Inventrust Properties Corp. annual report, FY2015

Business Context and Reporting Period

InvenTrust Properties Corp. filed this Form 10-K for the fiscal year ended December 31, 2015. The REIT reported 129 properties: 97 retail properties, 18 student-housing properties and 14 non-core properties. Its strategy was to transition toward a multi-tenant retail-focused business. The filing includes audited 2015 financial statements; the 2014 comparison is affected by major asset sales and the February 2015 spin-off of Xenia Hotels & Resorts.

Financial and Operating Highlights

• Retail economic occupancy was 93%; same-store retail modified NOI increased 5.1% to $167.1 million. Student-housing occupancy was 95%, and segment modified NOI rose 30.4% to $54.1 million, partly reflecting newly opened and acquired properties. Non-core same-store modified NOI rose 6.8%, but total segment modified NOI fell 13.3% to $78.4 million, mainly due to dispositions.
• Net income fell sharply, reflecting lower gains and discontinued-operation income versus 2014, as well as $108.2 million of impairment charges in 2015. This included $92.2 million for the Railyards land development and $16.0 million for two retail properties. The $12.9 million Railyards contribution loss was also recorded.
• Interest expense from continuing operations was $94.6 million; the reported weighted-average rate on total debt was 4.94%. Operating, investing and financing cash flows were $194.7 million, negative $164.3 million and negative $560.3 million, respectively.
• Distributions declared were $138.6 million, or $0.16 per weighted-average share; cash distributions paid were $146.5 million, or $0.17 per weighted-average share. The board cut the annualized distribution rate from $0.50 to $0.13 after the Xenia spin-off. For tax purposes, 92% of 2015 distributions paid was classified as return of capital.

Liquidity, Debt and Capital

Year-end debt included $1.77 billion of mortgages and $110 million outstanding under a $300 million unsecured term-loan facility. The company also had a $300 million revolving credit facility fully available. The term loan bore LIBOR plus 1.30% or 1.60%, depending on tranche; the revolver bore LIBOR plus 1.40%. Mortgage maturities included $275.2 million in 2016 and $600.4 million in 2017. Management said it was negotiating refinancing for 2016 maturities and expected to repay, refinance or extend them. Approximately $47.3 million of outstanding debt was recourse to InvenTrust. One $2.7 million mortgage loan was not in compliance with loan requirements at year-end; it was non-recourse, not cross-collateralized and due in 2016.

Material Changes, Outlook and Risks

• In February 2015, InvenTrust spun off 95% of Xenia to stockholders. It completed the transition to self-management, changed its name and acquired four retail properties during the year. It sold five non-core properties, 11 retail properties and a land parcel for aggregate gross proceeds of $196.6 million.
• In December 2015, the company announced a planned pro-rata spin-off of substantially all non-core assets into Highlands REIT, expected in Q2 2016, subject to approvals and other conditions. In January 2016, it agreed to sell its student-housing platform for a stated gross all-cash value of approximately $1.4 billion; final net proceeds depend on closing adjustments and conditions. Both transactions were pending at the filing date. Management expected distributions to decline after the student-housing sale, and said it would set a new distribution rate based on the remaining portfolio.
• Management anticipated modest rental-income growth and improving occupancy in its target retail markets, and planned selective redevelopment, pad-site development, acquisitions and non-strategic property sales. It noted that asset sales could dilute operating performance before proceeds are reinvested.
• AT&T leases generated 15.8% of annualized rental income excluding student housing. AT&T did not renew the Hoffman Estates lease expiring in August 2016; the St. Louis renewal option expired in September 2016, with the original lease ending in 2017. Nonrenewal could make the properties difficult to re-lease or refinance and could lead to mortgage-payment defaults if replacement tenants are not secured.
• Other material risks include refinancing and interest-rate exposure, tenant and lease rollover risk, retail competition and e-commerce, geographic concentration, the illiquidity of real estate and InvenTrust shares, REIT qualification, and the execution and completion of planned strategic transactions. The filing states that no established public trading market exists for InvenTrust shares; the $4.00 estimated share value was set in February 2015 and is not a guaranteed sale or liquidation value.
• The SEC informed the company in March 2015 that it did not intend to recommend enforcement action following its investigation. A derivative-litigation settlement resulted in $7.3 million of net proceeds recorded as other income in 2015. The auditor issued an unqualified opinion on the consolidated financial statements.

Important Facts for Investors to Verify

• Whether the Highlands spin-off and student-housing sale closed, their final terms and net proceeds, and how the transactions affected the remaining company’s balance sheet and cash generation.
• AT&T’s renewal decisions, any re-leasing progress and the status of the related property loans and cash-sweep provisions.
• Refinancing or repayment of 2016–2017 maturities, covenant compliance and liquidity after the pending portfolio transactions.
• Post-transaction distribution rate and whether distributions are supported by recurring operating cash flow rather than asset-sale proceeds or other sources.
• The company’s updated estimated share value and any change in share liquidity; the filing’s prior $4.00 estimate is not an established market price.