Filing summary: Inland American Real Estate Trust, Inc. — Form 10-Q
Entity note: The supplied filing is for Inland American Real Estate Trust, Inc., not “Inventrust Properties Corp.” It covers the quarter ended September 30, 2013; the financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
The REIT owned 268 properties in its continuing portfolio and classified 225 additional properties as held for sale. Its stated strategy was to concentrate on retail, lodging and student housing, while selling non-core assets and using proceeds for strategic acquisitions and debt reduction. Results are affected by substantial property sales and by reclassifying held-for-sale properties as discontinued operations, so period comparisons are not purely like-for-like.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total income | $330.0 | $291.2 | $962.5 | $836.2 |
| Operating income (loss) | $5.4 | $(13.9) | $(96.3) | $39.0 |
| Net income (loss) from continuing operations | $(34.1) | $(64.3) | $(198.9) | $(109.7) |
| Net income (loss) attributable to the Company | $237.5 | $(17.6) | $209.3 | $(65.8) |
| Operating cash flow | Not separately stated | Not separately stated | $325.7 | $352.3 |
| Funds from Operations (FFO, non-GAAP) | Not stated | Not stated | $350.5 | $345.7 |
Net income attributable to the Company included discontinued-operations income of $271.7 million for Q3 and $408.2 million for the first nine months. The nine-month discontinued-operations result included $400.9 million of gains on property sales. Continuing operations recorded $228.4 million of property impairment charges for the nine months, versus $53.8 million a year earlier; a single large office property accounted for $147.5 million of the 2013 charge.
- Property operations: Nine-month segment net operating income (NOI) was $432.0 million, up from $386.9 million. Same-store NOI increased 4.3% to $298.3 million: lodging rose 8.6%, student housing 4.9%, retail was essentially flat, and non-core fell 5.1%.
- Cash flow and liquidity: Nine-month investing activities provided $1,092.5 million, primarily reflecting property sale proceeds; financing activities used $1,255.2 million, including substantial debt repayments and distributions. Cash and cash equivalents were $383.8 million at quarter-end.
- Debt: Mortgage loans outstanding were $4,688.8 million, with a 5.13% weighted-average rate. Total debt including debt associated with held-for-sale properties was reported as $4,815.4 million. The company had $200 million available on its $200 million revolver and $75 million outstanding on its term loan at September 30. Approximately $300.7 million of total debt was recourse to the company.
- Distributions: Declared distributions were $336.6 million for the nine months, equivalent to $0.38 per weighted-average share for the period and a $0.50 annualized rate. Operating cash flow plus distributions from unconsolidated entities totaled about $341.0 million; reported distribution coverage also included substantial gains on sales.
Material changes versus the prior comparable period
- Total nine-month income rose 15.1%, while operating cash flow declined to $325.7 million from $352.3 million. Management attributed part of the cash-flow comparison to a one-time $22.1 million accrued-interest timing item in 2012.
- Attributable net income turned positive primarily because of gains on property sales, not because continuing operations became profitable. Continuing-operations losses worsened year over year, largely reflecting the higher impairment provision.
- Property recycling accelerated: the company sold 304 properties for a gross disposition price of $1.816 billion, compared with 86 properties for $432.5 million in the first nine months of 2012. It acquired 15 properties for a gross price of $831.9 million, compared with eight for $457.3 million.
- Portfolio operations diverged by segment. Lodging and student housing improved, while retail NOI softened in total partly because properties were contributed to a joint venture; non-core same-store occupancy and NOI declined.
Outlook, management commentary, risks and unusual items
- Management expected lodging growth to continue through 2013, retail performance to remain flat or decline slightly, and non-core leasing to face some risk of lower re-leasing rates. It expected to maintain the distribution in 2013, funded by operations, joint-venture distributions and property-sale gains. These are management expectations, not formal earnings guidance.
- The company expected the remaining 225 net-lease properties to be sold in multiple closings during late 2013 and the first half of 2014. It cautioned that dispositions could dilute operating performance until proceeds were reinvested, used to repay debt or used for share repurchases.
- Management said 2013 mortgage maturities were being refinanced or negotiated and believed short-term funding was adequate, but gave no assurance that refinancing would be available on satisfactory terms. Five mortgage loans with a carrying value of $86.5 million were not in compliance with certain loan requirements; the filing says these loans were neither cross-collateralized nor recourse to the company. Management also described $82.0 million of remaining 2013 mortgage maturities.
- The senior unsecured credit facility includes financial and operating covenants, including distribution and investment restrictions; a breach could accelerate repayment and impair liquidity or distributions. After quarter-end, on November 5, the company increased the revolver to $300 million and total term-loan borrowing to $200 million, with an $800 million accordion feature.
- The SEC was conducting a non-public fact-finding investigation concerning, among other matters, management and property fees, affiliate transactions, distributions, impairments and possible self-administration. The company said it had not been accused of wrongdoing and was cooperating. Related shareholder demands, a stayed derivative action and a putative class action concerning DRP share pricing were also disclosed.
- The company had requested IRS closing agreements concerning possible REIT qualification issues involving dividend practices and investments in bank commercial paper. The filing states that adverse tax consequences or penalties were possible and that the IRS outcome was uncertain.
- Other post-quarter events included the purchase of five hotels for $308.8 million and the October 7 sale of one held-for-sale property for $67.2 million. Interest-rate sensitivity analysis estimated that a sustained 1% rate increase on floating-rate debt would reduce future earnings and cash flow by approximately $10.1 million.
Important facts for investors to verify
- Whether the pending net-lease sales closed on the anticipated timetable and at the expected prices, and how proceeds were allocated between debt repayment, acquisitions and other uses.
- Whether recurring operating cash flow, excluding asset-sale gains, can sustainably support the distribution and planned investment program.
- Progress on refinancing near-term maturities, covenant compliance, and the status and terms of post-quarter credit-facility increases.
- Updates and potential financial consequences of the SEC investigation, shareholder litigation and IRS closing-agreement requests.
- Whether reported lodging and student-housing gains persist, and whether retail and non-core occupancy, leasing and NOI stabilize.
- The effects of the unusually large impairment charges and the assumptions used to value affected properties, particularly the large single-tenant office asset.