Business context and reporting period
Inland American Real Estate Trust, Inc. (the issuer named in this filing; not the Inventrust Properties Corp. identified in the request metadata) filed this unaudited Form 10-Q for the quarter ended March 31, 2014. The REIT was repositioning its portfolio toward retail, lodging and student housing while disposing of non-core assets. At quarter-end it owned 272 properties and classified 10 properties as held for sale.
Financial results and liquidity
Unless otherwise noted, amounts below are in millions of dollars. Revenue and operating income rose, but reported net income was driven principally by gains on property sales.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total income | $392.9 | $302.3 |
| Operating income | $49.4 | $26.9 |
| Net income attributable to company | $130.5 | $4.5 |
| Continuing-operations income (loss) | $4.9 | $(24.3) |
| Discontinued-operations income | $125.6 | $28.8 |
| Net income per share, basic and diluted | $0.15 | $0.01 |
| Funds from operations (FFO), non-GAAP | $112.1 | $107.2 |
| Cash from operating activities | $61.7 | $94.1 |
| Cash from (used in) investing activities | $219.9 | $(18.6) |
| Cash used in financing activities | $(48.3) | $(92.7) |
Operating margin was approximately 12.6% of total income, versus 8.9% a year earlier. Segment net operating income (NOI) was $165.4 million, up $28.0 million, or 20.4%; NOI as a share of total income was approximately 42.1%, compared with 45.4%. FFO is a supplemental non-GAAP measure and is not equivalent to operating cash flow or cash available for distributions.
Cash and cash equivalents were $552.6 million at March 31, 2014, compared with $319.2 million at year-end. Total assets were $9.115 billion and reported total debt was $4.212 billion. Mortgage debt was $4.157 billion, with a 4.88% weighted-average rate; approximately $242 million of outstanding debt was recourse to the company. The $500 million unsecured facility included a fully drawn $200 million term loan and approximately $299.8 million available on the revolver. Mortgage maturities included $270.8 million in 2014 and $386.7 million in 2015.
Quarterly distributions declared were $114.2 million; $113.9 million was paid. The company reported $61.7 million of operating cash flow and $15.6 million of distributions from unconsolidated entities during the quarter, and described property-sale gains as a further distribution funding source. FFO was below distributions declared.
Material changes versus the prior period
- Total income increased 30.0%, including lodging income growth of $89.7 million. Management attributed much of the lodging increase to a full quarter from hotels acquired in 2013; same-store lodging NOI rose 9.3%.
- Total NOI increased 20.4%. Same-store retail NOI was essentially flat, student housing NOI declined 2.3%, and non-core same-store NOI declined 2.1%.
- Net income rose sharply, primarily because discontinued operations included a $125.7 million gain on property sales, versus $23.9 million a year earlier. Continuing-operations results improved to income of $4.9 million from a $24.3 million loss.
- Operating cash flow declined by $32.4 million. Management cited higher lodging receivables and payments associated with the self-management transition, among other factors.
- The company sold 223 properties in the quarter for a reported gross disposition price of $1.0707 billion as part of its non-core net-lease portfolio sale. It acquired two retail properties and one lodging property for a combined $209.2 million.
- The company early adopted new discontinued-operations guidance effective January 1, 2014. Accordingly, classification and period-to-period comparisons may differ from prior reporting; the company said only qualifying net-lease assets were included in discontinued operations.
Outlook, commentary, risks and unusual items
- Management expected lodging same-store performance to continue improving, student housing rents and performance to strengthen, retail same-store income to be comparable with 2013, and non-core performance to be similar or slightly lower. These are expectations, not guarantees; no quantified earnings guidance was provided.
- Management expected to maintain the 2014 cash distribution, funded by operating cash flow, joint-venture distributions and property-sale proceeds. It noted first-quarter operating cash flow is seasonally low, partly because of lodging seasonality and real estate tax payments.
- The company began transitioning to self-management on March 12, 2014, ending its business management agreement, hiring employees and assuming certain operating functions. Remaining property-management functions were expected to transition by year-end. Management anticipated a positive effect on net income and FFO but could not estimate the impact because transition costs were uncertain. General and administrative expense increased $7.4 million year over year.
- Management was negotiating refinancing 2014 maturities and expected to repay, refinance or extend them, but cautioned that satisfactory refinancing was not assured. A 1% permanent increase in rates on floating-rate debt was estimated to reduce future earnings and cash flows by approximately $11.3 million.
- The SEC was conducting a non-public investigation into matters including fees, affiliate transactions, distributions, impairments and possible self-management. The company said it had not been accused of wrongdoing and was cooperating. Related shareholder demands and a derivative lawsuit remained under review; the lawsuit was stayed. A separate class action had been dismissed with prejudice, and the appeal was settled for an amount the company described as immaterial.
- The company disclosed potential REIT qualification issues involving distribution practices and securities ownership, and had requested IRS closing agreements for itself and a subsidiary REIT. The IRS could decline the requests or impose penalties; the company could not assure the outcome.
- After quarter-end, the company accepted approximately 60.7 million shares in a tender offer at $6.50 per share, for an aggregate cost of approximately $394.3 million before fees. On May 8, 2014, it completed the final net-lease portfolio closing for 280 assets, reporting approximately $828.4 million of net proceeds after specified debt repayments, fees and prorations. A separate $228.4 million asset transaction was terminated, and the buyer paid $10 million from escrow.
Important facts for investors to verify
- Reconcile the reported $4.212 billion total debt with mortgage, credit-facility and margin balances, including debt classified with assets held for sale, and review upcoming maturities, covenant status and refinancing progress.
- Assess distribution sustainability against operating cash flow, FFO, joint-venture distributions and asset-sale proceeds; verify how distributions are funded after the portfolio-sale proceeds and tender offer.
- Review the completed net-lease sale proceeds, debt repayments, terminated asset transaction and use of remaining proceeds, including the tender-offer cash outlay.
- Monitor lodging, student-housing and retail same-store performance, and execution and costs of the transition to self-management.
- Track the SEC investigation, shareholder claims and IRS closing-agreement requests for any developments or potential financial consequences.