Business context and reporting period
Registrant note: The supplied filing is for Inland American Real Estate Trust, Inc., not “Inventrust Properties Corp.” It is an unaudited Form 10-Q for the quarter ended March 31, 2012; comparisons are with the quarter ended March 31, 2011 unless noted. The company is a diversified REIT with 970 commercial properties across retail, lodging, office, industrial and multifamily.
Unless stated otherwise, dollar figures below are in millions. The filing reports financial statements under U.S. GAAP and also presents FFO, a supplemental non-GAAP measure.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Total income | $344.1 | $314.3 |
| Operating income | $48.1 | $42.7 |
| Net loss attributable to company | $(30.3); $(0.03) per share | $(54.6); $(0.06) per share |
| Funds from operations (FFO) | $109.3 | $94.4 |
| Cash from operating activities | $85.9 | $77.3 |
| Cash used in investing activities | $(260.0) | $(75.1) |
| Cash from / (used in) financing activities | $118.5 | $(119.5) |
| Cash and cash equivalents at quarter-end | $162.6 | $218.2 at December 31, 2011 |
| Mortgages, notes and margin debt, net | $6,259.9 | $5,902.7 at December 31, 2011 |
- Revenue rose 9.5%, led by lodging income, which increased $22.4 million, and higher rental income. Operating expenses increased to $296.0 million from $271.6 million; lodging operating costs rose alongside lodging revenue. Depreciation and amortization was $109.5 million.
- Continuing-operations net loss widened to $30.2 million from $26.1 million. The smaller total net loss versus 2011 reflects the prior-year $26.3 million loss from discontinued operations, not an improvement in continuing-operations earnings.
- At March 31, cash was $162.6 million, restricted cash and escrows were $99.8 million, and marketable securities were $318.7 million. Investment properties, net, were $9.76 billion; total assets were $11.20 billion and total equity was $4.59 billion.
- Mortgage loans totaled $6.14 billion at a 5.2% weighted-average interest rate; margin securities debt was $157.2 million. Approximately $555.2 million of total debt was recourse to the company. Mortgage maturities include $402.4 million in 2012 and $1.01 billion in 2013. Management said refinancing discussions were underway and it believed short-term funding was adequate, while acknowledging no assurance of acceptable refinancing terms.
- Operating cash flow was below $109.2 million of declared distributions by about $20.2 million, even including $3.1 million of distributions from unconsolidated entities. The company said the shortfall was met with excess cash flow from prior years. The distribution was $0.12 per weighted-average share for the quarter, or $0.50 annualized.
Material changes and operating trends
- Five upper-upscale hotels totaling 2,302 rooms were acquired in March; the notes report $396.1 million of gross acquisition price, including a retail outparcel. The company also reported $180.0 million of mortgage debt assumed at acquisition. Separately, MD&A describes approximately $199 million of real estate acquisitions completed in the quarter; investors should check the filing’s acquisition and cash-flow reconciliations.
- Same-store net operating income increased 1.1% overall. Lodging rose 3.9% and multifamily 7.2%; retail was nearly flat (+0.1%), industrial rose 0.4%, and office declined 2.0%. Total lodging revenue growth also reflects acquisitions.
- Lodging RevPAR was $83 versus $80, average daily rate was $123 versus $119, and occupancy was 68% versus 67%. Multifamily economic occupancy was 94% versus 93%; retail was 93% versus 94%, office 90% versus 92%, and industrial 92% versus 95% on the reported same-store comparison.
- Investment-property impairment was $10.4 million, versus $6.5 million in continuing operations in Q1 2011. The company also recorded a $4.2 million impairment on an unconsolidated joint-venture investment. Available-for-sale securities had $18.3 million of unrealized gains in other comprehensive income; no other-than-temporary securities impairment was recorded.
- After quarter-end, the company disposed of 29 retail bank branches for $26.5 million at a gain. It repurchased 3.35 million shares for $24 million on April 24, at $7.22 per share, funded by its distribution reinvestment plan.
Outlook, risks and unusual items
- No quantified full-year earnings or FFO guidance is provided. Management expected lodging and multifamily same-store performance to improve through 2012, retail and industrial income to be broadly consistent with 2011, and office income to be lower. It expected the lodging industry and multifamily rents to grow, and said it aimed to maintain distributions, funded by operating cash flow, joint-venture distributions and property-sale gains.
- Management noted lodging seasonality, with stronger revenue and operating income generally in the second and third quarters. It also cited expected low interest rates through the remainder of 2012, while warning that future rate increases could raise costs.
- The company disclosed an ongoing non-public SEC fact-finding investigation concerning, among other matters, manager fees, affiliate transactions, distributions, impairment determinations and possible self-administration. The company said it had not been accused of wrongdoing, was cooperating, and could not predict the outcome or timing. Its business manager offered to reduce fees to reimburse certain investigation-related costs, fees, fines or assessments, subject to stated exceptions and legal limits.
- Six mortgage loans with a carrying value of $102.9 million were not in compliance with certain loan requirements. Their collateral had a carrying value of $71.9 million; the filing says these loans were not cross-collateralized or recourse to the company.
- Key risks include refinancing maturities, variable-rate debt, tenant and geographic concentration, lease rollover, joint-venture partner actions, securities-market volatility, and the ability to sustain distributions. SunTrust-leased bank branches generated about 9% of rental revenue and three AT&T-leased properties about 7%; one AT&T lease covering approximately 1.7 million square feet expires in 2016.
- Related-party charges include a $10.0 million quarterly business-manager fee, $7.3 million of property-management fees and $0.8 million of loan-placement fees. The business manager waived a further $18.5 million of fee it could otherwise have received for the quarter; the filing cautions there is no assurance such waivers will continue.
Important facts for investors to verify
- Confirm the issuer identity: the provided filing names Inland American Real Estate Trust, Inc., not Inventrust Properties Corp.
- Review the refinancing plan and lender status for the $402.4 million of 2012 and $1.01 billion of 2013 mortgage maturities, including the six loans with covenant exceptions.
- Assess distribution coverage: Q1 declared distributions exceeded operating cash flow plus unconsolidated-entity distributions by about $20.2 million, and management cited prior-year excess cash as a source.
- Track the SEC investigation, its potential financial or operational effects, and the scope and duration of the business manager’s reimbursement offer.
- Reconcile the $396.1 million gross acquisition figure with MD&A’s approximately $199 million acquisition amount and the related assumed debt and cash-flow disclosures.
- Monitor the Net Lease Strategic Asset Fund joint-venture disposition terms and valuation. The filing reports a $19.3 million carrying value after a $4.2 million quarterly impairment and describes an April 2012 agreement with an election deadline of September 17, 2012.