InvenTrust Properties Corp. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; financial statements are unaudited. Dollar amounts below are in millions unless noted.
Business context
Following the 2016 Highlands spin-off and University House sale, InvenTrust is focused on a multi-tenant retail platform. At quarter-end, it owned 73 retail properties (12.7 million square feet; 93.3% occupied), one non-core office property, and held a 55% interest in a joint venture owning 15 retail properties. The company reported 773.3 million common shares outstanding at March 31, 2017.
Key financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total income | $64.1 | $63.3 |
| Operating income (loss) | $(4.3) | $3.2 |
| Net income from continuing operations | $2.2 | $16.0 |
| Net income, including discontinued operations | $2.1 | $25.4 |
| Net income per share, diluted | $0.00 | $0.03 |
| Cash provided by operating activities | $26.5 | $36.1 |
| FFO, a non-GAAP measure | $43.8 | $50.9 |
| Modified NOI, a non-GAAP measure | $45.0 | $43.4 |
Revenue increased modestly, while GAAP net income fell substantially. Results included $16.4 million of impairment charges, $14.5 million of realized gains on marketable securities, and only $1.0 million of property-sale gains, compared with $24.0 million of property-sale gains in Q1 2016. Comprehensive loss was $32.5 million, principally reflecting unrealized investment-security losses and reclassification of realized gains.
Same-store modified NOI rose 3.4% to $35.1 million, primarily due to lower real estate tax expense. Retail-platform economic occupancy was 93.4%, unchanged year over year; annualized base rent per square foot increased to $15.84 from $14.86. Comparable renewal leases achieved a 3.6% rent increase; first-quarter rollover retention was 90.0%.
Financial position, liquidity and debt
- Total assets were $2,791.6 million at March 31, 2017. Cash and cash equivalents were $243.2 million, down from $397.3 million at year-end; restricted cash was $25.7 million.
- Debt, net, was $772.5 million, versus $730.6 million at December 31, 2016. This comprised $472.6 million of mortgages, net, and $300.0 million of unsecured term loans. The $300 million revolving credit line was undrawn and available.
- Operating cash flow was $26.5 million. Investing activities used $168.6 million, largely for acquisitions; financing activities used $11.9 million. Cash declined $154.0 million during the quarter.
- Mortgage debt carried a 5.17% weighted-average rate. Scheduled mortgage maturities included $138.7 million for the remainder of 2017 and $59.6 million in 2018. Management said it expected to use sales proceeds, cash, term-loan and revolver capacity to repay, refinance or extend near-term maturities.
- Two mortgage loans totaling $38.3 million were in default and had matured in 2016 or 2017; they were nonrecourse and not cross-collateralized. The company reported compliance with its credit-agreement covenants.
Material changes, outlook and risks
The company acquired three retail properties for a gross price of $289.9 million, assuming $41.7 million of mortgage debt on one acquisition, and sold one property for $29.1 million gross. Operating cash flow was lower year over year, partly because of the prior-year portfolio sales and 2016 spin-off and student-housing sale. Interest expense declined to $8.3 million from $14.7 million, reflecting debt paydowns, partly offset by new borrowing.
Management expects occupancy to increase and rental income to grow slightly to modestly in 2017. It is pursuing acquisitions in target markets, dispositions in lower-growth markets, redevelopment and pad-site opportunities, and tighter geographic concentration. Management described debt maturities as manageable and expected low interest rates to prevail through 2017, while noting that portfolio repositioning timelines depend on external and macroeconomic conditions. Distributions are funded from operating cash flow, joint-venture distributions and some property-sale proceeds; the board reviews the rate quarterly.
Effective for the April 2017 quarterly distribution, the annual rate increased from $0.0675 to $0.0695 per share; $0.017375 per share was paid April 6, 2017. Other risks include retail-market and tenant performance, lease expirations and reletting, interest rates, refinancing, execution of acquisitions and dispositions, and the company’s REIT status.
Legal contingency: After quarter-end, a jury returned a $12.0 million verdict against a subsidiary and other defendants: $6.0 million compensatory damages, stated as fully insured, and $6.0 million punitive damages for which the insurer reserved its rights. The company recorded a $3.0 million potential-loss accrual, a $9.0 million liability and a $6.0 million insurance receivable at quarter-end; it intended to pursue post-trial remedies and mitigation. Management reported no expectation that other pending claims would materially affect the company.
Important facts for investors to verify
- Refinancing, repayment or extension plans for the $138.7 million of 2017 mortgage maturities and the status of the two defaulted loans.
- The final outcome and insurance coverage of the punitive-damages verdict, including the reported $3.0 million accrual, $9.0 million liability and $6.0 million receivable.
- Whether acquisition, disposition and redevelopment plans translate into sustained occupancy, rent growth and cash flow.
- Distribution coverage by recurring operating cash flow, given the quarter’s cash decline and management’s stated use of some sale proceeds to fund distributions.
- Performance and liquidity of the marketable-securities portfolio, whose fair value fell to $110.6 million from $183.9 million at year-end.