Q3 2023 InvenTrust Properties Corp Earnings Call
Hello, and thank you for standing by and welcome to invent Trust's third quarter 2023 earnings Conference call. My name is <unk> 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 inventory properties' dotcom all lines will be muted during the presentation portion of the call with an opportunity for questions and answers.
If you would like to ask a question. Please press star followed by one on your telephone keypad now.
Like to turn the call over to Mr. Dan <unk>, Vice President of Investor Relations.
Please go ahead Sir.
Thank you operator, good morning, everyone and thank you for attending our call today.
Joining me from the <unk> team as DJ Busch, President and Chief Executive Officer.
Mike Phillips, Chief Financial Officer, Christy, David Chief Operating Officer, and Dave Heinburger, Chief Investment Officer.
Following the team's prepared remarks, we will open the lines for questions.
As a reminder, some of today's comments may contain forward looking statements about the company's views on the future of our business and financial performance, including forward looking earnings guidance and future market conditions.
These are based on management's current beliefs and expectations and are subject to various risks and uncertainties any forward looking statements speak only as of today's date and we assume no obligation to update any forward looking statements made on today's call are that are in the quarterly financial supplemental or press release.
In addition, we will also reference certain non-GAAP financial measures the comparable GAAP financial measures are included in this quarter's earnings materials, which are posted on our Investor Relations website.
With that I will turn the call over to D. J.
Thank you Dan and good morning, everyone.
Ill begin the call with some brief remarks regarding the quarter, Mike will provide you with an overview of our financial results and Christie will touch on some of our operational accomplishments.
<unk> delivered another solid quarter of operating results driven by our simple and focused strategy that is to own and operate a central open air retail centers exclusively in the Sunbelt region of the U S.
Maintain a simple and low levered capital structure and employ straightforward capital allocation plan.
The better than expected performance has allowed us to once again adjust our 2023 full year guidance higher for <unk> per share, which Mike will touch on that a bit.
The performance in the quarter is even more impressive given the recent liquidation of a top tenant.
Drove nearly the entirety of our sequential leased occupancy decline.
But like the commentary by many of our peers the activity around these spaces has been unprecedented with opportunities to grow the rent upgrade the merchandize mix and ultimately make our centers more valuable Christie will provide more color on this in a bit.
On the supply side, new retail construction remains materially lower than historical averages and shopping center vacancy is at its lowest levels since the global financial crisis. Our leasing results reflect this landlord favorable supply and demand dynamic which is amplified in the markets where we operate.
Demographic trends in the Sunbelt continue to give us the confidence that market rent growth in our communities should outpace the national average for the foreseeable future.
Continued tenant demand coupled with the activity in our leasing pipeline bodes well for our ability to organically grow cash flow, while waiting for the broader capital markets to be more combative for external growth opportunities.
Regarding our balance sheet after exercising an extension option subsequent to the quarter, which Mike will touch on we have no meaningful maturities until late 'twenty, four which provides us some flexibility and allows us to be patient until the debt capital market stabilized whatever level that may be.
Given the uncertainty regarding the capital markets or external growth criteria. It has and will remain very selective.
Liquidity and low leverage affords us the ability to be opportunistic when appropriate but at the end of the day. Our primary focus is sustainable cash flow growth year in year out, which should in turn translate into superior total returns for our shareholders.
I'm going to turn the call over to Mike to discuss some of our financial results Mike.
Thank you TJ and good morning, everyone same property NOI grew five 3% over the third quarter of last year year to date same property NOI was $106 3 million growing four 4% over the first nine months of 2022.
Year over year growth continues to be driven by higher occupancy contractual rent bumps and solid leasing spreads. In addition, we have a tailwind of 110 basis points due to lower operating costs in 2023 compared to 2022 and as anticipated. These gains were offset by 70 basis points for out of period rents collected in 2022.
And <unk> reported NAREIT <unk> of $27 6 million or <unk> 41 per diluted share for the three months ended September 32023, an increase of five 1% for the same period in 2022.
Year to date, NAREIT <unk> was $84 7 million or $1 25 per diluted share a decrease of <unk> <unk> per share driven by our private placement debt funding in the third quarter of last year and GAAP adjustments related to our <unk> acquisition completed earlier in 2023.
Our core <unk> for the quarter was $27 6 million or <unk> 41 per diluted share up 11% from last year and our nine months <unk> increased 1% compared to 2022 <unk>.
Components of core <unk> growth include the increase in same property NOI the acquisition of 45% of our joint venture that was not owned and higher interest income offset by an increase in interest expense.
From a balance sheet perspective, we ended the quarter with $457 million of total liquidity, including a full $350 million of borrowing capacity available on our revolving line of credit our net leverage ratio is 27% and our net debt to adjusted EBITDA is five two times on a trailing 12 month basis.
Our weighted average interest rate is three 9% with a weighted average maturity of four one years.
In October we executed a one year extension option for the cross collateralized pool alone we assumed when we acquired the remaining interest in our joint venture, which was set to mature this year with the subsequent activity our debt metrics moved to a weighted average interest rate of four 3% with a weighted average maturity of four two years and our variable rate debt of approximately.
10%.
In the third quarter, we declared a dividend payment of $21.05 per share, which is a 5% increase over last year and in August Fitch ratings affirmed our long term issuer rating of Triple B minus with a rating outlook to stable.
Turning to our guidance, we are raising our 2023 <unk> midpoint to $1 64, with a range of $1 63 to $1 65 per share. We also raised our 2023 NAREIT <unk> midpoint to $1 68, with a range of $1 66 to $1 69.
Finally, our same property NOI growth guidance midpoint increased to $4, 63% with a range of $4 two 5% to 5% our full year guidance assumptions are provided in our supplemental disclosure filed yesterday and with that I'm going to turn the call over to Christie to discuss our portfolio activity.
Thanks, Mike and then trust portfolio continues to deliver solid operating results highlighted by strong leasing activity leasing spreads and occupancy levels are.
Our outstanding performance is indicative of our strategy of owning and operating premier necessity based shopping centers in growing sunbelt markets.
Tenant demand for our portfolio remains broad based and include tenant categories, such as grocers off price retailers medical fitness concept in restaurants.
For the quarter, we leased 273000 square feet with additional leases in our pipeline at various stages of negotiation, including our bed Bath <unk> beyond spaces, which we will discuss in detail shortly.
Inker space leased occupancy finished at 96, 6% a decline of 200 basis points from last quarter, primarily driven by new vacancies from recent bankruptcies.
Our small shop leased occupancy increased to 92, 4%.
Our total portfolio leased occupancy finished at 95, 1%.
As of September 30th and Suntrust total portfolio ABR was $19 36, an increase of two 4% compared to 2022.
Comparable leasing spreads were at 16% and 8% for new and renewal leases respectively.
A portion of our new leasing activity did involve larger spaces with longer lease duration, which aligns with our increased leasing cost compared to last quarter. Our retention remains high at 89%, which we continue to view as a positive bandwidth with our new deal activity given the capital commitments required for each entity.
And then trust had five bed Bath <unk> beyond spaces, one lease at the Highlander flower mound property in Dallas MSA with purchased at auction by Michael which will lead to minimal disruption and no impact to base rent.
There are other bed Bath <unk> beyond spaces, we have identified replacement tenants and are in the process of finalizing lease terms.
Our leasing team is also in the process of replacing a former Christmas tree shop space with a painted tree boutique a home decor and boutique clothing store.
This tenant is a fantastic addition to our West Park shopping center in the Richmond MSA.
We are projecting these tenants to open their stores sometime in the next 12 to 18 months with sizable rent increases.
As CJ mentioned earlier retailer bankruptcies continue which ultimately affords us the opportunity to re merchandize with stronger credit tenants.
<unk> recently announced their bankruptcy and initial list of store closings and Bank Trust has one rite aid location in southern California, which accounts for 2% of our overall AVR. This space is in a strong center and was not on the current list of stores to be closed our exposure is limited and we are confident in our ability to absorb and re lease these spaces.
In closing, we acknowledge that our results reflect the strength of the current retail environment, the attractiveness of our sunbelt assets and our operating team's hard work. We see this momentum continuing as we worked through the opportunity set in our pipeline.
Operator that concludes our prepared remarks, and you can open up the line for Q&A.
Thank you.
I'd like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like Jimmy is that a question. Please press star followed by Chip again to ask a question. Please press star followed by one as a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question and please do ensure that you have unmatched it locally.
Our first question today comes from the line of <unk> <unk> from Bank of America. Please go ahead. Your line is now open.
Hi, good morning, everyone.
I just wanted to dig into the car.
Our comments around bed Bath and the other.
Anchor tenants.
With bankruptcies involved.
Could you again confirm.
How many bed bath boxes are left to backfill.
In addition, our Christmas tree.
In Michaels.
Then kind of talk to the expected timeline for back filling them.
Each of these boxes.
And then separately.
If we could kind of get a better understanding of the economics on the returns.
Associated with.
The boxes when it comes to <unk>.
The associated costs.
Yeah sure good morning Lizzy.
I can provide.
Start and I'll have Christie hopefully fill in the blanks, but we have.
Five bed Bath <unk> beyond boxes.
One was assigned.
And then the other four are currently under some form of negotiation.
Think of it won't be able to have those executed in short order hopefully by the end of the year maybe.
Tailing into the early next year.
But we feel really good about the backfill and the opportunities that we have at all the locations from a timing standpoint.
These things usually take once they are executed and I think it's pretty standard right around 12 months, maybe even up to 15 months. So we're not expecting a whole lot of income when you think about 2024. So it may be a little bit of a headwind that we think we can certainly overcome as we look out to next year and as it relates to the X.
Omics it really.
Obviously with construction costs up were much more sensitive to using our own capital because we wanted to get a good return on that capital we've been very pleased and it sounds like many of our peers. The same as it relates to the rents that we're able to to attain in some of these spaces.
And just to give you a little bit of color. When we're looking at our negotiations right now the payback periods for these for these boxes are in most cases under two years, which is pretty strong for an anchor space and we're looking at net effective rents.
Healthy net effective rents call it in the.
Low double digits.
Okay.
Okay, great and to confirm is that.
Above.
What's.
Typical of.
Yeah.
Repositioning or re tendering.
Your anchor boxes in terms of.
And the economics.
It is surprisingly so because if you think about.
Pre pandemic, we're talking about probably in the $60 square foot Buildout and now thats closer to 90, so the rents and because of the performance of the open air space and the strength of the retailers and the sales up to this point, we're able to push the rents to offset those higher construction costs in almost every case.
Great. Thank you.
And then.
My next question.
You you all spoke to this last quarter, but just curious on hearing.
Any new thoughts on.
Addressing the the swap that set that set to expire in November this year on the $75 million maturity.
The mortgage loan what would you look to.
The swap let it go to variable.
Could you just discuss what options you're considering.
When it comes to <unk>.
Refinancing alone given your view of where rates are headed.
No. It's a great question, we try not to we try to be agnostic to where rates are headed I don't think were.
None of us are economists in this room.
But we're always trying to make sure that we have full visibility as it relates to forecasting our cash flows. So obviously.
Fixing it is something that we're considering it also you have to remember we have.
Plenty of liquidity and a lot of cash on the balance sheet. So we can chip away at at that loan if we wish to if that's the best use of our capital at that time.
Because at the end of the day.
As I said in my prepared remarks, we're just we're trying to consistently grow cash flow and that can come in a lot of different forms. So we are looking at a lot of different opportunities.
Whether that be fixing it paying a portion of it down.
All of those things are on the table. The good news is with that extension option, we do have some latitude.
As we look forward into 2024 and with an additional extension option Theres really.
Little debt, we have two that we have to address as we look forward to next year.
Okay. Thank you that's it for me.
Yeah.
Thanks.
Thank you. Our next question today comes from the line of <unk> from Wells Fargo. Please go ahead. Your line is now open.
Hi, good morning, Thanks for the call.
But can I get to ask the question.
Can you comment about.
The bid ask spreads you are seeing in your core sunbelt markets for.
Properties that meet your criteria.
Do you think that gap has.
Just a little bit in Britain.
Awesome trades or what do you see.
Yeah.
Yes, it's a good question I would say there are still things.
That are hitting the market.
The way I would characterize it sooner if you think about what we sold in the quarter the smaller asset in Atlanta.
Those deals and that kind of $10 million to $15 million range I think the bid ask spread continues to be something that.
People can get comfortable transacting, so it's a little bit more narrow as it grows and as those assets become a little bit more.
Financing dependent that's where you see the bid ask spread widening I think that's still the case.
We're obviously not in the market for very large assets at this moment in time because of that reason.
And it's not that you can't get financing for larger open air assets you can.
Price the pricing is obviously much more elevated than it has been in the past and I think that's something that we're going to stop to get comfortable with and see where the pricing shakes out.
I know just from listening to some of our peers it sounds like.
There has been some of those larger assets the transaction some of the more high quality Blue chip.
Shopping centers of larger size, which is good to see.
But I would say if I look back to our comments last quarter.
It hasnt changed that much.
With the exception of.
And those smaller and smaller assets there is still some activity.
Yeah got it thanks, and just quick following up.
Or would you.
What does that cap rate difference now for larger assets versus say the smaller assets similar to what we saw recently.
Can you can you provide a cap rate for the asset.
That was sold.
Ours was in the in the high fives.
And I would say that's probably.
Felt like that was.
A good price for both buyer and seller for an asset like the one that we sold I cant really comment on some of the other ones. Although it seems like some of the cap rates were pretty.
Pretty attractive for.
From a.
As those assets get larger the cap rate tenor so why now and I think some of those.
Cap rates were probably very well executed but.
That's just from the outside looking in.
Got it and then one more if I may.
What's a realistic timeline for the put the excess cash to work.
Like I acknowledge that comment too. This is a question on the optionality to pay down debt, depending on where rates go but just curious.
I wouldn't think the priority is to grow the property portfolio. So just curious what some what's a realistic timeline to go back to work.
Yeah.
It's a good question I think.
We look at it.
Yes.
As a fluid situation I mean, we're still active in our pipeline still as assets that we would love to transact is just obviously the hurdle rate is much higher.
Looking at using our cash to pay down.
Portions of our debt.
The same way, we would look at growing our business now obviously are our mandate is to try and grow this business, but we have to do it in an accretive manner. So.
The overarching goal for this company is to grow cash flow, obviously, we want to do that while while growing scale, but I don't I don't see it.
Try to look at it.
Under this under the same lens.
But to your point.
Shrinking the company.
Paying down debt with.
Maybe portions of cash.
As is.
It's just it is just one option that we're considering but youre absolutely right. I mean, if we can find accretive acquisitions, where we can continue to grow cash flow and expand the asset base. We will absolutely do that we just have to do it in a prudent manner.
Thanks for the time, congratulations on a good quarter.
Thanks Cesar.
Thank you as a reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad.
The next question today comes from the line of Paulino Rojas from Green Street. Please go ahead. Your line is now open.
Good morning.
Your your implied guidance range for Q.
For same property NOI is relatively wide.
Sure.
One month or two it's already behind us.
You're not the only one.
And some of your peers from Bernstein.
So my question is what do you see it.
Two keeping places wide range.
How conservative do you think it will.
Sure.
For guidance.
Do you think it's wise at this point to be conservative and think that perhaps next year.
Higher than average tenant fallout.
Oh, it's a good question pollyanna and good morning.
<unk>.
When we think about our implied guidance for the fourth quarter you have to think about the size of our company, we're talking about 600 or $500000 on both sides of the mid point. So really it's just if theres any unforeseen fallout really.
That we can't.
We don't see today for the last couple of months of the border and it can move it can it can move the needle a little bit, but I think we're very comfortable with the range that we've provided.
But it is just a box here or there or not even a box really a handful of small shops.
Here or there.
As we think about bad debt in the fourth quarter.
Looking forward to next year look I don't think our goal or anybody in this space goes to to be conservative I think it's just to be pragmatic on the current environment.
Been very resilient up to this point.
I think with a lot of the opportunities that were created by bed Bath and beyond and maybe some of the other bankruptcies timing is going to play a big factor next year as it relates to getting some meaningful rent back online not only for adventurous but for for many of our peers in.
And that timing will dictate how.
And the ability to kind of.
Get those back online will dictate how successful next year will be I do think when we look forward to next year, we're going to overcome.
Many of those headwinds because of the.
Our ability.
Our ability to push rents and the strength of the strength of our ability to push in place escalators everything that we've been discussing.
That's that's going to obviously translate into ore.
Translating transfer into 2024 as well.
Okay.
And in terms of additional Walmart and then.
No.
I think the future, but and because of that uncertainty and everything works.
The macro perspective.
Is it reasonable to assume higher than average and higher than historical average.
Perfect.
Yeah.
<unk>.
Look I think it's.
What's been fascinating to me is this year most most shopping center Reits have stayed within their bad debt range, even with <unk>.
Material bankruptcy or for many was a top 20 tenant and then you had a handful of other bankruptcies as well I think that's a testament to the strength the overarching strength of the fundamentals in the business as we look forward to next year.
Without getting too much into 2024, I don't see it being that much different when we think about anchor risk I feel like that's been.
That's growing that's been minimized because of we had some of that this year.
The resiliency of this small shop continues to be very impressive I would expect that to be more normalized next year as well, but it is something that we're looking at look.
The financing cost for many of our small shop retailers has obviously gone up but the credit quality of our small shop retailers has also improved so the strength of their balance sheets have improved as well, even though they are facing some of the.
Some of the inflationary and other headwinds that are out there. So when we look forward to next year I don't see being too dissimilar as we think about tenant fallout or bad debt.
If I may one last one.
The project.
At our pavilion.
Welcome development.
Here you are transforming a single tenant building working with tenants and multiple tenant building.
Sure the G&A, but I'm curious.
What is the cost per square foot to do a project like that.
I think you mentioned in your prepared remarks the costs.
I couldn't catch the details and so if you could be PDP.
I think he said.
Yes.
Replacing a tenant.
We are.
Yes.
So yes overall, if you could provide an update on the call.
Tenants in different types of <unk>.
Okay.
Yes.
Missed the first part of your question. The second part of the question following up what I answer the first part and then maybe you can repeat the second part, but the Sarasota pavilion. It's obviously a re merchandising opportunity for US we the costs, obviously are higher than what a single tenant users and thats not.
That's certainly not unique to us. So if you think about and I'm just going to use very broad based numbers and it all depends on.
What youre working with and what the initial build out looks like but we're for a single tenant use that I mentioned earlier that for our for many of our bed Bath <unk> beyond the opportunities at somewhere close to call it $90 a square foot.
For something where youre cutting at this space and have and like I said it depends on the size of it could be upwards to 150 to $170 $75 a foot, we're still working through that math and making sure the economics and returns make sense for <unk>, but.
It's certainly an exciting opportunity for that center.
A really strong center in Florida.
Obviously.
We're doing it because we can get to that to those returns that are acceptable and value accretive for us.
And then if you can.
Just repeat that second part.
No need I think articulated well and he got it. Thank you so much.
Alright.
Great.
Thank you as a reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad.
There are currently no additional questions waiting at this time, so I'd like to pass the call back over to the management team for any closing remarks.
No. Thank you everyone for joining us today, and we look forward to seeing many of you.
Later this month at NAREIT in Los Angeles enjoy the rest of the day.
This concludes today's conference call. Thank you all for your participation you may now disconnect your lines.
[music].
Sure.