Q3 2022 Inventrust Properties Corp Earnings Call

Thank you for standing by and welcome to invent trusts third quarter 2022 earnings Conference call. My name is forum 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.

Invent trust properties Dot com.

All lines will remain muted during the presentation portion of the call with an opportunity for questions and answers at the end.

If you would like to ask a question. Please press star one on your telephone keypad.

I would now like to turn the call over to Mr. Dan Lombardo, Vice President of Investor Relations. Please go ahead Sir.

Good morning, everyone and thank you for joining us in the room with me today is D. J Busch, President and Chief Executive Officer, Mike Phillips, Chief Financial Officer, Christy, David Chief Operating Officer, and Dave Hayne, Brager Chief investment Officer. Following the team's prepared remarks, we will open the lines and answer questions from the research analysts.

Community.

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 there.

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 are that are in the quarterly financial supplemental our press release.

In addition, we will also reference certain non-GAAP financial measures.

Comparable GAAP financial measures are included in this quarter's earnings materials, which are posted on our Investor Relations website with that it is my pleasure to turn the call over to D. J.

Thanks, Dan and good morning, everyone, a little over a year ago and ventral is listed on the NYSE and at that time, we laid out our business plan and strategy that offered a unique investment opportunity in the retail REIT sector. We've continued to execute on our stated goals throughout the last 12 months, one of which is moving our portfolio concentration closer to a 100% sunbelt by sourcing.

Attractive grocery anchored acquisitions in our target markets, while opportunistically rotating out of our non sunbelt assets. We also utilize our investment grade rating to diversify and fortify our capital structure, our team's efforts across all facets of the business proved that a simple and focused strategy can deliver strong results as shown by our solid double digit core <unk>.

In 2022 as implied in our updated guidance.

This past year also underscored is that the underlying quality of our portfolio is outstanding our sunbelt markets continue to experience in migration of companies and highly skilled workers further adding to the positive demographic trends seen over the past decade further the demographic profiles of our consumers and our markets likely are able to better absorb some of the pressures.

From inflation and economic uncertainty, while we know we're not immune to the adverse impacts of inflation rising interest rates in a recessionary risk <unk> has and is expected to continue delivering consistent results leasing demand remains robust, resulting in record high leased occupancy and strong same property NOI growth for the first nine months of the year on the supply side.

Higher costs and inflation headwinds are limiting new development of grocery anchored centers as the hurdles for new construction remain challenging this scenario brings additional demand and leasing opportunities to our portfolio and affords us the opportunity to evaluate and focus on ensuring the proper tenant mix and credit quality of our centers all while driving rents. When you include our sex.

Our leading balance sheet, we have positioned the company not only to drive growth when times are good but also preserve cash flow while looking for opportunities during times of economic uncertainty the strength of our balance sheet and our low leverage uniquely positions us to take advantage of any value dislocation. We may see in the market that said on the transaction front, we remain extremely disciplined.

Blend in our evaluation of new acquisitions.

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

Thanks D J and thank you everyone for joining us yesterday and of interest reported core <unk> of $82 9 million or $1 23 per share representing an increase of 21% for the first nine months of 2022 compared to the same period last year. They.

The increase was largely driven by pro rata same property NOI contributing <unk> <unk> per share and an additional <unk> <unk> from 2022 acquisitions.

In addition, we realized G&A savings of <unk> due to recurring and nonrecurring cost reduction as well as a positive <unk> <unk> impact from our $100 million share repurchase in Q4 of last year. These gains were offset by an increase in interest expense of <unk> <unk>.

Pro rata same property NOI year to date reached $110 5 million growing five 4% over the same period last year. The increase was primarily driven by contractual rent increases occupancy gains reductions of abatements given in 2022 offset by net out of period rent collected.

I did want to point out as expected and discussed in our previous two earnings calls our year to date results did decelerate in comparison to the strong start for the first half of the year. This is primarily due to significant out of period rent collected in the third quarter of 2021 as well as the timing of operating expenses that had been contemplated in our guidance throughout the year, removing this out of period.

Rent from the comparison periods pro rata same property NOI would have increased <unk>, 8% for the quarter and six 6% year to date moving to the balance sheet as of September 30th our net leverage ratio was 25% and net debt to adjusted EBITDA was five times, which makes our leverage profile one of the lowest in the sector.

Our pro rata weighted average interest rate is three 8% and a weighted average maturity is four nine years.

Approximately 87% of our debt is fixed rate.

At the end of the third quarter, we had approximately $575 million of total liquidity, including $350 million of borrowing capacity available on our credit facility with our cash on hand cash flow generated by our portfolio and the significant capacity available on our revolver. We can address our near term maturities as well as continue to evaluate strategic opportunities in our <unk>.

Capital allocation plan without needing to source new debt.

Moving onto our guidance, we are raising our core <unk> range to $1 57 to $1 60, reduce G&A and an increase in interest income were the main drivers of the upward revision.

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

Our full guidance assumptions are provided in our supplemental disclosure filed yesterday.

With that I'm going to turn the call to Christie to discuss our portfolio activity.

Good morning, everyone as Mike M. D. J mentioned, and then trust continues to experience strong operational and leasing performance.

For the quarter, we signed 83 leases, representing 478000 square feet from various retail categories.

Our leased occupancy ended the first nine months of the year at 95, 6% 210 basis points about the same time period last year.

Our anchor lease percentage for the third quarter remained at 98, 2% and our small shop increased to 91% both at all time high.

This solid leasing volume with bolstered by re spreads at 8% for comparable new and renewal leases for the corner there.

These results continue to validate the strength of our markets are irreplaceable location and showcases our portfolio's ability to attract and retain tenants.

Our annual base rent as of September 30th kind of pro rata same property portfolio with $18 91 and.

An increase of two 5% compared to September 30 of 2021.

Anchor tenant ABR was $12.39 with small shop, ABR hitting $31 91 times, both increases over Q2 of 2022 in Q3 of 2021.

Our retention rates through the year is above 89%.

We expect lease renewals to continue to make up a significant percentage of our leasing deals.

And in an environment of rising buildout costs, our robust retention rate that eliminates downtime will remain a focal point in our overall leasing strategy.

And our discussions with retailers there is a common theme.

To make long term real estate decisions to secure the best brick and mortar locations with landlords that are committed to meeting store opening expectations are.

Our team continues to be proficient in effectively turning sign leases into rent paying tenants in a period, where supply chain issues remain prevalent we are thrilled with our team's ability to deliver space on time.

For the third quarter and year to date and Ventura opened up 120002 hundred 25000 square feet of space respectively.

Finally, I wanted to address the impact of Hurricane Ian as it relates to our portfolio and then trust owned 11 properties in Florida and seven in North Carolina, all near the path of the storm.

I applaud the hard work and dedication of the ventures team, who helped prepare our properties and tenants for the historic weather event. There are efforts were crucial in limiting the damage to our centers.

After evaluating the centers immediately after the storm some property did sustain some wind and water damage. However, we are pleased to report the cleanup has been swift and our tenants are back open and operating and servicing their communities.

The recovery for impacted areas remains an ongoing process and we continue to work closely with our tenants to provide the support and assistance needed.

Our thoughts continue to be with our partners and their families that were impacted by the hurricane.

Now I will turn the call over to DJ for some final remarks, thanks, Christy I would like to conclude by officially welcoming smithy Shaw to inventors Board of directors last month, <unk> announced the expansion of our board and the appointment of Smith.

I know she will be a dynamic AD to our board and will bring a new perspective as well as an impressive array of leadership and understanding of complex global infrastructure and environmental solutions.

With his appointment furthers <unk> commitment to finding high caliber professionals across all levels of the company, while enhancing our governance and management oversight efforts, we look forward to working with her in the rest of the board and our goal to maximize shareholder value.

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

Absolutely if you would like to ask a question. Please press star followed by one on your telephone keypad.

If for any reason you would like to remove that question. Please press star followed by two again to ask a question press Star one.

As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question. Our first question comes from the line of Floris Van <unk> with Compass point Floris. Your line is now open.

Thanks for taking my question guys.

Hey, Jay I'd love to get your comp.

The real estate industry, and the retail industry in particular sort of beer.

Being impacted by by two trends retail in particular, one positive maybe one slight negative to positive.

Most of your peers have been talking about.

<unk>.

Leasing demand from from retailers and wanted to get your perspective on that what you are seeing and what you expect to see going forward and then the negative trend is.

We see rising interest rates are going to put upward pressure on cap rates and maybe if you can provide a little commentary on that as well.

Yes, good morning, <unk>. Thanks for the question yes.

So to address the positive first you kind of hit the nail on the head the underlying fundamentals of the business are quite strong as many of our peers have alluded to or mentioned.

In their calls as well.

Seeing much of the same obviously the markets that we're in.

We've continued to.

Experienced tremendous in migration positive demographic trends all in the face of.

Higher inflation higher higher housing cost and the like but what we're seeing on the ground is continued to leasing demand one thing that I would mention is obviously there is.

The big.

Piece Thats really in our favor is the lack of supply lack of institutional supply with occupancy levels across the board at all time highs that gives us a lot more levers than we've had in the past you add to that.

The construction costs being elevated the mobility of the tenants is probably not as.

As it used to be so those two dynamics I think are working in our favor.

Much of how long and how sustainable that is remains to be seen but.

For the foreseeable future.

We see pretty good traction as it relates to our leasing demand.

On the capital market side look I think we're all dealing with the same thing Luckily we've we did a lot of our financing right before we listed the company and then thereafter with a private placement earlier this year, where in hindsight the rates look quite quite favorable based on where pricing is today.

As it relates to cap rates I think the thing that we're watching is cap rates are just one data point, we're trying to get to a return where we can make it accretive to our business and because we haven't seen cap rates move as much as we've seen financing cost that's a little bit more difficult in today's environment now if cap rates.

Increase in Unlevered returns increase where we can make money.

That's okay too so I think.

As I mentioned in prepared remarks, we're taking a little bit of a wait and see approach.

To see if cap rates rise there are some opportunities that we can take advantage of.

In terms of cap rates.

I know you just bought a smaller center in.

In North Carolina.

I believe just outside of Charlotte.

How long have you been looking at that and has the cap rate on that center.

Moved in your favor or was this a historical deal that was done at cap rates that you think are maybe not reflective of where they are going to.

No. It's a fair question and obviously it just closed subsequent to the quarter. So obviously, that's been a negotiation for a while it was unencumbered. So those deals tend to move a little bit more quickly we were very.

Happy with the yield that we're getting sue it's accretive to the business is accretive to the cash flow in the portfolio.

Which is why it made us comfortable also remember that we've been recycling out of Colorado, So really it's almost like a match funding.

You are taking out some of our Colorado assets and moving.

Bring in the Sun belt, particularly in North Carolina on an accretive basis.

Thanks, PJ and that's it for me.

Thank you for your question. Our next question comes from the line of Craig Schmidt with Bank of America. Craig. Your line is now open.

Thank you.

Just wanted to focus on the property operating expense.

Denise do increase.

Maybe you could tell us what's driving that.

As the third quarter, a good run rate.

Hey, good morning, Craig Thanks for the question.

Third quarter it wouldn't be a good run rate I think we've alluded to in <unk>.

In the first and second quarter this year that many of our property operating expenses.

Particularly on the non recoverable side, we're going to be a little bit back loaded.

The run rate I would say it was probably closer to what you saw at the beginning or the first half of the year as opposed to what youre going to see in the third and fourth quarter, where we expected.

Some one time items some opportunities to get some things done at the port at the property levels too.

Further increase the demand at our centers.

But I would look at the first half as opposed to the second half and that goes for the fourth quarter as well.

Okay, Great and then.

How much higher can you take.

Your anchor occupancy and your small shop occupancy I'm, just wondering where the bigger opportunity lies.

Yes, I mean.

Look we're at all time highs now.

Think we can continue to push the big bogey is we haven't seen any bankruptcies in a while right. So I think.

Withstanding no bankruptcies with some of the obvious tenants that have struggled where us and many of our peers have at least some exposure.

Everything else feels quite good I would say on the small shop side, we're just being mindful of the inflationary pressures pressures on the small shop tenants I think it hits them, a little particularly harder than it does maybe for some of the larger national anchors.

But we expect occupancy.

Based on our leased occupancy versus physical to continue to increase barring any any.

Major disruptions on the bankruptcy front.

The good news, though Craig is once we get to these levels of occupancy that's where we can start to really push price.

And as Christie mentioned with a retention rate in the high eighties, and where you can push price. There is no better return than hitting renewals, where youre not putting a whole lot of capital if any back into the centers, but youre increasing rents.

Thank you and then just finally, maybe.

Maybe talk a little bit about the consumer are you still seeing.

Good traffic to your centers.

Through October and when you talk to your retailers what are their expectations for holiday 2002.

Yes, I think our holiday 2022, excuse me, it's still a little bit unknown I will tell you that the consumer at least.

At our centers still.

Is quite strong our traffic is down modestly from earlier in the year, but still above pre pandemic levels, which is great. I think obviously the grocers in an inflationary environment continued to do quite well, even if even if trips are down baskets makeup for that.

What we're focused on is making sure that small shops, the ancillary offerings in our centers whether it be services.

Smaller food options.

That's where our kind of our focus has been and we haven't seen any material changes, yet, which is which is good not to say it won't happen. If this as this is.

More sustainable or longer lasting than we anticipate but.

Going into this holiday season, I would say that we feel.

Cost cautious, but relatively optimistic that.

Our centers are going to are you going to do.

Well.

Okay. Thank you that's it for me.

Thanks, Craig.

Thank you for your question. This concludes our question and answer session for today's call I will pass back to D. J Busch for closing remarks. Thank you.

Yes.

Thank you everyone for joining us. This morning, if you have any follow ups. Please don't hesitate to reach out enjoy the rest of your day.

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