InvenTrust Properties Corp. Q1 2023 Earnings Call
Speaker 1: Thank you for standing by and welcome to Inventrust's first quarter 2023 earnings conference call. My name is Emily and I'll be your conference call operator today.
Speaker 1: 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 www.inventrustproperties.com
Speaker 1: After the prepared remarks you will have the opportunity to ask any questions by pressing start followed by the number 1 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.
Speaker 2: Good morning everyone and thank you for joining us today. In the room with me is DJ Bush, President and Chief Executive Officer, Mike Phillips, Chief Financial Officer, Christy David, Chief Operating Officer and Dave Heimburger, Chief Investment Officer.
Speaker 2: Following the team's prepared remarks, we will open up the lines for questions.
Speaker 2: 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.
Speaker 2: 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.
Speaker 2: 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.
Speaker 2: With that, it is my pleasure to turn the call over to DJ.
Speaker 2: Thanks, Dan. Good morning everyone and thank you for joining us. Inventress opened 2023 with another strong quarter of operating results. In the face of some economic uncertainty and a challenging capital markets backdrop, our Sunbelt grocery and necessity-based portfolio continues to perform well. We maintained our record high occupancy rate of 96.1% for the second quarter in a row.
Speaker 2: and our same property net operating income grew at 3.2% over the first quarter of 2022. Both our NARIT and CORE FFO grew sequentially by over 17% compared to the fourth quarter of 2022. Our results are a testament to the dependability, consistency, and strength of our portfolio and markets.
Speaker 2: Necessity-based retail continues to show signs of strength and has proven to perform well during challenging economic times despite persistent inflation.
Speaker 2: The Inventress portfolio consists of high quality, essential retail tenants with approximately 60% of our AVR coming from either grocery, discount, or necessity based retailers.
Speaker 2: Fine tuning our merchandise mix across our properties to serve each of communities needs accordingly has been and will continue to be a key component of our long-term strategy and ultimate success. A notable tailwind in the space is the continued lack of new retail supply. Development for new strip center properties has been well below historical averages for the better part of a decade.
Speaker 2: Next, retailers, particularly grocers, continue to evolve and extract value out of their local brick and mortar locations. In our portfolio, we continue to see the expansion of our online order execution and fulfillment directly from our store locations.
Speaker 2: Additionally, and arguably the most important and unique attribute of our portfolio is the continued benefit from the well-documented migration to the Sunbelt. 95% of Inventress NOI comes from Sunbelt Markets.
Speaker 2: Demographics in our markets continue to grow and we expect these market dynamics will create advantages to our portfolio and performance for the years to come.
Speaker 2: A secondary point regarding migration is the suburbanization movement accelerated by the hybrid model that is seemingly the new normal. Clearly, this structural shift places consumers closer to our centers for longer periods during traditional working hours, bringing additional activity and in turn demand to our properties.
Speaker 2: Our simple and focused portfolio is well positioned to produce strong sector-leading internal growth, and with our balance sheet capacity, we have the ability to grow through acquisitions without the immediate need for external funding should capital markets remain in flux. This gives us flexibility to capture acquisition opportunities as they present themselves.
Speaker 2: On the acquisition front, as we discussed last quarter, we started the year by executing on the roughly $100 million purchase of the remaining stake in our joint venture. This transaction has been a part of our investment strategy since entering the public market. In terms of private market transactions, with lower deal volume and the attractiveness of the sum belt, we have been able to make a lot of money on the stock market.
Speaker 2: competition for quality centers remains high and we will continue to remain disciplined and patient in our capital allocation plan.
Speaker 2: Before I turn it over to Mike Phillips, I want to reiterate that we have started the year in an outstanding position and believe we are set to produce impressive sector-leaning internal growth in 2023. Delivering at a high level within a competitive space is a testament to how this team and this portfolio will continue to create value for our shareholders.
Speaker 2: Mike will now walk everyone through our financials and guidance for the quarter. Mike. Mike.
Speaker 3: Thanks, DJ. Inventrust started 2023 on a positive note. First quarter, same property, NOI, finished at $35.8 million, growing 3.2% over the first quarter of last year. The increase was primarily driven by contractual rent increases, occupancy gains, and rent spreads.
Speaker 3: We reported first quarter NAIRID FFO of $28 million or to $0.41 per share and CORE FFO of $27.4 million or $0.40 per share.
Speaker 3: This anticipated decline over the first quarter of 2022 is primarily due to higher interest rate expense and our strategic exit from Colorado in 2022. As DJ mentioned on a sequential basis, both our FFO results increased over 17% as compared to 4th quarter of 2022.
Speaker 3: Moving to the balance sheet, as of March 31st our net leverage ratio is 28% and net debt to adjusted EBITDA is 5.5 times on a 12 month basis.
Speaker 3: Our weighted average interest rate is 4% with a weighted average maturity of 4.6 years and when contemplating extension options available to us we only have $16 million of maturities through 2024, 2% of our debt stack. At quarter end we had approximately $36 million of total liquidity.
Speaker 3: including a full $350 million of borrowing capacity available on our revolving line of credit. Effective April 3, we were able to swap $100 million of floating rate debt on a portion of one of our term loans to a fixed rate of 3.69%, with an all-in rate of 4.99%. This further reduced our exposure to a volatile interest rate environment.
Speaker 3: And with the swap in place, our fixed rate debt now totals 98%. Finally, we declared a dividend payment for the second quarter of 21.5 cents per share, which is a 5% increase over last year.
Speaker 3: Turning to guidance, we are reaffirming our 2023 core FFO guidance of $1.59 to $1.64 per share, as well as our NAIRID FFO guidance of $1.64 to $1.69 per share. We are also reaffirming our 2023 same property NOI guidance of 3.5 to 5%. These ranges have the same 50 to 150 basis points of bad debt that we provided in our call last quarter.
Speaker 3: Our full year guidance assumptions are provided in our supplemental disclosure filed yesterday. With that, I'm going to turn the call over to Christy to discuss our portfolio activity.
Speaker 4: Good morning everyone. Event Trust continues to experience strong leasing momentum. We are observing demand across the board from both national anchor tenants and local small businesses looking to expand their footprint.
Speaker 4: Demand is also broad-based from a full array of retail categories, such as fast-casual restaurants, wellness and beauty tenants, and discount retailers.
Speaker 4: Lack of new supply has made Premier well-located retail space more valuable.
Speaker 4: David's bridal and Tuesday morning, there is a bit of a silver lining if a space becomes available.
Speaker 4: For example, in the past, Bed Bath was a brand name tenant and for the most part their stores were located in prime locations at high quality centers.
Speaker 4: These boxes are attractive to a variety of tenants which reduces marketing time to filter vacancy.
Speaker 4: We have already had constructive conversations with a variety of tenants for every one of our five bed bath locations.
Speaker 4: We continue to believe our market-dominant essential retail centers are exactly where retailers want to be, and they are waiting anxiously for this space to become available.
Speaker 4: Despite some long telegraph bankruptcies, there are multiple retail concepts with announced store openings. Along with retail categories mentioned earlier, our team is also seeing demand for medical users.
Speaker 4: Medical tenants have been active and we are excited to include them in our centers. From a tenant mix perspective, medical compliments are fitness and wellness operators, and with our occupancy rate at an all-time high, their willingness to take traditionally hard to lease space matches the vacancy we currently have available. Retail is and always will be an evolution of concepts and new ideas.
Speaker 4: Regardless of all of the negative headlines, we are not seeing a softening of retail fundamentals, but a more return to a normal retail environment, where some tenants may fail. Names on the martis may change over time, but that is what keeps our properties fresh and vibrant. This is a normal retail cycle.
Speaker 4: This environment allows the Inventress team to focus on ensuring our properties have an attractive tenant mix with tenants that are going to drive traffic and improve the financial performance of our centers. Let me conclude my remarks by reviewing our leasing results for the quarter. We leased 254,000 square feet of space during the quarter.
Speaker 4: with a multitude of additional leasing activity at various stages in the process. We ended the quarter at 96.1% lease occupancy.
Speaker 4: which is a 170 basis point increase over the first quarter of 2022. Our Anchor Space lease occupancy increased to 98.8% and our small shop increased to 91.4%. Both all-time highs.
Speaker 4: As of March 31st, InventTrust's same property portfolio, ABR, was $19.12, an increase of 2.6% compared to March 31st of 2022.
Speaker 4: Blended lease spreads for the quarter were 7% and our retention rate for the quarter was above 95%.
Speaker 4: These solid results continue to validate our portfolio's ability to drive leasing demand.
Speaker 4: Operator, this concludes our prepared remarks. Please open the line for any questions.
Speaker 1: As a reminder, if you would like to ask a question today, please do so now by pressing start followed by the number 1 on your telephone keypad. If you change your mind and would like to be removed from the queue, that's start followed by 2. We ask that when preparing to ask your question, please ensure that your device or your microphone is unmuted locally.
Speaker 5: you're currently in on the, I believe it's for Bed Bath, one by by, by by Baby Store, that you're in conversations with on back filling those spaces. Maybe if you could just characterize what any kind of wait list or.
Speaker 5: Just provide a bit more color on that. And then also, you know, what really is leading to the assumptions of getting to that low and high end of the range that you've reaffirmed on credit loss? Thanks. Sorry, the close Boo Push d We haven't reached theene to Kl Kl
Speaker 4: Hey Lizzie, this is Christy. I'll take the first part of that question. With respect to our bed bath, you are correct. There are four bed baths and one bye-bye baby. And we have various levels of interest on all of those boxes. I will say that we are expecting an LOI on a couple of them.
Speaker 4: minimizes our cost in terms of putting them in.
Speaker 3: And then Mike, do you want to take the second part? Yeah, hey Lizzie, good morning. I'll take the second part on the bad debt. So as we said in our prepared remarks kind of at the midpoint.
Speaker 3: kind of at the midpoint of the bad debt we planned this quarter and last quarter for Bed Bath to pay probably through June and that's looking how it's going to play out which takes the big portion of it.
Speaker 2: Yeah, and then, you know, Lizzie, the only thing that I would add is I think some of our, some of the other companies have highlighted kind of the opportunity set or actually the spread related to the Bed Bath and Beyond and maybe some other of the retailers that are struggling. We're no different. I think we feel very comfortable out where the in place rent is and where we're able to mark those to market to the tune of call it.
Speaker 5: Is there any change in the timing of delivery on seeing the stores, on the stores you're anticipating to come online throughout the year? I noticed just the threat on snow came down about 10 basis points this quarter. If you could just comment on
Speaker 2: any kind of delays you're seeing or if you're on schedule as planned? No, it's a good question. So actually, yeah, the sign-up did come down 10 basis points. It's really because we had two big boxes commence this quarter. It's really just timing. The pipeline remains really strong, you know, even despite, you know, obviously the headwinds that we discussed in the prepared
Speaker 3: add a little more detail. We do take account in our bad debt range a little bit of that, but we haven't seen much Lizzie so far through the year.
Speaker 5: I was wondering if you could.
talk about any new opportunities. Maybe you're probably not seeing as a lot of your peers have commented on seeing the transactions market as still limited. But maybe if you could talk about opportunities you're hoping for or.
color on the strategy there for this year and then in 24.
Yeah, no, sure. So obviously this year we're hoping to deploy $150 million of net investment activity. The joint venture obviously solved for about $100 million of that. So we're hoping to obviously put out another $50 million. But to your point, we're hoping to put out
The transaction market is thin. If you think about obviously the markets where we're trying to buy, it's even tighter. There is still a pretty wide gap on the bid ask, especially in our markets where not too long ago, pricing was very aggressive. We're just being patient and we're also very mindful even though we can buy
that are coming to market. It's just not, it's not as robust as it was, call it 12 months ago.
Great, thanks. If I could just add one more quick question. On the same store NOI growth this quarter 3.2%, does that exclude out of period runs? And if not, what would that growth be when excluding that?
Yeah, it does. It would be 4.2% if we included it. Okay, great. Thanks. Our next question comes from Floris Van Dicken with Compass Point. Floris, please go ahead.
Thank you. Morning, guys.
I guess I had a question regarding maybe the balance sheet. Obviously you took out a $100 million swap. I think that's essentially fixed all of your debt, it looks like. Maybe if you can walk through that in greater detail and also talk about your plans for addressing the...
you know, the I guess the three cross collateralized mortgages that are coming due at the end of this year. And why would you not simply pay them off with your cash at hand?
Yeah, maybe I'll start in if Mike has any color, but Flores, you're absolutely right. Not to name any names, but I loved how Connor talked about on the site center's call about how they were thinking about that because we think about the same way. We're just trying to take any of the interest rate risk off the table. Obviously, swapping the 100 million, that puts us almost
effectively with the exception of maybe $17 million at all fixed rate data at still a pretty attractive price. And we're going to continue to do that and look for those opportunities. Now as you mentioned in November that cross-collateralized load does, a swap on that does burn off. So our...
fixed to variable will probably go to somewhere closer to 90%, 10%, give or take. And we're looking at a lot of options as it relates to what we want to do with that. We could pay it off, obviously, with the current balance sheet. We could refinance or use some other instrument to do it. Or we do have two extension options.
two one-year extension options on it as well. So it'll just come down to market conditions and working with our advisors and bankers as it relates to the best option for us. And those discussions have kind of just started but we'll certainly pick up over the summer.
And just to, you know, the swaps on those notes are pretty low, right? Presumably the extension options would be done at market rates. And so there would be a jump in interest. Is that is that the right way to read it?
Yeah, so think of it this way. So the swap that we just put in place, so in our supplemental, our weighted average interest rate is, I believe, 4%. The swap that we were able to just accomplish makes that closer to 3.8%, so it actually gets better. Once those burns, based on the current curve, our weighted average rate would probably go up, call it 40 basis points.
And part of it is you guys have also more, you know, newer assets probably than some of your peers. But I would imagine there are, you know, some untapped out parcel opportunities still remaining. And as you know, the acquisition markets are essentially shut right now.
Are you looking more closely at trying to unlock some of the other value-add opportunities within your existing holdings? And how much can that grow over time? No, it's a good question. I think you hit it on the head. Our assets tend to be on the smaller side. We do have some...
those. Right now frankly it's really hard to make the math work even though the returns tend to be pretty strong. Construction costs are still high. We don't want to burden any of those tenants especially if you're doing a multi-tenant out parcel with high rent where you know they're putting in a position of fail just to make our return hurdles.
but we're going to continue to look at those. We do have a couple bigger redevelopment opportunities but it's more of an over, I would call more of a re-merchandising endeavor that gets us a really good incremental return. We have one asset in particular down in Tampa Florida that
then either burdening new tenants with high rent or making your in-line space less competitive. So we're trying to balance all of that. But I will tell you our redevelopment pipeline is one that's going to be.
slightly complementary to the overall portfolio. It's going to make our assets better, it's going to grow our NOI over time, but I wouldn't expect us to spend any more time than this, because it is going to continue to be a smaller part of our overall growth strategy.
complementary to the overall portfolio. It's going to make our assets better. It's going to grow our NOI over time, but I wouldn't expect us to spend any more time than this because it is going to continue to be a smaller part of our overall growth strategy. Thanks. And maybe as...
At what point when the acquisition markets remain shut and the lending markets are gummed up still?
At what point, and your stock is trading at a discount to NAV, at what point do you start to think, DJ, hey, we should look at buying back some stock because we're trading at a discount to NAV, pretty, not dissimilar to everybody else, by the way, in the sector, but at what point do you say, hey, maybe we should just use that capital to repurchase stock?
No, it's a great question and it's one we think about and our board thinks about a lot. Obviously, we bought back our shares to support the stock price right when we listed the company in late 2021. There's a lot of factors that go in. So first, we're not looking to sell assets. When we think about selling or repurchasing shares.
I think personally, and as a management team, we think it should be paired with selling part of your portfolio and then repurchasing to take advantage of that arbitrage. We're not in the market or we're not disposing a lot of assets of any in the time being, and we have to be mindful of our size. So we're already on the smaller size. We're obviously not blind to that. We want to make sure this platform
fall out, it's probably usually ends up when the dust settles to be somewhere in between. The public markets probably overshot a little bit. That's that's our opinion. But maybe private market pricing will settle a little bit lower as well from a valuation standpoint. So thinking about all those and then obviously being mindful of our size and our efficiency and our scale.
You know, it is a tool that we will use and we have used in the past but you know the bar, you know Has to you know There's a lot of factors that we've taken into place and the bar is pretty high for us to Really pull that trigger and shrink the company further I guess last question
here on my side. As I look out at your lease expiration schedule next year as well, that's where a bulk of your growth is going to have to come from, right? It's from releasing at higher rates and we're in an environment where you have the pricing power. But I noticed
your small shop expirations are, you know, it's, you know, above where your average small shop rents are the expiring rents per square foot. Maybe can you walk us through how your, you know, how you're thinking about your expirations going forward and how you're planning on tackling that and how much upside.
you think there could be in as, you know, as the market still benefits from this lack of new supply and still, you know, consistent retailer demand? No, it's a good question. I, the way we think about it, and I will say, I,
you know, and obviously the lease expiration schedule is an important piece of disclosure, however it can be a little misleading because it's all about the mix on what's coming due. So it's hard to read into the obviously the rent that you you highlighted. We feel very comfortable that we're going to continue to be able to have positive spreads and push rents because of the pricing power. That being said, we're also trying to
continue to push our escalators. So getting that three and four percent escalate escalation over a period to make sure we're not only getting um you know a positive spread uh cash spread at the onset of the lease but um building in some substantial escalators so we can grow with
the success of our tenant and not overburden them with rent, you know, right away, but you know, benefit, you know, through the through the term of the lease, really. So we still feel very good, obviously, at an all time high occupancy, all of our growth at this point, or most of our growth, I should say is going to be coming from our pricing power. And it shows and I know that we've talked to you in the past some of our best.
growing assets are ones that have been 100 percent occupied because of the pricing power and the annual escalators that we've been able to put in place.
ones that have been 100 percent occupied because of the pricing power and the annual escalators that we've been able to put in place. Thanks, DJ.
Thanks. Thanks so much, Flores. We have no further questions, so I'll turn the call back to the management team for any closing remarks. Our group will be
Yeah, thanks. Maybe I'll just close by echoing some of our key comments. Look, we talked a lot about our internal and external growth opportunities. I think it's driven by our simple and focused portfolio. We're expecting to deliver sector leading cashflow growth. Our investment grade balance sheet provides us.
invest in a geocentric portfolio in markets with fantastic demographic trends and the security of grocery and necessity based tenants, I think Inventress is obviously a natural option for that criteria. We look forward to seeing everyone over the next several weeks in ICSE Las Vegas and out in New York for ReaWeek.
As always, if you have any additional questions, please feel free to reach out. Otherwise, everyone have a fantastic weekend. Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.