InvenTrust Properties Corp. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet figures are as of March 31, 2018, compared with December 31, 2017. InvenTrust is a REIT focused on multi-tenant retail properties. Unless noted otherwise, dollar amounts below are in millions.
Business and operating context
The company reported 67 wholly owned retail properties totaling 11.2 million square feet, with 93.6% occupancy. Including its interest in the IAGM joint venture, its platform comprised 81 retail properties and about 14.2 million square feet. Management continued to sell properties outside core markets and said it intends to redeploy proceeds selectively. During the quarter it sold three properties, surrendered Stonecrest Marketplace to its lender, and IAGM sold Bryant Square.
Key financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total income | $63.9 | $62.3 |
| Operating income (loss) | $11.4 | $(4.7) |
| Net income | $34.2 | $2.1 |
| Net income per share, basic and diluted | $0.04 | $0.00 |
| FFO applicable to common shares (non-GAAP) | $43.7 | $43.8 |
| Cash provided by operating activities | $27.3 | $26.5 |
| Modified NOI (non-GAAP) | $41.5 | $43.0 |
| Same-property modified NOI (non-GAAP) | $31.6 | $33.4 |
Revenue grew 2.6%. Operating margin, calculated as operating income divided by total income, was approximately 17.8%, compared with a negative 7.6% a year earlier. The increase in reported net income was substantially affected by property-sale gains of $20.3 million and a $10.8 million gain on debt extinguishment; it should not be read as equivalent growth in recurring operations. FFO was nearly flat, while same-property modified NOI fell 5.4%, which management attributed mainly to slower leasing at certain properties and higher bad-debt expense.
Cash and cash equivalents were $292.6 million, with $7.0 million of restricted cash. Combined cash, cash equivalents and restricted cash increased $127.7 million during the quarter, principally reflecting $119.8 million of net property-sale proceeds. Investing activities provided $114.3 million; financing activities used $13.9 million, including $13.4 million of distributions. Distributions declared were $13.9 million, or $0.02 per share for the quarter.
Debt, net, was $629.8 million, down from $667.9 million at year-end. The company had $300 million outstanding on its unsecured term loan and $300 million available under its revolving credit facility. Mortgage principal was $332.6 million; the weighted-average mortgage rate was 4.53%. The company reported compliance with credit-facility covenants and with mortgage requirements except for one non-recourse loan in default.
Material changes and unusual items
- Three property sales generated a combined gross disposition price of $127.5 million. The Stonecrest surrender satisfied non-recourse debt and contributed to the $10.8 million debt-extinguishment gain.
- Same-property economic occupancy declined to 92.3% from 94.1% a year earlier; same-property annualized base rent per square foot rose to $16.04 from $15.83.
- Asset impairment provision declined to $0.8 million from $16.4 million in Q1 2017. General and administrative expense decreased 27.6%, while property operating expense and real estate taxes increased 14.8% and 16.0%, respectively.
- Interest and dividend income fell to $0.4 million from $2.2 million, largely reflecting the reduction in the marketable-securities portfolio. The company adopted new revenue and financial-instrument accounting standards in 2018; the filing describes the revenue-recognition transition effect as immaterial.
- After quarter-end, the company sold Market at Morse/Hamilton for a gross price of $10.0 million.
Outlook, risks and contingencies
Management provided no numerical earnings or operating guidance. It plans to focus on grocery-anchored and necessity-based retail centers in selected growth markets, pursue redevelopment and leasing opportunities, and consider strategic transactions intended to enhance shareholder value and provide liquidity. The board increased the annualized distribution rate from $0.0695 to $0.0716 per share, effective with the quarterly distribution paid in April 2018; management said the board will continue to review the rate.
Management said it believes liquidity is adequate for short-term needs and expects to use operating cash flow, joint-venture distributions, property-sale proceeds and available borrowing capacity to meet obligations. Risks include retail tenant and e-commerce pressures, leasing and disposition execution, interest-rate changes, and refinancing needs. Approximately $66.2 million of company mortgage principal was scheduled to mature in 2018; the filing also identifies a $6.6 million non-recourse loan in default at Bellerive Plaza, with surrender expected after foreclosure proceedings. IAGM had $204.0 million of scheduled 2018 maturities and plans to refinance and pay down some debt with cash; about $23.0 million of IAGM mortgage debt is recourse to InvenTrust, and refinancing is not assured. A former purchaser’s indemnity claims could result in up to $5.0 million of additional loss beyond the amount accrued. Management did not expect ordinary-course legal matters to have a material adverse effect.
Important facts for investors to verify
- How much of Q1 net income came from property dispositions and debt extinguishment versus recurring property operations; compare reported earnings with FFO and same-property NOI.
- Whether occupancy and same-property NOI stabilize, and how leasing spreads and tenant retention develop.
- Plans and financing progress for 2018 company and IAGM debt maturities, including the Bellerive Plaza default and the recourse exposure to IAGM debt.
- Whether property-sale proceeds can be reinvested at attractive returns and whether the increased distribution is supported by recurring cash flows.
- The eventual resolution and financial impact of the UHC indemnity claims, and any material changes in disclosed legal or other contingencies.