InvenTrust Properties Corp. (NYSE:IVT) Q4 2024 Earnings Call Transcript

InvenTrust Properties Corp. (NYSE:IVT) Q4 2024 Earnings Call Transcript February 12, 2025

Operator: Thank you for standing by, and welcome to InvenTrust Properties Corp.’s Fourth Quarter and Full Year 2024 Earnings Conference Call. My name is Elliot, 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. A replay will be available on the Investors section of the company’s website at inventrustproperties.com. And I’d now like to hand over to Mr. Dan Lombardo, Vice President of Investor Relations. Please go ahead, sir.

Dan Lombardo: Thank you, operator, and good morning, everyone. And thank you for attending our call today. Joining me from the InvenTrust Properties Corp. team is DJ Busch, President and Chief Executive Officer; Michael Phillips, Chief Financial Officer; Christy David, Chief Operating Officer; and Dave Heimberger, Chief Investment Officer. Following the team’s prepared remarks, the lines will be opened 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.

Michael Phillips: Representing a 4.5% increase, our net acquisition assumption is $100 million for 2025. Further details on our guidance assumptions are available in our supplemental disclosure filed yesterday. And with that, I’ll turn the call over to Christy David to discuss our portfolio activity. Christy?

Christy David: Thanks, Mike. Our strategy is to deliver strong above-average results. We remain focused on maximizing cash flow by optimizing rents, enhancing occupancy, and refining the merchandising mix across our centers. With 87% of our NOI coming from grocery-anchored assets, we recognize the vital role these tenants play in driving foot traffic to a thriving retail center. This dynamic strengthens our leasing leverage and brings additional value to our portfolio. At the time of our listing in 2021, our total portfolio leased occupancy stood at 93.0%. By the end of 2024, we achieved 97.4%, a 390 basis point increase, highlighting the exceptional quality of our centers and the appeal of our Sunbelt markets. Anchor space leased occupancy ended the year at 99.8%, matching our all-time high achieved last quarter.

Small shop lease occupancy finished the quarter at 93.3%, also an all-time high for our portfolio. Even at these unprecedented levels, our leasing team remains committed to further increasing occupancy, especially in the small shop category. In 2024, we signed 210 leases totaling 1.3 million square feet. Notable tenants signed in the fourth quarter include Skechers, Snooze, an A.M. Eatery, and Mendocino Farms. Beyond simply increasing occupancy, we believe that curating the right mix of national, regional, and local retailers is essential to creating a dynamic environment that drives tenant sales growth and maximizes leasing spreads for both new and renewal leases. By strategically assembling the best combination of necessity-based retailers for each market, we cultivate an atmosphere where tenants can prosper, fueling their success while enhancing our ability to grow rent.

InvenTrust Properties Corp.’s total portfolio ABR ended 2024 at $20.07 per square foot, reflecting an increase of 3% compared to 2023. For the year, we delivered blended comparable leasing spreads of 11.3%, with new lease spreads at 16.6% and renewals at 10.6%. Our retention rates stood at 94% in 2024. High tenant retention remains a key element of our portfolio. This dynamic translates to better economics, reducing downtime, and significantly lowering tenant improvement costs. Additionally, we have successfully embedded rent escalators of 3% or higher in 90% of our renewals, supporting long-term NOI growth.

Christy David: Moving to retail news, I want to briefly address the recent store closings and bankruptcies. At InvenTrust Properties Corp., we view this as part of the natural life cycle of retail. Disruption and store closures following the New Year are predictable and expected. While store closures remain below historical averages, they may be returning to more normalized levels compared to the last few years. As a reminder, our portfolio has one Joann location in Austin, Texas, representing 0.2% of ABR. We have no exposure to Big Lots or The Container Store. As Mike mentioned earlier, any expected disruptions or assumed vacancies within our portfolio from distressed retailers are fully accounted for in our guidance. Despite these headlines, demand for high-quality retail space remains strong.

Supply is still constrained, and many retailers are increasing their long-term store opening targets in our markets, recognizing the traffic and sales growth these locations can generate. We remain confident that any space we recapture presents an opportunity to drive rent growth and further enhance our tenant mix. Before concluding, I want to take a moment to acknowledge the devastating wildfires in Southern California. The widespread destruction and loss are truly heartbreaking. Thankfully, all InvenTrust Properties Corp. employees are safe, and at this time, our properties remain unaffected. We continue to closely monitor the situation. InvenTrust Properties Corp. is ready to provide support to our communities and tenants wherever it is needed.

Operator, that concludes our prepared remarks, and you can open the line for questions.

Q&A Session

Operator: Thank you. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Dori Kesten with Wells Fargo. Your line is open. Please go ahead.

Dori Kesten: Thanks. Good morning. Based on what you’ve said previously about the likely trajectory of acquisitions this year, that $100 million net investment figure seemed a bit conservative. Is this meant to be, you know, what you’re close to closing? I guess, does it assume acceleration in dispositions?

DJ Busch: Hey. Good morning, Dori. It’s a great question. So when we think about 2025, I think we’ve said this in the past, when we’re thinking about our initial acquisition guidance, we really are trying to message that we’re going to continue to be a net acquirer over the course of the year. The pace and acceleration of that really is dependent on our cost of capital. You did mention dispositions. We are going through a kind of capital recycling endeavor in 2025 with some of our properties in California. Depending on when those pricing comes in, we think our California portfolio is probably our most attractive kind of use or cost of capital to redeploy those proceeds in some of the other markets that we’ve been a little bit more excited about and we’ve been recently more active in. So within that $100 million, you can expect the gross number to be materially higher than that depending on, you know, the success of our disposition activity in our California markets.

Dori Kesten: Okay. And then your retention rate, I think, was about 94%, 95% this year, up from 90% last year. Can you talk through your expectations for this measure in 2025 and then kind of somewhat related, would you expect lease spreads this year to be comparable to the low teens that you were able to achieve in 2024?

DJ Busch: Yeah. Maybe I’ll just touch quickly on the retention rate and then I’ll have Christy give a little more color on what we’re expecting from a spread standpoint. The 94% is probably a little bit higher than what we’re expecting in 2025 only because of the known exits we may have this year as it relates to Party City and to a lower probability that Joann Fabrics. Other than that, when we think about 2025 and beyond, a 90% retention rate is kind of the baseline for us, and that allows us to push spreads while also keeping capital costs low.

Christy David: I’ll just follow up on that and say that with respect to the lease spreads, I think that our current run rate that you’ve seen over the past year should run similar into 2025. Our leasing team is focused on continuing to deliver at that rate.

Dori Kesten: Okay. Thank you.

Operator: We now turn to Jeff Spector with Bank of America. Your line is open. Please go ahead.

Jeff Spector: Great. Thank you. And congratulations on a great 2024. Just thinking about some of the comments in your discussion around your best use of capital, the dispositions in California, what about the balance sheet? I mean, you are under-leveraged. I guess, how are you thinking about the balance sheet and using that to grow even faster?

DJ Busch: You know, obviously, coming off the equity raise last year, which we found to be pretty opportunistic both just as it relates to what our cost of equity capital was at the time, but most importantly, our ability to go and acquire quickly and accretively to use those proceeds and show transparency and quick visibility to the market. Jeff, that’s the same recipe that we’re planning on using this year. Now as you can appreciate, you know, California as it relates to our property, we have a phenomenal California portfolio. It’s a strategic decision for InvenTrust Properties Corp. I mean, California retail is core for most shopping center REITs, both public and private. We just have found that, you know, we have an opportunity set, you know, in some of our other core markets that are going to look more attractive to us over time.

And because of that, we can make a nice little spread on that capital recycling or beget very, very high-quality trophy properties in those markets that we otherwise probably wouldn’t be able to go after, given where our cost of debt and cost of equity capital is if we were to just use the balance sheet. But we are in a position with the capacity on the balance sheet to lever up if the opportunity presents itself, and we’ll do that as you saw what we did in the back half of last year.

Jeff Spector: Okay. Fair. Thank you. And then as the company has gotten more aggressive, let’s say, on acquisitions, is that changing the conversation, let’s say, with owners or sellers? Like, you know, I assume that there’s a lot of competition to buy Sunbelt grocery-anchored centers. Like, how do you think this has changed, let’s say, InvenTrust Properties Corp.’s profile or the ability to do deals versus others?

DJ Busch: No. It’s a great question. I think what I would say is it is an extremely competitive environment. And we’ve been successful both on marketed deals, off-market deals, and everything in between. And I think that’s been kind of our recipe for success, and that’s the reason why I think we feel more comfortable in continuing to invest all of our energy in some of the markets where we’ve seen us inactive. You know, I would say because of our cost of capital both with our recycling program and then obviously where our multiple is, I think we have an ability to be appropriately aggressive and opportunistic. But it is a competitive environment, and we try to fully contemplate that as we think about our ability to be successful.

Jeff Spector: Okay. Thank you. And then just to confirm, on the same-store NOI range of 3.5% to 4.5%, I guess, is it safe to assume that at the high end, you’re assuming, let’s say, you know, you continue to move occupancy higher or leasing spreads are even stronger versus the bottom end? Let’s say that, you know, the bad debt reserve, let’s say, the 75 to 100 bps is more towards the 100 bps. Is that fair to say? Or is there anything else to point out on the range of the same-store NOI?

Michael Phillips: Yeah. This is Mike. I think you’ve got it kind of the range from the top to bottom. Really, what can move it is the uncollectible lease income, the bad debt throughout the year, and then just getting tenants kind of in and operating on time. The big driver would be the uncollectible lease income.

Jeff Spector: Okay. Great. Thank you.

Operator: We now turn to Linda Tsai with Jefferies. Your line is open. Please go ahead.

Linda Tsai: Hi. Thanks for taking my question. What is the appetite like for your California assets? Who are the potential buyers and what kind of cap rate do you apply to those centers?

DJ Busch: Yeah. It’s a good question, Linda. I would say California has always had a wide canvas of buyers, public, private, smaller, even and then certainly some of the larger international sovereign funds. I mean, that’s the, you know, the good and bad thing about California is it’s extremely competitive because of the dynamics of that market. So, you know, we sold one California asset last year. We’re in market with several assets currently. Demand has been very, very strong thus far, but nothing signed or executed yet, and we’ll watch those. But it’s, yeah, the important thing to note is we don’t have to sell anything in California if we don’t feel like we can redeploy those proceeds accretively. So if we’re not satisfied with the price or the opportunity set on the buy side isn’t as robust as we would hope, we have the ability to kind of slow or accelerate that pace accordingly because the most important thing is that we’re moving cash flow forward for InvenTrust Properties Corp.

As it relates to pricing, it’s too early to comment on what that pricing looks like, but I would say that the goal is to, you know, where we’re expecting pricing to command, it would allow us to be, like I said earlier, appropriately aggressive on trophy properties in markets where we’ve been more active and at a positive spread.

Linda Tsai: Thanks for that. And then my second question is for your acquisitions, how do you think about the mark-to-market opportunities in those assets?

DJ Busch: No. I mean, look, I think one thing that we love about our portfolio in the Sunbelt is that market rents are outpacing our current growth profile. And maybe to give you a little context of that, for instance, in any given quarter, we’ll have tenants miss an option notice date, in which case we get to renegotiate the lease. Right? So I think the most recent quarter or in 2024, we had about 23 tenants that missed their option period, in which case they would have probably had an increase in rent between, call it, in the high single digits. We were able to renegotiate those rents at closer to a 30% spread. It just gives us confidence that, you know, we’re perpetually below market in most of the portfolio. And that allows us to build a sustainable cash flow model even if there is a slowdown in the economy, we still feel like we’re in a good spot.

And that’s what we look for in our new acquisitions as well. The acquisitions that we tend to buy are market rate driven as opposed to any type of significant occupancy or value-add upside, I would say.

Linda Tsai: Really helpful. Thank you.

Operator: We now turn to Floris van Dijkum with Compass Point. Your line is open. Please go ahead.

Floris van Dijkum: Thanks. Interesting. Twenty-three tenants last quarter missed their option periods. Presumably, you know, that was not in your budget and not in your guidance either. Does that seem normal?

DJ Busch: Yeah. Floris, let me clarify. It was 23 tenants. So if, you know, when you think about all the activity throughout the year, it’s not that much, but it is a nice surprise when it happens. But it would be very hard for us to forecast a subset of tenants missing their option date. If you were to do the percentage, it is certainly on the lower end, but it does give you an indication of where market rents are relative to where people are resigning due to option.

Floris van Dijkum: So my question that I had before you mentioned the missing the option thing, which prompted another, the cap rates on new acquisitions, and one of the things that I find interesting is that I think you’re really the only REIT right now that’s planning in the town of Southern Charm in Charleston. And you’ve got two assets there. Presumably, that means the returns that you’re getting on those assets should be a little bit higher than more heavily trafficked markets like Houston, like Tampa, where a lot of the other REITs are active and a lot of the, you know, obviously, the pool of private buyers is bigger as well. Maybe you can talk a little bit about the cap rates and where if you see more opportunities in markets like Charleston and Richmond, which are not as heavily trafficked.

DJ Busch: No. That’s actually a good observation, Floris. I would say yes. On a risk-adjusted basis, we think markets like Charleston, like Richmond, are equally as attractive, and it’s a great complement to the InvenTrust Properties Corp. portfolio, which tends to be anchored around those larger cities. Right? So we have spent more time canvassing the Charleston markets or even markets like Asheville. Certainly, Nashville would be on the larger end, but Knoxville, some of these cities that are very complementary to the markets in which we already operate, and we can be very efficient in those markets. Now I will tell you the criteria in those markets is much more stringent. Right? You know, in Houston, we can own ten assets.

In Austin, we can own ten assets. We’re not there yet, but the point being, in these smaller markets, we may only get to, you know, two, three, or four, but we want to make sure that they are in the top quartile of assets or retail centers in those markets. I think the bar is a little bit higher, but the risk-adjusted returns and the ones that we’ve identified are equally as or if not more compelling than what we see in some of those larger markets where, to your point, it can be a little bit more competitive.

Floris van Dijkum: So and the cap rates would be or the risk-adjusted returns, are they 50 to 100 basis points higher?

DJ Busch: I wouldn’t say I would say the former. I mean, they’re some of the highest quality assets in those markets with great growth profiles. So, you know, all the initial yields are still going to be, you know, in the sixes, but we’re still buying everything that we look at has to make sense, and that tends to be anywhere in the low to mid-sevens from a levered return perspective.

Floris van Dijkum: And then my last question maybe, and I apologize if I’m using up my question here. But wanted to, you know, your cost of equity, I mean, you did raise a little bit of equity last quarter, your stock continues to trade at sort of where consensus has your NAV. I know you have a pretty good balance sheet as it is, but, you know, how do you if you see deals that you like and presumably, you’re scouring the markets, why not raise more equity to fund some of those transactions? Or maybe talk about your thinking on that.

DJ Busch: No. I think it’s a good point. And, you know, obviously, we’re very, very our equity is precious. We want to make sure we’re doing it at the right time, and anything we’re doing is value accretive for both current and prospective shareholders. But the opportunity set has to match it as well, and that’s what was so fortuitous in the back half of last year is that the pipeline we had deals that were very close to under contract or under contract and had an immediate use of proceeds. Now I’m not saying it has to be matched perfectly like that, but if our cost of equity capital continues to be attractive or get more attractive, and we can put those proceeds to use in an accretive manner and leverage our platform faster because the whole goal is to use this platform to grow cash flows faster than, you know, other options within the sector, we’re going to absolutely do that, but we got to make sure that we can find opportunities and uses for that capital.

Floris van Dijkum: Thanks, DJ.

Operator: We now turn to Paulina Rojas with Green Street. Your line is open. Please go ahead.

Paulina Rojas: Good morning. I find Nexon Square an interesting property, an anchored closer to a lifestyle center. How does pricing for a property like this compare to a traditional grocery-anchored center in terms of cap rate? And how do you think about the growth profile on a relative basis and the risk as well?

DJ Busch: Good morning, Paulina. Great questions. You’re absolutely right. This is more of a lifestyle type of center. And the reason I say that is it’s unanchored, it doesn’t have any traditional grocery or large box spaces. You can imagine when we look at that, certainly, we own things like this, but they tend to have some sort of shadow grocery or some box components. What made this particular asset attractive to us was the market, the market which is in Nexon, which is up near Somerville. The market is growing very, very quickly. And this asset is serving that market and will continue to serve that market as it relates to a lot of the dining options and local retail options that it has, and we found the market the in-place rents very attractive to us.

Obviously, there is a different risk profile when you remove some sort of grocery, but it’s a really great complement for our portfolio because I think we’ve discussed with you and many in the past, InvenTrust Properties Corp. anchors towards grocery and food centers, mostly necessity-based. But we are format agnostic if we find the risk-adjusted returns attractive. This is a market-driven strategy, not an asset-specific strategy or retail asset-specific strategy outside. So you can see us do things like a Nexon Square, and you can see us do some things like the Forum, which tends to have a little bit more box, but it’s in a market that we really, really like, and we got very comfortable with those rents as well. So we’re always going to anchor to those necessity-based centers, but these are nice complements with different growth profiles and risk profiles that I think complement and fill out the portfolio nicely.

Paulina Rojas: In terms of pricing, does the cap rate for something like this compare to traditional grocery-anchored?

DJ Busch: I would say let’s put a cap rate aside. But when you think about the risk-adjusted returns, you could think of it kind of falling in between what you would consider core grocery-anchored and on the low end and then power center, it would be somewhere in between. And, obviously, you know, the underwritten rents are going to move that, but that’s kind of where some of these types of centers fall. And then I will mention, it is on the smaller size of a lifestyle center, which obviously was attractive to us as well. So 130,000 or so square feet. We got comfortable with, you know, the tenant mix, the current in-place rents.

Paulina Rojas: Thank you. That’s all for me.

Operator: We have no further questions. I’ll now hand back to DJ Busch for any final remarks.

DJ Busch: Thank you to all for the questions and for joining us today. We look forward to seeing many of you in the months to come. Enjoy the rest of the week.

Operator: Ladies and gentlemen, today’s call is now concluded. We’d like to thank you for your participation. You may now disconnect your lines.