InvenTrust Properties Corp. (IVT) Earnings Call Transcript & Summary

Welcome to Citi's 2026 Global Property CEO Conference. I'm Craig Mailman with Citi Research, and we are pleased to have with us InvenTrust and CEO, DJ Busch. This session is for Citi clients only and disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand or go to liveqa.com and enter code GPC26 to submit questions. DJ, we're going to turn it over to you to introduce your company and team, provide any opening remarks, tell the audience the top reasons that investors should buy your stock today, and then we can get into Q&A.

Sounds great. Thanks so much, Craig, for having us, and thanks for joining us. With me today is our Chief Financial Officer, Mike Phillips; and our Chief Investment Officer, Dave Heimberger. If you're not familiar with InvenTrust, we are an open-air retail REIT, 75 properties, almost exclusively in the Sun Belt. So Craig, to answer your question, why you would invest in InvenTrust, we are really -- the only way to get full concentration into the markets that are growing the fastest in the U.S. Just to give you a little bit of a background on the portfolio, about 85% or 90% of our portfolio is grocery-anchored. 2/3 of the portfolio is your traditional neighborhood or community centers. And then the remaining 1/3 is a little bit larger format, but almost all of those also have a grocery component. So we do really lean into the essential nature of retail, essential goods and services. But going back to my first point, the most important piece of our story is we are investing in the markets that are growing the fastest, that have the demographic tailwinds, and we're -- and you're seeing that in the results that we've been putting out. Just to give you a background, since we listed the company in late '21, we've delivered same-store NOI growth of north of 4% every year. The last 2 years, we've been trending above 5%, but equally as important or more important, that's generating FFO per share of north of 5% on an annual basis. And the visibility that we have going forward with the underlying credit quality of our tenant base and in the markets that we're in, we feel like that's a cadence that we can continue going forward. We are one of the lowest levered companies in the open-air sector. We're at about just under 4x on a forward basis. So along with our internal growth prospects, we have some exciting external growth opportunities as well. And that was evident last year when we acquired nearly $465 million of assets, which is not nothing for a company right around, call it, just over $3 billion enterprise value. So ability to move the needle internally, certainly, the ability and balance sheet capacity to move the needle externally as well.

Great. Thanks for the overview. You mentioned the Sun Belt strategy there. Can you talk a little bit about the exit from California, the redeployment of those proceeds and really the kind of the targeted investment or redeployment this year?

Yes, absolutely. So obviously, 2025 was a transformational year from a capital recycling standpoint. We identified an opportunity a couple of years ago related to our California portfolio, which at the time was about 12% of our NOI, so a pretty significant portion. And really, the returns that we were forecasting in California relative to the returns that we've been enjoying elsewhere in the portfolio, particularly in the Southeast, they were superior in the Southeast. So we decided to take advantage of what we saw was a unique situation with our portfolio. And the reason that it was so successful is that California is obviously a very -- one of the most, if not the most liquid real estate market. The returns and initial yields are very competitive. We were able to take advantage of a very tight market in Southern California, in particular, and reinvest those proceeds in markets that we like the growth prospects, frankly, better. And some of those examples are buying Whole Foods and Publix-anchored centers in Asheville, Charleston and Savannah, just by way of example. So perhaps a little bit smaller markets, but with either the best or one of the best retail assets in those smaller markets that are still enjoying some of those really strong demographic trends that we've been seeing elsewhere in the portfolio.

And you guys have been really pursuing that secondary market strategy, right? And you have also just announced a new market. So I don't know if you want to kind of talk about where you're focusing those deployment dollars, how you're targeting those markets to deploy there then a little bit about the new market you have.

Yes. It's -- one of the -- when you think about our portfolio, I think, especially at our size being one of the smaller companies, one of the things that we've found a tremendous advantage for us is using that clustered hub-and-spoke strategy, if you will. So really leaning into our core markets, whether that be one of the major markets in Texas or Charlotte or here in Florida, but then finding complementary markets that we can still operate at a very high level. So a really good example is we have a core portfolio in Charlotte. I mean, Charlotte has had some of the best demographic demand drivers in the Southeast. But then adding something like an Asheville where we can operate it very efficiently, and we see very similar trends, albeit being in a smaller market. So you can -- you're going to see a lot of the similar strategies going forward. We've done something very similar in the Southwest with our Phoenix expansion. Two years ago, we had one asset in Phoenix. Today, we have about -- we -- we're about to have 5 between Phoenix and Tucson, and that's a market that we really like the growth trajectory as well. You alluded to our recent acquisition, we just planted our first flag in Nashville. Nashville is obviously one of the fast -- has been one of the fastest-growing markets in the Sun Belt. It's something that we've been looking at for quite some time. It's a tight market. There's not a whole lot of things that trade often, and this is an asset we've had our eyes on for a long time. It's a little bit larger format, which InvenTrust is not new to. Like I mentioned earlier, we do have a few larger format assets, but they tend to be one of the strongest assets in the submarket that they're in. So most of our power center exposure is in Nashville, Austin, Texas, the Buckhead area in Atlanta and the like. In Nashville, the thing that was so interesting to us is that it's shadow anchored by 3 different grocers: a Costco, a Publix and a Target. So really, really strong traffic drivers, and we believe that we're going to be able to push rents and enhance that asset over time. Equally as important, what we've seen in Phoenix is once we do get that first asset, it does start to unlock other opportunities. So we're very hopeful that we'll be able to see some other opportunities in the Nashville area over time.

And so as you go through your buy box, like what are the attributes of either the trade area, the market that are the most important aspect, especially as you guys cast a wider net into some power center assets within some of your markets?

Yes. It's -- we like -- we tend to say that we're a little bit more format agnostic, but we do lean into the essential retail portion of the business. That is the stickiest part of our business for sure. And the way we kind of -- in very simple terms, half of our capital allocation is going to be neighborhood grocery-anchored centers that are kind of right down the fairway, if you will. And then there's going to be a smaller portion where we will allocate capital to larger format centers if the growth and risk-adjusted returns make sense for us, in which case, Nashville did. On the other spectrum, we have done smaller format or unanchored centers as well, and those tend to be complementary to some of the assets that we already own in the market, whether they be in the similar retail node as one of our other centers or we've bought small lifestyle centers, and an example is we're in the north side of Charleston with a small lifestyle center that just fits the market perfectly, has explosive types of population growth with master-planned communities coming, and it's a de facto downtown for that submarket. So we can do a lot of different things, Craig. I think the most important thing that investors should feel comfortable with is that we're going to continue to exclusively invest in these Sun Belt markets.

And just looking at the portfolio, I mean, you guys are very well leased. I think, 94% in shop and 90 -- close to 97% overall. Is the external growth going to be the main driver of earnings growth for the next couple of years? Or is there more -- talk about the upside you think embedded still internally through unlocking mark-to-markets and remerchandising and curating assets?

Yes, it's a good question. Our external growth profile is very complementary to the internal growth. And there's a couple of ways, I'll walk you through that. So most importantly, the portfolio that we have and that we're very fortunate to have, it's very homogenous in nature. It's very high quality. So we don't have a whole lot of capital recycling that we have to do. We can be opportunistic like we were with California. And it's very unique to have a situation where you can reallocate capital and fine-tune the portfolio and you can do it on an accretive basis. And that's something that I think we -- besides California, there's a couple of other unique opportunities within the portfolio where we can do that as well. But this is a growth vehicle. We're not -- I think last year was probably the most capital recycling you'll see InvenTrust do for some time, but there will always be one-off basis where we plan to sell out of an asset to redeploy those proceeds in something that's more interesting to us. On the internal growth side, one of the -- it's obvious in our guidance this year was same-property NOI growth at the midpoint being in the high 3s. That is, if you will, a deceleration from the last couple of years, but that's simply because this portfolio is becoming more and more stabilized, which means we're at a situation -- we're in a great situation to where we're almost fully occupied from an anchor standpoint. We have 5 anchor vacancies across the portfolio, 3 of those are at the same center, which is going to be under redevelopment this year. We're going to reimagine and relocate a grocer and do some other remerchandise activities to fortify that asset for the future. The reason I bring that up is because of what we've been able to do, and many of our peers, by the way, with building in annual escalators, building in embedded rent that we haven't had in the past, what we should enjoy over the next several years, and this particularly relates to InvenTrust is a situation where we're re-leasing space to high credit tenants, doing select remerchandising, keeping retention rate quite high, which means even if same-property NOI is perceived to be decelerating, which it is or it could be, free cash flow could accelerate because less tenant capital is needed to continue to grow cash flow, which is a unique situation that we're in, in this part of the cycle. And that's something that will only further accelerate our ability to grow the business with external opportunities.

And you mentioned you guys are among the lowest levered in the retail space. So that gives you excess capacity to your 5 or 6x long-term debt-to-EBITDA target. I'm just kind of curious, in your former life, you may have been at a shop that's a little dogmatic on their views of leverage. But in a property sector like retail that's more stable, you're going in cap rates are a bit higher. So even at a 5 to 6x debt-to-EBITDA, your LTVs are not as high as it would be in resi or some other property types. Just your views on where the optimal leverage target may be? Is it always going to be 5 to 6x? Could it be closer to 6x as you try to compete with private guys who utilize a lot more leverage, which gives them a little bit of a different view on underwriting and what they need to achieve to get to their IRRs?

Yes. I mean it's a great question. And coming out of the pandemic, I think it's warranted for everyone to ask themselves if we could operate at a higher leverage. I think, obviously, it's extremely competitive on the private side. We're seeing that in the transaction market every day. Look, I think one of the -- employing a low leverage model to us just -- it makes good sense even though our cash flows have proven to be even more resilient than what we previously thought. We have plenty of capacity. And just to give you kind of rough numbers at just under 4x on a forward basis, that gives us close to $600 million, $700 million, not including free cash flow to grow over the next couple of years. So plenty of capacity before we get to that, call it, mid-5s types on a forward basis. I think the most important thing when it comes to leverage, especially for a company of our size who has aspirations certainly to grow over time, is to never bump up to the high end of that leverage. You never want to feel like you're stuck, right? So as long as we -- as long as we're thoughtfully growing the portfolio and leaving a little bit of room on the balance sheet at different points where the capital markets could be less accommodative, we can still -- we still have avenues of growth. I think that's the most important thing for InvenTrust. But I think it's a fair question on whether that 5.5x in our business with the duration of our leases, with the stickiness of our cash flow, especially for InvenTrust that has 25%, 30% coming from grocery rent and 12% are coming from ground leases, we feel very, very good about the durable part of our cash flow stream.

And part of this question, too, is the evolution of the REIT investor and the metrics that are relied upon, right? When I started my career, it was very NAV focused. And so you were looking at that value creation over time. Today, it's trending more towards FFO growth. And that's what I think has weighed a little bit on the public market valuations for retail. And so I guess my question comes from a standpoint of, if the group needs to kind of get out of the mud a little bit and excess leverage in the near term is the push that gets you there. And then as you demonstrate your ability to grow and your cost of equity comes down a bit, you don't necessarily need to recap in a large way, just the next incremental deal you could do much more equity driven rather than debt, right? And so it's iterated over time. And I'm just trying to get a sense from you and your peers, right? Everyone is scarred from the GFC and the rating agencies and everyone is so focused on keeping and getting that investment-grade rating. It just feels like -- and I don't want to speak for the unsecured borrowers, if there's any in the room, feel free to chime in. But the pricing matrix of a little bit down on the unsecured rating relative to being an A, might, it's just that historic gap that you had in the real estate space or the public side has narrowed, it feels like.

Yes. So there's a couple of great points there. First one being on how we think about trying to create value for shareholders, whether that be anchoring towards something closer to an analysis on net asset value versus growing through earnings. And I think it's a little bit of both. I think NAV can always be a useful tool on understanding where perhaps your cost of capital is based comparing private market valuations versus where the equities are trading today in the public market. But really, that it's a helpful data point. I think there's -- like most REIT sectors, I certainly feel this way. I think there's really, really strong operators in the open-air space across the open-air sector. Having said that, we haven't admittedly done as good a job growing earnings or cash flow year in, year out. And that is in part due to some costly refinancings at different points in times that can be dilutive. And in some cases, it's dilutive asset sales because a portion of the portfolio, whether it's market-driven or format-driven, tends to start underperforming and you kind of have to recycle parts of the portfolio, which certainly can be a dilutive endeavor as well. I think the most important thing in our sector at this point in the cycle and how good most of us feel about the business prospects going forward is to show how we can grow free cash flow on a recurring basis. I think that will probably be the next leg up from a valuation perspective because it's being proven, there's certainly no shortage of demand coming in from private market participants. I think on the public side, it's just important for us to -- we have strong KPIs across the board. We have strong credit quality across the board. How does that translate into earnings and cash flow. To your point on the ratings agencies, I think, look, there is a cost of debt advantage by being of size and scale in this business. There's -- it's unquestioned. Our larger competitors or peers obviously can issue in the public market at spreads that are tighter than where we can issue today. The one thing that we have going in our favor is we can shrink that gap in different parts of the debt capital markets because of the quality of the portfolio. So even though we are of subscale, which is -- the intention is not to be that way for a long period of time, we can be more competitive in the capital markets because of the quality that we've created over time.

And as you think about cash flow, right, growth organically, talk a little bit about maybe your watch list, talk a little bit about CapEx needs and trends on a percent of NOI or however you guys kind of look at it internally of your portfolio maybe relative to peers?

Yes. So I think one of the things that may have gone maybe slightly unnoticed is we did decrease our forecast related to bad debt reserves for 2026. And I think that was important. I think over the last couple of years, we've -- we being InvenTrust and many of our peers have been reserving the same amount of credit loss year in, year out and been surprised to the upside, which has been great. Obviously, that has not been the case in previous cycles, certainly pre-pandemic when the bankruptcy environment was obviously much more active, unfortunately. But as we look at our business today, going back to my commentary on our anchors, we've never felt probably more confident even with the softness in pockets of the consumer, undoubtedly, but we've never felt more confident on the underlying credit of our anchor base. There is no real foreseeable at least in the InvenTrust portfolio, anchor -- imminent anchor risk as we look through 2026 and really even into 2027. That's a difference even in the last couple of years, there's always been 1 or 2 anchors that have filed for bankruptcy or have been distressed or where you've gotten space back. Even if it was modest space, it is income that you lose. So that's the biggest difference on why we felt so confident slightly reducing that credit reserve. And really, it all comes down to the health of our small shop tenants. Small shop continues to be extremely resilient even at the local level, but there are certain pockets of softness. Foodservice continues to be hypercompetitive with the trade down in the consumer, we have seen some softness in some of the areas of QSR or quick service restaurants, which is stating the obvious. But we still feel very good about how we're looking at and forecasting our credit reserves for the year and the underlying quality of the tenants. And that goes back to my point on keeping a high retention rate with the merchandise mix that we feel very confident in, which should continue to generate better free cash flow.

Any questions from the audience? The other piece I wanted to hit, you guys are underway with a repositioning at Gateway.

Yes.

Just kind of walk through maybe the opportunity there, timing.

Yes. So that's a project that we anticipate starting towards the end of this year. It's a little bit complicated because we're relocating a grocer within the center. So we've de-leased adjacent space. We will be building out in concert with our grocery partner, their new space right next to it. And then they'll close one day and open the next in their new prototype. And then obviously, we'll then backfill a couple of box spaces next to it while adding a little bit of GLA in some outparcel opportunities that are unique. This is something that we've done in the past. We've done these anchor rebuilds. -- fantastic return for both parties. It fortifies the grocer for the foreseeable future in a new prototype. We partnership with them, and we're allowed -- and we're able to put additional capital into the remaining part of the center. So it all gets brought up to a new standard and really at a great return relative to what we can get elsewhere.

Shifting gears a little bit. We're trying to incorporate some discussion about AI into the conference. It's kind of a dual question given retail. I'm kind of first curious about agentic commerce, you guys know there's a lot of talk about what that could do to physical retail. It's you guys are less discretionary spend in your assets maybe than some other formats. But just your views there before we kind of delve into how InvenTrust is incorporating it internally.

Yes. It's a great question. I think it's -- I'm probably -- I don't know how many of you have had, I'm probably the 15th person to say it's probably still too early to tell. But the reality is it's moving so quickly. There's a lot of ways that we've contemplated and ones that we're not even thinking about yet on how agentic AI can change marketing behaviors, consumer behavior and the like. You mentioned, I think based on our merchandise mix with essential retail goods and services, grocery, I think we're probably a little bit more immune than others, but that doesn't mean that we're not paying very close attention as it relates to our business. We think about it in 2 phases, really. The first one is, I think in the near term, it's going to allow -- and this is very important for InvenTrust. It's going to allow us to scale our business faster without adding a lot of overhead. One of the most proud metrics that we discussed with investors is if you go back to 2019, we've -- to today, we've grown net operating income over $40 million, but G&A on a nominal basis is basically the same. AI may unlock that next iteration of us to continue to scale our platform in the same manner. So efficiencies and expense management is probably Phase 1. Revenue opportunities is probably Phase 2, and there's a lot of things in between. It's already changing the way and at speed at which we can underwrite properties. It will probably do the same with leasing opportunities as well. And one of the things that was important to us is champion AI internally. So our third-party software systems, whether it be Salesforce, ARGUS, JD Edwards and the like, all of them are spending so much time and energy trying to understand how their business models are going to change. And we feel very comfortable and confident with the partnerships that we have with them that we can enjoy the benefits of that as they discover new opportunities.

And so in this space, it sounds like you're going the buy route or using existing partners and leveraging their spend to implement your kind of AI initiatives?

Yes. Yes, absolutely. But as I mentioned, every employee and team member at InvenTrust has access to either Copilot or OpenAI, ChatGPT. And we want people to find ways to break the system, especially at our size, I think it can move the needle for us quicker than maybe some others, finding ways and efficiencies in our business in many different avenues, whether it's on the accounting side, legal side, financial reporting, financial analysis, certainly on underwriting and corporate finance. So there's a lot of opportunities out there that we haven't yet even tapped into.

You noted it's making underwriting a bit faster. I've heard mixed reviews of popping kind of deal details into a model and having it spin something out. I'm just kind of curious what your experiences have been with that and also how you navigate not having that next generation of deal people that if you guys do lose someone, right? And it's great to keep headcount, but context and judgment at some point does play a role in go or no-go decisions. So kind of curious there, too.

Do you want to touch on that?

Yes. I mean it is a new product, so I think everyone is exploring. So I think as you kind of dump data into a system, there does need to be a quality control element. It isn't perfect. The speed is what DJ spoke to is really just you can get to your first review faster. That could go from a lease document. That could be an initial ARGUS run. I still think there needs to be someone at the driver's seat to kind of guide and make adjustments that fit our company and the way we view these assets. It's not going to just take over and do the thinking for us. I think it's really it functionally looks like an additional person, like an assistant or maybe an analyst that could just help you get there faster. So I think the speed, it unlocks opportunity to do the deeper thinking that's more important through a due diligence process. You could possibly underwrite more assets just by using the speed you're gaining through the tools we have. But it is still very new. So I think it's not going to underwrite and close the deal for us any faster than the people we have, but I think it is additive.

And I don't want to beat a dead horse here, but I'm also curious from the financial standpoint, right, there's been some skeptics who said you're kind of -- the AI companies are getting get hooked a little bit now on maybe a discounted rate and then down the road when you really get integrated, you're going to pay the full freight for either energy or tokenization. And so the economics you thought you were getting on the technology actually changes. So I'm kind of curious how you guys measure internally the return on this and the -- or the cost savings relative to other initiatives or existing processes.

Yes. It's a good point. Are we reallocating full resources? The answer is no because we can't afford to, right? But we're watching it extremely closely. And going back, we have a subset of people that are using it on a daily basis. I know Mike has no intention of having it take over our financial reporting at any time soon. And it will -- and it's a good question on how quickly that return will start to materialize. I think we're very comfortable the way that we're thinking about it today. It's certainly been more and more discussion within the boardroom, because it's obviously important for our Board members for us to think strategically as it relates to where this business can go. And how are there going to be different ways we can scale this business that we weren't thinking of even just a year ago.

Any questions in the audience? All right. I may jump to rapid fires and get us to lunch 3 minutes early. Yes, go ahead, [ Chris ]. Just hit the button.

Maybe you could just talk about across your portfolio, like the in-place rents versus market and kind of where you stand now and what the opportunity is to bring them up to market?

Yes, it's a good question. There's one anecdote, and I call it back because it's a smaller subset that I always point to, because one of the frustrations, and it's only frustrating now because we've been at such a good point in the cycle. One of the frustrations is we can only get access to about 10% or 12% of our leases in any given year. So unquestionably, we've seen this not only in our acquisition pipeline or the underwriting that we've done with our new opportunities, and then certainly the core portfolio is there's undoubtedly a lot of mark-to-market rent opportunities throughout the portfolio. And the anecdote I was going to share is we've had about, call it, 2 dozen or so leases over the past 18 months that had an option that wasn't executed by the tenant. That increase would have been closer to, call it, 7%, which is kind of a normal option increase, because we were able to renegotiate those given the missed option period, we were able to get closer to 30% on those leases on a cash basis, which speaks to the kind of embedded rent opportunities in the portfolio. I think one of the most important things that we are careful of is there's a recipe for success in this business, and it's not buying up rent or charging too much rent to where the tenant can't succeed. So the introduction of higher escalators and you can enjoy rent growth in concert with your retail tenant, whether it be services or retail, their business can succeed, we can succeed. And then if you do get that space back at a certain point in time, you're not sitting on an above-market rent and then additional capital having to go into that to retenant it. So making sure our partners feel good about the rent increases, and then we will take 3% to 4% sustainable internal growth, supplement that with external growth, deliver mid-single digits free cash flow growth. And that -- you put that all together, it's a total return that I think is acceptable for our investors.

Great. So rapid fires for retail. Same-store NOI growth in 2027?

For the sector?

For the overall sector.

For the overall sector, I would say 3.75% to 4%.

And then this time next year, will there be more, fewer or the same amount of companies in your space?

Probably fewer.

Great. Well, thank you guys so much.