Business context and reporting period
InvenTrust Properties Corp. (formerly Inland American Real Estate Trust) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. Unless noted otherwise, dollar figures below are in millions. The company is a REIT focused on growing retail and student housing and disposing of non-core assets. It completed the taxable spin-off of 95% of its lodging subsidiary, Xenia Hotels & Resorts, on February 3, 2015; lodging results are presented as discontinued operations. At quarter-end, InvenTrust owned 143 properties: 110 retail, 14 student housing and 19 non-core.
Financial results and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total continuing-operations income | $109.1 in 2015; $114.1 in 2014 | $218.7 in 2015; $232.6 in 2014 |
| Operating income (loss) | $25.1; $(41.4) | $44.4; $(19.9) |
| Net income attributable to company | $62.1; $9.5 | $67.9; $140.0 |
| Basic earnings per share | $0.07; $0.01 | $0.08; $0.16 |
| Funds from operations (FFO) | $83.5; $142.7 | $140.6; $254.8 |
| Cash provided by operating activities | $88.3 for the first half of 2015; $200.4 in 2014 |
First-half property net operating income (NOI) was $156.6, down from $165.0. Same-store modified NOI rose 4.2% to $148.0: retail increased 5.1%, student housing 8.3%, and non-core 0.4%. Total modified NOI, including non-same-store properties, was $156.5 versus $161.8. The filing does not present a single consolidated operating-margin figure.
At June 30, assets were $4.30 billion, liabilities $1.99 billion and total equity $2.30 billion. Cash and cash equivalents were $171.6; marketable securities were $211.9. Balance-sheet debt was $1.83 billion. Mortgage loans totaled $1.84 billion, with a 5.01% weighted-average rate; approximately $39.5 million was recourse to the company. A $300 million unsecured revolver had about $299.96 million available and only $0.04 million outstanding. Six-month investing cash use was $81.1 and financing cash use was $568.7; cash declined $561.5 to $171.6.
Material changes versus the prior comparable period
- Second-quarter income increased substantially from 2014, chiefly because 2014 included $68.1 million of impairment charges; no impairment was recorded in 2015. First-half 2015 also had no impairment, compared with $74.9 million in first-half 2014.
- First-half net income fell to $67.9 million from $140.0 million, primarily reflecting the lodging spin-off and prior-year property-sale gains and discontinued operations. 2015 results also included $26.0 million of second-quarter equity earnings from unconsolidated entities, including $13.1 million of nonrecurring excess distributions, and $20.2 million of realized gains on marketable securities for the half year.
- Continuing-operations income declined 5.9% in the second quarter and 6.0% for the first half. Management attributed much of the decrease to property sales. Interest expense fell to $45.9 million from $64.6 million for the first half, mainly following property sales and mortgage repayments.
- The spin-off and other dispositions materially reduced the portfolio: the company reported 143 properties at June 30, 2015 versus 268 at June 30, 2014. Compared with December 31, 2014, total assets fell from $7.50 billion to $4.30 billion, reflecting the spin-off and related balance-sheet reclassification and transfers.
- First-half operating cash flow decreased to $88.3 million from $200.4 million, primarily due to property dispositions, including the spin-off. First-half distributions paid were $109.2 million, exceeding operating cash flow.
Outlook, risks and contingencies
- Management expected overall operating performance to increase in 2015, while warning that dispositions could dilute results before reinvestment. It expected retail same-store income to be consistent with 2014, student housing results to improve and non-core performance to be similar or lower.
- After the spin-off, the annualized distribution rate was reduced to $0.13 per share, beginning with the March 2015 payment; management said the former rate was not sustainable without Xenia’s cash flows. Quarterly distributions were planned to begin in the third quarter, with estimated annual printing and mailing savings of about $1 million. Management expected to fund distributions with operating cash flow, joint-venture distributions and property-sale gains.
- Management considered debt maturities manageable and expected to repay, refinance or extend 2015 maturities, but gave no assurance that refinancing would be available on satisfactory terms. Mortgage maturities included $25.8 million in 2015, $256.9 million in 2016 and $784.1 million in 2017. Two mortgage loans totaling $14.1 million were in covenant default; they were not cross-collateralized or recourse to the company. The company was negotiating refinancing for 2015 maturities and reported compliance with its revolver covenants.
- Non-core lease rollover is a material exposure: leases expiring in 2016 and 2017 represented 44.4% and 24.8%, respectively, of non-core annualized rent. Two AT&T leases expire in those years; AT&T-related properties generated about 13% of first-half retail and non-core revenue. Nonrenewal could result in vacancy, lower rents and significant leasing costs.
- Interest-rate sensitivity: a permanent 1% rise or fall in rates on floating-rate debt was estimated to affect future earnings and cash flows by approximately $2.3 million. Marketable securities, including a 5% Xenia stake valued at $123.3 million, expose the company to equity-price risk.
- The SEC staff concluded its investigation on March 24, 2015 and said it did not intend to recommend enforcement action against the company. A derivative-litigation settlement agreement in principle was reported July 28, 2015; it was subject to documentation and court approval and expected to result in a payment to the company. The company also agreed to indemnify Xenia for specified losses related to the investigation and derivative matters.
- Subsequent to quarter-end, the company sold three non-core properties for a gross disposition price of $24.4 million. Management cited leasing, refinancing, tenant, joint-venture, market, litigation, REIT-status and other risks in its forward-looking disclosures.
Most important facts for investors to verify
- Whether the reported improvement in second-quarter GAAP income is sustainable after removing prior-year impairment effects and 2015 nonrecurring joint-venture and securities gains; also review FFO and NOI trends.
- Whether cash generation can support the reduced distribution, given first-half distributions paid exceeded operating cash flow and management also expects joint-venture distributions and sale gains to contribute.
- Progress and terms of refinancing, particularly the 2016–2017 mortgage maturities, and resolution of the two loan covenant defaults.
- Renewal or replacement plans for the major AT&T leases and the associated potential vacancy, rent and tenant-improvement exposure.
- Final court approval and financial terms of the derivative settlement, along with any obligations under the Xenia indemnity agreement.
- Actual proceeds and effects of non-core property sales, development spending and planned investment in retail and student housing.