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

Well, thank you, everybody. On to the next panel, we got InvenTrust here with us. Happy to have DJ Busch with us, who is the CEO of the company. Why don't you introduce your team? -- you have some opening remarks to start off.

Yes. Thanks so much, Samir. Thank you, guys, for having us, Andrew. With me today is Christy David, our Chief Operating Officer and General Counsel; and Dave Heimberger, our Chief Investment Officer. I think most of the faces here certainly look familiar. Thanks for joining us and your interest. Just a quick background, InvenTrust Properties, 78 properties, open-air, essential retail, exclusively in Sun Belt markets. So 2/3 of our portfolio is, kind of, core neighborhood grocery-anchored centers, the balance being power centers. But the sole focus and mandate for our company is to own and operate essential retail, open-air centers in markets that we feel that are exhibiting better growth characteristics than what you see in the balance of the country, in which case -- and that shows up through our ability to push rents and grow cash flow faster than some of the other -- most -- certainly, our goal is to grow it faster than the sector average or what else is available in the public market. We've been a public company for almost 5 years. It will be 5 years on October 13 (sic) [October 12]. Over that 5-year period, we've grown NOI by over 20%, FFO per share by over 25%, grown the asset base by over $0.5 billion with the expectation that we can continue to do that for the foreseeable future. We have plenty of capacity on our balance sheet to continue to grow our business without having to access the equity capital markets and continue to grow and accelerate free cash flow, both through internal prospects and our external growth prospects. Obviously, in the current market, it's become a little bit more challenging for 2 reasons. First one, obviously, being retail is back in vogue from a private market perspective. It has been a much more competitive environment, especially in the markets where we're looking to acquire and expand our business and our presence. But equally as important, our cost of capital has obviously changed over the past several quarters with rising debt costs impacting our incremental -- our ability to get incremental debt at a level that's attractive compared to the use of proceeds. So we're monitoring that. We've been very fortunate this year. We've closed on to date, including the one we closed subsequent to the quarter, $290 million of acquisitions in current and new markets. So this year, we've closed a couple of deals in Charlotte, our deal in Nashville, our first deal in Knoxville, Tennessee, as well. And then subsequent to the quarter, we did close a grocery-anchored center in Greensboro, North Carolina. So core markets and then finding really exciting opportunities in some of these complementary emerging Sun Belt markets that exhibit the same characteristics that we do see in some of our core markets like in Austin or Charlotte or West Florida or the like. But I'll start there and then go in any direction you want, Samir.

Yes. Maybe just on macro. You talked about the Sun Belt, kind of, where you've been focused, clearly, a big beneficiary of the migration that we saw over the last several years. Are you seeing any, sort of, changes in, sort of, household formation there? -- population growth that, kind of, maybe going the other way now?

No. So what we have seen is we've seen the migration trends continue, especially in the Carolinas, in Florida and in our markets in Texas. We've seen that continue. What has changed is the cost of living in some of our core markets has gotten harder, meaning home prices have certainly increased, other pricing has increased, which has availed new opportunities in some of those secondary emerging markets where, obviously, Nashville has become over the last 15 years has completely transformed. We see similar characteristics, certainly not to the same extent, but similar characteristics in Knoxville, which is -- continues to be a lower cost of living, but has some great growth drivers as well. So same thing in Greensboro versus what we're seeing in Charlotte or Asheville. So using those, kind of, that hub-and-spoke strategy to support it. Now what I will say is the most -- the great thing about our business is and specifically retail is the lack of new supply. So even in the markets that -- where the cost of living and rent prices and home values have gone up, new supply has actually alleviated some of that, specifically in the Sun Belt. So if you think about this, if this was multifamily, and I was -- we had a Sun Belt strategy, I'd be a little bit more worried because there's been a lot of new supply that's put -- that's tempered or even reduced our rental rates. That's great for our business. It makes our -- it gives our customer an ability -- more wallet share to come to our centers. And our centers certainly are still not having -- are not impacted by any new supply. So a relief in home prices and rental rates at multifamily is helpful for our retail centers.

And then when you talk about new supply, I mean, which are the markets again? I mean it's...

So new supply, I was talking about new housing.

New housing...

Supports retail. From a retail perspective, we're still not seeing any new...

Maybe in Texas or Houston, right, [indiscernible].

Yes. Exactly.

Okay. And let's talk about the leasing pipeline today, maybe compare that to this time last year. what's changed as you think about the depth in demand, the quality of prospects?

Yes. Well, Christy, do you want to touch on that?

I think that our leasing pipeline is still very healthy. We have signed our signed but not open pipeline, which is about $5.6 million. We have another 170 basis points of deals sitting in our leasing pipeline. And that means that they're either at lease or LOI or in the legal stages so that they're in the fruition, but they haven't made it to the signed stage. And the quality is exactly what you'd expect of, kind of, what we've been doing, Samir. It's a good mix of either fitness. We're still seeing service-oriented. We're seeing food uses and the like. And so I think it's a continuation of what we've been producing, and you've seen us sign and open in our centers. And I think that, that pipeline continues to just be robust. And we're actually -- compared to where we were at last year, we were at about 110 basis points this time last year. So seeing a little bit of increase there.

One of the things we had an economics panel this morning and our economist was talking about, obviously, higher gas prices and what that could mean for, sort of, consumer discretionary, right, spending. And I know you've talked about your restaurant exposure. I want to say it's close to 20%, right? I think -- I mean, what are you seeing on that end? And as we think about restaurant credit and, sort of, expansion plans?

Yes, it's a good question. So I would say restaurants tend -- it's a fickle business. It's a tough business. It's certainly harder to succeed than fail, it seems like. But it's an important merchandise mix for us. Especially if you think about the structural change in our centers and the traffic patterns that we have post COVID and the adoption, certainly in some of our markets, the much more widespread adoption of hybrid work environments. There's just more frequency, more daytime frequency at our centers, which lends itself well to services and specifically food uses. So I think we're right around 20%, just over 20% today. That's a great, kind of, a -- that's a great mix for us. A great additional complementary has been like health services, which has just surpassed, I think, 10%, maybe close to 12% of our merchandise mix. Those uses would have probably been a lot lower pre-pandemic as they should have been because you're not getting the same frequency that we're getting today in our suburban shopping centers. So I think we'll continue to curate our food uses. Credit is supremely important. Even if they don't succeed, you need to make sure that you're protected. But the reality is the trends in foodservice move quickly. And we just -- it's an important part of our merchandise mix, but it also -- it probably has one of the higher levels of risk from a category perspective. The good news is every restauranteur we lose, we get a more optimistic restaurant tour to come in.

This isn't mine either.

Quick question, DJ. 20% restaurant-related one that -- how do you think about and manage the CapEx spend that goes with that? Because a lot of -- historically, if you have a bad restaurant, you pump a lot of money into.

Great question. So what is the average restaurant survival? The average restaurant survives how many years, 3 or 4 years? We do 10-year leases, right? Luckily, most of our centers are of high quality. Most of -- our level of success is obviously certainly higher than that. But it does come with -- it's one of our most capital-intensive tenants. So the credit backing is supremely important. Make sure that they're putting in enough capital and they're committing to the site just as much as the landlord is, if not more. And depending on what their credit looks like, Christy and her team will be asking for different things from that tenant. The good news is once you do have a real good restaurant build-out, you can tend to use that over and over again if it's in reasonably good shape. But it's certainly -- from a due diligence perspective, it's probably the things that we spend -- that Christy and her team spend the most time on, save for big anchor transactions.

But it sounds like as we think -- when we talk about restaurants, you're not seeing really an impact today.

No, no. It's a healthy part of our business. What I would say any fallout that we've had is almost entirely operationally driven, and it's not an indication of like a soft -- the general softness at our centers or our markets.

Got it. And then in terms of, just, kind of, expanding that pie a little bit, the local mom-and-pop tenants, they continue to perform well?

They do. We're always we have good insight with our mom-and-pop tenants. We get a decent amount of sales and productivity numbers from them. But over half of them, we have really good insight. The other half, Christy's team is speaking with them. I mean, we have 1,900 tenants. There's not many -- I'll say this a lot, but there's not many good things about being a small company. But one is we do have a really good understanding of our -- the health of our small shop tenants across the portfolio. We've lost a handful this year, but they were ones that have been on our watch list for several years and just they weren't able to make it work, which is fine. And we have suitable replacements. Mom-and-pops are always -- they're an important part of our business. I think what Dave, like 10% of our -- 10% of the portfolio is local mom-and-pop -- true mom-and-pop tenants like single-store operators. And they're important to those communities. And some of them are going to make it and some of them aren't, but it's important for us to continue to invest and try and find those opportunities because it's important to the communities they serve. They tend to be less capital intensive. But to your point, Samir, like in an environment where gas prices are up and there's other inflationary pressures, it's much more difficult for small shop tenants like that to absorb those costs relative to some of the larger operators.

And maybe on the external growth side, you've been active on acquisitions, right? And you're, sort of, at a point where you've, kind of, reached -- you're approaching your, sort of, your net investment goals for the year. Like, I guess, maybe, just to expand that a little bit, like, what are you seeing in the transaction market? I mean, we were with Brixmor earlier. Obviously, there are certain cap rates here that we've seen compression in cap rates, especially in power centers as well now. So talk about, kind of, the overall market and, kind of, how we should think about your net investment goals for the year.

Yes, Dave, do you want to touch on that?

Yes. So I think overall market, it was Brixmor, I'm sure Mark touched on just the amount of interest in retail. None of that's new. I think what we've seen over the past year is just whether it's a rotation within existing portfolios, movement from funds from multifamily assets into retail, whatever it is, the allocation, everyone's underweight retail. It's obviously driving pricing up, cap rates down. And for us, again, we're fortunate through the first half of the year to get close to our goal. That allows us to be really patient. So as we feel pricing get a little frothy, we can take a pause or we can move on to whether it's a different format, different market. That's why you've seen us, kind of, move into some of these emerging markets. There's a little bit of a pricing delta, although it's all catching up. So every time we make a move, what we think is 2 steps forward, the capital just, kind of, cast a wider net because the amount of people that are losing deals is still pretty significant. We're okay taking a pause. I think that allows us to think about our dispositions. We have a couple in market. Those are just, sort of, rotational opportunities that we'd like to take advantage of. Obviously, sellers are in a great position to sell assets into a market like this. That could free up some capital for us to rotate back through, kind of, reset a growth profile on an asset-by-asset basis. But I think the new thing for the back half of this year is really just more institutional capital, whether that's pensions coming in, wanting to be back into retail, some operator partnerships forming to help run that capital in retail. So just continue like a continuation of the competitive environment. At some point, as rates continue to run, maybe that could slow it down a little bit, but we haven't seen that just yet.

Yes. Just the only thing that I would add simply is, obviously, InvenTrust, we have a compelling internal growth story, but equally it's a compelling external growth story using the balance sheet. Having said that, we're not going to simply acquire things just to grow the business. They have to make sense, they have to make economic sense and they got to be accretive to cash flow at some point in the foreseeable future. That's the only way we can grow this business responsibly. So as Dave said, well, we can, kind of, turn off our activity very slowly off and on, while keeping a very robust pipeline, and we're always looking at things. And some are going to make sense and some won't. And we've had more cases recently with the amount of competition that haven't made sense from a pricing perspective, but that can change quickly and the market can move quickly, and we'll be ready to do that when the time comes.

And did you say you have 2 properties in the market right now for sale? Is that right?

Yes.

Okay. I was just curious, like, obviously, you lighten the load in California. What's, sort of, the disposition strategy at this point? Is it geographic? Is it individual internal growth considerations?

It's a little -- it's a little bit of both, right? Both are the considerations.

One thing that we don't do is we're not looking at something that's going to generate growth or not generate growth next year and be shortsighted. We're looking at the long-term trajectory of the asset. Is it going to be competitive in 10 years' time? Is the grocer going to be competitive in 10 years' time within the market that it's supporting in certain markets? So we -- just under 50% of our assets come from Texas or our NOI comes from Texas. You could probably -- it's probably reasonable to think that that's going to shrink both through additional investment in other Southeast states and markets and maybe a little bit by divesting strategically out of some assets in Texas based mostly on grocer performance as opposed to any structural problem or with the market itself.

And then in terms of the $290 million of acquisitions you've done year-to-date, what do you think enabled you to win those bids? I mean everyone's cash is as green as everybody else is, but what did you see in those opportunities that others perhaps didn't?

It's a good question. Dave will answer this better than I do. But there's a lot of different nuances that come along. Some of it is we can get to a better number. And maybe it's because we have more optimistic embedded rent underwriting estimates because we're already in those markets. Some of them have been first-mover advantage in some of these new markets that we've gone to and like a Knoxville or Greensboro. And others simply are because we've been repeat buyers from the same seller, and we ran a great process. And that matters a lot in our business, especially in a volatile market where there can be some sort of retrading going on. That's never been InvenTrust's strategy. Obviously, there's a shock to the system, you're allowed to take a pause. But we've always been very fair as with our counterparty, and that matters and execution is probably just as important, if not more important than price in some cases. I don't know, Dave, if you have anything you want to add?