InvenTrust Properties Corp. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results. Dollar amounts are in U.S. dollars; financial statement amounts below are generally in millions unless stated otherwise.
Business context and reporting period
InvenTrust is a REIT reshaping itself into a focused open-air, multi-tenant retail platform, primarily grocery-anchored centers and necessity-based power centers in growth markets. At year-end it owned 71 retail properties totaling 12.2 million square feet, plus one non-core office property, and managed 15 retail properties through its 55%-owned IAGM joint venture.
Major 2016 portfolio actions included acquiring eight retail properties for approximately $465.2 million, spinning off substantially all remaining non-core assets to Highlands REIT, and selling its University House student-housing platform. The University House sale had a gross price of approximately $1.41 billion and generated final net proceeds of approximately $845 million after debt repayment and transaction costs.
Financial and operating metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Total income | $249.7 million | $267.5 million |
| Net income (loss) | $252.7 million | $3.5 million |
| Net income (loss) from continuing operations | $86.9 million | $(25.7) million |
| Net income per common share | $0.29 | $0.01 |
| Funds from operations (FFO) | $145.2 million | $247.2 million |
| Modified net operating income (NOI) | $168.6 million | $185.0 million |
| Cash from operating activities | $120.5 million | $194.7 million |
| Cash and cash equivalents at year-end | $397.3 million | $203.3 million |
| Total assets | $2,786.8 million | $4,204.9 million |
| Debt, net | $730.6 million | $1,094.7 million |
2016 net income included a $236.3 million gain on the University House sale and a $117.8 million gain on sales of investment properties. These gains were partly offset by $41.1 million of impairment charges in continuing operations and a $76.6 million impairment related to the Highlands spin-off. FFO excludes property-sale gains and is a non-GAAP measure; it is not equivalent to cash available for distributions.
Retail portfolio economic occupancy was 93% at year-end, unchanged from 2015; annualized base rent per square foot rose to $15.17 from $14.41. Same-store modified NOI was essentially flat, while total modified NOI fell 8.8%, mainly reflecting property sales, partly offset by acquisitions. Ross Dress for Less represented 4.3% of annualized base rent. Retail leases representing 7.6% of expiring GLA were due to expire in 2017 and 12.4% in 2018.
Fourth-quarter 2016 total income was $63.0 million and net income was $26.3 million, or $0.03 per share; continuing-operations income was $24.1 million. The filing does not provide a clear standalone fourth-quarter cash-flow value.
Material changes versus the prior comparable period
- Total income declined 6.7% year over year; rental income decreased to $188.8 million from $200.2 million.
- Net income rose sharply from $3.5 million, but the 2016 result was substantially affected by asset-sale gains and impairments. FFO declined approximately 41.3%, and operating cash flow declined approximately 38.1%.
- Year-end net debt fell by approximately $364.0 million. The company repaid or extinguished substantial debt following disposals, while taking on new borrowings.
- Assets decreased by approximately $1.42 billion, principally reflecting the Highlands spin-off and University House sale. The company repurchased 89.5 million shares, approximately 10.4% of shares outstanding at the offer reference date, for $238.1 million at $2.66 per share.
Liquidity, debt and distributions
Year-end debt principal was approximately $734.7 million, including $584.7 million fixed-rate or swapped to fixed and $150.0 million variable-rate debt. The weighted-average interest rate was 3.72%. Approximately $138.1 million matured in 2017 and $59.6 million in 2018; approximately $26.6 million of consolidated debt was recourse to the company. The company reported $300 million available under its revolving credit facility and compliance with its credit-facility covenants. One non-cross-collateralized, non-recourse mortgage with a $3.2 million carrying value was in default after maturing in 2016. Unconsolidated entities had $311.4 million of mortgage debt, approximately $23.0 million of which was recourse to InvenTrust.
Cash distributions declared were $83.6 million in 2016, versus $138.6 million in 2015; distributions paid were $98.6 million. The annualized rate was reduced from $0.13 to $0.0675 per share effective with the October 2016 quarterly distribution, reflecting the loss of cash flow from the dispositions and the plan to retain cash for portfolio rotation and a lower-levered balance sheet. In March 2017, the board approved an increase to $0.0695 per share annually. Management said distributions would be reviewed quarterly; 2016 distributions were supported by operating cash flow, joint-venture distributions and property-sale gains.
Outlook, commentary and risks
Management expected occupancy to increase and rental income to show slight-to-modest growth in 2017, supported by leasing, redevelopment, pad-site development and acquisitions in target markets. It characterized debt maturities over the next five years as manageable and expected low interest rates through 2017, while anticipating higher rates over the longer term. The company intends to continue selective retail acquisitions and dispositions and said the timing of portfolio refinement and any transaction intended to provide stockholder liquidity remained uncertain.
Key risks include the absence of an established public market for the shares; no assurance that strategic alternatives will be completed or provide liquidity; tenant failures, e-commerce competition, lease renewals and leasing costs; geographic concentration (including Houston, Dallas and Raleigh-Durham); Texas exposure to lower oil prices; refinancing, variable-rate interest and debt-covenant risks; and uncertainty in asset-sale proceeds, impairments and joint-venture outcomes. The $3.14 estimated share value announced in 2016 is not a trading price or assurance of realizable value; the tender offer price was $2.66 per share.
The filing also notes potential indemnification obligations connected with the Highlands and Xenia spin-offs and University House sale. In one pending personal-injury lawsuit, an insurer reserved its rights and disputed coverage; the company said it could not estimate a potential loss and recorded no estimate. Management stated that ordinary-course legal matters were not expected to materially affect the financial statements. The company remained qualified as a REIT and reported effective disclosure controls and internal control over financial reporting.
Most important facts for investors to verify
- Whether reported earnings and distribution capacity are sustainable apart from major asset-sale gains, impairments and other unusual items; assess operating cash flow and FFO separately.
- Progress on occupancy, same-store rents and NOI, lease renewals, and the 2017–2018 lease expirations.
- Debt repayment and refinancing plans for 2017–2018 maturities, the status of the matured mortgage in default, and exposure from unconsolidated joint-venture debt.
- Whether operating cash flow can support the current distribution rate without relying on asset-sale proceeds or other non-operating sources.
- Any strategic transaction or listing that could provide liquidity, and how any resulting value compares with the non-traded $3.14 estimated share value and the $2.66 tender price.
- Developments in the insurer coverage dispute and potential indemnification claims tied to prior spin-offs and the University House sale.