Business Context and Reporting Period
Company: Inland American Real Estate Trust, Inc. (Inland American)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: Inland American is a Maryland corporation and Real Estate Investment Trust (REIT) incorporated in October 2004. It acquires and manages a diversified portfolio of commercial real estate, including retail, office, industrial, and multi-family properties located in the United States. The company is sponsored by Inland Real Estate Investment Corporation, a subsidiary of The Inland Group, Inc., and relies on affiliated entities for property and business management.
Key Financial Metrics
| Metric | 2006 | 2005 |
|---|---|---|
| Total Assets | $3,040,544,000 | $865,851,000 |
| Total Income | $123,202,000 | $6,668,000 |
| Net Income (Loss) Applicable to Common Shares | $1,131,000 | $(1,373,000) |
| Funds From Operations (FFO) | $45,626,000 | $(775,000) |
| Cash Flows from Operating Activities | $65,883,000 | $11,498,000 |
| Cash Flows Used in Investing Activities | $(1,552,014,000) | $(810,725,000) |
| Cash Flows Provided by Financing Activities | $1,751,494,000 | $836,156,000 |
| Total Debt (Mortgages and Margins Payable) | $1,107,113,000 | $227,654,000 |
| Distributions Declared to Common Stockholders | $41,178,000 | $438,000 |
| Distributions Per Share | $0.60 | $0.11 |
Portfolio Composition (as of Dec 31, 2006): 93 properties totaling 14.8 million square feet.
- Retail: 63 properties (35.5% of GLA; 41.7% of Annualized Base Rental Income)
- Office: 13 properties (39.4% of GLA; 45.6% of Annualized Base Rental Income)
- Industrial: 16 properties (23.5% of GLA; 11.7% of Annualized Base Rental Income)
- Multi-family: 1 property (1.6% of GLA; 1.1% of Annualized Base Rental Income)
Material Changes Versus Prior Period
- Portfolio Expansion: The company significantly expanded its portfolio in 2006, acquiring 56 properties (32 retail, 9 office, 14 industrial, and 1 multi-family) compared to 37 properties in 2005. Total assets grew from $866 million to $3.04 billion.
- Revenue Growth: Total property revenues increased by $116.5 million (1,748%) to $123.2 million, driven primarily by new acquisitions and full-year operations of 2005 acquisitions.
- Profitability: The company transitioned from a net loss of $1.4 million in 2005 to a net income of $1.1 million in 2006. FFO improved from a negative $0.8 million to a positive $45.6 million.
- Debt Levels: Total debt increased by $879 million to $1.1 billion to fund acquisitions. The weighted average interest rate on mortgage debt was 5.27%.
- Occupancy: Overall economic occupancy increased to 97% in 2006 from 94% in 2005. Retail occupancy rose to 96% and Industrial remained at 100%, while Office occupancy dipped slightly to 97% due to the acquisition of multi-tenant properties with lower initial occupancy.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Guidance:
- Management expects to continue paying monthly cash distributions at a rate of $0.05083 per share through the remainder of 2007.
- The company anticipates upward trends in retail and industrial occupancy and rental rates to continue in 2007.
- The primary offering of common stock is expected to terminate on or before August 31, 2007.
Material Risks:
- Tenant Concentration: AT&T Inc. leases 100% of two major office properties (SBC Center and One AT&T Center), representing approximately 25% of total rental revenue. Default by this tenant would have a material adverse effect.
- Geographic Concentration: Approximately 18% of the portfolio is in the Chicago metropolitan area and 13% in the Houston area.
- REIT Status: Failure to qualify as a REIT would subject the company to federal income tax at regular corporate rates.
- Related Party Transactions: The company relies on affiliates of its sponsor for management, acquisition, and property services. Agreements are not negotiated at arm's length, creating potential conflicts of interest.
- Interest Rate Risk: While most mortgage debt is fixed, the company has variable rate margin debt used to purchase marketable securities. Rising rates could increase borrowing costs.
Unusual Items:
- Derivative Liability: The company has a put/call agreement related to its joint venture with Minto Builders (MB REIT) accounted for as a derivative instrument, resulting in a liability of $304,000 and an expense of $46,000 in 2006.
- Return of Capital: For tax purposes, 49.45% of the 2006 distributions were classified as a return of capital.
Important Facts for Investor Verification
- AT&T Dependency: Verify the financial health and lease status of AT&T, which accounts for 25% of rental revenue.
- Capital Deployment: Confirm the rate at which the company is deploying its remaining offering proceeds (approx. $333 million shares available in primary offering as of Dec 31, 2006) into income-producing assets versus holding cash or temporary investments.
- Debt Covenants: Review compliance with the 55% debt-to-fair-market-value policy and the 300% debt-to-net-assets limit in the articles of incorporation.
- Related Party Fees: Monitor the business management fee (up to 1% of average invested assets) and property management fees (4.5% of gross operating income) paid to affiliates, as these directly reduce distributable cash flow.
- MB REIT Put/Call: Understand the terms of the put/call agreement with Minto Delaware, which could require the company to purchase minority interests in MB REIT starting in 2011, potentially impacting liquidity.