Inventrust Properties Corp. quarterly report, Q2 FY2014

Business context and reporting period

The filing is a Form 10-Q for the quarter ended June 30, 2014, filed by Inland American Real Estate Trust, Inc. The supplied company metadata names InvenTrust Properties Corp.; the filing itself identifies Inland American, so the registrant identity should be verified. The unaudited results cover the three and six months ended June 30, 2014, compared with the same 2013 periods.

Inland American was repositioning toward retail, lodging and student housing while selling non-core assets. At June 30, it owned 268 properties: 115 retail, 100 lodging, 14 student housing and 39 non-core. It began transitioning to self-management in March 2014.

Financial results and position

• Six-month net income included $145.9 million from discontinued operations, principally gains on net-lease property sales; it should not be viewed as equivalent to recurring operating earnings. Six-month continuing operations remained loss-making.
• Six-month segment net operating income (NOI) was $352.2 million, up 21.2% year over year. Calculated NOI as a share of total income was approximately 42.9%, versus 45.8% in 2013; this is a derived, non-GAAP comparison.
• At June 30, assets were $8.55 billion, total debt $4.35 billion, equity $3.87 billion and cash and cash equivalents $364.2 million. Restricted cash and escrows were a further $151.1 million.
• Mortgage debt was $4.01 billion at a 4.89% weighted-average rate; the company also had $325.2 million outstanding under its unsecured credit facility and $20.7 million of margin debt. The revolving facility had $174.8 million available; its stated interest rate was 1.76%, and the term loan rate was 1.66%.
• Mortgage maturities included $204.1 million in 2014 and $385.3 million in 2015. Approximately $271.9 million of total debt was recourse to the company. Five mortgage loans with a carrying value of $105.9 million were not in compliance with specified loan requirements; the filing says these loans were neither cross-collateralized nor recourse to the company.
• Six-month distributions declared were $221.4 million ($0.25 per weighted-average share for the half-year; described by the company as $0.50 annualized). Distributions paid were $223.5 million. Operating cash flow was $198.9 million, so distributions exceeded that measure before considering other sources.

Material changes versus prior period

• Revenue rose substantially, mainly as lodging income increased $183.9 million for the first half, reflecting a full period of operations from hotels acquired in 2013. Total six-month NOI increased $61.6 million.
• Same-store six-month NOI increased 8.5% in lodging and 1.6% in retail, but declined 11.2% in student housing and 2.6% in non-core properties. Management attributed the student-housing same-store decline in part to a one-time major project.
• Asset impairment charges declined to $77.9 million for the first half from $185.1 million. A $67.6 million impairment followed the buyer’s termination of the purchase agreement for one net-lease asset.
• In the first half, the company sold 237 properties for a reported gross disposition price of $1.36 billion, including net-lease portfolio sales. Net proceeds from property sales in cash-flow reporting were $670.3 million. It acquired three properties for a gross price of $209.2 million.
• Debt declined from $4.15 billion at year-end 2013 to $4.35 billion at June 30, 2014? The balance-sheet figures show an increase; mortgage loans themselves fell from $4.74 billion to $4.01 billion, while borrowings under the credit facility rose. The tender offer also repurchased 60.8 million shares for approximately $394.9 million, reducing shares outstanding.
• The company early-adopted the revised discontinued-operations standard effective January 1, 2014, changing which disposals appear in discontinued operations and reducing comparability with 2013.

Outlook, commentary and risks

• Management expected continued 2014 lodging same-store growth and stronger student-housing performance, stable retail occupancy and NOI, and similar or slightly weaker non-core performance. It expected low interest rates to continue through 2014 and said 2014 debt maturities were manageable, while noting refinancing was not assured on satisfactory terms.
• Management expected to complete the remaining self-management transition at year-end 2014 and said self-management could benefit long-term net income and FFO, but it could not estimate the effect because transition costs were uncertain.
• After quarter-end, lodging subsidiary Xenia filed a preliminary Form 10 for a potential spin-off as a publicly traded lodging REIT. Management then expected a possible completion in four to eight months, subject to conditions and board approval. It expected Inland American’s distributions to decrease after a spin-off, and combined distributions by both entities to be below Inland American’s then-current level. The spin-off was not assured.
• The distribution reinvestment plan was suspended August 12, 2014. The share repurchase program also remained suspended. The company said future distributions depend on available funds and board discretion.
• The SEC was conducting a non-public investigation concerning fees, affiliate transactions, distributions, impairments and self-management matters. The company said it had not been accused of wrongdoing and was cooperating. Stockholder derivative demands and a related lawsuit, stayed pending a special litigation committee investigation, were also outstanding; outcomes and potential effects were uncertain.
• The company and its subsidiary REIT had requested IRS closing agreements concerning possible REIT qualification issues, including alleged preferential dividends and the treatment of overnight commercial paper under an asset test. The company could not assure IRS acceptance; potential taxes or penalties were uncertain.
• Other exposures include refinancing and interest-rate risk, marketable-securities price risk, property and tenant concentration (including three AT&T-leased properties generating about 14% of rental revenue), development execution risk, and the broad indemnity granted to Xenia for specified SEC, shareholder and litigation matters.

Most important facts for investors to verify

1. Confirm the registrant: the filing is for Inland American Real Estate Trust, Inc., not the company named in the request metadata.
2. Separate recurring performance from disposal gains: review continuing-operations results, property-sale proceeds, discontinued operations and FFO adjustments.
3. Track debt refinancing and covenant status, especially 2014–2015 maturities and the five noncompliant mortgage loans.
4. Assess the sustainability and sources of distributions; the filing reports distributions paid above operating cash flow and anticipates a possible reduction following a Xenia spin-off.
5. Monitor the proposed spin-off, its conditions, tax treatment, indemnity obligations and effect on Inland American’s cash flow and distributions.
6. Follow the SEC investigation, derivative proceedings and IRS closing-agreement requests for developments or quantified exposures.