Business context and reporting period
The supplied filing is Inland American Real Estate Trust, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2012—not a filing identified in its text as Inventrust Properties Corp. The REIT owned 887 commercial properties across retail, lodging, office, industrial and multifamily segments. Management described a strategy of repositioning the portfolio toward retail, lodging and student housing and selling nonstrategic assets.
Financial performance and condition
Amounts below are in millions of dollars, except per-share data.
| Metric | Three months ended September 30, 2012 | Three months ended September 30, 2011 | Nine months ended September 30, 2012 | Nine months ended September 30, 2011 |
|---|---|---|---|---|
| Total income | $373.4 | $312.5 | $1,080.6 | $924.6 |
| Operating income | $28.5 | $45.2 | $131.6 | $136.6 |
| Net loss attributable to company | $(17.6) | $(51.7) | $(65.8) | $(134.1) |
| Basic and diluted loss per share | $(0.02) | $(0.06) | $(0.07) | $(0.16) |
| Cash provided by operating activities | Not presented for quarter | Not presented for quarter | $352.3 | $302.7 |
| Funds from operations (FFO; non-GAAP) | Not presented here | Not presented here | $345.7 | $327.6 |
- Revenue and operating trends: Nine-month income increased 16.9%, led by lodging income growth of $126.2 million and rental income growth of $23.1 million. Nine-month net property operations rose to $575.4 million from $516.3 million. Same-store NOI increased 5.7% in lodging and 11.0% in multifamily; retail and office were broadly steady, while industrial same-store NOI edged down 0.3%.
- Profit and impairments: Despite higher revenue, operating income declined as impairment charges increased to $63.5 million for the nine months from $21.2 million. Third-quarter impairment was $39.0 million, versus $6.0 million a year earlier. Interest expense rose to $233.3 million for nine months from $215.6 million. Discontinued operations contributed $32.1 million of nine-month income, including $29.7 million of property-sale gains.
- Cash, distributions and liquidity: Cash and equivalents were $330.5 million at September 30, 2012, up from $218.2 million at year-end; restricted cash was $104.1 million. Operating cash flow exceeded the $329.1 million of distributions declared by $23.2 million before considering other distribution sources. Management’s broader coverage presentation also counted $27.2 million of unconsolidated-venture distributions and $29.7 million of property-sale gains, reporting an $80.1 million excess. Distributions were $0.38 per weighted-average share for nine months, or $0.50 annualized.
- Debt and balance sheet: Mortgages, notes and margin debt, net, totaled $6.03 billion, compared with $5.90 billion at December 31, 2011; total assets were $10.84 billion and total equity $4.41 billion. Mortgage debt outstanding was $5.93 billion at a 5.2% weighted-average rate; margin debt was $130.9 million. Mortgage maturities included $180.1 million in 2012 and $936.0 million in 2013. Approximately $1.38 billion of mortgage debt was variable-rate; swaps hedged $176.8 million. A 1 percentage-point sustained rate increase on floating-rate debt was estimated to reduce future earnings and cash flow by about $13.8 million.
Material changes, outlook and key risks
- The company acquired six upscale hotels and two retail properties during the first nine months, placed two student-housing developments (1,302 beds combined) into service, and sold 86 assets and surrendered one property. Net cash proceeds from property sales were $356.5 million. The portfolio count was 887, compared with 976 one year earlier.
- Management said lodging and multifamily same-store performance improved and expected generally steady retail, lodging and multifamily performance. It anticipated refinancing or repaying 2012–2013 maturities and maintaining distributions supported by operations, but cautioned that refinancing on satisfactory terms was not assured. No specific earnings or FFO guidance was provided.
- REIT qualification uncertainty: The company identified potential issues involving preferential dividends and the REIT asset test. MB REIT filed an IRS closing-agreement request on October 31, 2012; the company planned to file separately. Failure to obtain relief could result in loss of REIT status, corporate tax exposure and possible penalties; the filing gives no clear estimate of the potential liability.
- Regulatory and shareholder matters: The SEC was conducting a non-public formal investigation concerning management and property fees, affiliate transactions, distributions, impairments and possible self-administration. The company said it had not been accused of wrongdoing and was cooperating. A special litigation committee was investigating a shareholder demand alleging fiduciary breaches; no lawsuit had been filed. Outcomes and costs could not be estimated.
- Debt covenant exceptions: The company reported noncompliance with requirements on seven mortgage loans with a $112.6 million carrying value, secured by properties with a $90.3 million carrying value. These loans were described as nonrecourse and not cross-collateralized.
- Other exposures: SunTrust-leased banking properties generated approximately 9% of rental revenue and three AT&T-leased properties generated approximately 7%. Management also cited refinancing, interest-rate, leasing, geographic concentration, joint-venture and securities-investment risks. Disclosure controls were assessed as effective, with no significant internal-control changes reported.
Important facts for investors to verify
- Confirm the issuer identity: the filing names Inland American Real Estate Trust, Inc.; the request metadata names Inventrust Properties Corp.
- Track IRS closing-agreement requests, the potential REIT-status and tax consequences, and any related penalty or reimbursement arrangements.
- Monitor refinancing progress and terms for the $180.1 million 2012 and $936.0 million 2013 mortgage maturities, as well as the seven covenant exceptions.
- Assess whether operating cash flow can sustain distributions without relying on asset-sale gains or venture distributions, and distinguish GAAP cash flow from non-GAAP FFO.
- Follow impairment assumptions and asset dispositions, particularly given the $63.5 million nine-month impairment charge and the continuing SEC and shareholder investigations.