Business context and reporting period
This is Inland American Real Estate Trust, Inc.’s Form 10-K for the fiscal year ended December 31, 2013, filed March 13, 2014—not a filing in the name of “Inventrust Properties Corp.” The company is a non-listed REIT repositioning its diversified U.S. real estate portfolio toward multi-tenant retail, lodging and student housing.
At year-end, the continuing portfolio comprised 277 properties: 119 retail properties, 99 hotels, 14 student housing properties and 45 non-core properties. Another 224 properties were classified as held for sale.
Financial results and key metrics
- Revenue: $1.322 billion, up 18.1% from $1.119 billion in 2012. Lodging income was $881.8 million; rental income was $361.7 million.
- Net income: $244.0 million attributable to the company, versus a $69.3 million loss in 2012. Continuing operations generated a $215.5 million net loss; discontinued operations generated $459.6 million of net income, including a $442.6 million property-sale gain.
- Operating performance: Net operating income (NOI) rose 12.5% to $577.9 million from $513.6 million. Same-store NOI increased 2.2% to $465.8 million. Lodging same-store NOI rose 6.8% and student housing rose 5.5%; retail was down 0.5% and non-core was down 3.1%.
- Impairments and FFO: Continuing-operations asset impairment charges were $248.2 million, compared with $37.8 million in 2012. Funds from operations (FFO), a non-GAAP measure, fell to $459.6 million from $476.7 million.
- Cash flow: Operating cash flow was $422.8 million, down from $456.2 million. Investing activities provided $922.6 million, principally reflecting property-sale proceeds; financing activities used $1.247 billion, including significant mortgage payoffs. Cash and cash equivalents ended at $319.2 million.
- Debt and liquidity: Balance-sheet debt was $4.153 billion, versus $6.006 billion in 2012; this balance-sheet figure reflects debt classified with held-for-sale assets separately. Mortgage loans totaled $4.737 billion, with a 5.09% weighted-average rate. The company had $299.8 million available on its $300 million revolving facility, alongside a fully drawn $200 million term loan. Mortgage maturities were approximately $418.5 million in 2014 and $544.4 million in 2015.
- Distributions: The company declared $450.1 million, or $0.50 per weighted-average share, and paid $449.3 million. Management said distributions were funded by operating cash flow, joint-venture distributions and property-sale gains; the filing reports 0% of 2013 distributions as return of capital for federal tax purposes.
- Quarterly results: Fourth-quarter total income was $370.0 million and net income attributable to the company was $34.8 million. Third-quarter net income attributable to the company was $237.5 million, reflecting the period’s substantial disposition-related results.
Material changes versus prior comparable period
- Revenue and NOI increased, chiefly from acquired lodging and student housing assets, a full year of operations from prior acquisitions, and stronger lodging performance. Lodging RevPAR increased to $105 from $96; average daily rate rose to $143 from $133, while occupancy was 73% for the year.
- The portfolio underwent substantial rotation: the company sold 313 properties in 2013 for gross disposition proceeds of about $2.0 billion, acquired 21 properties for a gross price of about $1.217 billion, and contributed 14 retail properties to a joint venture.
- Net income turned positive primarily because of property-sale gains, while continuing operations remained loss-making and impairment charges rose sharply.
- Operating cash flow declined despite improved property performance, including $17.3 million of lender prepayment penalties in 2013. Cash from investing turned positive on dispositions, while financing cash use increased due to debt repayments.
Outlook, commentary, risks and unusual items
- Management expected 2014 lodging and student housing operating results to improve, retail performance to remain broadly consistent, and non-core performance to be similar or slightly lower. It expected to maintain the $0.50 annualized distribution, but acknowledged it would depend partly on sale gains and joint-venture distributions; continuation is not assured.
- The company expected to complete the sale of the remaining 224 held-for-sale net-lease properties in multiple closings during the first half of 2014. It reported subsequent closings in January, February and March 2014. Management cautioned that dispositions before reinvestment could dilute operating performance.
- Management was negotiating 2014 mortgage refinancing and believed maturities were manageable, but gave no assurance financing would be available on satisfactory terms. Approximately $1.0 billion of mortgage debt and $200.2 million of credit-facility debt bore variable rates; a permanent 1% rate increase was estimated to reduce future earnings and cash flows by about $10.5 million.
- On March 12, 2014, the company began transitioning to self-management, terminating its business management agreement and hiring the manager’s employees. It expected to internalize remaining property-management functions by 2015. Management fees are expected to fall, but direct payroll and operating costs will rise; the transition may create disruption or unforeseen costs.
- The SEC was conducting a non-public investigation into fees, affiliate transactions, distributions, impairments and possible self-management. The company said it had not been accused of wrongdoing and was cooperating. Related shareholder derivative demands and a stayed lawsuit remained under investigation. A separate DRP class action was dismissed with prejudice; an appeal was settled in February 2014 for an amount the company said was not material.
- The company had requested IRS closing agreements concerning possible REIT distribution and asset-test issues, including potentially preferential dividends and overnight commercial-paper holdings. IRS acceptance was not assured; failure to qualify as a REIT could create substantial tax consequences. The company also disclosed risks from tenant concentration (AT&T generated about 9% of continuing non-lodging rental revenue), property impairments, refinancing, market volatility and the illiquidity of its unlisted shares.
- There was no established public trading market for the shares. The $6.94 estimated per-share value was not a promise of realizable sale or liquidation value. The share repurchase program was suspended effective February 28, 2014, with possible reinstatement later in the year.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is for Inland American Real Estate Trust, Inc., not Inventrust Properties Corp.
- Track completion, proceeds, debt treatment and realized gains from the 224 held-for-sale properties, and determine the quality and returns of reinvestment.
- Assess distribution sustainability using operating cash flow and recurring joint-venture distributions separately from asset-sale gains.
- Review 2014–2015 debt refinancing, covenant compliance, variable-rate exposure and the distinction between reported debt and debt attached to held-for-sale assets.
- Monitor the SEC investigation, derivative matters and IRS closing-agreement requests, including any financial, legal or REIT-status consequences.
- Evaluate self-management costs and execution, including whether expected fee savings offset added direct expenses.
- Consider the lack of share-market liquidity and the limits of the estimated per-share value and repurchase program.