InvenTrust Properties Corp. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise. This is an annual report, not a standalone fourth-quarter filing.
Business context
InvenTrust is a Maryland REIT focused on multi-tenant, open-air retail centers, principally grocery-anchored neighborhood and community centers and necessity-based power centers. At year-end, its platform included 71 wholly owned or consolidated properties and a 55% interest in IAGM, which owned 15 properties. The combined platform comprised 86 properties and 15.4 million square feet, with 93.5% economic occupancy. The company has no established public market for its common shares.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Total income | $251.8 | $242.7 |
| Net income | $61.8 | $252.7 |
| FFO applicable to common shares (non-GAAP) | $167.7 | $145.2 |
| Modified NOI (non-GAAP) | $172.5 | $164.8 |
| Cash from operating activities | $118.2 | $122.0 |
| Cash and cash equivalents at year-end | $162.7 | $397.3 |
| Debt, net | $667.9 | $730.6 |
| Total assets | $2,698.6 | $2,786.8 |
- Total income rose 3.8%; rental income increased 3.7% to $188.2 million. Same-property modified NOI grew 0.7% to $122.9 million. Portfolio economic occupancy was 93.5%, down from 94.4%; ABR per square foot rose to $16.23 from $15.62.
- Net income fell 75.5%, reflecting much lower property-sale gains and discontinued-operation income than in 2016. 2017 also included $27.8 million of impairment charges on six retail properties and $46.6 million of net realized gains on marketable securities. FFO increased 15.5%; FFO and modified NOI are non-GAAP measures, not substitutes for GAAP earnings or operating cash flow.
- Cash from operations decreased 3.2%. Investing activities used $193.2 million and financing activities used $159.4 million; cash declined $234.5 million during the year. Marketable securities fell from $183.9 million to $4.8 million, with $171.7 million of net sale proceeds reported in investing cash flow.
- Year-end debt, net, was $667.9 million, including $369.5 million of mortgages net of related adjustments and $298.4 million of term-loan debt net of issuance costs. The company reported $300 million available under its revolving credit line. About $150 million of term-loan debt was swapped to fixed rates; approximately $150 million remained variable-rate.
- Declared distributions were $53.8 million and paid distributions were $53.4 million in 2017. The annual distribution rate was adjusted during the year; total distributions were $0.069 per share. For federal tax purposes, all 2017 distributions were treated as return of capital.
Material changes versus prior year
- InvenTrust continued its shift to a retail-only platform. It acquired eight retail properties for a gross $633.4 million and disposed of seven retail properties, a non-core office property and two outparcels for aggregate gross proceeds of $244.1 million.
- Revenue increased with acquired properties, partly offset by dispositions. General and administrative expense declined 14.1% to $46.4 million, while depreciation and amortization increased 13.9% and impairment expense rose to $27.8 million from $11.2 million.
- Net property-sale gains were $24.1 million, compared with $117.8 million in 2016. Interest expense fell 31.7% to $30.2 million, mainly reflecting prior debt repayments. Marketable-security income also declined as the portfolio was substantially sold down.
- Year-end cash was lower, while debt declined. Two non-recourse mortgage loans totaling $44.3 million were in default and receivership; the company planned to surrender the properties after foreclosure proceedings.
- After year-end, the company sold two retail properties for gross proceeds of $96.5 million and recorded an $18.9 million gain; IAGM sold another property for $38.0 million.
Outlook, risks and contingencies
Management intends to concentrate on 10–15 targeted growth markets, acquire accretive retail properties, dispose selectively of assets outside core markets or at maximized values, pursue redevelopment and pad-site opportunities, and maintain low leverage. Management stated that platform refinement may position the company to pursue strategic transactions aimed at providing stockholder liquidity, but the timing and form are uncertain and no transaction is assured. The company’s shares remain unlisted, and the $3.29 estimated share value announced in May 2017 is not a trading price or assurance of sale proceeds.
- Key business risks include e-commerce and changing retail conditions, tenant or anchor-store failures, lease renewals and vacancies, geographic concentration, redevelopment costs, and the ability to sell or reinvest assets on acceptable terms. Houston, Dallas–Fort Worth and Austin represented approximately 14%, 11% and 10% of annualized base rent, respectively.
- Mortgage debt scheduled for 2018 was $103.9 million, including the two matured loans in default. Management expected to use cash, sales proceeds and credit availability to repay, refinance or extend near-term debt. Approximately $23 million of unconsolidated-entity debt was recourse to the company and matured in 2018; management expected the ventures to repay, refinance or extend their debt.
- The company accrued for a legal settlement payment of $0.6 million after a jury verdict that included punitive damages; compensatory damages were insured. It also accrued an amount for buyer indemnification claims related to the University House sale; the ultimate loss could be up to $5.0 million above the accrued amount.
- The board periodically evaluates distributions. Management cautioned that distributions may not be sustainable at the current level and may be funded from sources other than operating cash flow. The filing also describes REIT qualification and tax-law changes as risks.
- Management concluded disclosure controls and internal control over financial reporting were effective at year-end. KPMG issued an unqualified opinion on the consolidated financial statements; it did not express an opinion on internal control.
Important facts for investors to verify
- Progress and final outcome of foreclosure proceedings for the two defaulted mortgages, and the company’s 2018 debt refinancing and repayment plan.
- Whether cash flow from operations can support distributions, capital spending and the retail strategy after the sharp reduction in cash and marketable securities.
- Actual leasing, occupancy and rent performance, particularly upcoming lease expirations and exposure to Houston and other concentrated markets.
- Disposition proceeds, impairment assumptions and the results of reinvesting sale proceeds; confirm subsequent asset sales and gains against later filings.
- Any strategic transaction or liquidity event, and the assumptions underlying any updated estimated share value; the existing estimate is not a guaranteed realizable price.
- Resolution of University House indemnification claims and any changes to legal contingencies or REIT/tax treatment.