Business Context and Reporting Period
Company: Inland American Real Estate Trust, Inc. (Inland American)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 31, 2007
Inland American is a Maryland corporation operating as a Real Estate Investment Trust (REIT). The company acquires and manages a diversified portfolio of commercial real estate, including retail, office, industrial, multi-family, and lodging properties. As of December 31, 2007, the company owned interests in 641 properties (excluding lodging and development) and 76 lodging properties across 33 states. The company is currently conducting a follow-on public offering of common stock at $10.00 per share.
Key Financial Metrics
| Metric | 2007 | 2006 |
|---|---|---|
| Total Assets | $8,211,758,000 | $3,040,037,000 |
| Total Income | $478,736,000 | $123,202,000 |
| Net Income (Applicable to Common Shares) | $55,922,000 | $1,896,000 |
| Funds From Operations (FFO) | $234,215,000 | $48,088,000 |
| Cash Flow from Operating Activities | $263,420,000 | $65,883,000 |
| Total Debt (Mortgages, Notes, Margins) | $3,028,647,000 | $1,107,113,000 |
| Distributions Declared | $242,606,000 ($0.611/share) | $41,178,000 ($0.60/share) |
| Weighted Average Shares Outstanding | 396,752,280 | 68,374,630 |
Material Changes vs. Prior Period
- Portfolio Expansion: The company significantly expanded its portfolio in 2007, acquiring 624 properties compared to 56 in 2006. This included major acquisitions of Winston Hotels, Inc. (44 hotels) and Apple Hospitality Five, Inc. (27 hotels), establishing a substantial lodging segment.
- Revenue Growth: Total income increased by 288% to $478.7 million, driven primarily by the acquisition of new properties and the addition of lodging operating income ($126.4 million), which was non-existent in 2006.
- Debt Increase: Total debt increased by 173% to $3.03 billion to fund acquisitions and operations. Mortgage debt specifically rose from $1.06 billion to $2.96 billion.
- Impairment Charges: The company recorded an "other than temporary" impairment of $21.7 million on marketable securities and a $10.1 million impairment on investments in unconsolidated entities (specifically Feldman Mall Properties), reflecting declines in the REIT stock market.
- Capital Raising: Gross offering proceeds totaled approximately $5.5 billion as of year-end, with the initial offering terminating in July 2007 and a follow-on offering commencing in August 2007.
Guidance, Outlook, and Risks
- Distribution Outlook: The company expects to continue paying monthly cash distributions at a rate of $0.05167 per share through the remainder of 2008. For 2007, 37% of distributions were classified as a return of capital for tax purposes.
- Liquidity and Capital Markets: Management notes recent volatility in domestic financial markets and tightening liquidity. While they believe they have sufficient liquidity to meet obligations, there is uncertainty regarding the ability to access credit markets on reasonable terms for future acquisitions.
- Key Risks:
- Tenant Concentration: AT&T Inc. accounted for approximately 16% of rental revenue in 2007. Default by this single tenant could materially impact results.
- Lodging Volatility: The lodging segment is subject to higher volatility than traditional real estate, with revenues tied to daily occupancy and rates. The company has limited experience in this sector.
- Interest Rate Risk: A significant portion of debt is variable-rate. A 1% increase in interest rates would decrease future earnings by approximately $4.0 million.
- Legal Proceedings: The company is involved in litigation with Crockett Capital Corporation regarding development agreements for four hotels, with potential damages sought of up to $24.9 million.
- Unusual Items: The company expensed approximately $5.0 million in rate lock deposits and breakage fees in 2007 after lenders refused to honor agreements due to "material adverse changes in the market."
Investor Verification Checklist
- Debt Maturity Profile: Verify the schedule of debt maturities, noting that $283.9 million of variable-rate debt matures in 2008, requiring refinancing in a potentially tight credit market.
- AT&T Lease Status: Confirm the status of the leases with AT&T, which represent a significant concentration of revenue risk.
- Marketable Securities Valuation: Review the valuation of the remaining marketable securities portfolio ($248 million) given the $21.7 million impairment already recognized and the potential for further write-downs.
- Lodging Performance: Monitor the occupancy rates and Average Daily Rates (ADR) of the newly acquired hotel portfolio, as this segment is new to the company and highly sensitive to economic conditions.
- Legal Resolution: Track the outcome of the litigation with Crockett Capital Corporation regarding the development hotels in North Carolina.