InvenTrust Properties Corp. — Q3 2015 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2015. InvenTrust, formerly Inland American Real Estate Trust, is focusing on retail and student housing and plans to dispose of its remaining non-core assets. The February 3, 2015 spin-off of 95% of lodging subsidiary Xenia Hotels & Resorts was treated as discontinued operations. At quarter-end, InvenTrust owned 142 properties: 110 retail, 16 student housing and 16 non-core. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial results and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total income | $112.7 | $110.7 | $331.5 | $343.3 |
| Net income (loss) attributable to the Company | $(95.6) | $52.6 | $(27.8) | $192.5 |
| Basic and diluted EPS | $(0.11) | $0.06 | $(0.04) | $0.22 |
| Funds from Operations (FFO), supplemental non-GAAP | $49.5 | $132.9 | $190.1 | $387.6 |
| Cash flow from operations | $55.4 | $123.2 | $143.8 | $323.6 |
| Modified net operating income (NOI), supplemental non-GAAP | $79.0 | $72.9 | $235.4 | $234.7 |
- Operating performance: Q3 property NOI was $79.3 million, up from $73.8 million. Nine-month NOI was $236.0 million, down from $238.8 million. Nine-month modified NOI was nearly flat overall, with growth in retail and student housing offset by contraction in non-core.
- Segment trends: Nine-month same-store modified NOI grew 5.3% in retail and 19.6% in student housing; non-core same-store modified NOI grew 5.3%, while total non-core modified NOI fell 15.8%, largely reflecting asset sales. Retail and student housing occupancy at quarter-end was 94% and 95%, respectively.
- Balance sheet and liquidity: At September 30, total assets were $4.19 billion, cash and cash equivalents were $253.2 million, and marketable securities were $184.4 million. Total equity was $2.15 billion. Balance-sheet debt was $1.85 billion, compared with $1.99 billion at December 31, 2014; the substantial reduction in reported assets and liabilities also reflects the lodging spin-off.
- Debt and liquidity facilities: Gross mortgage loans were $1.86 billion, at a 4.96% weighted-average rate. Approximately $41.6 million was recourse to the Company. The $300 million unsecured revolver had only about $0.04 million drawn and $299.96 million available; it matures in February 2019, with one extension option. Nine-month cash decreased $479.9 million to $253.2 million, reflecting, among other items, debt repayments and cash/property contributions to Xenia.
- Cash flows and distributions: Nine-month investing activities used $66.1 million; financing activities used $557.6 million. The Company declared $110.6 million and paid $118.5 million of distributions during the period. The annualized distribution rate was reduced to $0.13 per share beginning with the March 2015 payment, following the spin-off.
Material changes versus prior comparable periods
- Q3’s $95.6 million net loss principally reflected a $92.2 million impairment charge on the Sacramento Railyards development and a $12.9 million loss on contributing that land to a joint venture. Q3 2014 included a $27.9 million realized gain on marketable securities and $24.4 million of discontinued-operations income.
- Nine-month net income fell from $192.5 million to a $27.8 million loss. The main comparability factor was $208.3 million of discontinued-operations income in 2014, including gains on properties sold that year, versus $3.0 million in 2015. 2015 also included the Railyards impairment and contribution loss.
- Nine-month rental income declined $13.4 million, while interest expense fell $26.9 million, mainly due to property dispositions and mortgage pay-downs. Operating cash flow declined $179.8 million, primarily because of dispositions, including the Xenia spin-off.
- The Company completed two retail acquisitions and one student housing acquisition for $103.0 million in aggregate during the nine months. It sold four operating properties and a land parcel for an aggregate gross disposition price of approximately $53.3 million.
Outlook, risks and unusual items
- Management expected stable operating performance for the remainder of 2015, increased dispositions into 2016, and selective reinvestment in acquisitions. Dispositions may dilute operating performance before proceeds are reinvested. Management said the current $0.13 annualized distribution rate was sustainable based on the current portfolio, with funding expected from operating cash flow, joint-venture distributions and property-sale gains.
- Management described debt maturities over the next five years as manageable but noted refinancing is not assured on satisfactory terms. Mortgage maturities included $265.2 million in 2016 and $788.8 million in 2017. A $11.4 million 2015 maturity was extinguished after quarter-end using proceeds from a property sale.
- Two mortgage loans with a combined carrying value of $14.1 million were not in compliance with loan requirements at quarter-end. They were not cross-collateralized or recourse to the Company; the $11.4 million 2015 maturity was subsequently extinguished. The Company reported compliance with its unsecured revolver covenants.
- Non-core lease rollover is a notable exposure: leases expiring in 2016 and 2017 represented 45.2% and 23.3%, respectively, of non-core annualized rent. Two AT&T leases expire in those years, and management cautioned that nonrenewal could result in vacancy, lower rents and significant re-leasing costs. Three properties leased to AT&T generated approximately 13% of nine-month retail and non-core revenue.
- After quarter-end, the Company acquired two student housing properties totaling 1,439 beds for $165.5 million. On November 5, it entered into a $300 million unsecured term-loan facility, expandable to $600 million subject to conditions, with five- and seven-year tranches.
- A derivative litigation settlement provides for $7.4 million net proceeds to the Company. The court approved it on October 23, 2015; payment was contingent on expiration of the appeal period, and no gain was recorded at September 30. The SEC had concluded its investigation in March 2015 and informed the Company it did not intend to recommend enforcement action.
- Interest-rate sensitivity: management estimated that a permanent 1% change in rates on floating-rate debt would change future earnings and cash flow by approximately $2.4 million. The Company also holds marketable securities subject to equity-price movements, including a 5% interest in Xenia valued at $99.0 million at quarter-end.
Important facts for investors to verify
- Whether the Railyards impairment and joint-venture contribution valuation, including the $92.2 million charge and $12.9 million loss, are appropriately understood as unusual and nonrecurring.
- Refinancing plans and covenant status for 2016–2017 mortgage maturities, including the 2017 concentration and the subsequent resolution of the 2015 defaulted maturity.
- Renewal, vacancy and re-leasing prospects for the two large AT&T leases expiring in 2016 and 2017, and the associated tenant-improvement and leasing costs.
- Whether recurring operating cash flow supports the distribution rate after the lodging spin-off; assess coverage separately from joint-venture distributions and property-sale gains.
- The timing and proceeds of the litigation settlement, the post-quarter student housing acquisitions and term-loan facility, and the related effects on liquidity and leverage.