Inventrust Properties Corp. quarterly report, Q1 FY2016

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InvenTrust Properties Corp. — Q1 2016 Form 10-Q

Unaudited results for the three months ended March 31, 2016; balance-sheet comparisons are with December 31, 2015. Dollar amounts below are in millions unless otherwise noted.

Business context

InvenTrust is a REIT shifting its portfolio toward multi-tenant retail. At quarter-end it owned 124 properties: 92 retail, 18 student housing and 14 non-core properties. The quarter’s results precede the April 28, 2016 spin-off of Highlands REIT, which held substantially all remaining non-core assets, and the expected sale of the student housing platform.

Financial performance and liquidity

  • Total income was $114.3, up 4.2% from $109.7. Rental income increased $5.7, while tenant recovery income declined $2.0.
  • Operating income was $19.4, essentially unchanged from $19.3. Net income attributable to InvenTrust rose to $25.4 from $5.8; basic and diluted EPS were $0.03 versus approximately $0.00.
  • The year-over-year profit increase was driven principally by a $24.0 property-sale gain, versus $0.7 a year earlier. Q1 also included an $8.4 impairment charge on two retail properties. Net income is therefore not a clean measure of recurring performance.
  • Segment NOI was $83.6, up from $79.3; modified NOI, a company-defined non-GAAP measure, was $83.0 versus $79.2. Same-store modified NOI increased 1.8% overall: retail +1.8%, student housing +3.2%, and non-core +1.2%. Retail economic occupancy was 94%; student housing physical occupancy was 95%.
  • NAREIT FFO was $50.9, down from $57.1. The filing notes FFO is a supplemental non-GAAP measure and not a substitute for GAAP income or operating cash flow.
  • Cash from operations was $36.1, down from $40.7. Investing activities provided $73.8, mainly reflecting $107.6 of net property-sale proceeds; financing activities provided $122.4. Cash and equivalents rose to $435.7 from $203.3.
  • Total assets were $4,344.0. Debt, net of discounts and issuance costs, was $2,022.4, up from $1,870.2. Mortgage debt was $1,724.7 at a 4.93% weighted-average rate. Cash plus disclosed unused term-loan and revolver capacity was approximately $725.7; availability under those facilities was $150 and $140, respectively.
  • Mortgage maturities were $243.8 in 2016 and $601.9 in 2017. The company was negotiating 2016 refinancing and said it expected to repay, refinance or extend the maturities. One $3.0 mortgage loan was not in compliance with requirements; it matured in 2016, was non-recourse, and was not cross-collateralized.
  • Quarterly distributions declared were $28.0, or $0.03 per weighted-average share. Management said the board would reassess the distribution after the student housing sale and expected payments to decrease.

Material changes and transactions

  • Five retail properties were sold during Q1 for an aggregate gross price of $111.3. The filing reports $107.6 net proceeds and a $24.0 gain.
  • On January 4, the company agreed to sell its student housing platform for approximately $1.4 billion gross cash value, with final net proceeds subject to closing adjustments. Closing was expected by the end of Q2 2016, subject to customary conditions; certain consents could defer closing to July 5. The agreement provides for an $85 million reverse break-up fee in specified termination circumstances.
  • On April 28, the company completed the Highlands spin-off. Highlands received assets with a March 31 book value of approximately $660 and liabilities of approximately $435. Highlands shares were not listed and had no current trading market.
  • After quarter-end, three retail acquisitions were reported at gross prices totaling $333.7: Shops at the Galleria ($132.0), Renaissance Center ($129.2) and Stevenson Ranch Plaza ($72.5). The filing gives inconsistent acquisition dates for Stevenson Ranch Plaza (April 8 in MD&A and April 15 in a note).
  • Same-store retail NOI improved, but total retail modified NOI slipped 0.6%; total non-core modified NOI fell 5.8%, partly reflecting prior dispositions. Student housing modified NOI rose 41.3%, substantially due to assets added or placed in service after Q1 2015.

Outlook, risks and unusual items

  • Management expected modest rental-income growth and higher occupancy across the retail platform, citing favorable conditions in target markets, leasing demand and redevelopment opportunities. It planned to focus on high-growth markets and reduce its presence from as many as 40 markets to roughly half that number.
  • Management expected to redeploy some disposition proceeds into retail, while also considering debt reduction, capital-structure changes or share repurchases. It cautioned that disposals could dilute operating performance before proceeds are reinvested.
  • Management said Sports Authority represented approximately 1% of annual rental income and expected limited portfolio impact from its bankruptcy. It also noted uncertainty from the energy-sector downturn; approximately 24% of the retail platform was in Texas and Oklahoma.
  • Key risks include completing the student housing sale, refinancing near-term maturities, interest-rate exposure, leasing and tenant-credit risks, local economic conditions, disposition and acquisition execution, and REIT qualification. A 1% permanent change in rates on floating-rate debt was estimated to affect future earnings and cash flows by approximately $2.1.
  • Interest-rate swap liabilities increased to $5.6 from $1.9. A 10% change in equity-security prices would change the reported fair value of equity securities by approximately $17.9 million.
  • Management said ordinary-course legal matters were not expected to have a material adverse effect. No material change to previously disclosed risk factors was reported, and disclosure controls were judged effective at a reasonable assurance level.

Important facts for investors to verify

  • Whether the student housing sale closed, its final net proceeds, and the resulting use of proceeds and distribution-rate decision.
  • Refinancing or repayment of the 2016–2017 mortgage maturities and resolution of the loan covenant exception.
  • Post-Highlands and post-student-housing-sale portfolio composition, operating cash flow, leverage and recurring FFO.
  • The Stevenson Ranch Plaza acquisition date, which differs between sections of the filing.
  • Whether retail occupancy, same-store performance and leasing spreads support management’s growth outlook, and how much distributions are supported by recurring cash flow rather than asset-sale proceeds.