Business context and reporting period
InvenTrust Properties Corp. (formerly Inland American Real Estate Trust, Inc.) filed this unaudited Form 10-Q for the quarter ended March 31, 2015. On February 3, 2015, it spun off 95% of lodging subsidiary Xenia Hotels & Resorts to shareholders; the lodging business is reported as discontinued operations. At quarter-end, the company owned 142 properties: 108 retail, 14 student housing and 20 non-core. Its strategy is to grow retail and student housing and dispose of non-core assets. The company changed its name on April 16, 2015.
Financial performance and position
Amounts below are in millions, except per-share data and where noted.
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total income | $109.7 | $118.5 |
| Operating income | $19.3 | $21.5 |
| Net income from continuing operations | $3.6 | $(3.6) |
| Net income attributable to company | $5.8 | $130.5 |
| FFO, a non-GAAP measure | $57.1 | $112.1 |
| Cash from operating activities | $40.7 | $63.9 |
| Cash used in investing activities | $(40.7) | Cash provided: $217.5 |
| Cash used in financing activities | $(535.3) | $(48.1) |
- Continuing-operations net operating income (NOI) was $76.9 million, down from $84.6 million. Same-store NOI declined 0.9% to $73.1 million: retail decreased 2.4%, student housing increased 4.8%, and non-core decreased 0.3%.
- At March 31, cash and cash equivalents were $197.8 million; total assets were $4.30 billion and balance-sheet debt was $1.83 billion. Mortgage loans outstanding were $1.84 billion gross, with a 5.03% weighted-average rate. Approximately $31.9 million of debt was recourse to the company.
- The $300 million unsecured revolver had approximately $300.0 million available and $0.04 million drawn. It matures in February 2019, bears interest at LIBOR plus 1.40%, and may be increased to $600 million subject to conditions.
- Mortgage maturities include $25.8 million in 2015, $240.7 million in 2016 and $782.6 million in 2017. Approximately $209.3 million of mortgage debt was variable rate.
Material changes versus the prior period
- Reported net income and FFO fell sharply from Q1 2014, principally because prior-year discontinued operations included substantial property-sale gains and many more properties. The company attributed the decline in operating cash flow primarily to dispositions, including the Xenia spin-off. The periods are not directly comparable.
- Income declined 7.4%; operating income fell to $19.3 million. Interest expense decreased to $23.0 million from $31.7 million, mainly due to property sales and mortgage paydowns.
- General and administrative expense rose to $20.6 million from $14.1 million as self-management functions were internalized; the quarter included approximately $1.7 million in severance costs. No asset impairment was recorded, compared with $6.8 million in continuing operations in Q1 2014.
- Cash used in financing included $165.9 million contributed to Xenia, $130.1 million of lodging-property cash transferred to Xenia, and repayment of a $200 million term loan. The spin-off reduced equity by approximately $1.69 billion.
- Unrealized gains on securities contributed $51.2 million to other comprehensive income; the portfolio included a 5% Xenia stake valued at $129.0 million. A $2.7 million realized securities gain was recognized in earnings.
Outlook, risks and unusual items
- Management expects retail same-store income to be broadly consistent with 2014, student housing results to improve, and non-core performance to be similar or lower. It expects dispositions, which may dilute operating performance before proceeds are reinvested. No specific earnings or FFO guidance was provided.
- The board reduced the annualized distribution rate from $0.50 to $0.13 per share beginning with the March 2015 payment, citing the loss of Xenia cash flows and the need to retain capital. Management expects to sustain the new rate using operating cash flow, joint-venture distributions and property-sale gains. Quarterly distributions are planned to begin in Q3 2015.
- Management was negotiating refinancing of 2015 maturities and expected to repay, refinance or extend them, but cautioned that satisfactory refinancing is not assured. One $2.6 million mortgage was out of covenant compliance; it was not recourse to the company or cross-collateralized. The company stated it was in compliance with revolver covenants.
- Non-core tenant concentration and lease rollover are notable risks: AT&T accounted for approximately 13% of retail and non-core rental revenue. AT&T leases on two large properties expire in 2016 and 2017; renewal is not assured and re-leasing could require significant costs.
- Student housing development included five projects; management anticipated approximately 1,618 beds to be delivered mid-year 2015 and 831 beds in 2016. After quarter-end, the company acquired two retail properties for $90.5 million and sold one non-core property for $27.5 million.
- The SEC informed the company on March 24, 2015 that it had concluded its investigation and did not intend to recommend enforcement action. Derivative litigation remains ongoing; the company intends to pursue claims against former managers and related parties. It also agreed to indemnify Xenia for losses related to the investigation and related proceedings.
Important facts for investors to verify
- Refinancing plans and terms for the 2015–2017 mortgage maturities, especially the substantial 2017 balance.
- Whether the reduced $0.13 annualized distribution is covered by recurring operating cash flows rather than asset sales or other non-recurring sources.
- AT&T lease-renewal outcomes, related re-leasing costs and the planned pace and pricing of non-core dispositions.
- Development completion, leasing and funding needs for the student housing projects and expected bed deliveries.
- Potential financial exposure from derivative litigation, the Xenia indemnity and the company’s remaining investment in Xenia securities.