Inland American Real Estate Trust, Inc. — Q2 2012 Form 10-Q
Entity clarification: The filing identifies the registrant as Inland American Real Estate Trust, Inc.; it does not identify the company as Inventrust Properties Corp. The unaudited quarter and six-month periods ended June 30, 2012; dollar amounts below are in millions unless noted.
Business context
The REIT reported a diversified U.S. portfolio across retail, lodging, office, industrial and multifamily properties. At June 30, it owned 938 properties, including 696 retail properties and 100 hotels. Management said it intended to reposition the portfolio toward retail, lodging and student housing, including selective sales of non-strategic assets.
Financial performance and position
- Q2 revenue: $401.3, up from $333.1 in Q2 2011. Operating income was $61.7 versus $52.4. Net loss attributable to the company was $17.9, compared with $27.8; diluted loss per share was $0.02 versus $0.03.
- First-half revenue: $742.5 versus $644.9. Operating income was $108.7 versus $94.5. Net loss attributable to the company was $48.2 versus $82.4; diluted loss per share was $0.05 versus $0.09.
- Property operations: First-half same-store net operating income (NOI) rose 1.9% to $361.9. Same-store lodging NOI increased 5.3%, multifamily 11.5%, retail 0.1%; office and industrial each declined 1.0%.
- Cash flow: First-half cash from operations was $242.8, compared with $195.7 in 2011. Investing activities used $210.5 and financing activities used $39.0; cash declined $6.7 to $211.5.
- FFO: First-half funds from operations, a non-GAAP measure, was $226.7 versus $204.2. The filing cautions that FFO is not a substitute for GAAP net income or operating cash flow.
- Liquidity and balance sheet: Cash was $211.5, restricted cash and escrows $98.5, and total assets $11.07 billion. Total liabilities were $6.57 billion and equity $4.50 billion. Mortgages, notes and margin debt, net, totaled $6.20 billion; mortgage loans had a 5.2% weighted-average rate.
- Distributions: $218.9 was declared in the first half, or $0.25 per weighted-average share for the period (management described the rate as $0.50 annualized). Operating cash flow exceeded declared distributions by $23.9; management’s broader coverage presentation also included joint-venture distributions and property-sale gains.
Changes versus the prior comparable period
- Revenue growth reflected acquisitions, particularly five upper-upscale hotels acquired in March 2012, plus improved lodging and multifamily operations. The hotel acquisitions had a reported gross price of $393.1.
- First-half lodging income increased $79.9 and retail rental income increased $14.3 year over year. Lodging same-store NOI rose 5.3%; multifamily same-store NOI rose 11.5%.
- Net loss narrowed year over year, in part as 2011 included larger discontinued-operation losses and impairment charges. However, first-half continuing-operation loss increased to $44.5 from $34.4, with higher interest expense and impairments among the factors.
- Mortgage debt increased from $5.81 billion at year-end 2011 to $6.08 billion at June 30, 2012. Investment properties were acquired for $211.0 net cash during the first half, while property-sale proceeds were $104.6.
Outlook, risks and unusual items
- Management expected stronger lodging and multifamily same-store performance in 2012; stable retail and industrial performance; and lower office income than in 2011. It anticipated maintaining distributions, supported by operating cash flow, joint-venture distributions and property-sale gains. These are expectations, not guaranteed results.
- About $271 million of mortgage debt matured in 2012 and $1.03 billion in 2013. The company was negotiating refinancing and said it expected to repay, refinance or extend maturities, but acknowledged no assurance of acceptable terms. Approximately $583 million of total debt was recourse to the company; about $1.51 billion of mortgage debt bore variable rates.
- Eight mortgage loans with a carrying value of $122.5 were not in compliance with certain loan requirements; the related properties had a carrying value of $96.8. The filing said these loans were not cross-collateralized or recourse to the company.
- Impairments included $27.9 on investment properties and $4.2 on an unconsolidated investment in the first half. The latter related to a joint venture with a buy/sell and disposition arrangement; the company was required to notify its partner by September 17, 2012 whether it would buy the partner’s interest or sell its own interest under specified terms.
- The SEC was conducting a non-public formal fact-finding investigation involving management and property-management fees, affiliate transactions, distributions, impairment determinations and possible self-administration. The company said it was cooperating, had not been accused of wrongdoing, and could not predict the timing or outcome. Its business manager offered specified fee reductions to cover certain investigation-related costs, excluding company legal fees and costs covered by insurance.
- Revenue concentration is material: SunTrust Bank leases generated about 9% of first-half rental revenue and three AT&T properties about 7%. One AT&T lease covering approximately 1.7 million square feet expires in 2016. Management also cited geographic concentration and refinancing, interest-rate, joint-venture and leasing risks.
- Related-party property-management agreements were renewed effective July 1, 2012, with fees varying by property type; the business-management agreement was extended through July 30, 2013 on unchanged terms. The filing reported $20.0 of first-half business-management fees and $14.5 of property-management fees paid or incurred to related parties.
- Management stated disclosure controls were effective as of June 30, 2012 and reported no significant change in internal control over financial reporting during the first half.
Most important facts for investors to verify
- Confirm the filing entity: the supplied 10-Q is for Inland American Real Estate Trust, Inc., not the company named in the request metadata.
- Track refinancing progress for 2012–2013 maturities, covenant exceptions and any changes to debt terms or recourse exposure.
- Review the SEC investigation’s status, potential costs and the scope and enforceability of the business manager’s reimbursement offer.
- Assess distribution sustainability against recurring operating cash flow, debt service, capital needs and the company’s reliance on joint-venture proceeds or asset sales.
- Monitor the joint-venture disposition decision and valuation, impairment assumptions, and concentration in SunTrust, AT&T and key geographic markets.