Business context and reporting period
InvenTrust Properties Corp. filed this unaudited Form 10-Q for the quarter ended June 30, 2016. The REIT is repositioning toward a retail-focused portfolio. At quarter-end it reported 76 wholly owned retail properties with 12.7 million square feet; it had also completed the Highlands REIT spin-off and the sale of its University House student-housing platform during the period.
Key financial results
Amounts below are in millions of dollars except per-share data, occupancy, and where noted.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total income | $63.0 | $66.3 | $126.3 | $132.7 |
| Operating income (loss) | $(20.8) | $9.8 | $(19.4) | $12.1 |
| Continuing-operations net income | $19.6 | $55.8 | $35.0 | $51.7 |
| Discontinued-operations net income | $144.1 | $6.2 | $154.1 | $16.2 |
| Total net income | $163.7 | $62.1 | $189.1 | $67.9 |
| Basic and diluted earnings per share | $0.19 | $0.07 | $0.22 | $0.08 |
| NAREIT FFO | $30.8 | $83.5 | $81.7 | $140.6 |
Q2 continuing-operations revenue declined, while operating results included $29.9 million of impairment charges. Total net income was driven largely by discontinued operations, including a $225.3 million gain on the student-housing sale, partly offset by a $76.6 million impairment associated with the Highlands spin-off. Q2 gain on sales of continuing-operations properties was $52.4 million.
- Operating performance: Same-store modified NOI decreased 1.9% in Q2 and increased 0.1% for the six-month period. Total modified NOI declined 6.3% in Q2 and 5.4% for the six months, reflecting asset dispositions. Wholly owned retail economic occupancy was 94%, versus 93% a year earlier; rent per square foot was $14.84, versus $14.20.
- Cash flow: For the six months, operating cash flow was $85.5 million, investing cash flow was $1,016.6 million, and financing cash outflow was $492.5 million. Investing inflows principally reflected property and student-housing sale proceeds. Cash and cash equivalents rose to $812.9 million from $203.3 million at year-end 2015.
- Debt and liquidity: Debt, net, was $947.7 million at June 30, compared with $1,098.2 million at December 31, 2015. Mortgage principal was $805.2 million at a 5.15% weighted-average rate; the company also had a $150 million term-loan balance. It reported $150 million available under the term loan and $300 million available under its revolving facility. Mortgage maturities included $55.7 million in 2016 and $446.1 million in 2017. Management said it expected to repay, refinance, or extend near-term maturities and had adequate short-term funding sources.
- Distributions: The company declared $0.03 per share for Q2 and $0.06 per share for the six months, versus $0.10 for the six months a year earlier. Management expected distributions to decrease following the student-housing sale and said it planned to announce a revised rate before the October 2016 distribution date.
Material changes and management outlook
In April, the company distributed Highlands REIT shares to stockholders, transferring substantially all remaining non-core assets without cash proceeds. In June, it sold University House for a gross price of $1.41 billion and received approximately $845 million net cash after transaction costs and debt repayment; $9.9 million was placed in escrow and $8.0 million was held pending expected completion of a development property. It acquired three retail properties for $333.7 million gross during the six months. Subsequent to quarter-end, it acquired one retail center for $17.0 million and sold five retail properties for $79.7 million gross.
Management described retail conditions in its target markets as favorable, anticipated modest rental-income growth as occupancy improved, and cited redevelopment and pad-site opportunities. It expected to redeploy part of sale proceeds into multi-tenant retail assets, while the board was also evaluating debt reduction and share repurchases. Portfolio refinement was expected to continue over approximately 24 months; management warned that dispositions could dilute operating performance before proceeds are reinvested. It noted that approximately 39% of the retail platform was in Texas and Oklahoma and that a prolonged energy downturn could affect markets including Houston, although it had not observed a negative retailer impact to date.
Risks, contingencies, and unusual items
- Reported impairments totaled $38.3 million in continuing operations and $76.6 million in discontinued operations for the six months. Valuations relied in part on discounted cash-flow assumptions and unobservable forecasts.
- One mortgage loan with a $3.1 million carrying value was not in compliance with a loan requirement at quarter-end; it was not cross-collateralized or recourse to the company. The filing reported compliance with term-loan and revolving-credit covenants.
- Approximately $23 million of debt at unconsolidated joint ventures was recourse to InvenTrust. The company said it expected the ventures to repay or refinance their debt on time.
- Legal proceedings arising in the ordinary course were not expected by management to have a material adverse effect. The filing identified no material change to previously disclosed risk factors.
- Interest-rate exposure, marketable-securities price movements, refinancing conditions, tenant leasing and collections, and regional economic conditions remain relevant risks. Management estimated that a sustained 1% rate increase on floating-rate debt would reduce future earnings and cash flows by $1.5 million; the $150 million term loan was swapped to a fixed rate at quarter-end.
Important facts for investors to verify
- Final University House proceeds, escrow releases, and any post-closing adjustments or obligations.
- The announced post-spin-off distribution rate and its coverage by recurring operating cash flow, apart from asset-sale gains.
- Progress refinancing or repaying the 2016–2017 mortgage maturities and continued access to the term loan and revolver.
- Whether retail same-store NOI, occupancy, rents, and leasing spreads support management’s anticipated growth as the portfolio changes.
- The assumptions underlying recorded impairment valuations and the financial impact of remaining dispositions and reinvestment plans.