InvenTrust Properties Corp., the Sun Belt retail REIT, recently released its Q1 2024 earnings transcript, boasting strong same property NOI growth, impressive leasing spreads, and an expanding footprint in the coveted Phoenix market. The picture painted is one of robust performance and a bright future. But a closer look at their balance sheet reveals a curious anomaly – a negative inventory value, a detail seemingly overlooked by analysts. Could this "phantom inventory" be a sign of something more sinister, or is it simply an accounting quirk?

A negative inventory value is unusual, to say the least. Typically, inventory represents the value of goods held for sale. In a manufacturing company, it would be raw materials, work-in-progress, and finished goods. For a retailer, it's the merchandise on their shelves. REITs, however, don't typically deal in tangible goods. Their inventory, if they have any, usually comprises land held for future development. So, how does a REIT end up with a negative inventory value?

InvenTrust's Q1 2024 balance sheet shows an inventory value of -$22,076,000. This negative value also appears consistently in previous quarters, going back to at least 2019. This begs the question: what exactly is InvenTrust *losing* money on?

One possible explanation lies in InvenTrust's accounting practices. REITs, unlike traditional corporations, are required to distribute at least 90% of their taxable income to shareholders as dividends. To minimize their tax burden, REITs often employ various accounting strategies, including aggressive depreciation. This accelerated depreciation could potentially lead to a situation where the book value of certain assets, in this case, "inventory," falls below zero.

However, this explanation raises further questions. If the negative inventory is a result of aggressive depreciation, what specific assets are being depreciated? InvenTrust's portfolio primarily consists of open-air retail centers, with the vast majority anchored by grocery stores. These properties, while subject to depreciation, are unlikely to be categorized as "inventory" and depreciated to the point of a negative value.

Another possibility is that InvenTrust is employing a more complex accounting strategy related to its development pipeline. The company, in both its Q4 2023 and Q1 2024 transcripts, highlights its active development pipeline and mentions the strategic holding of certain anchor spaces for future redevelopment projects. Could these redevelopment projects, with associated costs and pre-leasing expenses, be booked as "inventory" and subsequently depreciated, resulting in the negative value?

If this is the case, it raises concerns about the transparency of InvenTrust's accounting practices. Investors rely on clear and accurate financial reporting to make informed decisions. A negative inventory value, without a clear explanation, obscures the true financial health of the company and casts doubt on its reported earnings.

While a negative inventory value in a REIT is not inherently a red flag, it certainly demands further investigation. InvenTrust needs to provide a clear and detailed explanation of this anomaly in its financial statements. Without transparency, investors are left to speculate, and the potential for erosion of trust cannot be ignored.

Hypothesis:

InvenTrust's negative inventory value is likely linked to its redevelopment pipeline. Costs associated with these projects, including pre-leasing expenses, tenant improvement allowances, and pre-development costs, might be categorized as "inventory" and aggressively depreciated, leading to the negative value.

Numbers:

Negative Inventory Value (Q1 2024): -$22,076,000

Redevelopment Pipeline (Q4 2023): Two Bed Bath & Beyond spaces leased to PGA Superstore and Nordstrom Rack with significant rent spreads and projected openings in 12-18 months.

Redevelopment Pipeline (Q1 2024): Mentions one remaining Bed Bath & Beyond space with a replacement tenant identified and lease negotiations underway.

Further Research:

Analyzing InvenTrust's accounting policies in its 10-K filings to understand how inventory is defined and depreciated.

Comparing InvenTrust's inventory accounting practices with those of its peers to determine if this is a common practice within the REIT industry.

Examining InvenTrust's disclosures related to its redevelopment pipeline to assess the potential magnitude of costs associated with these projects.

Lease Occupancy and Spreads Over Time

InvenTrust's overall performance metrics might paint a rosy picture, but the mysterious "phantom inventory" raises serious questions that demand answers. Until InvenTrust sheds light on this accounting enigma, a shadow of doubt will linger over its financial reporting.

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