Thank you all for coming today. I'm Dori Kesten, Retail Lodging Analyst from Wells Fargo. This morning, we have IVT for the next half hour, CEO D.J. Busch. If at any time you have questions, please feel free either to come up to the mic or just yell from your seat. If I'm not paying attention, just, you know, please speak out. Otherwise, I will pepper them with questions. But I'll pass it off to D.J., and you can introduce the team and maybe just give a quick elevator pitch to let everyone know, like, you know, why is IVT the right investment at this time, and what differentiates you from peers?
Yeah, sure. Thank you so much for being with us, Dori. Thank you, everyone here. Good morning. Like Dori said, I'm D.J. Busch. I'm the President and Chief Executive Officer of InvenTrust Properties. To my right and your left is Christy David, our Chief Operating Officer. Next to her is Mike Phillips, our Chief Financial Officer, and then Dave Heimberger is our Chief Investment Officer at the end. Hopefully, you get to hear from all of them throughout the next half hour. A quick couple minutes on InvenTrust. So we own 63 properties, just over 10 million sq ft. InvenTrust is the only open-air necessity base shopping center that's almost exclusively in Sun Belt markets.
Over 95% of our net operating income comes from all the states that have not only benefited from phenomenal migration trends over the past couple, couple years, specifically after COVID, but also a structural change in how people have been working with the hybrid business models and how that has really structurally changed the traffic that's generated at our centers in a very positive way. Our strategy is very simple and very focused. We're a little bit, excuse me, one of the smaller REITs in the space, just under $2 billion of equity market cap. So it's very important to our team to keep the investment thesis very simple. We have a very simple portfolio, 100% wholly owned, and a very simple capital structure that allows investors to get comfortable with the investment very quickly and know exactly...
If there's a moment in time where valuation looks appropriate, they know that IVT's story, balance sheet, and portfolio is really simple and focused. A few additional points on the portfolio. Like I said, over 95% coming from Sun Belt markets. Our number one market is Austin, at 17% of our income. Obviously, one of the fastest-growing, you know, markets over the past several years. That's followed by Houston, Miami, Palm Beach, Dallas, and Atlanta, all kinda give or take between 8% and 13% of portfolio. Over 85% of our centers have some sort of grocery component.
Obviously, that's the most important piece of our traffic, coming from those anchor tenants, and then it allows us to keep the demand on the small shop side and really drive rents through some of our small shop spaces. Additionally, leased occupancy for the portfolio is near or at all-time highs, 96.3%. Economic occupancy or tenants that are paying us rent is 93.4%. So we obviously have a spread there between leased and economic occupancy that basically equates to about $8 million or of additional income that's gonna come on, online throughout the portfolio over the next several quarters. So a really good indicator of where, our growth, our internal growth can be coming from. On the balance sheet side, we are one of the most low-levered REITs in the space.
On under 5 times net debt to EBITDA on a forward basis, under 30% net leverage. That allows us to self-fund our external growth, for the foreseeable future without having to go out and get additional capital. Puts us in a really good spot, especially with, some volatility in the, in the capital markets, to allow us to still implement our growth plan, both from an internal and external, standpoint, to deliver, cash flow growth to our to our shareholders, and then be at the ready if the equity capital markets are more accommodative in the future. You know, the last point I would say on that front, you know, we try to be very disciplined capital allocators. We're very, very attuned to our cost of capital.
We do have a very modest growth plan this year, $75 million of net investment activity. We've almost since hit that, since the last quarter. And we will look to, you know, grow as we continue to evaluate our cost of capital, both, you know, internally and then throughout the capital markets. With that, I'm gonna turn it back over to Dori for some questions.
Sure. So your team was recently out at ICSC in Las Vegas. What was the message from tenants and brokers out there?
Sure. Christy, you wanna touch on ICSC, some takeaways?
Sure. You know, generally, it was a great show, and our team had two days of meetings with most of the major retailers and even some of the smaller ones. The general takeaway is that there's a shortage of space, and all of these retailers are looking to grow. So it doesn't matter whether it's Great Clips or Target or TJX, everybody wants additional space, and they're trying to figure out how to find it.
So we heard just in prior meetings that there were tenants even looking out to 2026. Is that... Have you seen that spread before, or are typically tenants more looking, like, closer in?
I mean, traditionally, we've seen tenants come to us looking for more, you know, if it's this year, 2024, they're talking 2025. They're now looking at our portfolio because of the shortage of space, trying to figure out where there are opportunities to 20 to 2026 and even further, if we know that we're gonna get space back. So that, that, I think, is a new phenomenon, given the fact that there's a shortage of space.
The only thing I would add to that is, obviously, we don't have one of those major tenants that is in dire straits, as you know, a Bed Bath & Beyond was in the years past. We always had kind of one tenant you could point to and say, "Okay, let's do a portfolio review," and see with InvenTrust or many of our peers to identify those opportunities. Right now, there isn't that silver bullet or, you know, those distressed retailers, which is a pretty unique dynamic and a big change from what we've seen in the past, where there was always one or two, or unfortunately, more struggling tenants in those big boxes that you could easily identify it, but the demand certainly is there. And it's allowing a lot of the-...
bigger tenants to be more creative with their footprints. They, you know, we're not. If we can't deliver a perfect footprint, they're being more flexible than what we've seen in the past, which is great, 'cause we can do that at a lower cost as well.
Okay. And you were talking about the low availability of space. I mean, the market for the next few years has pretty low supply. What do you think needs to happen for construction to pencil out?
That's a good question. Obviously, that, you know, with inflation where it's been, that's been a lot on the labor side, certainly in the construction space. I think hard materials have calmed down a little bit, but on the labor side there's still labor shortages in construction, which has kept construction costs very high. And, you know, strip centers, our tenants are only able to afford a certain amount of rent before they're putting their own business plan at risk. And certainly, the rents that you would have to underwrite with the current construction costs does not make it possible. So I think we're still quite a ways away from seeing any meaningful build. Now, there are certain markets where it's a little bit easier.
There are some houses, obviously, you know, Dallas and Houston, you know, have a lot of infrastructure, excuse me, to continue to move out. But even in those markets where they used to be a lot quicker to get things out of the ground, even those are slowed up. So we think that the imbalance between supply and demand should last at least for the next 2, if not 3 years.
A few things have been in the news lately, closures at Stop & Shop, and then the low-end consumer being squeezed. Can you just comment on your exposure to each broader issue, and then give us your level of concern or maybe lack of concern regarding your portfolio?
No, it's a good question. I think one of the things that insulates InvenTrust is we're a little bit more clustered in some of the larger cities. So, while we're in the Sun Belt, we're in Sun Belt markets where the, the overall demographic profile has become more wealthy because a lot of the in-migration from some of the Northeast and certainly the West Coast. So if you think about the types of folks that are moving to Austin, the types of businesses, businesses that are moving to Austin, no doubt that they've seen a slowdown. And actually, when housing becomes more affordable, we do even better, right?
So as kind of rents have kind of cooled off in some of those markets, certainly Austin, you can throw Atlanta in there, some parts of North Carolina where we're at, we've been able to curtail that. Now, I will say, we have seen some stronger grocery trends within some of the lower-end concepts that we have, but it hasn't been a huge shift.
Yeah. So just talking about the clustering, what's the benefit of that strategy, and is there any certain markets you'd consider yourself under clustered or in need of acquisition?
Sure. Christy, do you want to take that?
Sure. I mean, the benefit of us being clustered is that our operations teams are on the ground in each of these markets and can get to our assets very quickly. You know, that allows us to effectively manage and effectively and efficiently lease these assets at a lower cost, as well as with our actual employees to be able to give immediate feedback with the help of our partners. I think, you know, there's one market right now where we only have one asset, which is Phoenix, and we're obviously trying to grow there. We have a property manager that is servicing that market, but it would be more efficient for us if we could purchase more assets there in order to be more efficient.
I think that in terms of other markets, we're pretty well clustered, and we have larger quantities of assets there, which leads to the efficiency of how we operate our properties.
Then just on acquisitions, how much are you underwriting today? You know, return hurdles, do you have a preference for stabilized assets versus, you know, something that, you know, has more of a growth story?
Yeah, great question. Dave, why don't you touch on the pipeline a little bit?
Yeah, sure. So pipeline-wise, you know, call it $500 million of things to look at, menu of options. Kind of runs the gamut, stabilized things with a little bit of leasing value add component to it. And I think we'll look at everything, but we're very sensitive to cost of capital and just how precious dollars on the balance sheet are right now. So been very selective in terms of, does it make strategic sense? Does it pencil on the return side? Is it additive to the portfolio, and does it keep our thesis intact? In terms of return hurdles, I think the things that, you know, screen InvenTrust in terms of quality, grocery-anchored Sun Belt, going-in cap rates are low-to-mid 6, with unlevered IRRs in the 7s. Again, that's pretty modest growth.
I think that's down the fairway underwriting, nothing hyper aggressive. Most of these are stabilized, and it's all about mark-to-market rent story. That takes time to unlock. So again, we're talking 2%-3% growth annually on the deals we're underwriting. But again, very selective. You know, we'll-our growth plan, $75 million, we've sort of closed in on that through the first two quarters. So again, just very selective going forward.
You all are one of the smaller strip REITs in the space. What is the 3-5-year plan? I mean, how big would you expect to be over that time frame?
Yeah, it's a good question. So, you know, if I take a step back in the history of InvenTrust, just for, you know, a minute, this company was a traditionally non-traded REIT, so effectively private, although, for, the better part of 15 years before we listed the company in October of 2021. Throughout that period of time, the company was a lot bigger, much more diversified, and then as it honed in on the core strategy, we kind of went from what used to be $12 billion of assets under management and kind of funneled that down to what you see today, which is a very, very concentrated, high-quality grocery anchor portfolio.
But the good news to that is, the platform and infrastructure is there for us to add meaningful amount of assets without adding a ton of expenses. So, as a company that's, call it, give or take between $2.5 billion and $3 billion of enterprise value, it's very hard to be efficient, on a relative basis to a lot of our peers. But the good news is we can move the needle faster through internal and external growth, which is exactly what investors should expect of a smaller company, and then we can leverage the platform as well, not only from an overhead perspective, but exactly what Christy was talking about by adding assets in our clustered markets. So it's something that we're hyper, hyper-focused on at our size.
So, in 3-5 years, we could almost double the size of the portfolio without meaningfully changing our cost structure, which is a really good competitive advantage. But now we just have to wait for the capital markets to be more accommodative 'cause we're not going to grow for the sake of growth. A lot of REITs have done that in the past, and it usually comes with subpar total returns.
Okay. About 95% of your assets are in the Sun Belt. You started off mentioning that.
Mm.
Would you consider those, you know, assets kind of non-core? And then when you think of the remainder of the portfolio, are there any other markets that you'd consider non-core, maybe a source of funds for future acquisitions?
Yeah, it's a great question. You know, so when we say 95%, technically, we have three assets that don't kind of fit the definition of Sun Belt, and one is in Richmond, Virginia, actually a really strong market. It's an asset that we wouldn't mind holding on to if we could add one or two assets in Richmond. That market has actually gotten even more competitive, certainly from where it was a couple of years ago. And the other two are in the Maryland area, kind of up north of Bethesda. Those are certainly assets that we would consider rotating out of, especially when our cost of capital is not as strong. Is there a way that we can sell assets?
Certainly, in a strong corridor, in a core market for most of our peers, both public and private. So to be able to get good pricing on something there, redistribute those proceeds down into a market where we already have some exposure and possibly at a better yield, that's certainly something that we're always looking at, but we're kind of, we're trying to always match it with acquisition opportunities. So the way I like to think about it is if, you know, InvenTrust was trying to hit $75 million in net investment activity, the capital markets aren't very strong. So you could expect if we were to go over that $75 million, it's because we will probably use...
We'll probably have a disposition on the back end of that, and it would be one of those non-core, one of those non-core assets. As it relates to other markets, we're always making sure our concentration is appropriate. Obviously, we have a big presence in Texas. We think of that as just business as usual, and we wouldn't call them non-core. It's just if we have an opportunity where we've extracted more value out of the property, or as much as we could, and we can rotate out of that in an accretive basis, we would do that as well. Our whole capital allocation and growth strategy is built on making sure as we're rotating and turning the portfolio, that we're always moving forward.
We don't want to do, one step forward, two steps back, as it relates to our acquisition and disposition cadence.
Okay. Given that the company has a relatively low float versus your peers, you're typically asked about your interest in issuing equity to-
Yeah
... you know, to fund growth. How do you think about that holistically?
Yeah, it's a great question. So, when we listed the company, I say that on purpose 'cause we didn't actually do an IPO in October of 2021. We just, we effectively just listed the shares on the exchange and let them trade freely, you know, that same day. There's a couple of really strong benefits to that. It was, one, our balance sheet was so low-levered that we didn't really need capital, and we didn't want to take it on a dilutive basis, which tends to be the case in IPO, certainly in the history of retail REIT IPOs. But also to make sure that we could prove out our story and our thesis to the market, and then hopefully, at some point in time, the equity markets would be accommodative for us to grow the business faster.
We haven't gotten there yet because obviously in this in a rising interest rate environment, it's not many sectors, certainly in retail, are trading at a call it somewhere near underlying intrinsic value or NAV. But that's the path that we would like to take, but we're gonna do it when the time is right. And the good news is, as frustrated as we can get over our float, we can still grow the business. And as long as we can do that, hopefully, at some point in time, we don't base our business philosophy on hope.
But, as we move forward, if there is a relief in the interest rates, and we get inflation under control, perhaps, there's some runway for the REITs, especially if you look at the comparison between the RMZ and where the S&P 500 yield is. It's probably one of the largest spreads that we've seen. So you could. I think that there is some opportunity, maybe not tomorrow, but, we don't really need the cash tomorrow.
Okay. By our estimates, the company has one of the smaller watch lists-
Mm
... among your strip peers. You know, by your watch list, what percentage of your EVR do you consider to be kind of near to medium-term at risk?
You know, it's a good question, and I would say, Mike, why don't you talk about how we think about our cash-basis tenants, and then-
Yeah.
Christy, you can talk maybe more specifically about some of the tenants.
Yeah. So as we've kind of evolved from kind of the COVID cash-basis tenants on our balance sheet, where we're not recognizing accrual-basis tenants, we're recognizing the revenue as it comes in, we've kind of found ourselves steady at about, like, 4 or 5% of our portfolio on cash-basis tenants. And those are kind of the tenants you would see, the big tenants in the news, the bankruptcy tenants that kind of come out of it, for a certain period of time, but mostly small shop tenants. So I would say it's about 4%-5% in any given time period, with the kind of the major tenants that would be kind of on our concerned watch list, very, very shallow at this point.
... Yeah, I mean, I think the ones that are in the news are, we have one JOANN, which obviously JOANN came out of bankruptcy and didn't close anything. We'll still watch them to make sure that they can pull off their existing business plan successfully. We have one Rite Aid, which we have an agreement with Rite Aid to keep, assuming they can come out of bankruptcy successfully. The other small shops where we've seen a little bit of weakness is, specialty health. Specifically, you know, there's one men's health line that's showing some weakness and then, you know, a couple of the cosmetic and beauty chains, and those services related to those have shown a little bit of weakness, but otherwise, there's not really a trend.
We're seeing some normal fallout and some normal rotation that you'd always see in retail, and the good news is that we have a healthy pipeline in order to be able to backfill them pretty quickly.
I'll pause for a second. Is there any questions from the audience? So your leased occupancy today is around 96%. Where would you expect this to be, you know, a year from now, and what's driving that growth?
Yeah. We would expect it to be modestly higher. We, we see enough opportunities within the pipeline, and we don't have one of those Bed Bath & Beyond situations where you kind of go back 100 basis points. That's not. That doesn't really exist right now in the portfolio. It's really, you know, just making sure our small shop tenants are healthy, and with our small shop tenancy, I call it, what? 92% or so. We actually think there's quite a bit of runway to move that higher, even, even past the high water mark or close to the high water mark we're at today. There's a couple reasons for that. One is, obviously, people are...
You know, if there's no space available in the market, some tenants are taking, you know, less ideal space than they would have in the past just to make sure they're in the right centers, even if it's not an ideal location within the center itself. Another interesting dynamic is with some of the non, I would call them non-traditional, but they're becoming more and more staples in our centers, is just the medical retail, and things, and other services, where I talked about it in my opening remarks, with the hybrid work model, I can't understate how that's changed kind of the traffic patterns at our centers because people are spending more time there. They're spending more time there during times where they would otherwise been in the office from that nine-to-five time. I don't know, I don't know how...
if that's good or bad long term, but it's great for our business because, people can go, to the dentist, they can go to the doctor, they can go to their chiropractor midday, right down the street from their house, as opposed to driving, you know, somewhere closer to a larger medical office, complex or even a hospital, for that matter. Those types of tenants don't need to be front and center. If you're going to see your doctor, you don't really care if you're not doing it on impulse. So they can take secondary locations, they can take second-floor locations, which has really unlocked our ability to kind of go after that last 5% or so of frictional vacancy that we would have never been able to lease prior, and it's just that's the nature of the business.
There's always complicated areas and spaces, whether it's parking or some other threshold resistance, if you will, to get them to be successful, and that's really structurally changed within the last couple of years.
Are you seeing a premium rent for those?
No, and that's a good question, but we don't care because it's space that hasn't been leased for a long time. So actually, you know, if our average base rent goes backwards a little bit, but we're actually filling our centers at a price that makes sense for us and the retailer, we feel like that's a win-win situation.
Do you think you can expand with the medical and maybe increase some of that?
We could. We do have some medical uses that like to have more prominent space, and in those cases, they will pay big rent. There's a couple cases like that, and I'm thinking of one in particular in Orlando, and there's a couple others in Florida as well, where if they are gonna be on an out parcel or something, they will pay market, market type of rent.
Thank you. Can you compare how the consumer is using your centers, like 2019 to today, whether it's number of visits or time spent or sales is great, but just you know, any metric that you have?
Yeah. So sales are certainly up, you know, substantially, especially with our grocers. One of the most interesting things that we saw was, through COVID and then, and then certainly outside of it, is we've had many of our grocers have not only increased total sales, taken a tremendous amount of market share as it relates to their online order pickup business, and we didn't know how that was gonna impact us, but the store sales have gone up as well. Some of our most successful centers are up close to 30% or 40% since 2019, which is just a staggering if you think about some of the nominal dollars that are coming, that some of these centers are generating.
We use a bunch of different, you know, gauges for traffic. Certainly dwell times. Dwell times have gone up a tad. The frequency and time during the day has changed, and, you know, more or less, we kind of spiked, I would say, in 2022. We're not down that far, and we're certainly still above where we were at 2019 or pre-pandemic. So, the traffic is, has been great, but more importantly, the sales across the board is substantially higher, which just get from a mark-to-market perspective, is gonna give us really good opportunities to push those rents, hopefully on a renewal basis, so we're not having to put additional capital into the stores, and that is like the recipe for really, really strong free cash flow growth.
You know, lower CapEx, better rent, don't have to do anything, no downtime, and that's where, you know, your free cash flow can really accelerate.
and as you guys are negotiating contracts today, what are you pushing for versus what is the tenant pushing back on? And where does the, where does the leverage lie today?
Yeah, great question. Christy, you want to touch on that?
Sure. You know, I think the tenant is still, especially with the big guys, focused on control. And part of that control is how many options they would like to have so that they can have that control going into the future. I mean, but they're more willing now to pay a better rental bump on those options than they were in the past. So I think that what we're trading for is not just for, you know, the financial side of it at this point. We're looking for flexibility. So while they want control, we're looking for more flexibility in terms of what we can do with our center.
We're pre-negotiating rights in order to put out parcels in more flexibility to put in car charging stations and ways to utilize our real estate differently. And so we're taking the opportunity that we have to make sure that we've looked into the future of what we want to do with the center, so we don't have to go back to them for consents, or any other approvals in order to keep our centers where we would like them to be.
The only thing I would add to that is, the escalators is really important in our business, because we don't get to touch our leases, for, you know, for 5 years in many cases, and so in some cases, not for 10 or 15 years. So being able to put some embedded rent step-ups while we're waiting for those leases to come back to us has been a huge positive change in our business. We're never going to be like a, you know, a, excuse me, a residential REIT or even an industrial REIT. It's really hard for us to compress that kind of lease maturity, but that's okay.
You know, we're going to get our bite at the apple from a mark-to-market perspective, but all the while, we're building better step-ups, which is just going to allow us to continue to kind of just curate that, you know, sustainable, you know, growth on a year-over-year basis.
So on the rent step-ups, usually we talk about, you know, at least 3%-
Yeah being where you're aiming for in the small shop. You know, let's call it the last two quarters, what percentage of your leases were at 3% bumps versus-
Ninety.
I don't... 2022.
Yeah. So on everything we were able to get back at over 90%, we were able to negotiate a 3% annual escalator or higher. And almost 100% transition to fixed-base CAM if they were not already on that. So fixing our expense structure as well, which gives us a lot more control over our expenses in good times and in bad times. So that's been a huge lever that we've been able to pull as well.
So the one area where there doesn't seem to be as much flexibility is on anchor rents.
Yep.
So typically, if you're 10 years, after 5 years, you get a bump. Is there really anything that is going to move that, or do you see getting your most growth just out of the small shop over time?
I can answer, and Christy will say, you can say if I'm wrong or not. I don't-- We've been very happy with the partnership with many of our anchors, 'cause they do realize that it is a very tight market from a vacancy standpoint. Having said that, we haven't seen a ton of change. The best anchors are going to still be able to kind of get what they want from a lease perspective. Now, we're not doing as many restrictions, if any. We're certainly not doing any co-tenancy issues, which used to be a big, big issue in our space because it would just really kill your cash flow if you lost an anchor or a named anchor tenant or two anchors.
We've been able to fix that up, so we took a lot of the embedded risk out of the business by doing that. As it relates to the rent step-ups, we have not had as much success, and that's okay, 'cause we've been able to get it on the small shop side. I don't see that changing anytime soon. Having said that, if we stay in the same environment for three years, and there's even a more aggressive kind of jockeying for space among, you know, a lot of the publicly traded national anchor box tenants that have to show growth to their investors, perhaps we could find some level of success.
Perfect.
So, I guess, we have about a minute left. An internal view on the trajectory of rates?
So we try not to. We're agnostic, right? I mean, we just if we should probably be in a different business if we could call rates. So we're very happy with where we're at. We're about 90% fixed rate debt in the portfolio right now, so we do have some floating rate exposure, which is fine. We can pay that off if there's no more creative use for the capital when we want. But we feel good about if rates stay where they're at, we know we can still make money. If we're lucky enough for them to kind of cool off a little bit, we'd do even better, and I would just leave it at that.
I think we don't want to trick ourselves into thinking one way or the other. We're managing our business for, you know, as if they were going to stay, you know, at this rate for quite some time.
Okay We are out of time. Thank you all for coming.
Thank you.