Inland American Real Estate Trust, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. The supplied metadata names “Inventrust Properties Corp.,” but the filing itself identifies the registrant as Inland American Real Estate Trust, Inc.
Business context
The REIT held a diversified U.S. real estate portfolio, with a stated strategic focus on retail, lodging and student housing. At September 30, it reported 203 operating properties and classified 52 select-service hotels as held for sale. The company was transitioning to self-management and pursuing a potential lodging-company spin-off through subsidiary Xenia Hotels & Resorts.
Financial performance and liquidity
| Metric | Three months ended September 30, 2014 | Nine months ended September 30, 2014 | Comparable 2013 period |
|---|---|---|---|
| Total income | $341.8 million | $1,040.0 million | $268.8 million; $788.2 million |
| Net income attributable to company | $52.6 million | $192.5 million | $237.5 million; $209.3 million |
| Net income per share | $0.06 | $0.22 | $0.27; $0.23 |
| Cash from operations | $125.4 million | $324.3 million | $114.6 million; $325.7 million |
| Funds from operations (FFO), non-GAAP | $132.9 million | $387.6 million | $103.8 million; $350.5 million |
For the nine months, net operating income (NOI) rose 20.7% to $454.7 million, led by lodging. Same-store NOI increased 3.6% overall: lodging rose 11.1%, retail 2.2%, student housing fell 23.3% because of a major repair project, and non-core declined 0.5%. Nine-month lodging RevPAR increased to $127 from $117 for same-store properties.
At September 30, cash and cash equivalents were $348.8 million, restricted cash and escrows were $148.9 million, total assets were $8.28 billion and total equity was $3.79 billion. Balance-sheet debt was $3.64 billion, with a further $533.1 million of liabilities associated with assets held for sale. The debt note reports $3.96 billion of mortgage loans, including $510.4 million tied to held-for-sale properties, plus a $200 million term loan. The company had $300 million available on its revolving credit facility. Mortgage debt’s weighted-average rate was 4.83%; $73.6 million matured in 2014 and $425.4 million in 2015.
Operating cash flow was nearly flat year over year; investing cash provided $560.1 million, mainly from property sales, while financing used $854.9 million, including $403.9 million for share repurchases. Cash increased $29.6 million during the nine months. The company declared $329.1 million of distributions and paid $331.1 million; management’s presentation included property-sale gains among distribution funding sources.
Material changes versus prior periods
- Nine-month net income declined to $192.5 million from $209.3 million, while Q3 net income fell to $52.6 million from $237.5 million. Management attributed the declines primarily to much smaller property-sale gains than in 2013; 2013 included substantial gains from dispositions.
- Continuing-operations results improved: nine-month net income from continuing operations was $34.0 million versus a $193.9 million loss in 2013, reflecting higher NOI and lower impairment charges. Nine-month impairment expense fell to $80.3 million from $225.0 million.
- Reported income and discontinued operations are affected by significant portfolio sales and an accounting-policy change. The company early-adopted new discontinued-operations guidance in 2014 and reclassified comparative periods; only disposals representing a strategic shift with a major effect qualify.
- Total assets decreased from $9.66 billion at December 31, 2013, largely alongside asset dispositions and a decrease in assets held for sale. Shares outstanding fell following a tender offer repurchasing approximately 60.8 million shares for about $394.9 million at $6.50 per share.
- Business-management fees ended after the March 2014 transition began. General and administrative expenses increased, in part from payroll, legal and professional costs related to self-management and lodging transaction preparations.
Outlook, risks and unusual items
- The company agreed to sell 52 select-service hotels, 6,976 rooms, for approximately $1.1 billion, expecting about $480 million of net proceeds after repayment of related debt. Closing was expected by November 17, 2014, subject to customary conditions. Management expected to deploy proceeds toward retail and student-housing growth, debt reduction and general corporate purposes.
- Xenia had filed a preliminary Form 10 for a potential spin-off and NYSE listing. Management then expected completion in two to six months, but emphasized that the transaction could be delayed or abandoned. It expected the company’s distributions to decrease after a spin-off because lodging assets generate substantial operating cash flow; post-separation distribution rates were not determined.
- Management expected lodging same-store performance to remain strong, student housing to benefit from rental growth, retail to maintain high occupancy, and non-core performance to be similar or slightly lower in 2014. These are expectations, not guaranteed outcomes.
- Three mortgage loans totaling $73.7 million were not in compliance with certain loan requirements at quarter-end; they were nonrecourse and not cross-collateralized. Management reported compliance with the unsecured credit facility and expected to repay, refinance or extend near-term maturities, while noting refinancing was not assured.
- The company disclosed an ongoing non-public SEC fact-finding investigation concerning, among other matters, fees, related-party transactions, distributions, impairments and self-management. It said it had not been accused of wrongdoing and was cooperating. Stockholder derivative demands and a related lawsuit were under investigation by a special litigation committee; the lawsuit was stayed. The company could not predict timing or impact and agreed to indemnify Xenia for specified related claims and investigation losses.
- A Napa earthquake damaged two lodging properties. The company recorded an $8.3 million property loss and an offsetting insurance receivable, but had not recorded a business-interruption recovery.
- Three properties leased to AT&T generated approximately 15% of rental revenue reported for the non-core segment during the nine months. Management identified tenant nonpayment or default as a potential concentration risk. Interest-rate sensitivity analysis estimated a $10.8 million annual earnings and cash-flow impact from a sustained 1% change in floating rates.
Investor facts to verify
- Whether the hotel sale closed on the announced terms and whether expected net proceeds were realized.
- Whether the Xenia spin-off and listing were completed, and the resulting distribution policies, tax treatment and retained ownership.
- Actual refinancing or repayment of 2014–2015 maturities, status of the three noncompliant mortgages, and available liquidity after asset sales.
- Underlying recurring earnings and distribution coverage, separating operating results from property-sale gains, securities gains, impairments and discontinued operations.
- Progress and potential financial consequences of the SEC investigation, derivative claims and Xenia indemnity commitments.