InvenTrust Properties Corp. — Q3 2018 Form 10-Q
Reporting period: Quarter ended September 30, 2018. Unless stated otherwise, financial amounts below are in millions. InvenTrust is a REIT focused on owning, leasing, redeveloping, acquiring and managing open-air multi-tenant retail centers.
Business context
At quarter-end, the company managed 77 retail properties totaling 13.5 million square feet, including 63 wholly owned or consolidated properties and 14 properties held through its IAGM joint venture. Portfolio economic occupancy was 94.0%, versus 93.7% a year earlier; annualized base rent per square foot was $17.19, versus $16.14.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total income | $60.5 | $62.9 | $186.2 | $187.3 |
| Operating income | $1.1 | $8.8 | $23.9 | $14.9 |
| Net income | $8.9 | $22.0 | $66.3 | $58.0 |
| Net income per share | $0.01 | $0.03 | $0.09 | $0.07 |
| NAREIT FFO | $30.7 | $31.5 | $106.0 | $122.1 |
| Operating cash flow | Not provided here | Not provided here | $101.7 | $94.9 |
Q3 same-property modified NOI increased 2.8% to $32.3 million; nine-month same-property modified NOI fell 2.1% to $85.0 million. These are company-defined non-GAAP measures. Nine-month total modified NOI was $120.8 million, down from $125.3 million.
Balance sheet, liquidity and cash flows
- At September 30, total assets were $2.564 billion, total liabilities $716.6 million, and stockholders’ equity $1.847 billion. Net debt was $590.0 million, down from $667.9 million at year-end 2017.
- Cash and cash equivalents were $157.4 million, with restricted cash of $28.0 million. The company reported $185.4 million in combined cash, cash equivalents and restricted cash.
- Nine-month investing activities provided $71.4 million, reflecting $254.4 million of net property-sale proceeds, offset in part by $158.7 million of property acquisitions. Financing activities used $159.6 million, including the share repurchase and distributions.
- The unsecured revolving line had $248 million available under its $300 million commitment at quarter-end and matured February 2, 2019, with a conditional 12-month extension option. Management said it expected to meet near-term needs through operating cash flow, joint-venture distributions, property sales and borrowing capacity, and believed it could repay, refinance or extend debt.
- Management reported compliance with debt covenants. Company mortgage maturities included $7.6 million for the remainder of 2018 and $41.0 million in 2020. After quarter-end, the company paid off the $7.6 million mortgage; it said no company mortgage debt was then recourse to it.
Material changes and unusual items
- The company acquired retail properties for a gross $159.8 million in the first nine months, versus $633.4 million in the comparable 2017 period, and disposed of properties for a gross $283.0 million, versus $152.6 million. It described these sales as part of its strategy to exit non-core or value-maximized assets and reinvest selectively.
- Q3 operating income declined to $1.1 million, principally as depreciation and amortization rose $5.7 million and the company recorded $2.7 million of impairment, while total income fell $2.4 million. Q3 net income also benefited from a $13.5 million property-sale gain.
- Nine-month net income rose to $66.3 million, but included $51.7 million in property-sale gains and $10.7 million in net debt-extinguishment gains. FFO declined 13.2% to $106.0 million. The comparable 2017 period included $30.9 million of realized and unrealized investment gains, versus $0.2 million in 2018.
- The company repurchased 46.5 million shares, about 6% of shares then outstanding, for $2.10 per share and approximately $99.2 million including fees and expenses. Nine-month declared distributions totaled $40.8 million, or $0.05 per share.
- Subsequent to quarter-end, the company sold three properties for a combined gross $123.1 million. Its IAGM joint venture sold Victory Lakes for $53.0 million and entered a $152.0 million secured refinancing in November 2018; the filing says that refinancing removed the company’s recourse exposure to the joint venture’s mortgages.
- The company recorded $3.5 million of property impairment in the first nine months. Its share of IAGM’s impairment was $2.0 million, and its share of the joint venture’s property-sale loss was $2.1 million. A separate UHC indemnity claim had been accrued; management said the ultimate loss could be up to $5.0 million above the amount accrued.
Outlook, commentary and risks
Management’s strategy is to focus on open-air grocery-anchored and necessity-based centers in selected growth markets, improve rental income through leasing and redevelopment, and continue selective acquisitions and dispositions. It gave no specific financial guidance or forecast. Management said the company had not been materially affected to date by tenant failures to adapt to e-commerce and believed its locations supported backfilling vacancies, while acknowledging uncertainty around execution timing.
Risks highlighted include retail-market and local economic conditions, e-commerce and tenant bankruptcies, leasing and occupancy, property sale prices and acquisition competition, access to capital, refinancing and interest-rate exposure, joint-venture performance, and REIT qualification. The company estimated that a sustained 1% change in rates on variable-rate debt would change annual interest expense by about $2.0 million. Its 2018 risk factors were otherwise reported as unchanged from its 2017 Form 10-K.
Important facts for investors to verify
- Whether property sales and reinvestment can sustain operating cash flow and FFO, given lower nine-month FFO and modified NOI.
- Execution and economics of the portfolio-repositioning plan, including sale proceeds, occupancy, leasing spreads and the cost of tenant improvements.
- Refinancing and maturity exposure, including the revolving credit facility’s February 2019 maturity and the terms and ongoing obligations associated with debt refinanced after quarter-end.
- The sustainability of distributions relative to recurring cash generation, and the effect of the $99.2 million tender offer on liquidity and per-share results.
- Resolution of the UHC indemnity claims and any further property or joint-venture impairments.