Inland American Real Estate Trust, Inc. — 2014 Form 10-K
Entity note: The supplied filing is for Inland American Real Estate Trust, Inc., not “Inventrust Properties Corp.” It reports the fiscal year ended December 31, 2014; the filing was signed March 27, 2015. Figures below are in U.S. dollars; financial-statement amounts are generally in millions unless stated otherwise.
Business context and reporting period
Inland American was a diversified U.S. REIT. At year-end it reported 188 properties across retail, lodging, student housing and non-core assets. Its strategy was shifting toward retail and student housing, with non-core asset sales and a planned separation of lodging. The filing describes major post-year-end changes, including the February 2015 spin-off of Xenia Hotels & Resorts; therefore, 2014 results include lodging operations that Inland American no longer retained after the spin-off.
Financial and operating results
| Metric | 2014 | 2013 | Change / context |
|---|---|---|---|
| Total income | $1,379.1 | $1,108.1 | Up 24.5%; lodging income and acquisitions contributed materially. |
| Net income attributable to the Company | $486.6 | $244.0 | Includes $233.6 of discontinued-operations income, principally disposition gains. |
| Net income from continuing operations | $253.0 | $(206.9) | Improved, but included substantial investment, debt-extinguishment and securities gains. |
| Funds from operations (FFO, non-GAAP) | $442.5 | $459.6 | Down 3.7%. |
| Cash provided by operating activities | $340.3 | $422.8 | Down 19.5%; included $65.7 of prepayment penalties and other working-capital effects. |
| Total assets | $7,497.3 | $9,662.5 | Declined alongside portfolio dispositions. |
| Debt | $3,190.6 | $3,641.6 | Year-end debt; mortgage debt weighted-average rate was 4.63%. |
Segment NOI was $598.7, up 16.1%, including lodging; excluding lodging, NOI declined about 2% to $316.0. Same-store retail NOI rose 2.6%, student housing same-store NOI fell 21.6% due largely to a $5.8 repair project, and non-core same-store NOI fell 2.8%. Retail economic occupancy was 93%; student-housing physical occupancy was 91%.
Cash and cash equivalents were $733.2 at year-end. January–February 2015 spin-off-related cash activity reduced cash by approximately $485.0, leaving about $248.2. The Company repaid its $200 million term loan in January 2015. A new $300 million revolving facility was entered into in February 2015, with only about $0.04 million drawn as of March 23, 2015.
Material changes versus the prior period
- Sold 313 properties in 2014 for a reported gross disposition price of approximately $2.7 billion, including the triple-net portfolio sale and a 52-hotel select-service sale for about $1.1 billion.
- Completed a $394.9 million modified Dutch tender offer for approximately 60.8 million shares. The distribution reinvestment plan and share repurchase program were suspended.
- Transitioned to self-management during 2014, completing the remaining property-management transition on December 31. Business-management fees fell to $2.6 million from $38.0 million, while general and administrative expense increased to $83.0 million from $55.5 million, partly reflecting transition, legal and transaction costs.
- Completed the Xenia spin-off on February 3, 2015. The Board then reduced the annualized distribution from $0.50 to $0.13 per share, citing the loss of Xenia cash flows and the need to retain reserves.
Outlook, risks and unusual items
Management expected 2015 retail same-store performance to be broadly consistent with 2014, student-housing results to improve, and non-core performance to be similar or lower. It anticipated delivery of approximately 1,618 student-housing beds in 2015 and 831 in 2016. Further dispositions could temporarily dilute operating performance before proceeds are reinvested. Management considered debt maturities manageable, while acknowledging refinancing uncertainty and expecting interest rates eventually to rise.
- Distributions in 2014 were funded by operating cash flow, distributions from unconsolidated entities and property-sale gains; the filing cautions that FFO is not cash available for distributions. The lower post-spin distribution reflects management’s assessment that the prior rate was unsustainable.
- AT&T accounted for approximately 15.5% of annualized rental income excluding lodging and student housing. Three leases expire in 2016, 2017 and 2019; the large 2016 and 2017 properties create significant re-leasing and tenant-improvement risk. Non-core leases representing 41.7% of that segment’s annualized rent expire in 2016.
- 2014 included $287.7 million of gains in discontinued operations, $73.2 million of gains on continuing-operations property sales, a $64.8 million gain from terminating a joint venture, $43.0 million of realized securities gains, and $85.4 million of asset impairments. These items make reported earnings less indicative of recurring operations.
- The SEC notified the Company on March 24, 2015 that it had concluded its investigation and did not intend to recommend enforcement action against the Company. Derivative litigation remained: the special litigation committee recommended pursuing certain former related parties over alleged nondisclosure of fee-related facts; the Company also agreed to indemnify Xenia for specified investigation and litigation-related losses.
- The common shares had no established public trading market. The Company’s $4.00 estimated value per share, announced in February 2015, was an appraisal-based estimate, not a market price or guaranteed liquidation value.
- Other material risks include lease rollover and tenant defaults, refinancing and interest-rate exposure, execution of the self-management transition and asset-sale strategy, student-housing development and leasing risks, and maintaining REIT qualification.
Most important facts for investors to verify
- Reconcile reported net income and FFO to recurring property cash generation, separating disposition and investment gains, impairment charges and discontinued operations.
- Review post-spin cash, debt, debt maturities and covenant headroom, including the $485 million reduction in cash and the new revolving facility.
- Assess whether the $0.13 annualized distribution is covered by recurring operating cash flow, without relying on asset-sale gains or unconsolidated-entity distributions.
- Check AT&T lease renewal or disposition plans, near-term retail lease expirations, and the costs and occupancy effects of re-leasing.
- Monitor post-spin student-housing operating results, development costs and delivery schedules, and the financial results of the self-management transition.
- Review the final status and potential exposure of derivative litigation and the scope of the Company’s indemnity to Xenia.
- Do not treat the $4.00 estimated share value as an observable trading price: the filing states that no established public market existed.