiving our inaugural investment grade rating from Fitch ratings, executing on a $250 million private placement to fund our growth strategy and diversify our debt capital structure, and publishing our inaugural ESG report.

Moving closer to a 100% sunbelt portfolio by acquiring $190 million of assets in Austin, Texas, and selling two of our Colorado assets. Putting in place an ATM program and a share repurchase program. Receiving our inaugural investment grade rating from Fitch ratings. Executing on a $250 million private placement to fund our growth strategy and diversify our debt capital structure. And publishing our inaugural ESG report these.

Putting in place an ATM program and a share repurchase program.

Receiving our inaugural investment grade rating from Fitch ratings.

Executing on a $250 million private placement to fund our growth strategy and diversify our debt capital structure.

And publishing our inaugural ESG report these.

These accomplishments, as well as our inclusion in numerous indices, have moved our institutional ownership closer to 60%. Every day the InvenTrust team is motivated by our core principles and we will continue to strive to bring value to our stakeholders. We will also continue to maintain our simple and focused sunbelt strategy. That should continue to deliver sustainable cash flow growth in the future and be an attractive investment for our current and new shareholders.

Every day the <unk> team is motivated by our core principles and we will continue to strive to bring value to our stakeholders. We will also continue to maintain our simple and focused on belt strategy that should continue to deliver sustainable cash flow growth in the future and be an attractive investment for our current and new shareholders.

Operator, this concludes our prepared remarks, please open the line for questions.

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press star followed by the number one on your touchtone phone. You will hear a two-toned prompt acknowledging your request. If you would like to withdraw your request, please press star followed by two. One moment please for your first question.

One moment. Please for your first question.

The first question comes from Floris Van Dijkum from Compass Point. Please go ahead.

Floris van Dijkum: Good morning, guys. Thanks for taking my question. So I had a question on the occupancies, which are at record levels and I would love to get your comments on we're sort of in unprecedented for the portfolio anyway occupancy levels already. How much more can occupancies increase in your view and also what does that mean? I saw that your leasing costs were pretty elevated for the quarter, is that partly due to the mix or is that also [inaudible] space that hasn't been leased before and thus requires more refurbishment, and is that something that we can expect going forward as well or just want to get a sense of your optimism or your view on how much more can you push the occupancies and then obviously that would allow you to push rents presumably as well.

Thanks for taking my question so.

I had a question on the Occupancies, which are at record levels and I would love to get your comments on yeah, we're sort of in unprecedented for the portfolio anyway occupancy levels already how much more can.

Ken Occupancies, increasing your view and and also what does that mean I saw that your.

Leasing costs were.

Pretty elevated for the quarter is that.

Partly due to the mix or is that also.

<unk> space that hasn't been leased before and thus requires more refurbishment and is that something that we can expect going forward as well or you just wanted to get a sense of your your optimism or your view on how much more can you push the occupancies and then obviously that would allow you to push rents presumably as well.

Daniel Joseph Busch: Hey, Floris, this is DJ, good morning. It's obviously an important observation. I think we're not alone in the sense that we're getting certainly past pre-pandemic occupancy levels, but getting close or past peak occupancy levels, which is tremendous tailwind as we think about pricing power and I think some of our peers have already mentioned that. We do think that we can push occupancy a little bit higher than I think you hit on an interesting point, we're actually having success in areas of our centers that have struggled to be leased in the past whether it's just in a suboptimal location or something else.

It's obviously an important observation I think we're not alone in the sense that we're getting certainly pass pre pandemic occupancy levels, but getting close or past peak occupancy levels, which is tremendous.

Tailwind as we think about pricing power and I think some of our peers have already mentioned that we do think that we can push occupancy a little bit higher than I think you hit on an interesting point, where we're actually having success in areas of our centers that have struggled to be leased in the past whether whether it's just in a suboptimal location or something.

Els.

I do think to your point on leasing cost that's more of a mix issue than trying to get space that's been maybe a long period of time they are vacant. We're actually being much more careful and cautious on leasing costs in those areas because we want to make sure if it has been a space that has struggled in the past that we're not putting too much capital in the case that it may come back to us. So we're actually being more cautious, not only from a base rent perspective to make sure that those tenants that are taking some space that's struggled in the past to be more successful, but also with the capital that we're investing in those as well. We do expect through the balance of year for occupancy to continue to tick higher. Obviously, in the current economic backdrop, we are in unprecedented territory as far as the lack of bankruptcies. Certainly, I'm not sure that that will last forever, but it's obviously been a huge boom for us in the interim.

Trying to get space that's been.

Maybe long.

Long period of time they are vacant.

Or actually being much more careful and cautious on leasing costs in those areas because we want to make sure.

If it has been a space that has struggled in the past that we're not putting too much capital of that in the in.

In the case that it may come back to us So we're actually being more cautious.

Not only from a base rent perspective to make sure that those tenants that are taking some space thats struggled in the past to be more successful.

But also with the capital that we're investing in those as well we do expect through the balance of year for occupancy to continue to tick higher obviously in the current economic backdrop.

We are in unprecedented tariff <unk> as far as the lack of bankruptcies.

I'm not sure that that will last forever, but it's obviously been a huge boon for us in the interim.

Floris van Dijkum: Thanks, DJ. Maybe if I can follow up with an additional question, I'd love to get your comments on your market exposures. Obviously, you're predominantly sunbelt, Boston being the biggest market. You just bought an asset that you had in a joint venture with [inaudible] in Dallas. How do you look at and compare Dallas and maybe Atlanta, which I think is your second largest market, and are you as excited about those markets as you are about the Austin market and clearly Austin has gotten a lot of attention from investors and cap rates have really compressed in that market. Are you more hesitant about deploying more capital in a market like that?

Thanks, DJ maybe if I can follow up with with an additional question I'd love to get your comments on on your market exposures and obviously youre predominantly.

Sunbelt Boston being the biggest market you just bought some some asset an asset that you had in joint venture and fly reminder, in Dallas, How do you look at. And compared Dallas, and maybe Atlanta, which I think is your second largest market and are you as excited about those markets. As you are about the Austin market and clearly Austin and it's gotten a lot of attention from investors and cap rates have really compressed in that market. Are you more hesitant about deploying more capital in a market like that.

And compared Dallas, and maybe Atlanta, which I think is your second largest market and are you as excited about those markets. As you are about the Austin market and clearly Austin and it's gotten a lot of attention from investors and cap rates have really compressed in that market.

Are you more hesitant about deploying more capital in a market like that.

Daniel Joseph Busch: Yes, it's a good question. I think our approach is a little bit more holistic. Obviously, we like all three of the markets that you mentioned: Dallas, Atlanta, and Austin but for a couple of different reasons. I think when we think about the total returns that we need to get to or we want that we're underwriting, obviously, Austin is going to be on the lower end of that spectrum because of the dynamics and the growth prospects in that market, not only from a demand perspective, but from a lack of supply perspective. Those dynamics are a little bit different in some of the parts of Atlanta and Dallas, and certainly Houston, where it is a little bit easier to build and it doesn't have the same level I guess, for lack of a better word, nimbyism that places like Austin and even the triangle in North Carolina have.

Our approach is a little bit more holistic obviously, we like all three of the markets that you mentioned in Dallas, Atlanta and Austin.

But for a couple of different reasons I think when we think about the total returns that we need to get to where we want that we're underwriting obviously Austin is going to be on the lower end of that spectrum because of the dynamics and the growth prospects in that market not only from a demand perspective, but from a lack of supply perspective.

Those dynamics are a little bit different in some of the parts of Atlanta, and Dallas, and certainly Houston, where.

It is a little bit easier to build.

And it doesn't have the same level I guess until out for lack of a better word nimbyism that places like Austin and even.

The triangle in North Carolina have.

We expect to obviously continue to invest in those markets, but to point out some other markets that we are equally or maybe even more excited about the dynamics that we've seen in Central and West Florida have been very exciting on just the assets we have which goes to our acquisition of Bay landing and then we would love to get further investment in concentration in the Carolinas where many of our peers have assets as well, but the dynamic there from our perspective, and what we're seeing on the ground, are a little bit closer to Austin to then maybe Dallas or Houston or Atlanta.

In those markets, but we are to point out some other markets that we are equally or maybe even more excited about the dynamics that we've seen in central and West Florida had been very exciting on just the assets, we have which goes to the to our acquisition of Bay landing and then we would love to.

To get further investment in concentration in the Carolinas, where many of our peers have assets as well, but the debt dynamic the dynamic excuse me there.

From our perspective, and what we're seeing on the ground are a little bit closer to Austin, and then maybe a dallas or Houston or Atlanta.

Floris van Dijkum: And maybe another, in terms of cap rates, the view is interest rates have gone up significantly as the market certainly, the stock market has repriced everything as if cap rates are going to increase. We haven't seen a whole lot of evidence of that yet in the direct markets, but most people expect that to occur later on this year. How have you changed your underwriting criteria for acquisitions and investments?

The view is.

Interest rates have gone up significantly as the market certainly the stock market has repriced everything as if cap rates are going to increase we havent seen a whole lot of evidence of that yet in the direct markets, but most people expect that too to occur later on this year. How are you how have you changed your underwriting.

Our criteria for acquisitions and investments.

Daniel Joseph Busch: I think it is just--and I mentioned in the prepared remarks, it's just more discipline because to your point, what we've seen in our current pipeline is pretty sticky pricing and obviously, most of the stuff that we're looking at continue to be core grocery in the markets that we're already in and we haven't seen a whole lot of movement. A lot of that is due to the core grocery anchored centers, usually, it can be bought on the balance sheet, and they're not as highly dependent on unsecured financing. I think the larger assets, perhaps in the power center space I think that is more dependent on the mortgage market, probably have moved a little bit, it may move a little bit more but we haven't seen the same. But I would agree with your sentiment that we could expect a pullback. Obviously, we had a fantastic run-up in values and down and cap rates just from our observations over the last 18 to 24 months, and if that cools off a little bit that's okay, but we haven't seen that yet which is why we've been a little bit more disciplined in our acquisitions.

And I mentioned in the prepared remarks, it's just more discipline because to your point.

What we've seen in our current pipeline is pretty sticky pricing and obviously, we're most of the stuff that we're looking at continues to be core grocery in the markets that we're already in.

And we haven't seen a whole lot of movement a lot of that is due to.

The core grocery anchored centers, usually it can be bought on balance sheet. They don't theyre not as highly dependent on unsecured financing I think the larger assets, perhaps in the power Center space I think that is more dependent on.

On the mortgage market.

<unk> has moved a little bit that may move a little bit more but we haven't seen the same but I would I would agree with your sentiment that.

We could expect a pullback obviously, we had a fantastic.

Run up in values and down and cap rates just from our observations over the last 18 to 24 months.

And if that cools off a little bit that's okay, but we haven't seen that yet which is why we've been a little bit more disciplined.

In our acquisitions.

Floris van Dijkum: Thanks, DJ, that's it for me.

Daniel Joseph Busch: Thank you, Floris.

Operator: Thank you. As a reminder, should you have any questions, please press star followed by one.

The next question comes from Craig Schmidt at Bank of America. Please go ahead.

Craig, your line is open, you may proceed with your question. Craig Schmidt, please proceed.

Craig Smith. Please proceed.

At this time, there appear to be no other questions, I will turn the conference back over.

Daniel Joseph Busch: Thank you everyone for joining us. Thank you for your interest in InvenTrust and we look forward to speaking with many of you over the coming months. Have a great rest of your day.

Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines. Enjoy the rest of your day.

Rest of your day.