Business context and reporting period
The supplied filing is Inland American Real Estate Trust, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2013—not an InvenTrust Properties Corp. filing as identified in the request. Confirm the intended issuer. Inland American reported a diversified U.S. commercial real estate portfolio of 759 properties, with retail, lodging, office, industrial and multifamily segments. Management said its strategy was to concentrate investment on retail, lodging and student housing while disposing of less strategic assets.
Financial performance and position
Unless otherwise noted, dollar amounts below are in millions. Comparisons are for the three months ended March 31.
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total income | $373.9 | $315.2 |
| Operating income | $52.2 | $46.0 |
| Net income (loss) attributable to the Company | $4.5 | ($30.3) |
| Net loss from continuing operations | ($20.1) | ($25.8) |
| FFO, a non-GAAP measure | $107.2 | $109.3 |
| Cash provided by operating activities | $94.1 | $85.9 |
| Cash used in investing activities | ($18.6) | ($260.0) |
| Cash from (used in) financing activities | ($92.7) | $118.5 |
- Total income rose 18.6%; operating income rose 13.4%. Operating margin was approximately 14.0%, compared with 14.6% a year earlier.
- Q1 2013 net income included $24.6 million of discontinued-operations income, including a $23.9 million gain on property sales. Continuing operations remained loss-making.
- At March 31, cash and cash equivalents were $203.5 million; total assets were $10.73 billion; total liabilities were $6.41 billion; and equity was $4.32 billion.
- Mortgages, notes and margin payables, net, totaled $6.02 billion. Mortgage principal was $5.93 billion at a 5.07% weighted-average rate; margin securities debt was $120.3 million. About $698.6 million of total debt was recourse to the Company.
- Mortgage maturities were $721.4 million for the remainder of 2013 and $752.4 million in 2014. The Company said it was negotiating refinancing 2013 maturities and believed it had adequate short-term funding, while cautioning that refinancing on satisfactory terms was not assured.
- Cash distributions declared were $111.6 million and paid were $111.4 million; the stated annualized distribution rate was $0.50 per share. Q1 operating cash flow alone was below distributions paid. Management identified operating cash flow, joint-venture distributions and property-sale gains as funding sources. FFO was also below distributions declared.
Material changes and operating trends
- Same-store NOI increased 2.4% overall. Lodging rose 10.6% and multifamily 6.2%; retail was nearly flat (+0.1%), while office declined 0.7% and industrial declined 2.1%.
- Total lodging income increased with prior-year hotel acquisitions; same-store RevPAR rose from $86 to $93 and ADR from $127 to $134. Multifamily growth reflected rent increases and newly acquired student housing assets.
- The Company acquired four properties for a gross $119.9 million and sold 38 properties for a gross $115.3 million. Compared with Q1 2012, acquisition spending was lower and property sales generated significant proceeds.
- Impairment expense from continuing operations increased to $13.9 million from $3.5 million, primarily for retail properties, with an additional $1.1 million related to industrial property.
- Unrealized gains on marketable securities contributed $47.4 million to other comprehensive income. The marketable securities portfolio was valued at $371.0 million, up from $327.7 million at year-end.
Outlook, risks and unusual items
- Management expected higher same-store performance in lodging and multifamily during 2013, broadly stable retail and industrial results, and lower office income. It anticipated increased dispositions, which could temporarily dilute operating results while proceeds await reinvestment. Lodging results are seasonal and typically stronger in the second and third quarters.
- Management intended to maintain the monthly distribution in 2013, expecting funding from operations, joint-venture distributions and property-sale gains. This expectation is not a guarantee; Q1 distributions exceeded cash from operations.
- Interest-rate exposure is material: management estimated a permanent 1% change in rates on floating-rate debt would change future earnings and cash flows by approximately $13.2 million. The filing also notes exposure to market-value changes in its securities portfolio.
- Four mortgage loans with a carrying value of $66.3 million were not in compliance with certain loan requirements. The filing says they were neither cross-collateralized nor recourse to the Company.
- The SEC was conducting a non-public formal investigation involving, among other matters, fees, affiliate transactions, distributions, impairments and possible self-administration. The Company said it was cooperating and had not been accused of wrongdoing; the outcome and potential effect could not be predicted.
- Stockholders filed a derivative action in March 2013, and a putative class action concerning estimated share values and DRP share purchases was filed in April. The Company said it intended to defend the class action. Management also sought IRS closing agreements concerning possible REIT distribution and asset-test issues; REIT qualification, potential tax and penalties remained uncertain.
- After quarter-end, the Company reported additional property sales and an $80 million hotel purchase; a retail joint venture with PGGM; and a May 8 agreement for a $200 million revolving credit line and $75 million term loan.
- Management reported disclosure controls and procedures were effective as of March 31, 2013, with no significant change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm issuer identity: this filing names Inland American Real Estate Trust, Inc., not InvenTrust Properties Corp.
- Review refinancing progress and liquidity against the $721.4 million of remaining 2013 mortgage maturities, including the post-quarter credit facilities.
- Assess whether recurring operating cash flow and FFO can support distributions, especially given Q1 distributions exceeded operating cash flow and FFO.
- Monitor the SEC investigation, stockholder litigation and IRS closing-agreement requests for potential costs, penalties or effects on REIT status.
- Check whether the reported same-store gains, acquisitions and subsequent dispositions translate into sustainable operating performance after sale gains and other unusual items are excluded.