Q1 2024 InvenTrust Properties Corp Earnings Call
Harry: Thank you for standing by, and welcome to Inventrust's first quarter 2024 earnings conference call. My name is Harry, and I'll be your conference call operator today. Before we begin, I would like to remind our listeners that today's presentation is being recorded, and a replay will be available on the investors section of the company's website at inventrustproperties.com. If you would like to enter the queue for questions, then please dial star 1 on your telephone keypad.
Thank you for standby and welcome to the infant trusts first quarter 2024 earnings Conference call. My name is Harry and I'll be your conference call operator today.
Harry: 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 infant trust properties Dot com.
Harry: If you'd like to enter the queue for questions and please dial star one on your telephone keypad. If you change your mind I'd like to exit the acute and freestyle staff followed by Chi.
Harry: If you change your mind and would like to exit the queue, then please dial star followed by 2. I would now like to turn the call over to Mr. Dan Lombardo, Vice President of Investor Relations. Please go ahead, sir.
Harry: I would now like to turn the call over to Mr. Daniel Butler, Vice President of Investor Relations. Please go ahead Sir.
Dan Lombardo: Thank you, operator. Good morning, everyone. And thank you for your attendance on today's call. Joining me from the Inventrust team are D.J. Bush, President and Chief Executive Officer, Mike Phillips, Chief Financial Officer, Christy David, Chief Operating Officer, and Dave Heimberger, Chief Investment Officer.
Dan Lombardo: Thank you operator good morning.
Dan Lombardo: Everyone and thank you for your attendance on today's call joining.
Dan Lombardo: Joining me from the <unk> team is D J Busch, President and Chief Executive Officer, Mike Phillips, Chief Financial Officer, Christy, David Chief Operating Officer, and Dave Heinburger Chief Investment Officer.
Dan Lombardo: 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 uncertainty. Any forward-looking statements speak only as of today, 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.
Harry: Following the team's prepared remarks, we will open the lines for questions.
Dan Lombardo: 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.
Dan Lombardo: These are based on management's current beliefs and expectations and are subject to various risks and uncertainties.
Dan Lombardo: 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 and.
Dan Lombardo: 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 DJ.
Dan Lombardo: 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.
DJ: With that I will turn the call over to D. J.
Daniel Joseph Busch: Thanks, Dan, and thank you to everyone joining us this morning. Today, I'll start with some brief commentary on our first quarter results, the overall operating environment, and how Inventrust continues to be positioned to grow sustainable cash flow long term. Mike will discuss our financial results and provide color around our updated 2024 guidance, and Christy will conclude with additional commentary regarding the leasing and operating land. 2024 is off to a solid start following an excellent 2023.
DJ: Thanks, Dan and thank you to everyone. Joining us this morning today I'll start with some brief commentary on our first quarter results. The overall operating environment and how inventor is continues to be positioned to grow sustainable cash flow long term, Mike will discuss our financial results and provide color around our updated 2020 forward guidance.
Daniel Joseph Busch: Christie will conclude with additional commentary regarding the leasing and operating landscape.
Harry: 2024 is off to a solid start following an excellent 2023.
Daniel Joseph Busch: We're operating fundamentals in the open-air retail sector continue to benefit from supply and demand dynamics not seen in several real estate cycles in our property type. As we have discussed in previous updates, tenant demand continues to remain very robust for all of our properties. Some of that demand is due to the nature of the necessity-based property type that has not only withstood but validated the importance of our offerings to the communities in which we serve.
Daniel Joseph Busch: We're operating fundamentals in the open air retail sector continued to benefit from the supply and demand dynamics not seen in several real estate cycles in our property type.
Daniel Joseph Busch: We have discussed on previous updates the tenant demand continues to remain very robust for all of our properties.
Harry: Some of that demand is due to the nature of the necessity based property type that is not only withstood the validated the importance of our offerings to the communities in which we serve.
Daniel Joseph Busch: The balance of the demand we at Inventrust are specifically experiencing is due to the markets in which we operate. As we have said since becoming a public company, we expect the concentration that we have aggregated within the portfolio, that is, major cities in Sunbelt markets, should outpace the national average from a market-friendly growth perspective. And we believe that our past performance, but equally as important, our future expectations will continue to prove that these.
Daniel Joseph Busch: The balance of the demand we had inventors are specifically experiencing is due to the markets in which we operate as we've said since becoming a public company. We expect the concentration that we've aggregated within the portfolio.
Daniel Joseph Busch: That is major cities and sunbelt markets should outpace the national average from a market rent growth perspective.
Daniel Joseph Busch: And we believe that our past performance, but equally as important our future expectations. We will continue to prove out that thesis.
Daniel Joseph Busch: Our simple and focused strategy to own and operate essential open-air retail centers exclusively in the Sunbelt region of the U.S. is playing out, and our straightforward and low-leveraged capital structure will allow us to continue to deploy capital in an appropriate manner if and when we can do so in an accretive way for our shareholders. Leasing activity continues to meet or exceed expectations. Our leased occupancy rate finished the quarter at 96.3%, both up slightly sequentially and on a year over year basis, all while delivering double-digit blended leasing spread.
Daniel Joseph Busch: Our simple and focused strategy to own and operate essential open air retail centers.
Daniel Joseph Busch: <unk> in the Sunbelt region of the U S is playing out.
Harry: And our straightforward and low Levered capital structure will allow us to continue to deploy capital in an appropriate manner, if and when we can do so in an accretive way for our shareholders.
Daniel Joseph Busch: Leasing activity continues to meet or exceed expectations are leased occupancy rate finished the quarter at 96, 3%, both up slightly sequentially and on a year over year basis, all while delivering double digit blended leasing spreads importantly, we're retaining high quality tenants across the portfolio negotiating rates that are favorable for our tenants continue.
Daniel Joseph Busch: Importantly, we are retaining high-quality tenants across the portfolio, negotiating rates that are favorable for our tenants' continued success but with better annual escalations, specifically for small shop tenants with minimal cash outlay. Said Deverly, we are retaining the proven tenants that are integral to the merchandise mix of our centers, while preserving capital, which will drive higher free cash flow for the portfolio into the future. Small shop leasing continues to be strong, and while we saw more normal first quarter of attrition, lease small shop occupancy remained above 92%.
Daniel Joseph Busch: Success.
Daniel Joseph Busch: With better annual Escalations, specifically for small shop tenants with minimal cash outlay. So definitely we are retaining the proven tenants that are integral to the merchandize mix of our centers, while preserving capital, which will drive higher free cash flow for the portfolio into the future.
Daniel Joseph Busch: Small shop leasing continues to be strong and while we saw more normal first quarter of attrition lease small shop occupancy remained above 92%. We continue to replace underperforming tenants and bring in higher credit and quality operators that will better serve their community constituents.
Daniel Joseph Busch: We continue to replace underperforming tenants and bring in higher credit and quality operators that will better serve their communities. Christy will provide a little more detail on our leasing activity in a few minutes. But to finish on the operating environment, I feel it's important to highlight how underappreciated the lack of new institutional quality supply exists in open-air retail. It cannot be understated how few development starts are materialized. What this means is that given the lead time from start to stabilization in retail real estate, landlords should benefit for the next few years before supply, if ever, begins to emerge in a material way in our sector.
Daniel Joseph Busch: Christine will provide a little more detail in our leasing activity in a few minutes, but to finish on the operating environment I feel it's important to highlight how underappreciated the lack of new institutional quality supply exists in open air retail.
Daniel Joseph Busch: It cannot be understated how few development starts are materializing.
Daniel Joseph Busch: What this means is that given the lead time from start to stabilization in retail real estate is that landlords should benefit for the next few years before supply if ever begins to emerge in a material way in our sector.
Daniel Joseph Busch: Coupled out with the demand drivers in the Sunbelt, Inventrust feels uniquely positioned to appropriately take advantage of this imbalance. On the capital allocation front, the opportunity to set up new deals has improved, but we remain selective in deploying capital, heeding to our cost of capital, and ensuring that we are growing in an appropriately accretive manner. Obviously, the capital market environment has been frustratingly volatile. As much as we would like to accelerate our external growth to complement our internal operations, we will continue to be prudent in our approach.
Daniel Joseph Busch: Couple that with the demand drivers in the Sunbelt and <unk> is uniquely positioned to appropriately take advantage of this imbalance.
Daniel Joseph Busch: On the capital allocation front the opportunity set of new deals has improved but we remained selective in deploying capital getting to our cost of capital ensuring that we are growing in an appropriately accretive banner, obviously the capital market environment has been frustratingly volatile as.
Daniel Joseph Busch: As much as we'd like to accelerate our external growth to complement our internal operations. We will continue to be prudent in our approach our balance sheet remains one of the lowest levered in the sector, which allows us to be patient yet opportunistic and we keep a robust pipeline to be at the ready when the markets open up to our favor.
Daniel Joseph Busch: Our balance sheet remains one of the lowest levered in the sector, which allows us to be patient yet opportunistic, and we keep a robust pipeline to be at the ready when the markets open up to our favor. As discussed on last quarter's call, we secured our first acquisition in the Phoenix market in the first quarter of 2024, and we also added another property subsequent to the quarter in the Upper West Side of Atlanta.
Daniel Joseph Busch: As discussed on last quarter's call, we secured our first acquisition that Phoenix market in the first quarter of 2024, and we also added another property subsequent to the quarter in the upper West side of Atlanta, Moore's Mill is a neighborhood Publix anchored center that Bose powerful grocery sales growth oriented supporting tenants and are situated on a generational piece of infill.
Daniel Joseph Busch: Moore's Mill is a neighborhood public-sanctuary center that boasts powerful grocery sales, growth-oriented supporting tenants, and is situated on a generational piece of infill real estate. With that, I'm going to turn the call over to Mike to discuss our financial prospects, Mike.
Mike: Real estate.
Daniel Joseph Busch: With that I'm going to turn the call over to Mike to discuss our financial results Mike.
Michael Douglas Phillips: Thank you, DJ, and good morning, everyone. I will start with our results for the quarter, then discuss our balance sheet position, and end with an update to our 2024 full-year guidance. Inventrust reported strong same property NOI of $41.5 million, an increase of 4.1% over the same time period last year. The increase was driven by growth from base rent, including 170 basis points from embedded rent bumps and net expense reimbursements of 280 basis points.
Mike: Thank you TJ and good morning, everyone I will start with our results for the quarter and discuss our balance sheet position and end with an update to our 2020 for full year guidance.
Michael Douglas Phillips: <unk> reported strong same property NOI of $41 5 million an increase of four 1% over the same time period last year. The increase was driven by growth from base rent, including 170 basis points from embedded rent bumps and net expense reimbursements of 280 basis points.
Michael Douglas Phillips: NARED FFO for the quarter was $30.8 million, or $0.45 per diluted share for the three months ending March 31, 2024, an increase of 9.8% over last year. For the quarter, Core FFO grew 10% to 44 cents per share compared to the same time period in 2023. Components of FFO growth for the quarter are primarily driven by same property NOI and NOI from acquisition. As D.J.
Michael Douglas Phillips: NAREIT <unk> for the quarter was $30 8 million or <unk> 45 per diluted share for the three months ending March 31, 2024, an increase of nine 8% over last year.
Michael Douglas Phillips: For the quarter <unk> grew 10% to <unk> 44 per share compared to the same time period in 2023 and.
Michael Douglas Phillips: Components of <unk> growth for the quarter, primarily driven by same property NOI and NOI from acquisitions.
Michael Douglas Phillips: As mentioned earlier, our balance sheet remains strong and provides us the ability to remain flexible as we navigate a challenging capital markets environment. We finished the first quarter with $421 million of total liquidity, including a full $350 million of borrowing capacity available on our revolving line of credit. Our net leverage ratio is 28%, and our net debt to adjusted EBITDA is 5.1 times on a trailing 12-month basis. Our weighted average interest rate into the quarter was 4.3% with a weighted average maturity of 3.7 years.
Michael Douglas Phillips: As DJ mentioned earlier, our balance sheet remains strong and provides us the ability to remain flexible as we navigate a challenging capital markets environment. We finished the first quarter with $421 million of total liquidity, including a full $350 million of borrowing capacity available on our revolving line of credit.
Michael Douglas Phillips: Our net leverage ratio was 28% our net debt to adjusted EBITDA is five one times on a trailing 12 month basis.
Michael Douglas Phillips: Weighted average interest rate ended the quarter at four 3% with a weighted average maturity of three seven years.
Michael Douglas Phillips: Our debt maturities are manageable, and we are comfortable with the limited amount maturing over the next two years. We will continue to monitor markets as we evaluate our options for the $72 million full loan that matures in November. And, as a reminder, we do have a one-year extension option.
Michael Douglas Phillips: Our debt maturities are manageable and we are comfortable with the limited amount maturing over the next two years, we will continue to observe markets as we evaluate our options for the $72 million loan that matures in November and as a reminder, we do have a one year extension option.
Michael Douglas Phillips: Finally, we declared an annualized dividend payment of $0.91 per share, a 5% increase over last year. I will conclude my remarks by updating Inventrust's 2024 guidance. With our strong start to 2024, we are raising our same property NOI growth guidance by 50 basis points at the midpoint, which is now expected to be in the range of 2.75% to 3.75%. Additionally, we are increasing NARED FFO to $1.71 to $1.77 per share. And finally, we are moving CORE FFO guidance up to $1.67 to $1.71 per share.
Michael Douglas Phillips: Finally, we declared an annualized dividend payment of <unk> 91 per share a 5% increase over last year.
Michael Douglas Phillips: I will conclude my remarks by updating <unk> 2024 guidance with our strong start to 2024, we are raising our same property NOI growth guidance by 50 basis points at the midpoint, which is now expected to be in the range of 275% to 375%, we're increasing NAREIT <unk> to a $1 71 to $1 77 per share.
Michael Douglas Phillips: And finally, we are moving core <unk> guidance up to $1 67 to $1 71 per share our bad debt reserve will remain at 50 to 100 basis points of total revenue and our net investment activity for the year remains unchanged at $75 million.
Michael Douglas Phillips: Our bad debt reserve will remain at 50 to 100 basis points of total revenue, and our net investment activity for the year remains unchanged at $75 million. Finally, as we mentioned last quarter, we continue to anticipate a headwind in the second quarter due to the impact of the bankruptcies of Bed Bath & Beyond and Christmas Tree Shops that took place in 2023, and NOI growth should reaccelerate after the second quarter. 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 Christy to discuss our portfolio activity. Christy?
Christy: Finally, as we mentioned last quarter, we continue to anticipate a headwind in the second quarter due to the impact of the bankruptcies of bed Bath <unk> beyond Christmas tree shops that took place in 2023 and NOI growth should reaccelerate after the second quarter.
Christy: 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 Christy.
Christy L. David: Thanks, Mike. As CJ mentioned, demand continues to be strong and is coming equally from local, regional, and national tenants looking to expand their stores. On the tenant side, store openings outpaced closings in 2023 by 2 to 1, and that trend is continuing into 2024. Given the favorable demand dynamics in the strip center space, we are committed to adding to our organic growth profile by securing annual contractual rent bumps and converting tenants to fixed income, both key factors to achieving stable long-term cash flow.
Christy: Thanks, Mike as TJ mentioned demand continues to be strong and is coming equally from local regional and national tenants looking to expand our footprint on the planet.
Christy L. David: Inside store openings outpaced closings on 2023 by two to one and that trend is continuing into 2024.
Christy L. David: Given the favorable demand dynamics almost strip centers Paul yes.
Christy L. David: It's adding to our organic growth profile by securing annual contractual rent bumps and converting tenants to fixed harm both key factors to achieving stable long term cash flow.
Christy L. David: Turning to our operating results. We started 2024 by signing 41 leases for over 180000 square feet with additional leases in our pipeline at various stages of negotiation.
Christy L. David: Turning to our operating results, we started 2024 by signing 41 leases for over 180,000 square feet, with additional leases in our pipeline at various stages of negotiation. We executed leases with tenants such as 7Brew, Sephora, and Cavendish, which backfills at Bed Bath & Beyond stores in the States. We have one remaining Bed Bath & Beyond space with a replacement tenant identified and lease negotiations underway.
Christy L. David: We executed leases with tenants, such as southern Peru, Sephora, and calendars, which backfill at bed Bath and beyond.
Christy L. David: We have one remaining bed bath <unk> beyond with a replacement tenant identified and lease negotiations underway.
Christy L. David: Our total portfolio leased occupancy ended the quarter at an all time high of 96, 3% up 10 basis points from last quarter, our anchor space leased occupancy finished at 98, 6% an increase of 40 basis points from last quarter and our small shop leased occupancy ended the quarter at 92, 1%.
Christy L. David: Our total portfolio lease occupancy ended the quarter at an all-time high of 96.3%, up 10 basis points from last quarter. Our anchor space lease occupancy finished at 98.6%, an increase of 40 basis points from last quarter, and our small shop lease occupancy ended the quarter at 92.1%. As of March 31, Inventrust's total portfolio AVR was $19.61, an increase of 2.6% compared to the first quarter of 2020.
Christy L. David: As of March 31, and then trust total portfolio ABR at $19 61.
Christy L. David: An increase of two 6% compared to the first quarter of 2023.
Christy L. David: For the quarter, we posted blended comparable leasing spreads of 11.2%. Spreads for new leases were 24.3%, with renewals at 9.4% for the quarter. Our retention rate remains at 90% as we continue to see tenants renew their existing leases at meaningful increases. Our signed, but not open pipeline remains at 290 basis points as of the first quarter, representing nearly $8 million of annual base rent, with 75% expected to come online at some point this year. In closing, leasing demand has never been stronger. Our portfolio has and continues to prove its resiliency and ability to drive results. Operator That concludes our prepared remarks, and you can open the line for questions.
Christy L. David: For the quarter, we posted blended comparable leasing spreads of 11, 2% spread.
Christy L. David: Spreads for new leases were 24, 3% with renewals at 94% for the quarter.
Christy L. David: Our retention rate remains at 90% as we continue to see tenants renew their existing leases at meaningful increases.
Christy L. David: Our signed not open pipeline remains at 290 basis points as of the first quarter, representing nearly $8 million of annual base rent with 75% expected to come online at some point this year.
Christy L. David: In closing leasing demand has never been stronger our portfolio has and continues to prove its resiliency and ability to drive results.
Christy L. David: Operator that concludes our prepared remarks, and you can open the line for questions.
Christy L. David: Okay.
Harry: Thank you. If you would like to ask a question, please dial star followed by one on your telephone keypad now. If you change your mind, please dial star followed by two to exit the queue, and, finally, when preparing to ask a question, please ensure that your phone is unmuted locally. And our first question today is from the line of Dori Kesten of Wells Fargo. Dori, your line is open, please go ahead.
Speaker Change: Thank you if you would like to ask a question. Please dial star followed by one on your telephone keypad now if you change your mind. Please dial star followed by two to exit the queue.
Dori Lynn Kesten: And finally, when preparing to ask a question. Please ensure that your phone is unrelated locally.
Harry: Yes.
Harry: And our first question today is from the line of Dori Kesten of Wells Fargo. Your line is open. Please go ahead.
Dori Lynn Kesten: Thanks. Good morning guys. You've made good headway today on your net acquisition guide. Can you talk generally about the kind of deals you're underwriting today, the amount that you're seeing versus maybe three months ago, and then just any shifts in pricing or competition you've seen?
Dori Lynn Kesten: Thanks, Good morning, guys.
Dori Lynn Kesten: We've made good headway today on your net Apple Michelin Guide can you talk generally about the kind of deals you're underwriting today, the amount that you're seeing versus maybe three months ago, and then just any shifts in pricing or competition right.
Daniel Joseph Busch: Yeah, sure. Good morning, Dori.
Dori Lynn Kesten: Yes, sure Marty I'm going to let <unk>.
Speaker Change: <unk> start and then.
Speaker Change: I'll add some color maybe up yet yes, sure so I'll start with volume.
David Heimberger: I'm going to let Dave start, and then I'll add some color maybe at the end. Go ahead, Dave. Yeah, sure. So, I'll start with, you know, volume. It's improved.
Dave: There's more options for us to underwrite so at any point in time, we look at the pipeline it could have $300 million or $500 million of options, it's more towards the higher end at the moment.
David Heimberger: There are more options for us to underwrite. So, at any point in time, we look at the pipeline; it could have 300 million or 500 million in options. It's more towards the higher end at the moment.
David Heimberger: So, we've been really active underwriting, obviously being very sensitive and observing our cost of capital, trying to make sure we're targeting appropriate IRRs. On the two deals that we mentioned in the press release or the earnings release, those sort of fit that mold. Again, one in Phoenix we talked about last quarter, but just to recap again, Chandler, a great wedge of growth out in Phoenix. Sprouts Anchored, so again, has sort of that specialty grocer component to it.
David Heimberger: So we've been really active underwriting obviously being very sensitive.
David Heimberger: Observing our cost of capital trying to make sure we're targeting appropriate.
David Heimberger: Irr's.
David Heimberger: On the two deals that we mentioned in the press release or the earnings release.
David Heimberger: Those sort of fit that mold again, one in Phoenix, we talked about last quarter, but just to recap again Chandler great wedge of growth out in Phoenix.
David Heimberger: Sprouts anchored so again has sort of that specialty grocer component to it and then mooresville very unique piece of real estate in Atlanta sort of very complementary to what we already own there very high performing publix.
David Heimberger: And then Moore's Mill, a very unique piece of real estate in Atlanta, sort of very complementary to what we already own there. Very high-performance public spaces, and we continue to see, you know, what we think will be significant rent growth over time. So, again, two deals added. The pipeline's full.
David Heimberger: And we continue to see what we think will be significant rent growth over time.
David Heimberger: We're very active. You know, we're closing in on that $75 million goal. Obviously, that's a marker that we want to achieve this year. There are more options, but obviously sensitive to our cost of capital before exercising any more external growth levers. And I think, Dory, that's the most important part. The way we think about the $75 million is a point in time based on where our cost of capital is.
David Heimberger: So again two deals added the pipelines full we're very active.
David Heimberger: We're closing in on about $75 million goal, obviously, that's a marker.
David Heimberger: We want to achieve this year, there's more options, but obviously sensitive to our cost of capital before exercising any more external growth levers I think sorry.
David Heimberger: DJ that's the most important part is the way we think about the $75 million is a point in time.
David Heimberger: Based on where our cost of capital is obviously move we would hope as most people in the sector that it was a little bit stronger today, because there are some opportunities out there so I wouldn't expect it.
David Heimberger: Obviously, we would hope, like most people in the sector, that it was a little bit stronger today, because there are some opportunities out there. But I wouldn't expect, if the environment stays the same, for us to go materially over that. What we could see is, if there are opportunities out there, we could use, perhaps, and we've talked about it a lot, there are a couple of properties we could use as a rotation of capital and use those as a source of proceeds if we find some other interesting opportunities in our market.
David Heimberger: If the environment stays the same for us to go materially over that but we could see is that there are opportunities out there we can't use perhaps and we've talked about it a lot theres a couple of properties, we could use as a rotation of capital and use those as a source of proceeds if we find some other interesting opportunities in our markets.
David Heimberger: Okay, and are you able to give the cap rate for the Atlanta acquisition?
David Heimberger: Okay.
David Heimberger: Are you able to give the cap rate for the Atlanta acquisition.
David Heimberger: No, so without getting into specific cap rates, I would just say, I would just tell you that we're still able to get to our unlevered IRR targets, which call it anywhere in the low to mid 7. So that's kind of how we're looking at it from an underwriting perspective. And, you know, both Atlanta and Phoenix were, we were able to get to that level.
David Heimberger: So without getting the specific cap rates I would just say I would just tell you that we're still able to get to our unlevered IRR targets, which call it anywhere.
David Heimberger: Anywhere in the low to mid 7%. So that's kind of how we're looking at it from an underwriting perspective.
David Heimberger: Both Atlanta, and Phoenix, where we were able to get to that level.
Dori Lynn Kesten: Okay, and my last one is, can you just walk through what the key drivers were for the guidance raised this year?
David Heimberger: Alright.
David Heimberger: The last one is can you just walk through what the key drivers were of the guidance range.
Michael Douglas Phillips: Yes, the guys who arranged for the same property.
Speaker Change: Yes, the guidance range for same property.
Michael Douglas Phillips: Yeah, the guidance rate. Yep.
Speaker Change: Yeah the guidance range.
Michael Douglas Phillips: Yeah, yeah, yeah, so base rent drove most of it. That's 220 basis points and that's heavily influenced by 170 basis point of contractual rent bumps, which we still Continue to be successful and getting call it in the three and sometimes up to four percent Especially in the small shops within when we're executing new deals and then Kind of as you walk down The line for a quarter today, we did have 280 basis points of contribution from net expense reimbursements our expenses were a little late this quarter compared to Q1 of 2023 what you'll see throughout the year is That increase a little bit in the subsequent quarters and get us kind of to an operating expense comparable Year to date last year may be slightly lower
Michael Douglas Phillips: Yes.
Michael Douglas Phillips: Yes, so base rent drove most of it.
Michael Douglas Phillips: 220 basis points and Thats heavily influenced by 170 basis points above contractual rent bumps, which we still continue to be successful in getting call. It in the three and sometimes up to 4%.
Michael Douglas Phillips: Especially in the small shops within word thanks.
Michael Douglas Phillips: Thanks for getting new deals and then.
Michael Douglas Phillips: Kind of as you walk down.
Michael Douglas Phillips: The line for a quarter to date, we did have 280 basis points.
Michael Douglas Phillips: Contribution from net expense reimbursements, where expenses were a little late this quarter compared to Q1 of 2023, what youll see throughout the year as the increase a little bit in the subsequent quarters and get us to an operating expense comparable.
Michael Douglas Phillips: Year to date last year, maybe slightly lower.
Dori Lynn Kesten: Okay, great. Thanks so much.
Speaker Change: Okay, great. Thanks, so much.
Harry: Our next question today is from the line of Jeff Spector or Bank of America. Please go ahead; your line is open.
Dori Lynn Kesten: Our next question today is from the line of Jeff Spector of Bank of America. Please go ahead. Your line is open.
Harry: Hi, This is Andrew <unk> on for Geoff Thanks for taking our questions.
Jeff Spector: Just within insubstantial amount of uncollectible rent and recoveries recorded in the quarter. Just wondering why reaffirm 50 to 100 basis points of bad debt within guidance.
Jeff Spector: And then just wondering what do you have.
Jeff Spector: Soon for reserves in terms of small shop as well as your bigger box exposure to Rite aid at this point in the year. Thanks.
Jeff Spector: No, hey, Andrew. No, happy to provide a little bit more color. Obviously, we're trending at the lower end of that bad debt range. And it really comes down to the way we think about it. I think the way that most of our peers have explained it is on a net basis. So you do have some unforeseen fallout that you're capturing within that bad debt, that 50 to 100 basis points. And it can be offset by some surprises as it relates to out-of-period collection of rents, mostly from tenants that are on a cash basis.
Jeff Spector: No Hey, Andrew no happy to happy to provide a little bit more color. Obviously, we're trending at the lower end of that bad debt range and it really come the way, we think about I think the way that most of our peers have explained it is on a net basis. So you do have some unforeseen fallout that youre, capturing within that bad debt that 50 to 100 basis.
Jeff Spector: And it can be offset by some surprises as it relates to out of Perry collection of rents mostly from tenants that are on a cash basis. So what happened in the first quarter as we.
Jeff Spector: We had expected fallout that we that was implied in our guidance, but we actually got a couple of wins as it relates to prior period collection of rents that we're not expecting much more out of period rents throughout the balance of the year, which is why we felt comfortable.
Jeff Spector: So what happened in the first quarter is we had the expected fallout that we, that was implied in our guidance, but we actually got a couple wins as it relates to prior-period collection of rents. Now, we're not expecting much more out-of-period rents throughout the balance of the year, which is why we felt comfortable maintaining that range. But to your point, obviously, we have one Rite Aid; we have one JoAnn Fabrics.
Jeff Spector: Maintaining that that range, but to your point, obviously, we have one rite aid we have one joann fabrics. So those are the primary retailers that have been in the news.
Jeff Spector: Are those consistent call it 25 basis points.
Jeff Spector: Those are the primary retailers that have been in the news. Those consist of, call it, 25 basis points, if you will. So far, the news has been good as it relates to those tenants for Inventrust specifically, but there's still a process to be run through the bankruptcy. But if those tenants were to stay in, you could expect us to probably end the year at the low end of that range. But with that being unknown and trying to be appropriately conservative or, I would say pragmatic as it relates to our small shop tenants throughout the year, we felt okay keeping that $3,500 basis point range.
Jeff Spector: If you will so.
Jeff Spector: So far.
Jeff Spector: The news has been good as it relates to those tenants for inventory specifically, but there is still a process to be run through through the through the bankruptcy, but if those if those tenants were understanding you could expect us to probably end the year at the low end of that range, but without being unknown.
Jeff Spector: Trying to be appropriately.
Jeff Spector: Conservative or I would say pragmatic as it relates to our small shop tenants throughout the year, we felt okay, keeping that 50 to 100 basis point range.
Michael Douglas Phillips: Okay, it was helpful. Thank you.
Speaker Change: Okay. That's helpful. Thank you.
Speaker Change: And then just on the small shop leased occupancy.
Michael Douglas Phillips: Saw that sequential decline after I think reaching a record high last quarter, it's still healthy and we understand it's getting harder to push occupancy with the lack of available space, but just hoping to get a little more color on what.
Jeff Spector: And then just on the small shop leased occupancy, saw that sequential decline after I think reaching a record high last quarter, still healthy. And we understand it's getting harder to push occupancy with the lack of available space, but just hoping to get a little more color on what drove the decline in the quarter. And then maybe what are you hearing from your latest leasing discussions with small shop tenants in particular?
Jeff Spector: Drove the decline in the quarter and then maybe what are you hearing from your latest leasing discussions with small shop tenants in particular.
Speaker Change: Yes, maybe I'll, just I'll start and I'll hand, it over to Kristy to talk a little bit on the discussions we've been having but really if you think about the quarter. One there was a more and I think we mentioned in the prepared remarks. It was a more normalized kind of level of fallout for our for our portfolio. It was about 60000 square feet of tenants.
Michael Douglas Phillips: Yeah, maybe I'll just, I'll start and I'll hand it over to Christy to talk a little bit about the discussions we've been having. But really, if you think about quarter one, it was a more, and I think we mentioned in the prepared remarks, it was a more normalized kind of level of fallout for our, for our portfolio. It was about 60,000 square feet of tenants too, but you can see this in the changes between economic and leased occupancy.
Michael Douglas Phillips: But and you can see this in the changes between economic and leased occupancy.
Michael Douglas Phillips: We've already released 30% of that space. We have another 50% of that space already with replacements that are helpfully in the double digits. And then we're, you know, working on the minimum amount of the space that's left. So that's why you saw a contraction between the kind of economic lease occupancy. But to your point, we do expect, you know, if the leasing environment holds, and because we are still seeing some really nice activity on the small shop side, even with a minimal amount of space, we do expect to kind of climb that to surpass our high watermark by the end of the year. Because you don't want to talk about some categories that we're seeing some activity in. Sure.
Christy: <unk> already re leased 30% of that space, we have another 50% of that space already with the replacement that spreads that are helpful. Healthily in the double digits and then we're working on a de minimis amount of the space Thats left so that's why you saw a contraction between kind of the economic lease occupancy but to your point.
Michael Douglas Phillips: We do expect.
Michael Douglas Phillips: If the leasing environment holds and.
Michael Douglas Phillips: And because we are still seeing some really nice activity on the small shop side, even with a minimal amount of space, we do expect to kind of climb that too.
Michael Douglas Phillips: To surpass our high watermark by the end of the year, Chris do you want to talk about some categories that we're seeing some activity.
Christy L. David: Sure. I would just add that, in general, our small shop pipeline remains very healthy. We are actually taking opportunities where we do see some small shops failing or struggling to be proactive in trying to release those with tenants that would add to the mix at our centers. And we're primarily seeing demand driven by the QSR category, personal health and services, and of course, some of the full service restaurants, but those are the main drivers of what's in our pipeline today.
Michael Douglas Phillips: I would just add that in general small shop, our smallcap pipeline remains very healthy.
Christy L. David: Our apps are taking opportunities, where we do see some small shop, failing or struggling to be proactive and trying to release those with tenants that would add to the mix at our centers.
Christy L. David: Primarily in the demand driven by the quick <unk> category personal health inherited.
Speaker Change: Of course.
Christy L. David: Yes. It is a full service restaurants, but those are the main drivers of what's in our pipeline today.
Jeff Spector: Okay, great. Thank you.
Speaker Change: Okay, great. Thank you.
Harry: As a reminder, if you would like to ask a question, please dial star 1 on your telephone keypad now. And our next question today is from the line of Paulina Rojas of Green Street. Please go ahead; your line is open.
Jeff Spector: As a reminder, if you would like to ask a question. Please dial star one on your telephone keypad now and our next question today is from the line of Paulino Rojas of Green Street. Please go ahead. Your line is open.
Paulina Alejandra Rojas: Good morning! The sector is today in a sweet spot, where supply is very limited, demand is strong, and I hear a lot of enthusiasm on your end. How bullish are you about the ability of landlords to push rent aggressively in the next five years? And your answer, if you could somehow frame...
Paulina Alejandra Rojas: Good morning.
Paulina Alejandra Rojas: The sector is today in the sweet spot where supply is very limited demand is strong.
Paulina Alejandra Rojas: There are a lot of enthusiasm on your end.
Paulina Alejandra Rojas: Sure.
Paulina Alejandra Rojas: Are you about the ability of landlords to push rents.
Speaker Change: Sadly in the next five years.
Paulina Alejandra Rojas: And in your answer if you could somehow.
Paulina Alejandra Rojas: Jim.
Paulina Alejandra Rojas: Dan.
Daniel Joseph Busch: These levels of enthusiasm, whether it's talking about rent growth or a wide growth trend, something to help us prepare for what is ahead.
Paulina Alejandra Rojas: This level of enthusiasm, whether it's talking about rent growth or NOI growth trends.
Speaker Change: Anything to help us.
Daniel Joseph Busch: Prepare for what is ahead.
Daniel Joseph Busch: No, Paulina, it's a great question. I think, I tried to get to it anecdotally, and I think we've talked about it several quarters, that the lack of supply and, you know, there's very, very minimal new construction starts in retail because the construction costs to do for new developments just remain much, much too high. But because of the long lead times in multi-tenant open-air retail, the amount of time it takes to get many of these things built, you know, two, if not three years at least, it sets up for strong fundamentals from our perspective for the next several years.
Speaker Change: No. That's a great question I think I tried to get to it anecdotally and I think we've talked about several quarters that the lack of supply.
Daniel Joseph Busch: There is there is very very minimal new construction starts and retail.
Daniel Joseph Busch: The construction cost for new developments just remains much much too high.
Daniel Joseph Busch: But because of the long lead times.
Daniel Joseph Busch: In multi tenant open air retail thats the amount of time it takes to get many of these things built.
Daniel Joseph Busch: <unk>.
Daniel Joseph Busch: Two if not three years at least.
Daniel Joseph Busch: It sets up for strong fundamentals from our perspective.
Daniel Joseph Busch: For the next several years.
Daniel Joseph Busch: Because even in the next two or three years, unless we are in an environment where you can flip the development switch back on, and there are developers that want to put shovels in the ground, they just can't.
Daniel Joseph Busch: Because even in the next two or three years, unless we are in an environment, where you can flip the development switchback on and there are developers that are.
Speaker Change: We want to.
Daniel Joseph Busch: Put shovels in the company just can't and we don't see that changing in a material way anytime soon.
Daniel Joseph Busch: And we don't see that changing in a material way anytime soon. So on the supply side, we're volatile. And it's really institutional quality supply that is most limited, and we're not seeing tenants. Trades down for lower quality, or you can call it B-quality space. So I think that's why most of the folks, or almost all the folks in the institutional or public market feel really strong about their portfolio positioning as it relates to the markets that they're operating in.
Daniel Joseph Busch: So the supply side, we're very bullish on.
Daniel Joseph Busch: And it's really the institutional quality supply is what is most limited and we're not seeing.
Daniel Joseph Busch: Tenants.
Daniel Joseph Busch: <unk> down.
Daniel Joseph Busch: For lower quality or are you willing to call B quality space. So I think that's why most of the folks are.
Daniel Joseph Busch: Almost all of the folks.
Daniel Joseph Busch: Institutional or public market feel really strong about their portfolio positioning as it relates to the markets that they're operating in.
Daniel Joseph Busch: Now, the one caveat to that is obviously inflation, where the economy is going, and making sure that we're not pushing rents to set our tenants up for failure. I think that's why Inventrust and many of our peers have not shifted gears but are being much more careful with capital, capital going into the spaces, pushing rent appropriately, but then setting ourselves up for sustainable growth through better escalation, both on the base rent side and the CAM expense side.
Daniel Joseph Busch: Now the ones they.
Daniel Joseph Busch: The one caveat to that is obviously inflation, where the economy's going and making sure that we're not pushing rents to set our tenants up for failure I think that's why Suntrust in many of our peers.
Daniel Joseph Busch: <unk>.
Daniel Joseph Busch: Shifting gears are being much more careful with capital.
Daniel Joseph Busch: Capital going into that into the Zip.
Daniel Joseph Busch: Zip spaces.
Daniel Joseph Busch: Pushing rent appropriately, but then setting setting ourselves up for sustainable growth through better Escalations, both on the base rent side and the Cam expense side. So those those two pieces I would say.
Daniel Joseph Busch: So those two pieces, I think, set us up very well for sustained NOI growth, and then it sets up to us, and so it's really, to an extent, out of our control to make sure we're financing our businesses appropriately, but there are interest rates headwinds, at least on the short end of the curve, that will probably curtail cash flow growth a little bit, but I would expect same property net, or NOI growth, to remain more robust than what we've seen in the past in this space, and then the better companies to be able to pass that through and see free cash flow growth as well.
Daniel Joseph Busch: Set us up very well for sustained NOI growth and then it's just up to us.
Daniel Joseph Busch: Really.
Daniel Joseph Busch: Extent out of our control.
Daniel Joseph Busch: To make sure we're financing our business is appropriately, but there are interest rate headwinds at.
Daniel Joseph Busch: At least on the.
Daniel Joseph Busch: Short end of the curve that we're probably curtail cash flow growth a little bit, but I would expect same property NOI growth to remain more robust than what we've seen in the past in this space and then the other.
Daniel Joseph Busch: Better maybe the better companies to be able to pass that through our free cash flow growth as well.
Paulina Alejandra Rojas: Okay, um... How do you think about retailer cyclicality within this discussion about demand? Because one theory is that yes, the money is strong, but this business is cyclical, and in a way, normal tenant failure could take care of that lack of supply. It's a good question.
Daniel Joseph Busch: Okay.
Paulina Alejandra Rojas: How do you think about we take here at.
Speaker Change: C P. Kennedy.
Paulina Alejandra Rojas: We think this discussion about demand because one CRE.
Paulina Alejandra Rojas: Yes demand is strong, but this business is cyclical and in a way normal tandem could take care of that lack of supply.
Daniel Joseph Busch: And I think that's why, you know, we're always trying to perfect the merchandise mix, but that merchandise mix is always going to change. I do think, you know, that the structural change in shopping habits or at 12 times and frequency of visits to the open air community center or grocery center space has changed almost permanently because of COVID and because of the hybrid work environment. There are services that are doing better today, and they will continue to do better in the years to come post-COVID than they probably ever would have done pre-COVID because of the amount of, and the frequency of visits and the changing of habits for the consumers. And that specifically relates to QSR.
Paulina Alejandra Rojas: Lack of need.
Paulina Alejandra Rojas: <unk>.
Daniel Joseph Busch: It's a good question and I think that's why we're always trying to perfect. The merchandize mix, but that merchandise mix is always going to change.
Daniel Joseph Busch: I do think.
Daniel Joseph Busch: The structural change in shopping avid habits, or 12 times and frequency of visits in the open Air community center or grocery anchor tenant space has changed.
Daniel Joseph Busch: Almost permanently because of COVID-19 because of the hybrid work environment.
Daniel Joseph Busch: There are services that are.
Daniel Joseph Busch: We are doing better today and they will continue to do better in the years to come post COVID-19 than probably they ever would have done pre COVID-19 because of the.
Daniel Joseph Busch: Mt.
Daniel Joseph Busch: The frequency of visits and the changing of habits.
Daniel Joseph Busch: For the consumers and that specifically relates to <unk> full service restaurants, and the medical services in beauty.
Daniel Joseph Busch: Those particular categories have a structural change in how people are visiting because they're not going to the office five times a week in most cases, certainly in our markets, and it gives them more time and opportunity to spend time in our centers. So, no doubt there's a cyclical nature to our business. There's no question that there are going to be tenants that fail, whether it's because it's a failed business model or whatever it may be, and we're always monitoring those tenants. But I do think there are categories that have structurally benefited in that shape.
Daniel Joseph Busch: Particular categories.
Daniel Joseph Busch: A structural change in how people are visiting because theyre not going to the office five times a week in most cases certainly in our in our in our markets.
Daniel Joseph Busch: And it gives them more time and opportunity to spend time at our centers. So no doubt there is a cyclical nature of our business Theres No Theres no question that there's going to be tenants that sale.
Daniel Joseph Busch: Sale.
Daniel Joseph Busch: Whether it's because it's a failed business model are.
Daniel Joseph Busch: Or whatever it may be.
Daniel Joseph Busch: And we're always monitoring those tenants.
Daniel Joseph Busch: But I do think there's categories that have structurally benefit that should continue.
Paulina Alejandra Rojas: And the last question, during the quarter, if I'm right, I saw that you had... and the True Benefit from UnitedStats. And I think we were expecting some of that because the fix came in, but it was more than we thought. Is there any expectation of this normalizing any seasonality in these numbers that I'm seeing?
Daniel Joseph Busch: And then last question and during the quarter you from right I saw that you.
Speaker Change: Uh huh.
Paulina Alejandra Rojas: The material benefit from net expenses.
Paulina Alejandra Rojas: And I think we were expecting some of that because of fixed cam.
Paulina Alejandra Rojas: And.
Paulina Alejandra Rojas: But it was more than we thought is there any expectation.
Paulina Alejandra Rojas: These normalizing and seasonality in these numbers that I'm seeing.
Michael Douglas Phillips: Yeah, some of it's Mike, Paulina, some of it's timing. I would expect that throughout the year, like I said earlier, to kind of flatten out in subsequent quarters, and our expenses will end up slightly lower or about where we ended up in 2020.
Speaker Change: So some of it this is Mike some of its timing I would expect that throughout the year like I said earlier to kind of flatten out in subsequent quarters and our expenses will end up slightly lower or about where we ended up in 2023.
Paulina Alejandra Rojas: Okay, but in terms of the full year, this should be a contribution to sustain property and the like, and... Yeah, it won't be the $200,000 date. Yeah, it won't be the 280 basis points that we had in Q1, but it'll be closer to 150 basis points. And a lot of that, too, is because we are getting a little bit higher tenant recovery this year because our expenses will be down a little bit, but we also have between 40% and 45% of our portfolio on fixed camp now. So we are getting 4% to 5% bumps on our fixed camps when we sign them with new tenants. Okay, thank you.
Michael Douglas Phillips: Okay.
Michael Douglas Phillips: The full year this should be a contribution to same property NOI growth.
Paulina Alejandra Rojas: It won't be the 200 gig.
Paulina Alejandra Rojas: Yes, it won't be the 280 basis points that we had in Q1, but it will be closer to 150 basis points and a lot of that too is because we are getting a little bit higher tenant recovery this year because.
Paulina Alejandra Rojas: Our expenses will be down a little bit, but we also have.
Paulina Alejandra Rojas: Between 40, and 45% of our portfolio on fixed Cam now so we are getting 4% to 5% bumps on our fixed and when we sign them with new tenants.
Speaker Change: Okay. Thank you.
Paulina Alejandra Rojas: Yes.
Harry: This will be the final reminder; if you'd like to ask a question, please type star 1 on your telephone keypad now. Great, we have no further questions in the queue at this time, so I'd like to hand you back to DJ Bush for any closing remarks.
Paulina Alejandra Rojas: This will be the final reminder, if you'd like to ask a question. Please dial star one on your telephone keypad now.
Speaker Change: Greg we have no further questions in the queue at this time, so I'd like to hand back to D. J Busch for any closing remarks.
Daniel Joseph Busch: Thank you everyone for joining us. If you have any additional questions, please feel free to reach out to Dan Lombardo. Otherwise, we look forward to seeing you guys in the coming months, either at ICSE or in New York City. Have a great rest of your day.
Daniel Joseph Busch: Thank you everyone for joining us if you have any additional questions. Please feel free to reach out to them are murdo otherwise, we look forward to see guys in the coming months, either at ICSC or in New York City.
Daniel Joseph Busch: Have a great rest of your day.
Harry: This concludes today's conference call. Thank you all for joining us. You may now disconnect your lines.
Speaker Change: This concludes today's conference call. Thank you all for joining you may now disconnect your lines.
Harry: [music].
Harry: Yeah.
Harry: Okay.
Harry: Okay.