InvenTrust Properties Corp. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited; financial-statement amounts below are in millions of dollars unless otherwise noted. InvenTrust is a REIT focused on multi-tenant retail, including grocery-anchored and necessity-based open-air centers.
Business context
At June 30, 2018, the company managed 78 retail properties totaling approximately 13.9 million square feet, including 64 wholly owned or consolidated properties and 14 properties held through IAGM, its retail joint venture. Portfolio economic occupancy was 93.0%, unchanged year over year; average base rent was $16.95 per square foot, up from $16.36. The company acquired two centers for $152.3 million and disposed of or transferred properties with a gross disposition price of $212.95 million during the first half.
Financial performance and liquidity
- Revenue: Q2 total income was $61.8 million, down 0.6% year over year; first-half income was $125.7 million, up 1.0%. First-half rental income declined $1.7 million, while tenant recoveries increased $3.0 million.
- Profit: Q2 net income was $23.2 million ($0.03 per share), versus $33.9 million ($0.04) a year earlier. First-half net income was $57.4 million ($0.07 per share), versus $36.0 million ($0.05). The first-half comparison benefited from higher property-sale and debt-extinguishment gains and lower impairment charges; Q2 results included substantially less investment income than the prior-year quarter.
- Operating measures: Same-property modified NOI was essentially flat at $34.0 million in Q2, but declined 3.7% to $59.7 million for the first half. Management attributed the first-half decline to slower leasing at certain properties, higher taxes, and non-recoverable operating costs. FFO, a non-GAAP measure, fell to $31.6 million in Q2 from $46.8 million and to $75.3 million in the first half from $90.6 million.
- Cash flow: First-half operating cash flow was $65.3 million, compared with $60.3 million. Investing activities provided $22.8 million, principally reflecting property-sale proceeds, while financing activities used $46.4 million, including $27.3 million of distributions and debt-related payments. Cash, cash equivalents, and restricted cash totaled $213.5 million at period end.
- Debt and liquidity: Debt, net of issuance costs and other adjustments, was $590.3 million, down from $667.9 million at year-end 2017. The company had $300 million available under its $300 million unsecured revolving credit line and reported compliance with debt covenants. Mortgage maturities included $59.6 million in the remainder of 2018; the revolver matures in February 2019 and has a conditional one-year extension option. The company reported $23 million of joint-venture mortgage debt recourse to it.
- Distributions: First-half distributions declared were $27.7 million, or $0.04 per share, versus $26.9 million, or $0.03, in the prior-year period. The board increased the annual distribution rate effective with the quarterly payment in April 2018; the filing does not state the new annualized rate in the supplied text.
Material changes and unusual items
- Q2 property-sale gains were $18.0 million; first-half gains were $38.3 million. First-half debt-extinguishment gains were $10.7 million, largely related to property surrenders, partly offset by payoff penalties and loan-cost write-offs.
- First-half asset impairment was $0.8 million, compared with $16.4 million in the 2017 period. IAGM recorded $2.3 million of impairments and a $3.9 million loss on a property sale; InvenTrust’s share contributed to equity-method losses.
- General and administrative expense fell $2.3 million in Q2 and $5.4 million in the first half, which management attributed to a more focused, smaller operating platform and expense controls.
- In adopting new accounting guidance, the company recognized $12.8 million of previously deferred gains in opening equity. Management said the revenue-standard adoption had an immaterial cumulative effect.
Outlook, risks, and contingencies
No quantified earnings or operating guidance is provided. Management intends to refine the retail portfolio, pursue acquisitions in selected growth markets, dispose of non-core assets, and invest in redevelopment and leasing. It cautioned that transaction timing is uncertain and that competition may raise acquisition prices or limit attractive purchases; disposition values and timing may also be affected by market conditions.
Key risks cited include retail-sector disruption and e-commerce, tenant bankruptcies and lease renewals, property taxes and operating costs, interest rates, refinancing and debt maturities, access to capital, joint-venture execution, and REIT qualification. IAGM planned to refinance or repay upcoming 2018 maturities using cash on hand, but stated there was no assurance refinancing would be available. A purchaser’s indemnity claims related to the 2016 sale of University House could result in a loss of up to $5.0 million beyond the amount accrued. Management did not expect ordinary-course legal matters to have a material adverse effect. The company reported effective disclosure controls and no material change in internal control during the quarter.
Investor verification priorities
- Assess recurring operating performance separately from property-sale and debt-extinguishment gains, and reconcile GAAP net income with FFO and modified NOI.
- Review the first-half same-property modified NOI decline, including leasing pace, tax growth, and non-recoverable operating expenses.
- Verify the 2018 mortgage maturity plan, the February 2019 revolver maturity and extension conditions, and the company’s available liquidity.
- Monitor IAGM’s refinancing needs, impairment activity, and the $23 million of joint-venture debt recourse to InvenTrust.
- Track distribution coverage from operating cash flow and the board’s future distribution decisions.
- Follow the resolution of the University House indemnity claims and confirm any change to the recorded contingency estimate.