Q4 2023 Inventrust Properties Corp Earnings Call

Participants

Dan Lombardo; VP of IR; InvenTrust Properties Corp.

Dj Busch; President and CEO; InvenTrust Properties Corp.

Mike Phillips; CFO; InvenTrust Properties Corp.

Christy David; COO; InvenTrust Properties Corp.

Dori Kesten; Analyst; Wells Fargo

Floris van Dijkum; Analyst; Compass Point Research & Trading, LLC

Presentation

Operator

Thank you for standing by, and welcome to InvenTrust fourth quarter 2023 earnings conference call. My name is Beijing 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 event Trust properties.com. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone. I'd now like to turn the call over to Mr. Dan Bodner, Vice President of Investor Relations. Please go ahead.

Dan Lombardo

Thank you, operator. Good morning, everyone, and thank you for attending our call today. Joining me from the InvenTrust team is Dj Busch, President and Chief Executive Officer, Mike Phillips, Chief Financial Officer, Christy David, Chief Operating Officer, and Dave Heimberger, 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 or that are in the quarterly financial supplemental or press release. In addition, we will also reference certain non-GAAP financial measures. The comparable GAAP financial measures are included in this quarter's earnings materials, which are posted on our Investor Relations website.
With that, I will turn the call over to Dj.

Dj Busch

Thanks, Dan, and good morning, everyone. Today. I'll start with a brief summary regarding the fourth quarter and the full year of 2023. Mike will provide an overview of our financial results and some color on our 2024 expectations, and Christian will conclude with some of our continued success on the operational front, 2023 was another excellent year for event trust performance that continues to demonstrate the strength and resiliency of our simple and focused strategy. It has been a little over two years since Inventor has introduced its portfolio and strategy to the public market in October of 21, which is to own and operate essential open-air retail centers exclusively in the Sunbelt region of the US while maintaining a simple and low levered capital structure and employ straightforward capital allocation plan in the two full years. Since joining the public market, the Company has grown Same property net operating income by an average of 4.8% per year above the narrow shopping center average. It's increased core FFO per share by 18%, again, well above the narrower each shopping center average included $240 million of net investment activity for a 10% expansion of the asset base. The strength in our underlying fundamentals is undoubtedly driven by the favorable demand drivers in the Sunbelt markets in which we operate and the generationally low amount of new retail construction to take demand dynamics a step further, nearly 85% of our properties are located in states that have disproportionately benefited from positive migration trends with Texas and Florida leading the way in spite of an uptick and some well-documented retail bankruptcies in 2023, our leasing velocity remains strong as we continue to push rents and lease up the minimal number of vacancies left in the portfolio. In fact, in the fourth quarter, we executed more new deals than in any quarter since 2019. As a result, leased occupancy continues to be near all-time highs at over 96%, primarily driven by the continued strength in our small-shop tenancy which again reached an all-time high of 92.5% and has increased sequentially for 11th consecutive quarters. Moreover, the underlying credit strength in predominately necessity-based offerings within our merchandise mix gives us confidence in our tenants' operating ability despite whatever economic disruptions may or may not unfold in the coming years.
As indicated in our 2024 guidance, the favorable trends within our business are expected to more than offset some of the downtime related to the bankruptcies noted earlier in normal cycle within our business and anchor leasing efforts today will be sizable contributors for continued growth beyond 2024.
On the capital allocation front, we remain selective regarding new acquisitions. We continue to carefully monitor our cost of capital in relation to private market values, and we'll continue to be disciplined as we look to grow the portfolio during the quarter, we did raise a modest amount of equity through our ATM program for the first time since becoming a publicly traded company. This subtle yet important milestone displays yet another avenue for inventors to raise capital if and when proceeds can be used in a value accretive manner.
Our balance sheet continues to be the core strength of the Company sector, low leverage levels and de minimus new-term maturities, put inventories in an enviable position as we seek new opportunities for growth. On that note, the Company did acquire grocery-anchored centers subsequent to the quarter and in Chandler, Arizona. This marks and Ventas first property in the Phoenix MSA, and we're excited to expand our footprint in a market that exhibits many of the favorable demographic drivers we see in the rest of our Sunbelt markets. Our core operations coupled by selective external growth opportunities like the one just described is the precise recipe on how we expect to deliver sustainable cash flow growth year in and year out, which should translate into superior total returns for our stakeholders.
With that, I'll turn the call over to Mike to discuss our financial results.

Mike Phillips

Thank you, DJ, and good morning, everyone. I will start by taking you through our fourth quarter and full year financial highlights, then I will discuss the condition of our balance sheet and conclude with our 2024 guidance to start a real FFO was $30.8 million or $0.45 per diluted share for the three months ended December 31st, 2023.
Full year. Indeed, FFO was 115.5 million or $1.70 per diluted share. The increases were primarily driven by NOI growth. The acquisition of the remaining 45% of our joint venture, higher interest income and higher than anticipated nonrecurring income from nonoperating activities. These items were offset partially by higher interest expense for core FFO in the Trust's fourth quarter results were 27.8 million or $0.41 per diluted share, an increase of 21% over fourth quarter of 2022. Full year results were $111.9 million or $1.65 per diluted share, an increase of 5% over the previous year. Fourth quarter same-property NOI grew at 6.4% over the same quarter in 2022. Drivers of NOI growth for the quarter were base rent of 260 basis points. Net expense reimbursements of 420 basis points, ancillary and percentage rents of 100 basis points and partially offset by 100 basis points of revenues deemed uncollectible. Full year same property NOI grew at 4.9%, driven primarily by base rent growth of 380 basis points. Net expense reimbursements of 190 basis points offset by 40 basis points from revenues deemed uncollectible and a 60 basis point headwind from out-of-period rent collected in 2022.
Our balance sheet remains well positioned with 446 million of total liquidity, including a full 350 million of borrowing capacity available on our revolving line of credit. Net leverage ratio is 27%, and our net debt to adjusted EBITDA is 4.9 times on a trailing 12 month basis. Our weighted average interest rate ended the year at 4.3% with a weighted average maturity of four years. As a reminder, in October, we extended the maturity on our cross-collateralized pool loan by executing one of its two one-year extension options. In December, we paid down 20 million of debt, reducing our variable rate debt exposure to 9%. As BJ mentioned, at the end of 2023, we raised 5.4 million of net proceeds through the issuance of approximately 208,000 shares on the open market at a weighted average price of $26.13. In the fourth quarter, we declared a dividend payment of $0.215 per share. And as you saw in our press release yesterday, the Board also announced another 5% increase in our dividend, beginning with our April 2024 payment. This brings our annualized dividend to $0.905 per share.
I will conclude my remarks by discussing our initial 2024 guidance building on our strong 2023 results. We expect Naveed FFO to be between $1.69 and $1.75 per share. We are setting a guidance range of $1.66 to $1.70 per share for core FFO. Components of FFO growth includes same property NOI and acquisitions, which is offset by higher G&A, increased interest expense and less interest income. Finally, we expect same-property NOI growth to be in the range of 2.25% to 3.25%. Our same-property NOI guidance range assumes a bad debt reserve of 50 to 100 basis points of total revenue growth for same property NOI is primarily driven by base rent, including 150 basis points coming from contractual rent bumps. 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 Kristie to discuss our portfolio activity.

Christy David

Thanks, Mike. Let me begin by reemphasizing DJ's earlier remarks. The leasing momentum we have and continued to experience is driven by limited new supply and the scarcity of premium retail space, we believe limited new supply for the strip center space across the country and in particular, the Sunbelt will be far below historical averages for several years to come.
Keeping premium retail space in high demand. The team is able to capitalize on these market dynamics by increasing rental rates and remerchandising with stronger credit tenants at our centers.
The fourth quarter of 2023 was one of the strongest and most active in recent years, we signed 86 leases for over 550,000 square feet. Part of this activity included the signing of two former Bed Bath & Beyond spaces, one with PGA superstore in Makita, California and the other with Nordstrom Rack in Charlotte, North Carolina. These outstanding tenants will be additive to the tenant mix and customer experience at each of these centers. We are projecting these tenants to open their stores sometime in the next 12 to 18 months with sizable rent spreads of over 30%. We have two remaining Bed Bath & Beyond spaces that each have received multiple LOIs. The team is actively assessing the best tenants for each asset and we'll proceed to lease execution during the quarter. We also secured several other leases with tenants, including Yard House, Old Navy and BJ's Brewhouse. All this activity increased our total portfolio leased occupancy to 96.2%, up 110 basis points from last quarter. Reapproach the portfolio's pace, our anchor space leased occupancy finished at 98.2%, an increase of 160 basis points from last quarter. And our small-shop lease occupancy increased to 92.5%, a new high point for our portfolio as of December 31st, and Ventas total portfolio ABR is $19.48, an increase of 2.1% compared to 2022 for the quarter, we posted blended comparable lease spreads of 13.9%. Spreads for new leases were approximately 34%, with renewals nearing 8% for the quarter. Our retention rate remains at 90% as we continue to see tenants renew their existing leases at meaningful increases. One of our main focal points for 2024 will be to lease up the few remaining anchor spaces within our portfolio and have our localized experienced teams expeditiously work to ensure all the leasing activity in 2023 resulted in new tenants open and operating at our centers.
Operator, that concludes our prepared remarks and you can open the line for questions.

Question and Answer Session

Operator

(Operator Instructions) Dori Kesten, Wells Fargo.

Dori Kesten

Good morning. You're $75 million in net investment activity this year, how much of that is in your sights, Abhay? And are you assuming some nonstandard asset sales within that?

Dj Busch

Hey, Dori, this DJ. Good morning. Yes, so within the seven, the $75 million net investment assumption that's been built into the guidance. You can think about a couple of ways. One, obviously, we've already closed on 30 million of that in the first quarter. And then there's so there's very good visibility as it relates to the pipeline grow. Our pipeline tends to have a couple of hundred million dollars of deals that we're always looking at now because many of those, as you can imagine, pricing either gets away from us or under due diligence, we decide to move in a different direction. But certainly the acquisition pipeline feels better today than it would have last quarter. And I would suspect that that would continue through the year and I believe many of our peers are seeing the same type of visibility within their pipelines as well.
An important note on our net investment assumption is it's really just how we're seeing the market today and we will pivot depending on what our cost of capital looks like. So the $35 million obviously is predicated on the current pipeline where we believe we can buy it today. Making sure it's accretive to the business and we will accelerate that if the market conditions get better or are we perhaps can pull back as it relates to your question on non-Sun, but there are three assets that are considered outside of the Sunbelt, one being enrichment two in Maryland. Those assets are always candidates. Those are assets that we have said in the past that we would move along from if we found an accretive replacement for that for those for those for that capital, excuse me, and we will continue to do so so those the dispositions of those properties will just be predicated on how much we can do on the acquisition side.

Dori Kesten

And and I believe your floating exposure now stands around just under 10% of those swaps expired. Are you are you comfortable at that level throughout the year or should we expect some additional swaps?

Dj Busch

We are and obviously we're monitoring the curve as everyone else is as we look through 2024, we did decide to pay down a little bit of debt with cash on hand at the end of last year to lower that, that exposure a little bit. I think 10% is a good number for us. It's a it's obviously if we can't find accretive opportunities in the aftermarket is not our first choice, but we will choose to chip away at would that have if rates move in a different direction than what we're expecting. And then we'll look to replace that with Permian debt when when when the markets are a little bit more accommodative. And we'll start to look at that probably in the second half of this year.

Dori Kesten

And just lastly, can you talk to the rationale behind the relatively small size of the ATM issuance in the quarter? I think you said the I mean the pricing was a quick accretive with the acquisition? Yes, just the 5 million sizing.

Dj Busch

Oh, yes, absolutely. We also are, as you know, obviously, one of the challenges with our with our one of the few challenges I would say is we did not issue equity when we decided to delist the company. So we didn't do a traditional IPO. So the $5 million of it as de minimus as it is, was important for us to show that we have we do have that access and it really just came down at the end of the at the end of the year. And when pricing, obviously, there was a lot of momentum in the repo market and we decided just to explore that avenue and we raised a little bit and that's something that we'll continue to do. If the price gets to a level that is acceptable for us and where we think we can put the proceeds, it will work in an accretive manner.

Dori Kesten

Thank you.

Dj Busch

Thanks.

Operator

Jay Cohen, Bank of America.

Hi, good morning. It was good to see you guys close on and the center in Phoenix and enter that new market. Just curious on kind of the process you plan on and starting on just you know, how will you get familiar with that market and expanding your team there? Where's the opportunity to grow from there? And then if I might have missed it but if you could provide any details on pricing or the cap rate, that would be helpful.

Dj Busch

Yes, hello. Good morning. A great question. I'm happy to address most of that. So Arizona and Phoenix in particular is a market and this predates me but in vend trusts and has owned and operated assets in that market prior, this goes back several years. Most of those were larger boxes in nature. So as a market that the team was familiar with it, it just had been a while we have been familiarizing ourselves with the Phoenix MSA more from getting more familiar with it. I should say over the last call it a couple of years, even since we've listed the company, it's a market that we've been very interested in getting into. And I was just trying to find the right asset at has to kind of stick or put our flag in the ground. And this one fit up fits that bill. And the reason is it's a stable asset. It's a it's a it's a really high-quality asset. There's not of a lot of legwork to do as it relates to property management or yield or any value add opportunities. It's really one of those assets that you can you can kind of you said it and operate it and it's going to do do great. And so it's rather new, call it 2016 vintage. And the reason that's important is a lot of these new our newer assets sometimes don't have a whole lot of embedded rent growth. However, if you think about where Phoenix was in 2016 and where retail was in 2016, the market has changed dramatically. So we do actually think for a more stable asset. This one actually has a little bit more upside as it relates to your pricing question without getting into specific cap rates, this this asset did get to kind of the hurdle rates or the unlevered IRRs that we tried to get to. Obviously, it's a core grocery. It's a little bit smaller. So you can imagine the IRRs that we're trying to get to is right around seven, call it high sixes or sevens.

So that's that's helpful. And the credit loss assumption you guys put out within guidance of 50 to 100 basis points seems and fairly wide. Just just curious on what the underlying assumption Some are for that question, whether it's, you know, based on and scenarios of a known tenant disruption versus the unknown. And then I don't know if you can comment specifically on what might be incorporated for Joanne.

Dj Busch

Sure. No, happy to. So we have one, Joanne, and I think that that would be incorporated in our assumptions in that in the underlying assumptions in that 50 to 100 basis point range, also incorporating that is we have one Rite Aid out in California. Obviously ready just going through the process. If they make it through the process, we feel confident that it's a site that they're happy with, but we'll wait to be seen. Then the remainder really is the unknown small shop. The small shop risk over the last two years has been a pleasant surprise a more normalized level is at some point is expected from and that that would make up the balance. So you kind of nailed it with.
Joanne, I would mention the other ones, Rite Aid, those those two don't make up a ton. But on the anchor side, those would be the 2.2. And then the remainder is really just some unforeseen small shop fallout.

Okay, helpful. Thank you.

Dj Busch

Thanks.

Operator

Floris van Dijkum, Compass Point.

Floris van Dijkum

Hey, good morning, guys. Thanks for taking my question. So a DJ. on and morning, solid solid results. The portfolios seems to be doing pretty well here. Phoenix, the new market. I know you addressed it a little bit, but what can we expect I mean for you just to plant a flag, Phoenix is a pretty big market. I mean, what can we expect in terms of dollar volume or in terms of assets over the medium term view to hold up for IBT to own in a market like Phoenix.

Dj Busch

Hey, Floris. No, it's a great question. And one of the things that you have to challenge yourself with is it's really hard to get scale quickly. So it's one of those ones. We found an asset where if it's the only one we have for a period of time, depending on pricing or opportunity set within the market, we'd be happy now obviously to get to a level where, you know, if you think about our portfolio where we have our assets are very clustered. And we think that that's a reason that we feel like we operate at a much higher level because of that clustered nature of the portfolio, what that would indicate that we think we operate at our best when we have at least three or four assets in a market now that's just going to take time but there's also never very few, I should say, portfolios in a single market that you can kind of grab in one fell swoop, especially where the pricing would make sense. So this is one that we've had our eyes on for a while for a lot of the reasons I mentioned earlier, we got very comfortable with it and look at Phoenix is going to be as it has been high on our list to add to our portfolio because of the the characteristics that it has. And it's many of the characteristics that we see in Florida that we see in our the four cities in Texas are the ones of the characteristics that we see in North Carolina. So we're excited about further exploring the opportunities out there. And that Chandler being the third largest city in that in that county gives us a lot of confidence that we're in the right spot and we will continue to expand from there if the opportunities arise.

Floris van Dijkum

Speaking of those opportunities, I mean, I know that ST has basically put itself its portfolio in the market out there for us to focus on curved. They had a bunch of stuff, I think in Phoenix as well. Presumably you would look at that.

Dj Busch

Is that something on your radar without getting into specific companies or portfolios. We'll look at everything for us because, as you know, are our portfolio a while, certainly predominantly neighborhood center and certainly almost exclusively necessity-based or grocery, we are we are too. And if we can be property agnostic, we do have some power centers. We do have some smaller, smaller centers. So the most important focus for us in our business model is location and necessity-based retail in the right location. I'm just speaking to and not being a little ignorant to SITE Centers portfolio, but I would imagine most of those would be larger in nature. And because of that, those are going to come with a little bit higher level of risk or perceived risk in some. I would imagine if we were underwriting those the hurdle rates would be a little bit higher, but it's certainly something that we would take a look at if the if the if the operations team could get comfortable with it.

Floris van Dijkum

Great. And maybe one other question from me and your occupancy levels are I would argue are probably near the top of sector peers in both in your anchor as well as your shop, your leased occupancy anyway, how much more room where do you see your ups?
I mean, as I as I look at this, I would say your shop occupancy at 92.5%. It probably has greater potential for growth. But I'm curious to see how you think about that, where and how much higher can you push occupancy in your view over the next deal 18 to 24 months now?

Dj Busch

I'd say it's a good question and observation just to get just to dive in and give a little color around that. We have five anchor vacancies in the entire portfolio, two of which are from Bed Bath & Beyond closures, of which we're well underway on getting signed leases in place of one of the vacancies is being purposely held for a larger development that's down in Florida, which will our redevelopment, I should say, which will be a great opportunity for us in the next couple of years. And then the last two are also in some form of negotiation right now. So up the five the team is effectively getting close to the finish line on all of those. Now that's not to say that we're not going to have some fallout, but we're getting pretty close to full occupancy on the anchor side. So I think your observation is correct. The opportunity set has been the 7.5%, a vacancy that we have in the small shop and the team is all his work and obviously, really hard on coming up with strategies for a lot of that remaining space, some of which hasn't been leased in a while, and we've made a lot of good headway on that. I would tell you a little bit of our growth over the next couple of years will continue to come from occupancy. The rest is going to be coming from rate and retention and retaining and at higher rates is probably the best return that we can get of minimal to no capital higher rent and with a proven with a proven concept.

Floris van Dijkum

Thanks, DJ.

Operator

Thanks. Thank you. There are no additional questions waiting at this time, so I'd like to pass the call back over to TJ for any closing remarks.

Dj Busch

Thank you, Dan, and thank you, everyone, for joining us this morning. And as always, if you have any questions, feel free to reach out to our team here and we appreciate you joining and your interest in invent trust, and we look forward to seeing many of you in the coming months. Have a great day.

Operator

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