InvenTrust Properties Corp.: Form 10-Q for the period ended Mar 31, 2024

Certain statements in this "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2024 (this "Quarterly Report"), other than purely historical information, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"). These statements include statements about InvenTrust Properties Corp.'s (the "Company," "InvenTrust," "we," "our," or "us") plans, objectives, strategies, financial performance and outlook, trends, the amount and timing of future cash distributions, prospects or future events; and they involve known and unknown risks that are difficult to predict.

As a result, our actual financial results, performance, achievements, or prospects may differ materially from those expressed or implied by these forward-looking statements. In some cases, forward-looking statements can be identified by the use of words such as "may," "could," "expect," "intend," "plan," "seek," "anticipate," "believe," "estimate," "guidance," "predict," "potential," "continue," "likely," "will," "would," "illustrative," and "should" and variations of these terms and similar expressions, or the negatives of these terms or similar expressions. Such forward-looking statements are necessarily based upon estimates and assumptions that, while we consider reasonable based on our knowledge and understanding of the business and industry, are inherently uncertain. These statements are expressed in good faith and are not guarantees of future performance or results. Our actual results could differ materially from those expressed in the forward-looking statements and readers should not rely on forward-looking statements in making investment decisions.

There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Quarterly Report. Such risks, uncertainties and other important factors, include, among others, the risks, uncertainties and factors set forth in our filings with the Securities and Exchange Commission ("SEC"), including our Annual Report on Form 10-K for the year ended December 31, 2023 (the "Annual Report"), and as updated in this Quarterly Report and other quarterly and current reports, which are on file with the SEC and are available at the SEC's website (www.sec.gov (http://www.sec.gov)).

Our operations are subject to a number of risks and uncertainties including, but not limited to:

• our ability to collect rent from tenants or to rent space on favorable terms or at all;
• declaration of bankruptcy by our retail tenants;
• the economic success and viability of our anchor retail tenants;
• our ability to identify, execute and complete acquisition opportunities and to integrate and successfully operate any retail properties acquired in the future and manage the risks associated with such retail properties;
• our ability to manage the risks of expanding, developing or redeveloping our retail properties;
• loss of members of our senior management team or other key personnel;
• changes in the competitive environment in the leasing market and any other market in which we operate;
• shifts in consumer retail shopping from brick and mortar stores to e-commerce;
• the impact of leasing and capital expenditures to improve our retail properties to retain and attract tenants;
• our ability to refinance or repay maturing debt or to obtain new financing on attractive terms;
• future increases in interest rates;
• rising inflation;
• natural or man-made disasters, severe weather and climate-related events, such as earthquakes, tsunamis, tornadoes, hurricanes, droughts, blizzards, hailstorms, floods, wildfires, mudslides, oil spills, nuclear incidents, and outbreaks of pandemics or contagious diseases, or fear of such outbreaks;
• our status as a real estate investment trust ("REIT") for federal tax purposes; and
• changes in federal, state or local tax law, including legislative, administrative, regulatory or other actions affecting REITs.

These factors are not necessarily all of the important factors that could cause our actual results, performance or achievements to differ materially from those expressed in or implied by any of our forward-looking statements. Other unknown or unpredictable factors also could harm our business, financial condition, results of operations, cash flows and overall value.

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements are only as of the date they are made; we do not undertake or assume any obligation to update publicly any of these forward-looking statements to reflect actual results, new information, future events, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent required by applicable law. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the related notes included in this Quarterly Report. All square feet and dollar amounts are stated in thousands, except per share amounts and per square foot metrics, unless otherwise noted.

Overview

Strategy and Outlook

InvenTrust Properties Corp. is a premier Sun Belt, multi-tenant essential retail REIT that owns, leases, redevelops, acquires, and manages grocery-anchored neighborhood and community centers, as well as high-quality power centers that often have a grocery component. We pursue our business strategy by acquiring retail properties in Sun Belt markets, opportunistically disposing of retail properties, maintaining a flexible capital structure, and enhancing our environmental, social and governance practices and standards.

InvenTrust focuses on Sun Belt markets with favorable demographics, including above average growth in population, employment, income and education levels. We believe these conditions create favorable demand characteristics for grocery-anchored and necessity-based essential retail centers, which will position us to capitalize on potential future rent increases while benefiting from sustained occupancy at our centers. Our strategically located regional field offices are within a two-hour drive of over 95% of our properties which affords us the ability to respond to the needs of our tenants and provides us with in-depth local market knowledge. We believe that our Sun Belt portfolio of high quality grocery-anchored assets is a distinct differentiator for us in the marketplace.

Evaluation of Financial Condition

In addition to measures of operating performance determined in accordance with U.S. generally accepted accounting principles ("GAAP"), management evaluates our financial condition and operating performance by focusing on the following financial and nonfinancial indicators, discussed in further detail herein:

• Net Operating Income ("NOI") and Same Property NOI, supplemental non-GAAP measures;
• Nareit Funds From Operations ("Nareit FFO") Applicable to Common Shares and Dilutive Securities, a supplemental non-GAAP measure;
• Core Funds From Operations ("Core FFO") Applicable to Common Shares and Dilutive Securities, a supplemental non-GAAP measure;
• Economic and leased occupancy and rental rates;
• Leasing activity and lease rollover;
• Operating expense levels and trends;
• General and administrative expense levels and trends;
• Debt maturities and leverage ratios; and
• Liquidity levels.

Recent Developments

On February 1, 2024, the Company acquired The Plant, a 57,000 square foot neighborhood center anchored by Sprouts Farmers Market in Chandler, Arizona for a gross acquisition price of $29.5 million. The Company used cash on hand and assumed $13.0 million of existing mortgage debt to fund the acquisition.

Our Retail Portfolio

Our wholly-owned and managed retail properties include grocery-anchored community and neighborhood centers and power centers, including those classified as necessity-based, as defined in our Annual Report. As of March 31, 2024, we owned 63 retail properties with a total gross leasable area ("GLA") of approximately 10.4 million square feet. The following table summarizes our retail portfolio as of March 31, 2024 and 2023.

(a) Economic occupancy is defined as the percentage of occupied GLA divided by total GLA (excluding Specialty Leases) for which a tenant is obligated to pay rent under the terms of its lease agreement as of the rent commencement date, regardless of the actual use or occupancy by that tenant of the area being leased. Actual use may be less than economic occupancy. Specialty Leases represent small shop and anchor leases with terms of less than one year and all common area leases regardless of term.

(b) Leased occupancy is defined as economic occupancy plus the percentage of signed but not yet commenced GLA divided by total GLA.

(c) Annualized Base Rent ("ABR") is computed as base rent for the period multiplied by twelve months. Base rent is inclusive of ground rent and any abatement concessions, but excludes Specialty Lease rent. ABR per square foot ("PSF") is computed as ABR divided by the occupied square footage as of the end of the period.

Summary by Center Type

The following table summarizes our retail portfolio by center type, as defined in our Annual Report, as of March 31, 2024 and 2023.

Summary by Same Property

Properties classified as same property were owned for the entirety of both periods presented ("Same Properties"). The following table summarizes the Same Properties of our retail portfolio for the three months ended March 31, 2024 and 2023.

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Lease Expirations

The following table presents the lease expirations of our retail portfolio as of March 31, 2024. This table does not include expirations of signed but not yet commenced leases, nor does it assume that unexercised contractual lease renewal or extension options contained in our leases will, in fact, be exercised.

(a) Expiring ABR PSF reflects ABR PSF at the time of lease expiration.

(b) Other lease expirations include the GLA, ABR and ABR PSF of month-to-month leases.

Our retail business is neither highly dependent on specific retailers nor subject to lease roll-over concentration. We believe this minimizes risk to our retail portfolio from significant revenue variances over time.

Leasing Activity, Retail Portfolio

The following tables summarize the activity for leases that were executed during the three months ended March 31, 2024, compared with expiring or expired leases for the same or previous tenant for renewals, and the same unit for new leases at the 63 properties in the retail portfolio. The Company's retail portfolio had GLA totaling 364 thousand square feet expiring during the three months ended March 31, 2024, of which 328 thousand square feet was re-leased to the in-place tenant. This achieved a retention rate of approximately 90%.

(a) Comparable leases are leases that meet all of the following criteria: terms greater than or equal to one year, unit was vacant less than one year prior to executed lease, square footage of unit remains unchanged or within 10% of prior unit square footage, and has a rent structure consistent with the previous tenant.

(b) Non-comparable leases are not included in totals.

Results of Operations

Comparison of results for the three months ended March 31, 2024 and 2023

We generate substantially all of our earnings from property operations. Since January 1, 2023, we have acquired six retail properties and disposed of one.

The following table presents the changes in our income for the three months ended March 31, 2024 and 2023.

Lease income, net, for the three months ended March 31, 2024 increased $1.7 million when compared to the same period in 2023, as a result of increases from properties acquired of $1.9 million, decreases from properties disposed of $0.3 million, and the following activity related to our Same Properties:

• $0.7 million of increased minimum rent attributable to increased rental rates,
• $0.1 million of increased common area maintenance and real estate tax recoveries, partially offset by:
• $0.5 million of decreased amortization of market lease intangibles and straight-line rent adjustments, and
• $0.2 million of net changes in credit losses and related reversals.

The following table presents the changes in our operating expenses for the three months ended March 31, 2024 and 2023.

Depreciation and amortization for the three months ended March 31, 2024 increased $1.4 million when compared to the same period in 2023, as a result of:

• $2.1 million of increases from properties acquired, partially offset by:
• $0.2 million of decreases from properties disposed, and
• $0.5 million of decreased in-place lease intangible amortization from our Same Properties.

Property operating expenses for the three months ended March 31, 2024 decreased $0.2 million when compared to the same period in 2023, as a result of:

• $0.3 million of decreased repair and maintenance costs from our Same Properties, and
• $0.1 million of decreases from properties disposed, partially offset by:
• $0.2 million of increases from properties acquired.

Real estate taxes for the three months ended March 31, 2024 decreased $0.6 million when compared to the same period in 2023, as a result of decreased real estate taxes from our Same Properties.

General and administrative expenses for the three months ended March 31, 2024 increased $0.2 million when compared to the same period in 2023, as a result of $0.2 million of increased compensation costs.

The following table presents the changes in our other income and expenses for the three months ended March 31, 2024 and 2023.

Interest expense, net

Interest expense, net, for the three months ended March 31, 2024 increased $0.1 million when compared to the same period in 2023, primarily as a result of:

• aggregate assumption of mortgages of $105.4 million since January 1, 2023, generating increased interest expense of $0.9 million, partially offset by:
• decreased interest rates on our corporate term loans generating decreased interest expense of $0.4 million,
• decreased amortization of debt issuance costs of $0.3 million, and
• aggregate reduction of mortgage payable of $34.1 million since January 1, 2023, generating decreased interest expense of $0.1 million.

Equity in losses of unconsolidated entities

The decrease in equity in losses of unconsolidated entities for the periods presented is a result of the Company acquiring the four remaining retail properties from its joint venture entity, IAGM Retail Fund I, LLC ("IAGM") on January 18, 2023.

Other income and expense, net

Other income and expense, net, for the three months ended March 31, 2024 increased $0.4 million when compared to the same period in 2023, as a result of increased interest income earned on cash and cash equivalents.

Net Operating Income

We evaluate the performance of our retail properties based on NOI, which excludes general and administrative expenses, depreciation and amortization, other income and expense, net, gains (losses) from sales of properties, gains (losses) on extinguishment of debt, interest expense, net, equity in earnings (losses) from unconsolidated entities, lease termination income and expense, and GAAP rent adjustments such as amortization of market lease intangibles, amortization of lease incentives, and straight-line rent adjustments ("GAAP Rent Adjustments"). We bifurcate NOI into Same Property NOI and NOI from other investment properties based on whether the retail properties meet our Same Property criteria. NOI from other investment properties includes adjustments for the Company's captive insurance company.

We believe the supplemental non-GAAP financial measures of NOI, same property NOI, and NOI from other investment properties provide added comparability across periods when evaluating our financial condition and operating performance that is not readily apparent from "Operating income" or "Net income" in accordance with GAAP.

Comparison of Same Property results for the three months ended March 31, 2024 and 2023

A total of 57 retail properties met our Same Property criteria for the three months ended March 31, 2024 and 2023. The following table presents the reconciliation of net income, the most directly comparable GAAP measure, to NOI and Same Property NOI for the three months ended March 31, 2024 and 2023:

(a) Adjustments to NOI include lease termination income and expense and GAAP Rent Adjustments.

Comparison of the components of Same Property NOI for the three months ended March 31, 2024 and 2023

Same Property NOI increased by $1.6 million, or 4.1%, when comparing the three months ended March 31, 2024 to the same period in 2023, and was primarily a result of:

• $0.8 million of increased minimum base rent attributable to increased rental rates,
• $0.6 million of increased operating expense recoveries primarily attributable to leases with fixed recovery terms, and
• $0.2 million of decreased non-recoverable expenses.

Funds From Operations

The National Association of Real Estate Investment Trusts ("Nareit"), an industry trade group, has promulgated a widely accepted non-GAAP financial measure of operating performance known as Funds From Operations ("FFO"). Our Nareit FFO is net income (or loss) in accordance with GAAP, excluding gains (or losses) resulting from dispositions of properties, plus depreciation and amortization and impairment charges on depreciable real property. Adjustments for IAGM are calculated to reflect our proportionate share of the joint venture's funds from operations on the same basis.

Core FFO is an additional supplemental non-GAAP financial measure of our operating performance. In particular, Core FFO provides an additional measure to compare the operating performance of different REITs without having to account for certain remaining amortization assumptions within Nareit FFO and other unique revenue and expense items, which some may consider not pertinent to measuring a particular company's on-going operating performance. In that regard, we use Core FFO as an input to our compensation plan to determine cash bonuses and measure the achievement of certain performance-based equity awards.

See our Annual Report for expanded descriptions of Nareit FFO and Core FFO.

Nareit FFO Applicable to Common Shares and Dilutive Securities and Core FFO Applicable to Common Shares and Dilutive Securities is calculated as follows:

(a) Reflects our share of adjustments for IAGM's Nareit FFO on the same basis as InvenTrust.

(b) Reflects items which are not pertinent to measuring on-going operating performance, such as miscellaneous and settlement income, and basis difference recognition arising from acquiring the four remaining properties of IAGM in 2023.

(c) Reflects our share of adjustments for IAGM's Core FFO on the same basis as InvenTrust.

(d) For purposes of calculating non-GAAP per share metrics, the same denominator is used as that which would be used in calculating diluted earnings per share in accordance with GAAP.

Liquidity and Capital Resources

Development, Redevelopment, Capital Expenditures and Tenant Improvements

The following table summarizes capital resources used for development and re-development, capital expenditures, and tenant improvements at our retail properties during the three months ended March 31, 2024. These costs are classified as cash used in capital expenditures and tenant improvements and investment in development and re-development projects on the condensed consolidated statements of cash flows for the three months ended March 31, 2024.

(a) Direct development and re-development costs relate to construction of buildings at our retail properties.

(b) Indirect development and re-development costs relate to capitalized interest, real estate taxes, insurance, and payroll attributed to improvements at our retail properties.

(c) Direct costs relate to improvements to a tenant space that are either paid directly by us or reimbursed to the tenants.

Short-Term Liquidity and Capital Resources

On a short-term basis, our principal uses for funds are to pay our operating and corporate expenses, interest and principal on our indebtedness, property capital expenditures, and to make distributions to our stockholders.

Our ability to maintain adequate liquidity for our operations in the future is dependent upon a number of factors, including our revenue, macroeconomic conditions, our ability to contain costs, including capital expenditures, and to collect rents and other receivables, and various other factors, many of which are beyond our control. We will continue to monitor our liquidity position and may seek to raise funds through debt or equity financing in the future to fund operations, significant investments or acquisitions that are consistent with our strategy. Our ability to raise these funds may also be diminished by other macroeconomic factors.

Long-Term Liquidity and Capital Resources

Our objectives are to maximize revenue generated by our retail platform, to further enhance the value of our retail properties to produce attractive current yield and long-term returns for our stockholders, and to generate sustainable and predictable cash flow from our operations to distribute to our stockholders.

Any future determination to pay distributions will be at the discretion of our board of directors (the "Board") and will depend on our financial condition, capital requirements, restrictions contained in current or future financing instruments, and such other factors as our Board deems relevant.

Capital Sources and Uses

Our primary sources and uses of capital are as follows:

In the first quarter of 2022, we established an at-the-market equity offering program (the "ATM Program") pursuant to which we may sell shares of our common stock up to an aggregate purchase price of $250.0 million. During the three months ended March 31, 2024 and 2023, no shares were issued under the ATM Program. As of March 31, 2024, $244.6 million of common stock remains available for issuance under the ATM Program.

We believe our listing on the NYSE will facilitate supplementing our capital sources by selling equity securities of the Company under the ATM Program or otherwise if and when we believe appropriate to do so. Also, from time to time, we may seek to acquire amounts of our outstanding common stock through cash purchases or exchanges for other securities. Such purchases or exchanges, if any, will depend on our liquidity requirements, contractual restrictions, and other factors. At this time, we believe our current sources of liquidity are sufficient to meet our short- and long-term cash demands.

Distributions

During the three months ended March 31, 2024, we declared distributions to our stockholders totaling $15.4 million and paid cash distributions of $14.6 million. As we execute on our retail strategy and continue to evaluate our business, results of operations and cash flows, our Board will continue to evaluate our distribution on a periodic basis.

Summary of Cash Flows

Cash provided by operating activities of $14.8 million and $16.0 million for the three months ended March 31, 2024 and 2023, respectively, was generated primarily from income from property operations. Cash provided by operating activities decreased $1.2 million when comparing the three months ended March 31, 2024 to the same period in 2023, as a result of general working capital fluctuations. Since January 1, 2023, we have acquired six retail properties and disposed of one.

Cash used in investing activities of $23.7 million for the three months ended March 31, 2024 was the result of:

• $16.5 million for the acquisition of one investment property, and
• $7.2 million for capital investments and leasing costs.

Cash used in investing activities of $56.4 million for the three months ended March 31, 2023 was the result of:

• $129.6 million for acquisitions of investment properties, and
• $6.1 million for capital investments and leasing costs, which were partially offset by cash provided by:
• $79.3 million from distributions from unconsolidated entities.

Cash used in financing activities of $15.8 million for the three months ended March 31, 2024 was the result of:

• $1.2 million for the payment of tax withholdings for share-based compensation, and
• $14.6 million to pay distributions.

Cash provided by financing activities of $28.1 million for the three months ended March 31, 2023 was the result of:

• $14.3 million for pay-offs of debt and other financing activities, and
• $13.8 million to pay distributions.

We consider all demand deposits, money market accounts and investments in certificates of deposit and repurchase agreements with a maturity of three months or less, at the date of purchase, to be cash equivalents. We maintain our cash and cash equivalents at major financial institutions. The combined account balances at one or more institutions generally exceed the Federal Depository Insurance Corporation ("FDIC") insurance coverage. We periodically assess the credit risk associated with these financial institutions. We believe insignificant credit risk exists related to amounts on deposit in excess of FDIC insurance coverage.

Off Balance Sheet Arrangements

None.

Contractual Obligations

We have obligations related to our mortgage loans, senior notes, term loans, and revolving credit facility as described in "Note 7. Debt" in the condensed consolidated financial statements.

The following table presents our obligations to make future payments under debt and lease agreements as of March 31, 2024, exclusive of debt discounts and issuance costs, which are not future cash obligations.

(a) Includes variable rate debt swapped to fixed rates through the Company's interest rate swaps.

(b) Includes leases on corporate office spaces.

Critical Accounting Estimates

Our financial statements are prepared in accordance with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company bases these estimates, judgments and assumptions on historical experience and various other factors that the Company believes to be reasonable under the circumstances. Actual results may differ from these estimates.

There have been no material changes to our critical accounting estimates as compared to the critical accounting estimates described in our "Management’s Discussion and Analysis of Financial Condition and Results of Operations" set forth in our Annual Report.

Interest Rate Risk

The Company is subject to market risk associated with changes in interest rates both in terms of variable-rate debt and the price of new fixed-rate debt upon maturity of existing debt. The Company's interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows. As of March 31, 2024, the Company's debt included outstanding variable-rate debt of $472.5 million, of which $400.0 million has been swapped to a fixed rate.

On March 16, 2023, the Company entered into one interest rate swap agreement with a notional amount of $100.0 million at 3.69%, achieving a fixed interest rate of 4.99%. As of the effective date of April 3, 2023, the entirety of the Company's variable rate term loans were swapped to fixed rates through the maturity dates of its $400.0 million term loan credit agreement ("the Amended Term Loan Agreement").

As of March 31, 2024, the Company's interest rate risk was limited to $72.5 million of variable rate cross-collateralized mortgage debt. If market rates of interest on all variable-rate debt as of March 31, 2024 permanently increased or decreased by 1%, the annual increase or decrease in interest expense on the variable-rate debt and future earnings and cash flows would be approximately $0.7 million. See the Annual Report for an expanded discussion regarding how the Company achieves its interest rate risk management objectives and how it often uses financial instruments to hedge exposures to changes in interest rates on loans.

The Company is party to five effective interest rate swap agreements and two interest rate forward swap agreements, which address the periods between the maturity dates of the effective swaps and the maturity dates of the Amended Term Loan Agreement. In tandem, the interest rate swaps achieve fixed interest rates for a constant notional amount through the maturity dates of the Amended Term Loan Agreement.

The following table summarizes the Company's five effective interest rate swaps as of March 31, 2024:

The following table summarizes the Company's two forward interest rate swaps as of March 31, 2024:

Gains or losses resulting from marking-to-market derivatives each reporting period are recognized as an increase or decrease in comprehensive income (loss) on the condensed consolidated statements of operations and comprehensive income (loss).

The information presented above does not consider all exposures or positions that could arise in the future. Therefore, the information represented herein has limited predictive value. As a result, the ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period, the hedging strategies at the time, and the related interest rates.

Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, the Company's management, including its Principal Executive Officer and Principal Financial Officer, evaluated as of March 31, 2024, the effectiveness of the Company's disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and Rule 15d-15(e). Based on that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the Company's disclosure controls and procedures, as of March 31, 2024, were effective at a reasonable assurance level for the purpose of ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the SEC and is accumulated and communicated to management, including its Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

There were no changes to the Company's internal control over financial reporting during the quarter ended March 31, 2024, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

As of March 31, 2024, there have been no material changes from the risk factors previously disclosed in response to Item 1A. to Part I of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023.