Business context and reporting period
InvenTrust Properties Corp. is a Maryland REIT reporting unaudited results for the quarter and nine months ended September 30, 2016. Following the April spin-off of Highlands REIT and June sale of its University House student-housing platform, the company’s strategy is focused on retail. At quarter-end it owned 73 retail properties totaling 12.2 million square feet and one non-core property; its 55%-owned IAGM joint venture held 15 additional retail properties.
Financial results and key metrics
Amounts below are in millions, except per-share figures and where noted.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total income | $60.7 | $66.2 | $184.9 | $196.7 |
| Net income (loss) | $37.3 | $(95.6) | $226.4 | $(27.8) |
| Continuing-operations income (loss) | $28.2 | $(100.7) | $62.9 | $(48.9) |
| Net income (loss) per share | $0.04 | $(0.11) | $0.26 | $(0.04) |
| Operating cash flow | $11.2 | $55.5 | $96.7 | $143.8 |
| NAREIT FFO | $25.0 | $49.5 | $106.7 | $190.1 |
| Modified net operating income | $41.7 | $47.0 | $128.6 | $139.1 |
At September 30, cash and cash equivalents were $578.7 million, versus $203.3 million at December 31, 2015; restricted cash was $20.6 million. Debt, net of discounts and issuance costs, was $653.4 million, down from $1,094.7 million. Mortgage principal was $508.0 million, and the term loan balance was $150.0 million. The company had $300 million available under its revolving credit line and $150 million available under its term loan facility. Mortgage debt maturities included $25.2 million in 2016 and $185.9 million in 2017; approximately $3.6 million of total debt was recourse to the company.
For the first nine months, investing activities provided $1,093.9 million, principally from asset-sale proceeds, while financing activities used $815.2 million, including $999.1 million of debt payoffs. Cash paid for distributions was $84.1 million. The filing does not present a conventional operating profit margin; same-store modified NOI increased 1.8% in Q3 and 1.1% for the nine-month period, while total modified NOI declined 11.3% and 7.5%, respectively.
Material changes versus comparable periods
- Total income declined 8% in Q3 and 6% for the first nine months, largely reflecting asset sales, partly offset by acquisitions.
- Reported earnings improved substantially, but were materially affected by disposition gains and impairments. Continuing-operations results included retail-property sale gains of $29.6 million in Q3 and $106.0 million for nine months. Nine-month discontinued operations included a $235.8 million gain on the student-housing platform sale and a $76.6 million impairment related to the Highlands spin-off. Continuing operations also recorded $41.1 million of impairment charges for the nine months.
- Operating cash flow fell $47.1 million year over year for the nine months, which management attributed mainly to asset disposals. FFO declined to $106.7 million from $190.1 million; FFO excludes property-sale gains and other specified items and is a supplemental, non-GAAP measure.
- Retail portfolio scale contracted through sales, while six retail properties were acquired for $401.6 million gross. Same-store occupancy was 94% at wholly owned properties, unchanged year over year; annualized base rent per square foot increased to $15.15 from $14.37.
Outlook, commentary, risks and unusual items
- Management expected occupancy to increase and rental income to grow slightly to modestly through 2016 and 2017. It cited favorable retail leasing conditions in target markets, redevelopment and pad-site opportunities, and plans to concentrate on higher-growth markets. The portfolio-refinement effort was expected to continue for 18–24 months; no specific earnings or revenue guidance was provided.
- The board reduced the annualized distribution rate from $0.13 to $0.0675 per share, effective with the October 2016 payment. Management cited lost cash flow following the student-housing sale and Highlands spin-off, capital needs for retail repositioning, and a goal of maintaining a lower-leveraged balance sheet. The board expects to review the rate quarterly.
- On October 27, the company launched a Dutch-auction tender offer for up to $200 million of shares at $2.45–$2.94 per share, intended to be funded with cash on hand. Subsequent to quarter-end it bought Northcross Commons for $31 million and sold four retail properties for $36.6 million, reporting an approximate $13.9 million gain.
- Management said debt maturities were manageable and anticipated using sale proceeds, cash, and credit facilities to repay, refinance, or extend near-term debt. One non-cross-collateralized, nonrecourse mortgage loan with a $3.2 million carrying value did not meet specified loan requirements; it was due in 2016. The company reported compliance with its term-loan and revolving-credit covenants.
- Risks include retail tenant and leasing performance, local economic conditions, refinancing and interest-rate exposure, and the execution and timing of asset sales and reinvestment. About 39% of the retail platform was in Texas and Oklahoma; management noted potential exposure to a prolonged energy downturn, particularly in Houston. A $150 million variable-rate term loan was swapped to fixed; the filing estimates a 1% rate change on floating-rate debt would affect future earnings and cash flow by $1.5 million.
- The company disclosed a pending personal-injury lawsuit for which its insurer issued a reservation-of-rights letter after quarter-end. Management disputes the insurer’s position, says it cannot estimate the effect, and has recorded no provision; it believes an adverse outcome would not materially affect financial condition, though a particular period’s results could be affected.
Important facts for investors to verify
- How much of reported earnings and cash generation is repeatable after separating property-sale gains, discontinued operations, impairments, and other nonrecurring joint-venture distributions?
- Whether the announced distribution rate remains appropriate as the portfolio changes, and how much of distributions is supported by recurring operating cash flow rather than asset-sale proceeds.
- Progress on refinancing or repaying the 2016–2017 mortgage maturities, covenant compliance, and the availability and terms of credit facilities.
- Execution of retail acquisitions, dispositions, occupancy and leasing plans, including exposure to Texas and Oklahoma markets and lease expirations.
- Outcome of the tender offer and the pending lawsuit/insurance coverage dispute, together with any effect on liquidity or financial results.