InvenTrust Properties Corp. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The company is a REIT focused on multi-tenant retail properties. Unless stated otherwise, financial amounts below are in millions of dollars.
Business context and portfolio
At quarter-end, InvenTrust owned 70 multi-tenant retail assets and one non-core office asset, and held interests in five unconsolidated entities. Its retail joint venture owned 15 additional centers. The combined retail platform comprised 85 assets and about 15.2 million square feet. Wholly owned retail occupancy was 93.3%; platform occupancy was 92.8%.
During the first half, the company acquired three retail assets for a gross price of $289.9 million and sold three for $99.3 million. It also surrendered one asset to its lender in satisfaction of non-recourse debt. After quarter-end, it sold two more retail assets for $32.0 million.
Financial results and key metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total income | $63.4 | $63.0 | $127.5 | $126.4 |
| Net income from continuing operations | $33.9 | $18.6 | $36.1 | $34.6 |
| Net income (loss) from discontinued operations | $0.0 | $145.1 | $(0.1) | $154.5 |
| Net income | $33.9 | $163.7 | $36.0 | $189.1 |
| FFO, a non-GAAP measure | $46.8 | $30.8 | $90.6 | $81.7 |
| Modified NOI, a non-GAAP measure | $42.8 | $43.5 | $87.7 | $86.9 |
Q2 diluted EPS was $0.04, versus $0.19 in 2016; first-half EPS was $0.05 versus $0.22. The prior-year comparisons include substantial discontinued-operations income, chiefly from the University House sale and Highlands spin-off. Current-period earnings included realized marketable-securities gains of $16.3 million in Q2 and $30.9 million for the first half, plus property-sale gains of $13.4 million and $14.4 million, respectively.
First-half same-property modified NOI increased 2.0% to $66.4 million; Q2 same-property modified NOI was essentially unchanged at $36.0 million. Platform ABR per square foot was $15.94, up from $15.26 a year earlier, while platform occupancy eased to 92.8% from 93.8%. First-half comparable lease spreads were 3.7% for renewals and 24.2% for new leases; retention of space expiring in the first half was 83.0%.
First-half operating cash flow was $60.3 million, down from $85.5 million. Investing activities used $65.8 million, compared with $1,016.6 million provided in 2016, when asset-sale proceeds were much larger. Financing activities used $25.5 million, including $26.5 million of distributions paid. Cash and cash equivalents were $366.2 million at June 30, compared with $397.3 million at year-end; restricted cash was $60.5 million.
Total debt, net, was $770.1 million, up from $730.6 million at year-end. It comprised $471.9 million of mortgages, net, and $298.2 million of unsecured term loans, net. The company had $300 million available under its revolving credit line and reported compliance with its credit-facility covenants. Mortgage rates ranged from 3.49% to 10.45%, with a 5.19% weighted average. Stockholders’ equity was $1,914.1 million; total assets were $2,797.8 million.
Changes, outlook and risks
Compared with 2016, lower interest expense and general and administrative costs supported results, while fewer asset sales reduced gains and lower marketable-securities holdings reduced dividend income. First-half impairment charges were $16.4 million, recorded in Q1 on three retail assets; there were none in Q2. The company reported first-half distributions declared of $0.03 per share, versus $0.06 a year earlier, and said the board evaluates the distribution rate quarterly. Management reported an increase to the annual distribution rate effective for the distribution paid in April 2017.
Management’s strategy is to concentrate on open-air grocery-anchored and necessity-based centers in selected growth markets, pursue redevelopment and pad-site opportunities, and sell assets in lower-growth markets or where value is considered maximized. Management described leasing conditions in its key markets as modestly improving and said tenant bankruptcies and store closures had not had a material portfolio impact to date, though reletting could take longer. It expects to fund distributions from operating cash flows, joint-venture distributions and some property-sale proceeds. No numerical earnings or FFO guidance was provided.
Mortgage principal maturities included $136.4 million in the remainder of 2017 and $59.6 million in 2018. Two non-recourse mortgage loans totaling $42.1 million were in default and had matured in 2017; the company said it believed it had adequate sources to repay, refinance or extend near-term maturities. About $26 million of total debt was recourse to the company, including approximately $23 million associated with unconsolidated joint ventures. A permanent 1% rate increase on floating-rate debt would, as disclosed, increase annual interest expense by $1.5 million.
A jury awarded $6.0 million in compensatory and $6.0 million in punitive damages in a premises-liability case. The compensatory award was insured; coverage for punitive damages was uncertain. The company reported an $8.0 million liability and a $5.0 million insurance receivable at quarter-end, and said it was pursuing post-trial and other options. Management also cited retail competition, e-commerce, tenant lease expirations, refinancing and interest-rate risks, and uncertainty around executing strategic transactions and providing stockholder liquidity. Disclosure controls were assessed as effective; no material change in internal control was reported.
Important facts for investors to verify
- How much recurring property cash flow and FFO depend on realized securities gains, property dispositions and other nonrecurring items.
- Plans and funding for the $42.1 million of matured defaulted mortgages and the other 2017–2018 maturities.
- The status, insurance coverage and ultimate cost of the jury award and related recorded liability and receivable.
- Whether occupancy, tenant retention, lease spreads and same-property NOI remain resilient amid retail closures and competition from e-commerce.
- The sustainability of distributions relative to operating cash flow, capital needs and anticipated property-sale proceeds.