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EX-32.2 - EXHIBIT 32.2 - InvenTrust Properties Corp.ivtp_0930201710-qexhibit322.htm
EX-32.1 - EXHIBIT 32.1 - InvenTrust Properties Corp.ivtp_0930201710-qexhibit321.htm
EX-31.2 - EXHIBIT 31.2 - InvenTrust Properties Corp.ivtp_0930201710-qexhibit312.htm
EX-31.1 - EXHIBIT 31.1 - InvenTrust Properties Corp.ivtp_0930201710-qexhibit311.htm
EX-10.3 - EXHIBIT 10.3 - InvenTrust Properties Corp.ivtp_0930201710-qexhibit103.htm
EX-10.2 - EXHIBIT 10.2 - InvenTrust Properties Corp.ivtp_0930201710-qexhibit102.htm
EX-10.1 - EXHIBIT 10.1 - InvenTrust Properties Corp.ivtp_0930201710-qexhibit101.htm

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM            TO
COMMISSION FILE NUMBER: 000-51609
INVENTRUST PROPERTIES CORP.
(Exact name of registrant as specified in its charter)

Maryland
 
34-2019608
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
3025 Highland Parkway, Suite 350, Downers Grove, Illinois
 
60515
(Address of principal executive offices)
 
(Zip Code)
855-377-0510
(Registrant’s telephone number, including area code)
_______________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.
Yes x   No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x   No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. (See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act). (Check one)
Large accelerated filer ¨
 
Accelerated filer ¨
 
 
 
Non-accelerated filer   x
 
Smaller reporting company ¨
 
 
 
(Do not check if a smaller reporting company)
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨   No x
As of November 1, 2017 there were 773,520,541 shares of the registrant’s common stock outstanding.
 




InvenTrust Properties Corp.

Quarterly Report on Form 10-Q
For the quarterly period ended September 30, 2017
Table of Contents

 
Page
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
 



- i-

INVENTRUST PROPERTIES CORP.

Consolidated Balance Sheets


(Amounts in thousands, except share and per share amounts)



 
 
As of
 
September 30, 2017
 
December 31, 2016
 
(unaudited)
 
 
Assets
 
 
 
Investment properties
 
 
 
Land
$
639,099

 
$
562,695

Building and other improvements
1,938,294

 
1,617,557

Construction in progress
7,762

 
1,316

Total
2,585,155

 
2,181,568

Less accumulated depreciation
(360,369
)
 
(351,389
)
Net investment properties
2,224,786

 
1,830,179

Cash and cash equivalents
102,810

 
397,250

Restricted cash
14,233

 
18,325

Investment in marketable securities
35,547

 
183,883

Investment in unconsolidated entities
185,096

 
178,728

Intangible assets, net
122,866

 
72,258

Accounts and rents receivable (net of allowance of $1,868 and $864)
27,039

 
28,914

Deferred costs and other assets
14,743

 
34,782

Assets of discontinued operations

 
42,435

Total assets
$
2,727,120

 
$
2,786,754

 
 
 
 
Liabilities
 
 
 
Debt, net
$
666,955

 
$
670,663

Accounts payable and accrued expenses
40,567

 
38,242

Distributions payable
13,440

 
13,041

Intangible liabilities, net
55,194

 
43,939

Other liabilities
23,077

 
10,928

Liabilities of discontinued operations

 
60,413

Total liabilities
799,233

 
837,226

Commitments and contingencies


 


 
 
 
 
Stockholders' Equity
 
 
 
Preferred stock, $.001 par value, 40,000,000 shares authorized, no shares outstanding

 

Common stock, $.001 par value, 1,460,000,000 shares authorized,
773,520,541 shares issued and outstanding at September 30, 2017 and
773,304,997 shares issued and outstanding at December 31, 2016, respectively
773

 
773

Additional paid in capital
5,681,254

 
5,676,639

Distributions in excess of accumulated net income
(3,769,278
)
 
(3,786,943
)
Accumulated comprehensive income
15,138

 
59,059

Total stockholders' equity
1,927,887

 
1,949,528

Total liabilities and stockholders' equity
$
2,727,120

 
$
2,786,754

See accompanying notes to the consolidated financial statements.

1

INVENTRUST PROPERTIES CORP.

Consolidated Statements of Operations and Comprehensive Income
(unaudited)

(Amounts in thousands, except share and per share amounts)

 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Income
 
 
 
 
 
 
 
Rental income
$
46,808

 
$
44,487

 
$
140,146

 
$
136,924

Tenant recovery income
14,704

 
13,500

 
42,523

 
40,110

Other property income
321

 
740

 
1,409

 
2,679

Other fee income
1,018

 
1,106

 
3,212

 
3,187

Total income
62,851

 
59,833

 
187,290

 
182,900

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
General and administrative expenses
12,070

 
12,002

 
36,330

 
40,259

Property operating expenses
8,181

 
7,627

 
22,808

 
21,885

Real estate taxes
9,874

 
8,667

 
27,041

 
27,053

Depreciation and amortization
23,941

 
21,106

 
69,815

 
62,674

Provision for asset impairment

 
2,818

 
16,440

 
11,208

Total expenses
54,066

 
52,220

 
172,434

 
163,079

Operating income
8,785

 
7,613

 
14,856

 
19,821

Interest and dividend income
938

 
3,128

 
3,853

 
8,538

Gain on sale of investment properties, net
7,253

 
29,586

 
21,634

 
105,998

(Loss) gain on extinguishment of debt
(41
)
 
(4,645
)
 
840

 
(10,317
)
Other income (expense)
2,610

 
677

 
(671
)
 
1,125

Interest expense
(7,588
)
 
(10,152
)
 
(22,795
)
 
(37,086
)
Equity in earnings of unconsolidated entities
648

 
3,849

 
1,895

 
7,739

Marketable securities realized gain and (impairment), net
71

 
(1,326
)
 
30,940

 
(698
)
Income from continuing operations before income taxes
12,676

 
28,730

 
50,552

 
95,120

Income tax expense
(432
)
 
(286
)
 
(943
)
 
(480
)
Net income from continuing operations
12,244

 
28,444

 
49,609

 
94,640

Net income from discontinued operations
9,721

 
8,875

 
8,372

 
131,787

Net income
$
21,965

 
$
37,319

 
$
57,981

 
$
226,427

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding,
basic and diluted
773,517,492

 
862,212,317

 
773,405,710

 
862,207,903

 
 
 
 
 
 
 
 
Net income per common share, from continuing operations,
basic and diluted
$
0.02

 
$
0.03

 
$
0.06

 
$
0.11

Net income per common share, from discontinued operations, basic and diluted
$
0.01

 
$
0.01

 
$
0.01

 
$
0.15

Net income per common share, basic and diluted
$
0.03

 
$
0.04

 
$
0.07

 
$
0.26

 
 
 
 
 
 
 
 
Distributions declared per common share outstanding
$
0.02

 
$
0.02

 
$
0.05

 
$
0.08

Distributions paid per common share outstanding
$
0.02

 
$
0.03

 
$
0.05

 
$
0.10

 
 
 
 
 
 
 
 
Comprehensive income
 
 
 
 
 
 
 
Net income
$
21,965

 
$
37,319

 
$
57,981

 
$
226,427

  Unrealized gain (loss) on investment securities
4,257

 
(10,447
)
 
(13,407
)
 
6,039

  Unrealized gain (loss) on derivatives
111

 
785

 
426

 
(1,831
)
    Reclassification for amounts recognized in net income
(71
)
 
1,656

 
(30,940
)
 
2,081

Comprehensive income
$
26,262

 
$
29,313

 
$
14,060

 
$
232,716

See accompanying notes to the consolidated financial statements.

2

INVENTRUST PROPERTIES CORP.

Consolidated Statements of Changes in Equity
(unaudited)

(Amounts in thousands, except share amounts)

For the nine months ended September 30, 2017
 
Number of Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Distributions
in excess of accumulated
net income
 
Accumulated Comprehensive Income
 
Total
Balance at January 1, 2017
773,304,997

 
$
773

 
$
5,676,639

 
$
(3,786,943
)
 
$
59,059

 
$
1,949,528

Net income

 

 

 
57,981

 

 
57,981

Unrealized loss on investment securities

 

 

 

 
(13,407
)
 
(13,407
)
Unrealized gain on derivatives

 

 

 

 
426

 
426

Reclassification for amounts recognized in net income

 

 

 

 
(30,940
)
 
(30,940
)
Distributions declared

 

 

 
(40,316
)
 

 
(40,316
)
Stock-based compensation
215,544

 

 
2,686

 

 

 
2,686

Refund of excess funds associated with 2016 tender offer

 

 
1,929

 

 

 
1,929

Balance at September 30, 2017
773,520,541
 
$
773

 
$
5,681,254

 
$
(3,769,278
)
 
$
15,138

 
$
1,927,887

See accompanying notes to the consolidated financial statements.


3

INVENTRUST PROPERTIES CORP.

Consolidated Statements of Changes in Equity
(unaudited)

(Amounts in thousands, except share amounts)

For the nine months ended September 30, 2016
 
Number of Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Distributions
in excess of accumulated
net income
 
Accumulated Comprehensive Income
 
Total
Balance at January 1, 2016
862,205,672

 
$
862

 
$
6,066,583

 
$
(3,956,032
)
 
$
37,290

 
$
2,148,703

Net income

 

 

 
226,427

 

 
226,427

Unrealized gain on investment securities

 

 

 

 
6,039

 
6,039

Unrealized loss on derivatives

 

 

 

 
(1,831
)
 
(1,831
)
Reclassification for amounts recognized in net income

 

 

 

 
2,081

 
2,081

Distributions declared

 

 

 
(70,592
)
 

 
(70,592
)
Stock-based compensation
10,022

 

 
1,552

 

 

 
1,552

Spin-off of Highlands REIT, Inc.

 

 
(151,105
)
 

 

 
(151,105
)
Balance at September 30, 2016
862,215,694

 
$
862

 
$
5,917,030

 
$
(3,800,197
)
 
$
43,579

 
$
2,161,274

See accompanying notes to the consolidated financial statements.


4

INVENTRUST PROPERTIES CORP.

Consolidated Statements of Cash Flows
(unaudited)

(Amounts in thousands)

 
Nine months ended September 30,
 
2017
 
2016
Cash flows from operating activities
 
 
 
Net income
$
57,981

 
$
226,427

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
71,096

 
94,184

Amortization of above and below market leases, net
(4,638
)
 
(2,791
)
Amortization of debt premiums, discounts and financing costs
947

 
4,725

Straight-line rental income
(1,418
)
 
414

Provision for asset impairment
16,440

 
117,722

Gain on sale of investment properties, net
(31,749
)
 
(341,778
)
(Gain) loss on extinguishment of debt
(838
)
 
13,143

Equity in earnings of unconsolidated entities
(1,895
)
 
(7,721
)
Distributions from unconsolidated entities
351

 
3,951

Gain on sale of investment in unconsolidated entities

 
(1,434
)
Marketable securities realized (gain) and impairment, net
(30,940
)
 
698

Non-cash stock-based compensation, net
4,007

 
2,558

Debt prepayment penalties and defeasance costs

 
(11,140
)
Changes in assets and liabilities:
 
 
 
  Accounts and rents receivable
1,682

 
2,422

  Deferred costs and other assets
6,326

 
7,888

  Accounts payable and accrued expenses
3,988

 
(9,410
)
  Other liabilities
3,546

 
(3,172
)
Net cash provided by operating activities
$
94,886

 
$
96,686

Cash flows from investing activities
 
 
 
Purchase of investment properties
(490,755
)
 
(360,770
)
Acquired in-place and market lease intangibles, net
(50,207
)
 
(21,144
)
Capital expenditures and tenant improvements
(20,278
)
 
(4,200
)
Investment in development projects

 
(53,077
)
Proceeds from sale of investment properties, net
162,512

 
1,533,492

Proceeds from sale of marketable securities, net
140,171

 
1,591

Proceeds and return of capital from the sale of unconsolidated entities

 
5,480

Contributions to unconsolidated entities
(6,109
)
 
(5,850
)
Distributions from unconsolidated entities
1,285

 
8,721

Lease commissions and other leasing costs
(2,201
)
 
(2,306
)
Change in restricted cash
13,894

 
900

Other assets
5,747

 
(8,911
)
Net cash (used in) provided by investing activities
$
(245,941
)
 
$
1,093,926

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

5

INVENTRUST PROPERTIES CORP.

Consolidated Statements of Cash Flows
(unaudited)

(Amounts in thousands)

 
Nine months ended September 30,
 
2017
 
2016
Cash flows from financing activities
 
 
 
Distributions
$
(39,917
)
 
$
(84,056
)
Refund of excess funds associated with 2016 tender offer
1,929

 

Proceeds from debt

 
299,735

Payoffs of debt
(104,032
)
 
(999,094
)
Principal payments of mortgage debt
(1,022
)
 
(10,526
)
Payment of loan fees and deposits
(343
)
 
(31
)
Cash contributed to Highlands REIT, Inc.

 
(21,195
)
Net cash used in financing activities
$
(143,385
)
 
$
(815,167
)
Net (decrease) increase in cash and cash equivalents
(294,440
)
 
375,445

Cash and cash equivalents, at beginning of period
397,250

 
203,285

Cash and cash equivalents, at end of period
$
102,810

 
$
578,730

 
 
 
 
Supplemental disclosure of cash flow information
 
 
 
Cash paid for interest, net of capitalized interest of $0 and $1,147
$
23,973

 
$
49,574

Cash paid for income taxes, net of refunds of $509 and $1,344
$
684

 
$
1,260

 
 
 
 
Supplemental schedule of non-cash investing and financing activities
 
 
 
Assumption of mortgage debt through acquisition of investment property
$
41,717

 
$
16,000

Accrued contingent consideration through acquisition of investment property
9,714

 

Net assets transferred at sale of real estate investments
3,894

 
2,007

Net assets acquired at purchase of real estate investments
3,102

 
2,290

Property surrendered in extinguishment of debt
2,440

 

Assumption of lender held escrows through acquisition of investment property
586

 

Net equity distributed to Highlands REIT, Inc. (net of cash contributed)

 
129,910

Mortgage assumed by buyer through disposition of investment properties

 
131,189

Like-kind exchange of real estate:
 
 
 
Restricted cash used in purchase of investment properties

39,800

 

Restricted cash proceeds from sale of investment properties
39,760

 


See accompanying notes to the consolidated financial statements.


6


INVENTRUST PROPERTIES CORP.

Notes to Consolidated Financial Statements
(Unaudited)

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Readers of these interim consolidated financial statements ("Quarterly Report") should refer to the audited consolidated financial statements of InvenTrust Properties Corp. (the "Company") as of and for the year ended December 31, 2016, which are included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016 ("Annual Report"), as certain note disclosures contained in such audited consolidated financial statements have been omitted from this Quarterly Report. In the opinion of management, all adjustments necessary (consisting of normal recurring accruals, except as otherwise noted) for a fair presentation have been included in these consolidated financial statements.
1. Organization
The Company was incorporated as Inland American Real Estate Trust, Inc. in October 2004, as a Maryland corporation and has elected to be taxed, and currently qualifies, as a real estate investment trust ("REIT") for federal tax purposes. The Company changed its name to InvenTrust Properties Corp. in April 2015. The Company was formed to own, manage, acquire and develop a diversified portfolio of commercial real estate located throughout the United States and to own properties in development and partially own properties through joint ventures, as well as investments in marketable securities and other assets. The Company no longer owns a diversified portfolio and is now focused on being a multi-tenant retail platform. As used in these Notes and throughout this Quarterly Report on Form 10-Q, the terms "Company," "InvenTrust," "we," "us," or "our" mean InvenTrust Properties Corp. and its wholly owned and unconsolidated joint venture investments.
Unless otherwise noted, all dollar amounts are stated in thousands, except share, per share, square foot and per square foot amounts.
Segment Reporting
Following the Highlands REIT, Inc. ("Highlands") spin-off and sale of the student housing platform, University House Communities Group, Inc. ("University House"), in 2016, as disclosed in the Company's Annual Report, the Company no longer has a non-core or student housing segment, respectively, as previously reported. Highlands and the Company operate independently as two separate companies, each having their own management team and board of directors. In addition, the Company disposed of its remaining non-core asset, Worldgate Plaza, on August 30, 2017, which represented the conclusion of the Company's strategic shift away from assets not classified as multi-tenant retail. These previously reported segments were classified as discontinued operations as they represented a strategic shift that had a major effect on the Company's operations and financial results. The assets and liabilities related to discontinued operations were separately classified on the consolidated balance sheet as of December 31, 2015, and the operations were classified as net income from discontinued operations on the consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2016.
With the completion of the University House sale and Highlands spin-off in 2016 as well as the disposal of Worldgate Plaza in 2017, the Company is now fully focused on investing in a multi-tenant retail platform as described above. In addition, the Company's assets now have similar characteristics, such as tenant type and economic performance, are all multi-tenant retail assets, and the Company does not distinguish its principal business or group its operations on a geographical basis for measuring performance. Accordingly, the Company believes it has a single reportable segment for disclosure purposes in accordance with GAAP as of September 30, 2017.
The accompanying consolidated financial statements include the accounts of the Company, as well as all wholly owned subsidiaries. Subsidiaries generally consist of limited liability companies (LLCs) and limited partnerships (LPs). All significant intercompany balances and transactions have been eliminated.
Each multi-tenant retail asset is owned by a separate legal entity which maintains its own books and financial records, and each separate legal entity's assets are not available to satisfy the liabilities of other affiliated entities, except as otherwise disclosed in "Note 7. Debt".
As of September 30, 2017, the Company's multi-tenant retail portfolio included 70 wholly owned multi-tenant retail assets with 12,253,822 square feet, of which approximately 94.4% was occupied, two consolidated multi-tenant retail assets considered Parked Assets as legal title was held by a wholly owned subsidiary of an Exchange Accommodation Titleholder (the "EAT") pending completion of a reverse like-kind exchange under Section 1031 of the Internal Revenue Code of 1986 (the "Code") ("Reverse 1031 Exchange") (see "Note 5. Investment in Consolidated and Unconsolidated Entities"), with 501,276 square feet, of which

7


INVENTRUST PROPERTIES CORP.

Notes to Consolidated Financial Statements
(Unaudited)

approximately 98% was occupied. In addition, the Company held a significant investment in two operating real estate joint ventures, one of which the Company owns an interest in as well as manages 15 multi-tenant retail assets with 2,977,303 square feet within the joint venture.
As of December 31, 2016, the Company had 72 wholly owned assets, which included 71 multi-tenant retail assets and one non-core office asset. As of September 30, 2016, the Company owned a combined total of 74 assets, which included multi-tenant retail assets and a non-core office asset. As of December 31, 2016 and September 30, 2016, the Company also managed 15 multi-tenant retail assets owned by an unconsolidated joint venture.
2. Basis of Presentation and Recently Issued Accounting Pronouncements
The accompanying consolidated financial statements reflect the consolidated financial position of the Company as of September 30, 2017 and December 31, 2016, the consolidated results of its operations for the three and nine months ended September 30, 2017 and 2016, and the consolidated statement of its cash flows for the nine months ended September 30, 2017 and 2016. These consolidated financial statements have been prepared in accordance with GAAP which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates, judgments and assumptions are required in a number of areas, including, but not limited to, evaluating the impairment of long-lived assets, allocating the purchase price of acquired assets, determining the fair value of debt and evaluating the collectability of accounts receivable. The Company bases these estimates, judgments and assumptions on historical experience and various other factors that the Company believes to be reasonable under the circumstances. Actual results may differ from these estimates.
Reclassifications
Certain reclassifications have been made to the consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2016 to conform to the 2017 presentation. These are as follows:
the reclassification of fees earned from providing property management, asset management, leasing commissions and other services to our unconsolidated joint venture partnerships from other income to other fee income for the three and nine months ended September 30, 2016 of $1,106 and $3,187, respectively; and
the reclassification of depreciation and amortization incurred on corporate level assets from general and administrative expenses to depreciation and amortization of $304 and $778 for the three and nine months ended September 30, 2016, respectively, of which $60 was included as part of net income from discontinued operations for the nine months ended September 30, 2016.
In addition, certain reclassifications have been made to the consolidated balance sheet as of December 31, 2016 and the consolidated statements of operations and comprehensive income for the nine months ended September 30, 2017 to reflect the results of Worldgate Plaza (sold on August 30, 2017), and for the three and nine months ended September 30, 2016 to reflect the results of Highlands (spun off on April 28, 2016), University House (sold on June 21, 2016) and Worldgate Plaza as discontinued operations.
Recently Issued Accounting Pronouncements Adopted
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-01, Clarifying the Definition of a Business, with the objective of providing guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The revised guidance will result in most of the Company's real estate transactions being classified as asset acquisitions and asset disposals. The guidance is effective beginning January 1, 2018. Early adoption is permitted. The Company early adopted ASU No. 2017-01 as of October 1, 2016.
In March 2016, the FASB issued ASU No. 2016-09, Compensation Stock Compensation, which outlines improvements to employee share-based payment accounting. The new standard impacts certain aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statements of cash flows. The Company has concluded that its adoption of ASU No. 2016-09, as issued, did not have a significant impact on the consolidated financial statements. The Company adopted ASU No. 2016-08 as of January 1, 2017.

8


INVENTRUST PROPERTIES CORP.

Notes to Consolidated Financial Statements
(Unaudited)

Recently Issued Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those promised goods or services. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective, although it will not affect the accounting for revenue deemed to be related to lease components of contracts. In April 2015, the FASB approved an amendment to the ASU, deferring the effective date one year to annual reporting periods beginning after December 15, 2017 for public entities. The standard permits the use of either the retrospective or cumulative effect transition method. Early adoption is prohibited. Most significantly for the real estate industry, revenue deemed to be related to non-lease components of contracts is within the scope of the new standard. A majority of the Company’s tenant-related revenue is related to lease components, and will be governed by the recently issued leasing guidance discussed below. As a result, while the total revenue recognized over time would not differ under the new guidance, the recognition pattern and presentation of revenue related to non-lease components would be different. The Company anticipates expanded quantitative and qualitative disclosures regarding revenue recognition will be required for contracts with customers that are subject to this guidance. However, the Company may elect certain practical expedients of the recently issued leasing guidance. As a result, the Company may generally not need to revisit historical accounting for leases executed prior to the leasing guidance effective date, which will be effective for annual reporting periods beginning after December 15, 2018.
The Company intends to implement the standard retrospectively with the cumulative effect (if any) recognized in retained earnings at the date of initial application. The Company will utilize the single practical expedient available and apply the guidance to new and existing contracts entered into subsequent to the date of initial application. The Company has completed a preliminary review of this standard to identify and document specific areas that will be affected by its adoption. In addition to revenue deemed to be related to non-lease components, the recognition of other fee income on the consolidated statements of operations and comprehensive income will be governed primarily by the new standard. The Company is continuing to evaluate this guidance and it does not expect its adoption will have a significant impact on the consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; and (g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 will be effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2017. Entities may early adopt the provisions related to the recognition of changes in fair value of financial liabilities. Entities must apply the standard using a cumulative effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The Company’s investments in marketable securities on the consolidated balance sheets are currently classified as available-for-sale and measured at fair value each reporting period. Changes in fair value are currently recorded through comprehensive income. As of the date of adoption, all unrealized gains or losses on available-for-sale equity securities will be reclassified to beginning retained earnings in the year of adoption. All subsequent changes in the fair value of the Company’s investments that have readily determinable fair values will be recognized through net income. The Company will continue to evaluate the impact of this guidance until adoption.
In February 2016, the FASB issued ASU No. 2016-02, Leases, amending the existing guidance for lease accounting for both parties to a lease contract (i.e. lessees and lessors). For lessees, the new standard requires application of a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset ("ROU") and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. For lessors, the new standard requires accounting for leases using a method that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating

9


INVENTRUST PROPERTIES CORP.

Notes to Consolidated Financial Statements
(Unaudited)

leases. ASU No. 2016-02 will be effective for annual reporting periods beginning after December 15, 2018, and early adoption is permitted as of the standard's issuance date. The new standard requires a modified retrospective transition method for all leases existing at the date of initial application, with an option to use certain practical expedients available.
On June 21, 2017 the FASB met to discuss an implementation question related to the adoption of ASU No. 2014-09 and ASU No. 2016-02. The FASB clarified that companies will not need to revisit the allocation of contract consideration to lease and non-lease components within the scope of ASU No. 2016-02 when an entity adopts ASU No. 2014-09. This clarification is limited to situations where companies decide not to early adopt ASU No. 2016-02 coincident with ASU No. 2014-09. Based on this clarification, if the Company elects the package of practical expedients, it will not need to revisit historical accounting for leases. Therefore, ASU No. 2016-02 would only apply to new leases executed after the effective date of January 1, 2019.
As a lessee, the Company believes the most significant change relates to the recognition of a new ROU asset and lease liability on the consolidated balance sheets for its corporate office leases, as well as a ground lease agreement where the Company is the lessee (see Note 12). Currently, the Company accounts for both the office and the ground lease arrangement as operating leases and they are not material to the Company’s consolidated financial statements.
As a lessor, the Company believes substantially all of the Company's leases will continue to be classified as operating leases under the new standard. Common area maintenance ("CAM"), utility recovery services, and non-routine major maintenance provided for in tenant lease contracts will be accounted for as non-lease components within the scope of the new revenue standard. As a result, we will be required to recognize revenues associated with tenant leases separately from revenues associated with CAM, utility recovery services, or non-routine major maintenance. The Company also has certain lease arrangements with its tenants for space at its retail assets in which the contractual amounts due under the lease from the lessee are not allocated between the rental and expense reimbursement components ("Gross Leases"). Presently, the aggregate revenue earned under Gross Leases is classified as rental income in the consolidated statements of operations. Under the new standard, the Company anticipates it will be required to allocate the embedded revenue associated with these reimbursements under its Gross Leases, which represent an immaterial portion of the Company’s lease portfolio, and separately present such amounts in its consolidated statements of operations. Lastly, due to the new standard’s narrowed definition of initial direct costs, the Company expects to expense as incurred certain lease origination costs currently capitalized and amortized to expense over the lease term. However, the Company does not believe this change will have a material impact on its consolidated financial statements. The Company will continue to evaluate the impact of this guidance until adoption on January 1, 2019.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows. This guidance is intended to reduce the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The core principle of the ASU requires the classification of eight specific issues identified under Accounting Standards Codification ("ASC") ASC 230, Statement of Cash Flows, to be presented as either financing, investing or operating, or some combination thereof, depending upon the nature of the cash flows. ASU No. 2016-15 will be effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2017, and early adoption is permitted. Entities are required to use a retrospective transition method for each period presented. Of the eight specific issues identified, the following clarifications are most pertinent to the Company: (a) cash payments for debt prepayment and extinguishment costs are presented as cash outflows from financing activities; (b) cash proceeds from the settlement of insurance claims are presented based on the nature of the loss; (c) distributions from equity method investments must be classified as investing or operating, or some combination thereof, based on an accounting policy election. The Company’s current presentation of cash payments for debt prepayment and extinguishment costs and cash proceeds from the settlement of insurance claims is in accordance with the standard. The Company currently utilizes the nature of the distribution approach regarding distributions from equity method investments, which will be formalized as an accounting policy in accordance with the standard. Under this approach, each distribution is evaluated on the basis of the source of the payment and classified as either operating cash inflows or investing cash inflows. The Company anticipates the adoption of this standard on January 1, 2018, and does not expect its adoption will have a significant impact on the consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows. The guidance is intended to reduce the existing diversity in practice of how certain transfers between cash and restricted cash are classified as operating, investing, or financing activities within the statement of cash flows. ASU No. 2016-18 will be effective for annual reporting periods beginning after December 31, 2017, and interim periods within those fiscal years. Early adoption is permitted. This guidance requires a retrospective transition method of adoption for each period presented. Under the standard, entities are required to explain the changes in the combined total of restricted and unrestricted cash in the statement of cash flows. As a result, a transfer between restricted and

10


INVENTRUST PROPERTIES CORP.

Notes to Consolidated Financial Statements
(Unaudited)

unrestricted cash accounts will not be reported as a cash flow. All cash receipts/payments with third parties directly to/from restricted cash accounts will be reported as operating, investing, or financing cash flows, as appropriate.
In February 2017, the FASB issued ASU No. 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets. The new guidance is required to be adopted concurrently with the amendments in ASU 2014-09, Revenue from Contracts with Customers. The standard, which adds guidance for partial sales of nonfinancial assets and clarifies the scope of Subtopic 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets, applies to the derecognition of all nonfinancial assets (including real estate) for which the counterparty is not a customer. Public entities should apply the amendments in this standard to annual periods beginning after December 15, 2017, including interim periods within those periods. The Company anticipates the adoption of this standard on January 1, 2018, and does not expect its adoption will have a significant impact on the consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. This guidance is intended to better align financial reporting for hedging activities with the economic objectives of those activities. The transition guidance provides the option of early adopting the new standard using a modified retrospective transition method in any interim period, or alternatively requires adoption for fiscal years beginning after December 15, 2018. This adoption method will require the Company to recognize the cumulative effect of initially applying the ASU as an adjustment to accumulated comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that it adopts the update. The Company is continuing to evaluate this guidance and does not expect its adoption will have a significant impact on the consolidated financial statements.

11


INVENTRUST PROPERTIES CORP.

Notes to Consolidated Financial Statements
(Unaudited)

3. Acquired Assets
The Company records identifiable assets, liabilities and noncontrolling interests acquired at fair value. During the nine months ended September 30, 2017, the Company acquired six wholly owned and two consolidated multi-tenant retail assets for a gross acquisition price of $633,425. Under the newly adopted ASU No. 2017-01, the Company determined these transactions should be accounted for as acquisitions of assets. Accordingly, the Company capitalized transaction costs of approximately $524 and $1,692, respectively, during the three and nine months ended September 30, 2017.
The following table reflects the multi-tenant retail assets acquired during the nine months ended September 30, 2017.
Asset
 
Location
 
Acquisition Date
 
Gross Acquisition Price
 
Square Feet
Campus Marketplace (a)
 
San Marcos, CA
 
1/6/2017
 
$
73,350

 
144,000
Paraiso Parc and Westfork Plaza
 
Pembroke Pines, FL
 
2/1/2017
 
163,000

 
386,000
The Shops at Town Center
 
Germantown, MD
 
2/21/2017
 
53,550

 
125,000
Cary Park Town Center
 
Cary, NC
 
8/14/2017
 
25,000

 
93,000
The Parke
 
Cedar Park, TX
 
8/18/2017
 
112,250

 
364,000
The Plaza Midtown
 
Atlanta, GA
 
8/18/2017
 
31,800

 
70,000
River Oaks (b)
 
Santa Clarita, CA
 
9/14/2017
 
115,000

 
275,000
Kyle Marketplace (b)
 
Kyle, TX
 
9/21/2017
 
59,475

 
226,000
 
 
 
 
 
 
$
633,425

 
1,683,000
(a)
As part of this acquisition, the Company assumed mortgage debt of $41,717 as reported within non-cash financing activities on the consolidated statements of cash flows for the nine months ended September 30, 2017.
(b)
These assets are held at a wholly owned subsidiary of the EAT as Parked Assets in anticipation of completing a Reverse 1031 Exchange in 2018 (See "Note 5. Investment in Consolidated and Unconsolidated Entities")
The following table summarizes the estimated fair value of the multi-tenant retail assets acquired and liabilities assumed for the nine months ended September 30, 2017, as listed above.
 
2017 Acquisitions
Land
$
125,990

Building and other improvements
440,204

Total investment properties
566,194

Intangible assets (a)
69,306

Intangible liabilities (b)
(19,099
)
Net other assets and liabilities
17,024

Total fair value of assets acquired and liabilities assumed
$
633,425

(a)
Intangible assets include in-place leases and above market leases.
(b)
Intangible liabilities include below market leases.

12


INVENTRUST PROPERTIES CORP.

Notes to Consolidated Financial Statements
(Unaudited)

The following table reflects the multi-tenant retail assets acquired during the nine months ended September 30, 2016 that were accounted for as business combinations.
Asset
 
Location
 
Acquisition Date
 
Gross Acquisition Price
 
Square Feet
Shops at the Galleria
 
Bee Cave, TX
 
4/1/2016
 
$
132,000

 
538,000
Renaissance Center (a)
 
Durham, NC
 
4/1/2016
 
129,200

 
363,000
Stevenson Ranch
 
Stevenson, CA
 
4/15/2016
 
72,500

 
187,000
The Pointe at Creedmoor
 
Raleigh, NC
 
7/12/2016
 
16,977

 
60,000
Windward Commons
 
Alpharetta, GA
 
8/23/2016
 
27,650

 
117,000
Old Grove Marketplace
 
Oceanside, CA
 
8/25/2016
 
23,250

 
81,000
 
 
 
 
 
 
$
401,577

 
1,346,000
(a)
As part of this acquisition, the Company assumed mortgage debt of $16,000 as reported within non-cash financing activities on the consolidated statements of cash flows for the nine months ended September 30, 2016.
The following table summarizes the estimated fair value of the multi-tenant retail assets acquired and liabilities assumed for the nine months ended September 30, 2016, as listed above.
 
2016 Acquisitions
Land
$
141,215

Building and other improvements
239,149

Total investment properties
380,364

Intangible assets (a)
37,432

Intangible liabilities (b)
(16,477
)
Net other assets and liabilities
258

Total fair value of assets acquired and liabilities assumed
$
401,577

(a)
Intangible assets include in-place leases and above market leases.
(b)
Intangible liabilities include below market leases.
For assets acquired during the nine months ended September 30, 2016 and accounted for as business combinations, the Company recorded total income of $8,025 and $14,804, respectively, for the three and nine months ended September 30, 2016. In addition, the Company recorded net income of $1,464 and $2,460, respectively, excluding acquisition costs expensed as general and administrative expense of $239 and $1,009, respectively, for the three and nine months ended September 30, 2016.
The assets acquired are included in the Company's results of operations based on their date of acquisition. The following unaudited pro-forma results of operations reflect these transactions as if each had occurred on January 1, 2016. The pro-forma information is not necessarily indicative of the results that actually would have occurred nor does it indicate future operating results.
 
Three months ended
September 30, 2016
 
Nine months ended
September 30, 2016
Total income
$
61,236

 
$
192,581

Net income from continuing operations
$
29,818

 
$
65,667


13


INVENTRUST PROPERTIES CORP.

Notes to Consolidated Financial Statements
(Unaudited)

4. Disposed Assets
The Company sold six multi-tenant retail assets and one non-core asset during the nine months ended September 30, 2017 for an aggregate gross disposition price of $206,130 and generated net proceeds from the sale of those assets of $162,512. The Company sold 24 retail assets, one non-core asset, and University House during the nine months ended September 30, 2016 for an aggregate gross disposition price of $1,887,550 and generated net proceeds from those sales of $1,533,492.
Continuing operations, multi-tenant retail assets
The following multi-tenant retail assets were sold during the nine months ended September 30, 2017. The Company recognized a net gain on sale from these six assets of $7,253 and $21,634, respectively, for the three and nine months ended September 30, 2017.
Asset
 
Location
 
Disposition Date
 
Gross Disposition Price
 
Square Feet
Penn Park
 
Oklahoma City, OK
 
1/10/2017
 
$
29,050

 
242,000
Sparks Crossing
 
Sparks, NV
 
5/19/2017
 
40,280

 
336,000
Lincoln Village
 
Chicago, IL
 
6/23/2017
 
30,000

 
164,000
Pavilions at Hartman Heritage
 
Independence, MO
 
7/31/2017
 
21,700

 
223,000
Legacy Crossing
 
Marion, OH
 
7/31/2017
 
10,250

 
134,000
Heritage Plaza
 
Chicago, IL
 
9/28/2017
 
21,350

 
132,000
 
 
 
 
 
 
$
152,630

 
1,231,000
In addition, the Company surrendered one asset to the lender (in satisfaction of non-recourse debt) on May 17, 2017. The Company is not aware of any material outstanding commitments and contingencies related to this asset. The Company recognized a gain on debt extinguishment of $882 related to this transaction as part of income from continuing operations for the nine months ended September 30, 2017.
Discontinued operations, disposition of Worldgate Plaza
On August 30, 2017, the Company sold Worldgate Plaza, the Company's remaining non-core office asset for a gross disposition price of $53,500, and recognized a gain on the sale of this asset of $10,115 as part of income from discontinued operations on the consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2017.
The major classes of assets and liabilities of discontinued operations as of December 31, 2016 were as follows:
 
December 31, 2016
Assets
 
Land
$
9,564

Building and other improvements
33,003

Total
42,567

Less accumulated depreciation
(2,601
)
Net investment properties
39,966

Accounts and rents receivable (net of allowance of $49)
1,566

Deferred costs and other assets
903

Total assets
$
42,435

Liabilities
 
Debt, net
$
59,942

Accounts payable and accrued expenses
116

Other liabilities
355

Total liabilities
$
60,413


14


INVENTRUST PROPERTIES CORP.

Notes to Consolidated Financial Statements
(Unaudited)

The operations reflected in discontinued operations in the consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2017 include Worldgate Plaza, and for the three and nine months ended September 30, 2016, includes University House, the Highlands spin-off, and Worldgate Plaza.
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Total income
$
844

 
$
2,786

 
$
3,855

 
$
90,389

Less:
 
 
 
 
 
 
 
Depreciation and amortization expense
301

 
617

 
1,205

 
32,231

Other expenses
492

 
2,084

 
2,398

 
38,302

Provision for asset impairment

 

 

 
106,514

Operating income (loss) from discontinued operations
51

 
85

 
252

 
(86,658
)
Interest expense, income taxes, and other miscellaneous income
(443
)
 
(1,087
)
 
(1,993
)
 
(15,924
)
Equity in earnings of unconsolidated entity

 

 

 
(19
)
Gain on sale of investment in unconsolidated entity

 

 

 
1,434

Gain on sale of properties, net
10,115

 
10,494

 
10,115

 
235,780

Loss on extinguishment of debt
(2
)
 
(617
)
 
(2
)
 
(2,826
)
Net income from discontinued operations
$
9,721

 
$
8,875

 
$
8,372

 
$
131,787

 
 
 
 
 
 
 
 
Net income per common share, from discontinued operations, basic and diluted
$
0.01

 
$
0.01

 
$
0.01

 
$
0.15

Weighted average number of common shares outstanding, basic and diluted
773,517,492

 
862,212,317

 
773,405,710

 
862,207,903


15


INVENTRUST PROPERTIES CORP.

Notes to Consolidated Financial Statements
(Unaudited)

5. Investment in Consolidated and Unconsolidated Entities
Consolidated Entities
During the third quarter of 2017, the Company entered into purchase agreements structured as Reverse 1031 Exchanges in order to acquire River Oaks and Kyle Marketplace. For a Reverse 1031 Exchange in which the Company purchases a new asset that is similar in nature, character, or class prior to selling the asset to be matched in the like-kind exchange (the Company refers to a new asset being acquired in the Reverse 1031 Exchange prior to the sale of the related asset as a "Parked Asset"), legal title to the Parked Asset is held by a wholly owned subsidiary of the EAT engaged to execute the Reverse 1031 Exchange until the sale transaction and the Reverse 1031 Exchange is completed. The Company, through a subsidiary, enters into a master lease agreement with the wholly owned subsidiary of the EAT whereby the EAT leases the Parked Asset and all other rights in connection with the acquisition to the Company. The master lease terminates on the earlier of (i) the date that the Parked Asset is transferred to the Company, or an affiliate, (ii) EAT transfers its ownership in the Parked Asset to the Company, or an affiliate thereof, or (iii) 180 days from the date that the asset was acquired in which title transfers to the Company. The EAT is classified as a variable interest entity ("VIE"), as defined in FASB ASC 810, Consolidation, as it does not have sufficient equity investment at risk to finance its activities without additional subordinated financial support.
River Oaks and Kyle Marketplace were deemed to be VIEs, for which the Company was deemed to be the primary beneficiary as it has the ability to direct the activities of the entities that most significantly impact economic performance and has all of the risks and rewards of ownership. Accordingly, the Company has consolidated River Oaks and Kyle Marketplace.
The following were the assets and liabilities of the consolidated VIEs. The liabilities of the VIEs are not recourse to the Company, and the assets must be used first to settle obligations of the VIEs. As of September 30, 2017, River Oaks and Kyle Marketplace were the Company's only active Reverse 1031 Exchanges.
 
 
September 30, 2017
 
December 31, 2016
Net investment properties
 
$
167,017

 
$

Other assets
 
17,024

 

Total assets
 
184,041

 

Other liabilities
 
10,649

 

Total liabilities
 
10,649

 

Net assets
 
$
173,392

 
$

During the third quarter of 2017, the Company acquired The Plaza Midtown (see "Note 3. Acquired Assets"), consisting of wholly owned multi-tenant retail space, and an undivided interest in certain common elements as tenants-in-common. An undivided interest is an ownership arrangement in which two or more parties jointly own property, and title is held individually to the extent of each party’s interest. The common elements primarily consist of a parking garage adjacent to the wholly owned multi-tenant retail space. The ownership of The Plaza Midtown was deemed to not be subject to joint control, as the other tenant-in-common lacked the ability to effectively participate in the decisions that most significantly impact economic performance of The Plaza Midtown. Accordingly, the Company has applied proportionate consolidation of the common elements. The parking garage had an estimated proportionate fair value of $10,790 at the acquisition date, which has been included in land and building and other improvements of $1,963 and $8,827, respectively, on the consolidated balance sheet as of September 30, 2017.

16


INVENTRUST PROPERTIES CORP.

Notes to Consolidated Financial Statements
(Unaudited)

Unconsolidated Entities
The entities listed below are owned by the Company and other unaffiliated parties in joint ventures. Net income, distributions and capital transactions for these entities are allocated to the Company and its joint venture partners in accordance with the respective partnership agreements.
The Company analyzed the joint venture agreements and determined that the joint ventures were not VIEs. The Company also considered the joint venture partners' participating rights under the joint venture agreements and determined that the joint venture partners have the ability to participate in major decisions, which equates to shared decision making. Accordingly, the Company has significant influence but does not control the joint ventures. Therefore, these joint ventures are not consolidated by the Company and the equity method of accounting is used to account for these investments. Under the equity method of accounting, the net equity investment of the Company and the Company's share of net income or loss from the unconsolidated entity are reflected in the consolidated balance sheets and the consolidated statements of operations and comprehensive income.
 
 
 
 
 
 
Carrying Value of Investment as of
Entity
 
Description
 
Ownership %
 
September 30, 2017
 
December 31, 2016
IAGM Retail Fund I, LLC
 
Multi-tenant retail shopping centers
 
55%
 
$
128,778


$
126,090

Downtown Railyard Venture, LLC
 
Land development
 
90%
 
56,429

 
52,365

Other unconsolidated entities
 
Various real estate investments
 
Various
 
(111
)

273


 

 

 
$
185,096

 
$
178,728

During the three and nine months ended September 30, 2017, the Company received a final distribution from one unconsolidated entity of $366, which reduced the Company's investment in the unconsolidated entity to zero as of September 30, 2017. No gain or loss was recognized as part of the transaction.
A gain on the sale of a joint venture for the development of a student housing community of $1,434 was recorded for the nine months ended September 30, 2016 and is included as part of net income from discontinued operations on the consolidated statements of operations and comprehensive income.
Combined Financial Information
The following tables present the combined condensed financial information for the Company's unconsolidated entities.
 
September 30, 2017
 
December 31, 2016
Assets:
 
 
 
Real estate assets, net of accumulated depreciation
$
624,500

 
$
628,667

Other assets
77,869

 
71,288

Total assets
$
702,369

 
$
699,955

Liabilities and equity:
 
 
 
Mortgage debt
311,525

 
311,378

Other liabilities
61,487

 
65,225

Equity
329,357

 
323,352

Total liabilities and equity
$
702,369

 
$
699,955

Company's share of equity
$
198,044

 
$
192,124

Excess of the net book value, net, of underlying assets over the cost of investments (net of accumulated amortization of $2,677 and $2,229, respectively)
(12,948
)
 
(13,396
)
Carrying value of investments in unconsolidated entities
$
185,096

 
$
178,728


17


INVENTRUST PROPERTIES CORP.

Notes to Consolidated Financial Statements
(Unaudited)

 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues
$
15,543

 
$
15,420

 
$
49,307

 
$
52,554

Expenses:
 
 
 
 
 
 
 
Interest expense and loan cost amortization
3,505

 
3,334

 
10,032

 
9,972

Depreciation and amortization
6,234

 
6,325

 
18,848

 
20,992

Operating expenses, ground rent and general and administrative expenses
5,193

 
4,398

 
17,463

 
15,064

Total expenses
14,932

 
14,057

 
46,343

 
46,028

Net income
$
611

 
$
1,363

 
$
2,964

 
$
6,526

 
 
 
 
 
 
 
 
Company's share of net income (loss), net of excess basis depreciation of $130, $130, $390 and $390, respectively
$
648

 
$
(152
)
 
$
1,895

 
$
3,107

Distributions from unconsolidated entities in excess of the investments' carrying value

 
4,001

 

 
4,632

Equity in earnings of unconsolidated entities
$
648

 
$
3,849

 
$
1,895

 
$
7,739

The unconsolidated entities had total third party debt of $311,525 at September 30, 2017 that matures as follows:
Maturities during the year ended December 31,
 
Amount
2017
 
$

2018
 
203,931

2019
 
16,247

2020
 

2021
 
22,984

Thereafter
 
68,363

 
 
$
311,525

Of the total outstanding debt related to assets held by the Company's unconsolidated joint ventures, approximately $23,000 is recourse to the Company and matures in 2018. It is anticipated that the joint ventures will be able to repay or refinance all of their debt on a timely basis.

18


INVENTRUST PROPERTIES CORP.

Notes to Consolidated Financial Statements
(Unaudited)

6. Investment in Marketable Securities
Investment in marketable securities of $35,547 and $183,883 at September 30, 2017 and December 31, 2016, respectively, consists primarily of preferred and common stock investments in other REITs and certain real estate related bonds which are classified as available-for-sale securities and recorded at fair value. The cost basis net of impairments of available-for-sale securities was $21,322 and $125,311 as of September 30, 2017 and December 31, 2016, respectively. The Company recognized net proceeds from sales of marketable securities of $140,171 during the nine months ended September 30, 2017.
Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and reported as a separate component of comprehensive income until realized. The Company has net accumulated comprehensive income related to its marketable securities portfolio of $14,225 and $58,572, which includes gross unrealized losses of $36 and $598 related to its marketable securities as of September 30, 2017 and December 31, 2016, respectively. Securities with gross unrealized losses have a related fair value of $0 and $1,204 as of September 30, 2017 and December 31, 2016, respectively.
The Company’s policy for assessing recoverability of its available-for-sale securities is to record a charge against net earnings when the Company determines that a decline in the fair value of a security drops below the cost basis and believes that decline to be other-than-temporary. Factors in the assessment of other-than-temporary impairment include determining whether (1) the Company expects the value of the security to recover, (2) the Company has the ability and intent to hold the security until it recovers, and (3) the length of time and degree to which the security’s price has declined. The Company recorded no impairment on available-for-sale securities for the three and nine months ended September 30, 2017. Other-than-temporary impairment to available-for-sale securities of $1,327 was recorded for the three and nine months ended September 30, 2016 as part of continuing operations in interest and dividend income on the consolidated statements of operations and comprehensive income.
Dividend income is recognized when earned. During the three and nine months ended September 30, 2017, dividend income of $350 and $2,582, respectively, was recognized and is included as part of continuing operations in interest and dividend income on the consolidated statements of operations and comprehensive income. During the three and nine months ended September 30, 2016, $2,650 and $7,950, respectively, was recognized and is included as part of continuing operations in interest and dividend income on the consolidated statements of operations and comprehensive income.

19


INVENTRUST PROPERTIES CORP.

Notes to Consolidated Financial Statements
(Unaudited)

7. Debt
Mortgages payable
As of September 30, 2017 and December 31, 2016, the Company had the following mortgages payable outstanding:
 
September 30, 2017
 
December 31, 2016
Mortgages payable (a)
$
370,029

 
$
374,796

Premium, net of accumulated amortization
538

 

Discount, net of accumulated amortization
(204
)
 
(317
)
Debt issuance costs, net of accumulated amortization
(1,704
)
 
(1,772
)
Total mortgages payable, net
$
368,659

 
$
372,707

(a)
Mortgages payable had fixed interest rates (for both conforming loans and loans in default) ranging from 3.49% to 10.45%, with a weighted average interest rate of 5.11% as of September 30, 2017, and 3.49% to 11.24%, with a weighted average interest rate of 4.85%, as of December 31, 2016.
Some of the mortgage loans require compliance with certain covenants, such as debt service coverage ratios, investment restrictions and distribution limitations. As of September 30, 2017, the Company was in compliance with all mortgage loan requirements except two loans in default with an aggregate carrying value of $43,187, both of which matured during the nine months ended September 30, 2017. As of December 31, 2016, the Company was in compliance with all mortgage loan requirements except one loan with a carrying value of $3,151, which matured in 2016. During 2017, the underlying multi-tenant retail asset was surrendered to the lender, as described in "Note 4. Disposed Properties". These loans are not cross-collateralized with any other mortgage loans and are not recourse to the Company.
The following table shows the scheduled maturities of the Company's mortgages payable as of September 30, 2017, for the remainder of 2017, each of the next four years, and thereafter.
 
Maturities during the year ending December 31,
 
 
 
 
 
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
Mortgages payable
$
43,187

 
$
59,575

 
$

 
$
41,000

 
$
12,894

 
$
213,373

 
$
370,029

The Company has the ability to repay, refinance or extend any of its debt, and the Company believes it has adequate sources of funds to meet short-term cash needs related to these refinancings or extensions. It is anticipated that the Company will use proceeds from sales, cash on hand, available capacity on term loan and line of credit, if any, to repay, refinance or extend the debt maturing in the near term. Of the total outstanding mortgages payable, approximately $3,000 is recourse to the Company at September 30, 2017 and is related to a wholly owned multi-tenant retail asset, and approximately $23,000 of mortgages payable related to multi-tenant retail assets owned by IAGM Retail Fund I, LLC is recourse to the Company at September 30, 2017.
During the nine months ended September 30, 2017, the Company assumed mortgage debt of $41,717 on one acquisition as part of non-cash financing activities.
Credit agreements
On November 5, 2015, the Company entered into a term loan credit agreement for a $300,000 unsecured credit facility with a syndicate of seven lenders led by Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith, Incorporated and PNC Capital Markets LLC as joint lead arrangers. The accordion feature allows the Company to increase the size of the unsecured term loan credit facility to $600,000, subject to certain conditions.
The term loan credit facility consists of two tranches: a five-year tranche maturing on January 15, 2021, and a seven-year tranche maturing on November 5, 2022. Interest rates are based on the Company's total leverage ratio. Based upon the Company's total leverage ratios, the five- and seven-year tranches bear interest at rates of 1-Month LIBOR plus 1.3% and 1-Month LIBOR plus 1.6%, respectively. As of September 30, 2017, the Company has swapped $150,000 of variable rate debt on the five-year tranche to fixed rate debt through two interest rate swaps.

20


INVENTRUST PROPERTIES CORP.

Notes to Consolidated Financial Statements
(Unaudited)

The term loan credit facility is subject to maintenance of certain financial covenants. As of September 30, 2017 and December 31, 2016, the Company was in compliance with all of the covenants and default provisions under the credit agreement.
On February 3, 2015, the Company entered into an amended and restated credit agreement for a $300,000 unsecured revolving line of credit with KeyBank National Association, JP Morgan Chase Bank National Association and other financial institutions. The accordion feature allows the Company to increase the size of its unsecured line of credit up to $600,000, subject to certain conditions. The unsecured revolving line of credit matures on February 2, 2019 and contains one twelve-month extension option that the Company may exercise upon payment of an extension fee equal to 0.15% of the commitment amount on the maturity date and subject to certain other conditions. The unsecured revolving line of credit bears interest at a rate equal to 1-Month LIBOR plus 1.40% and requires the maintenance of certain financial covenants. The Company had $300,000 available under the revolving line of credit as of September 30, 2017.
The credit facility is subject to maintenance of certain financial covenants. As of September 30, 2017 and December 31, 2016, the Company was in compliance with all of the covenants and default provisions under the credit agreement.
As of September 30, 2017 and December 31, 2016, the Company had the following borrowings outstanding under its term loan credit facility:
 
September 30, 2017
 
December 31, 2016
 
 
 
Aggregate
Principal Balance
 
Interest
Rate
 
Aggregate
Principal Balance
 
Interest
Rate
 
Maturity
Date
5 year - swapped to fixed rate (a)
$
90,000

 
1.3510%
 
$
90,000

 
1.3510%
 
1/15/2021
5 year - swapped to fixed rate (b)
60,000

 
1.3525%
 
60,000

 
1.3525%
 
1/15/2021
5 year - variable rate (c)
50,000

 
2.5372%
 
50,000

 
1.9167%
 
1/15/2021
7 year - variable rate (d)
100,000

 
2.8372%
 
100,000

 
2.2167%
 
11/5/2022
Total unsecured term loans
300,000

 
 
 
300,000

 
 
 
 
Issuance costs, net of accumulated amortization
(1,704
)
 
 
 
(2,044
)
 
 
 
 
 
$
298,296

 
 
 
$
297,956

 
 
 
 
(a)
The Company swapped $90,000 of variable rate debt at an interest rate of 1-Month LIBOR plus 1.3% to a fixed rate of 1.3510%. The swap has an effective date of December 10, 2015, a termination date of December 1, 2019, and a notional amount of $90,000.
(b)
The Company swapped $60,000 of variable rate debt at an interest rate of 1-Month LIBOR plus 1.3% to a fixed rate of 1.3525%. The swap has an effective date of December 10, 2015, a termination date of December 1, 2019, and a notional amount of $60,000.
(c)
Interest rate reflects 1-Month LIBOR plus 1.3% as of September 30, 2017 and December 31, 2016.
(d)
Interest rate reflects 1-Month LIBOR plus 1.6% as of September 30, 2017 and December 31, 2016.

21


INVENTRUST PROPERTIES CORP.

Notes to Consolidated Financial Statements
(Unaudited)

8. Fair Value Measurements
In accordance with ASC 820, Fair Value Measurement and Disclosures, the Company defines fair value based on the price that would be received upon sale of an asset or the exit price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value. The fair value hierarchy consists of three broad levels, which are described below:
Level 1 Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
Level 2 Observable inputs, other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The Company has estimated the fair value of its financial and non-financial instruments using available market information and valuation methodologies the Company believes to be appropriate for these purposes. Considerable judgment and a high degree of subjectivity are involved in developing these estimates and, accordingly, they are not necessarily indicative of amounts that would be realized upon disposition.
Recurring Measurements
For assets and liabilities measured at fair value on a recurring basis, quantitative disclosure of the fair value for each major category of assets and liabilities is presented below:
 
 
Fair Value Measurements at September 30, 2017
Assets
 
Level 1
 
Level 2
 
Level 3
Available-for-sale marketable securities
 
$
35,224

 
$

 
$

Real estate related bonds
 

 
323

 

Derivative interest rate swaps
 

 
913

 

Total assets
 
$
35,224

 
$
1,236

 
$

 
 
Fair Value Measurements at December 31, 2016
Assets
 
Level 1
 
Level 2
 
Level 3
Available-for-sale marketable securities
 
$
182,569


$


$

Real estate related bonds
 


1,314



Derivative interest rate swaps
 


487



Total assets
 
$
182,569

 
$
1,801

 
$

Level 1
At September 30, 2017 and December 31, 2016, the fair value of the available-for-sale marketable equity securities have been estimated based upon quoted market prices. Unrealized gains or losses on investment are reflected in unrealized gain (loss) on investment securities in comprehensive income on the consolidated statements of operations and comprehensive income.
Level 2
To calculate the fair value of the real estate related bonds and the derivative interest rate instruments, the Company primarily uses quoted prices for similar securities and contracts. For the real estate related bonds, the Company reviews price histories for similar market transactions. For the derivative interest rate instruments, the Company uses inputs based on data that is observed in the forward yield curve which is widely observable in the marketplace.  The Company also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value

22


INVENTRUST PROPERTIES CORP.

Notes to Consolidated Financial Statements
(Unaudited)

measurements which utilizes Level 3 inputs, such as estimates of current credit spreads. However, as of September 30, 2017 and December 31, 2016, the Company determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. As of September 30, 2017 and December 31, 2016, the Company had outstanding interest rate swap agreements with an aggregate notional value of $150,000.
Level 3
At September 30, 2017 and December 31, 2016, the Company had no Level 3 recurring fair value measurements.
Nonrecurring Measurements
The following table summarizes activity for the Company’s assets measured at fair value on a nonrecurring basis. The Company recognized certain impairment charges to reflect the investments at their fair values for the three and nine months ended September 30, 2017 and 2016. The asset groups that were reflected at fair value through this evaluation are:
 
For the three months ended September 30,
 
2017
 
2016
 
Level 3
 
Impairment Losses
 
Level 3
 
Impairment Losses
Investment properties, continuing operations
$

 
$

 
$
27,173

 
$
2,818

Investment properties, discontinued operations

 

 

 

Total
 
 
$

 
 
 
$
2,818

 
For the nine months ended September 30,
 
2017
 
2016
 
Level 3
 
Impairment Losses
 
Level 3
 
Impairment Losses
Investment properties, continuing operations
$
36,676

 
$
16,440

 
$
66,323

 
$
11,208

Investment properties, discontinued operations

 

 
584,358

 
106,514

Total
 
 
$
16,440

 
 
 
$
117,722

Investment properties, continuing operations
During the three and nine months ended September 30, 2017, the Company identified certain assets which may have a reduction in the expected holding period and reviewed the probability of these assets' disposition. The Company's estimated fair value relating to the investment assets' impairment analyses was based on broker opinions of value and letters of intent and 10-year discounted cash flow models, which include estimated inflows and outflows over a specific holding period and estimated net disposition proceeds at the end of the 10-year period. The cash flows consist of observable inputs such as contractual revenues and unobservable inputs such as forecasted revenues and expenses and estimated net disposition proceeds at the end of the 10-year period. These unobservable inputs are based on market conditions and the Company’s expected growth rates. As a result, during the nine months ended September 30, 2017, the Company recorded a provision for asset impairment of $16,440 in continuing operations on three multi-tenant retail assets based on broker opinions of value and letters of intent. There was no provision for asset impairment recorded for the three months ended September 30, 2017.
During the three and nine months ended September 30, 2016, the Company identified certain assets which may have a reduction in the expected holding period and reviewed the probability of these assets' disposition. The Company's estimated fair value relating to the investment assets' impairment analyses was based on purchase contracts. As a result, during the three and nine months ended September 30, 2016, the Company recorded a provision for asset impairment of $2,818 and $11,208, respectively, in continuing operations on three multi-tenant retail assets.

23


INVENTRUST PROPERTIES CORP.

Notes to Consolidated Financial Statements
(Unaudited)

Investment properties, discontinued operations
In connection with the Highlands spin-off during the nine months ended September 30, 2016, as disclosed in the Company's Annual Report, the Company evaluated Highlands as a disposal group for impairment. The Company's estimated fair value relating to the disposal group's impairment analysis was based on 10-year discounted cash flow models, which include estimated inflows and outflows over a specific holding period and estimated net disposition proceeds at the end of the 10-year period. The cash flows consist of observable inputs such as contractual revenues and unobservable inputs such as forecasted revenues and expenses and estimated net disposition proceeds at the end of the 10-year period. These unobservable inputs are based on market conditions and the Company’s expected growth rates.
As of the spin date, capitalization rates ranging from 6.75% to 10.00% and discount rates ranging from 7.75% to 15.25% were utilized in the model and were based upon observable rates that the Company believed to be within a reasonable range of current market rates. As a result of this analysis, the Company recorded a provision for asset impairment related to the Highlands spin-off of $76,583 for the nine months ended September 30, 2016.
During the nine months ended September 30, 2016, the Company identified one non-core office asset which may have a reduction in the expected holding period and reviewed the probability of this asset's disposition. The Company's estimated fair value relating to this asset's impairment analysis was based on a ten-year undiscounted cash flow model. Capitalization rates ranging from 6.75% to 7.00% and discount rates ranging from 7.00% to 8.00% were utilized in the model and were based upon observable rates that the Company believed to be within a reasonable range of market rates. As a result of this analysis, the Company recorded a provision for asset impairment of $29,931 on this asset, for a total provision for asset impairment of $106,514 in discontinued operations for the nine months ended September 30, 2016. There was no provision for asset impairment recorded as part of discontinued operations for the three months ended September 30, 2016.
Financial Instruments Not Measured at Fair Value
The table below represents the fair value of financial instruments presented at carrying values in the Company's consolidated financial statements as of September 30, 2017 and December 31, 2016.
 
September 30, 2017

December 31, 2016
 
Carrying Value
Estimated Fair Value

Carrying Value
Estimated Fair Value
Mortgages payable
$
370,029

$
372,418


$
434,746

$
435,513

Line of credit and term loan
$
300,000

$
299,760

 
$
300,000

$
299,741

The Company estimated the fair value of its mortgages payable using a weighted average effective market interest rate of 4.19% as of September 30, 2017 compared to 5.07% as of December 31, 2016.
The fair value estimate of the line of credit and term loan approximates the carrying value due to limited market volatility in pricing. The assumptions reflect the terms currently available on similar borrowing terms to borrowers with credit profiles similar to the Company's. As a result, the Company used a weighted average interest rate of 3.21% as of September 30, 2017 compared to 3.15% as of December 31, 2016 to estimate the fair value of its line of credit and term loan. The Company has determined that its debt instrument valuations are classified in Level 2 of the fair value hierarchy.

24


INVENTRUST PROPERTIES CORP.

Notes to Consolidated Financial Statements
(Unaudited)

9. Income Taxes
The Company has elected and has operated as such to qualify to be taxed as a REIT under the Code, commencing with the tax year ended December 31, 2005. So long as it qualifies as a REIT, the Company generally will not be subject to federal income tax on taxable income that is distributed currently to stockholders. A REIT is subject to a number of organizational and operational requirements including a requirement that it currently distribute at least 90% of its REIT taxable income (subject to certain adjustments) to its stockholders each year. If the Company fails to qualify as a REIT in any taxable year, without the benefit of certain relief provisions, the Company will be subject to federal and state income tax on its taxable income at regular corporate tax rates and would not be able to re-elect REIT during the four years following the year of the failure. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income, property or net worth and federal income and excise taxes on its undistributed income.
The Company has elected to treat certain of its consolidated subsidiaries, and may in the future elect to treat newly formed subsidiaries, as taxable REIT subsidiaries pursuant to the Code. Taxable REIT subsidiaries may participate in non-real estate related activities and/or perform non-customary services for tenants and are subject to federal and state income tax at regular corporate tax rates.
For the three and nine months ended September 30, 2017, income tax benefit of $2 and $6, respectively, was included in net income from discontinued operations on the consolidated statements of operations and comprehensive income. For the three and nine months ended September 30, 2016, income tax expense of $90 and $279, respectively, was included in net income from discontinued operations on the consolidated statements of operations and comprehensive income.
10. Earnings per Share
Basic earnings per share ("EPS") are computed using the two-class method by dividing net income by the weighted average number of common shares outstanding for the period (the "common shares"). Diluted EPS is computed using the treasury method if more dilutive, by dividing net income by the common shares plus potential common shares issuable upon exercising options or other contracts. The following table reconciles the amounts used in calculating basic and diluted income per share.
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Net income from continuing operations
$
12,244

 
$
28,444

 
$
49,609

 
$
94,640

Net income from discontinued operations
9,721

 
8,875

 
8,372

 
131,787

Net income
$
21,965

 
$
37,319

 
$
57,981

 
$
226,427

 
 
 
 
 
 
 
 
Weighted average shares outstanding, basic and diluted
773,517,492

 
862,212,317

 
773,405,710

 
862,207,903

 
 
 
 
 
 
 
 
Income from continuing operations allocated to common stockholders per share
$
0.02

 
$
0.03

 
$
0.06

 
$
0.11

Income from discontinued operations allocated to common stockholders per share
$
0.01

 
$
0.01

 
$
0.01

 
$
0.15

Net income per common share, basic and diluted
$
0.03

 
$
0.04

 
$
0.07

 
$
0.26


25


INVENTRUST PROPERTIES CORP.

Notes to Consolidated Financial Statements
(Unaudited)

11. Stock-Based Compensation
Incentive Award Plan
Effective June 19, 2015, the Company's board of directors adopted and approved the InvenTrust Properties Corp. 2015 Incentive Award Plan (as amended, the "Incentive Award Plan"), under which the Company may grant cash and equity incentive awards to eligible employees, directors, and consultants. Under the Incentive Award Plan, the Company is authorized to grant up to 30,000,000 shares of the Company's common stock pursuant to awards under the plan. At September 30, 2017, 24,714,297 shares were available for future issuance under the Incentive Award Plan. A summary of the Company's restricted stock unit activity as of September 30, 2017 is as follows:
 
Restricted Stock Units
 
Share Price at Grant Date
Outstanding at December 31, 2016
1,646,523

 
(a)
Restricted stock units granted in 2017
35,829

 
$3.14
Restricted stock units granted in 2017
1,964,442

 
3.29
Restricted stock units vested, granted in 2015
(25,498
)
 
4.00
Restricted stock units vested, granted in 2016
(191,009
)
 
3.14
Restricted stock units vested, granted in 2017
(11,824
)
 
3.14
Restricted stock units vested, granted in 2017
(87,677
)
 
3.29
Restricted stock units forfeited, granted in 2015
(10,643
)
 
4.00
Restricted stock units forfeited, granted in 2016
(67,694
)
 
3.14
Restricted stock units forfeited, granted in 2017
(7,929
)
 
3.29
Outstanding at September 30, 2017
3,244,520

 
(a)
(a)
The weighted average grant date price per share of common stock underlying the unvested restricted stock units based on total outstanding restricted stock units as of September 30, 2017 and December 31, 2016 was $3.29.
At September 30, 2017, there was $6,917 of total unrecognized compensation expense for unvested stock-based compensation arrangements granted under the Incentive Award Plan for 1,403,736, 1,273,622 and 567,162 unvested shares vesting in 2017, 2018 and 2019, respectively. Stock-based compensation expense is amortized on a straight-line basis over the vesting period. The Company recognized stock-based compensation expense of $1,616 and $4,325 for the three and nine months ended September 30, 2017, respectively, and $1,247 and $2,583 for the three and nine months ended September 30, 2016, respectively, related to the Incentive Award Plan. The Company has elected to account for stock-based compensation forfeitures as they occur.
12. Commitments and Contingencies
The Company is subject, from time to time, to various types of third-party legal claims or litigation that arise in the ordinary course of business, including, but not limited to, property loss claims, personal injury or other damages resulting from contact with the Company’s properties. These claims and lawsuits and any resulting damages are generally covered by the Company's insurance policies. The Company accrues for legal costs associated with loss contingencies when these costs are probable and reasonably estimable. While the resolution of these matters cannot be predicted with certainty, management does not expect, based on currently available information, that the final outcome of any pending claims or legal proceedings will have a material adverse effect on the financial condition, results of operations or cash flows of the Company.
As previously disclosed in our Quarterly Report for the quarter ended June 30, 2017, on September 6, 2013, a former tenant at the Legacy Corner Apartments property in Midwest City, Oklahoma filed a complaint in the District Court of Oklahoma County against the Company and other named defendants, Case No. CJ-2013-5011, alleging premises liability and negligent maintenance. At December 31, 2016, based on the facts and circumstances of this case, the Company believed it had a viable defense and was prepared to defend the suit vigorously. Due to the pendency of the Company's defenses and insurance policies, together with the inherent difficulty and uncertainty of predicting the outcome of litigation generally, the Company did not believe a risk of loss associated with compensatory damages was probable. Furthermore, the Company did not believe a risk of loss associated with punitive damages, which would be awarded due to gross negligence, was probable based on the information known, nor did the Company know what an estimated range of uninsured punitive damages could be. Therefore, at December 31, 2016, no loss contingency amounts related to this case had been accrued.

26


INVENTRUST PROPERTIES CORP.

Notes to Consolidated Financial Statements
(Unaudited)

The jury trial commenced on April 3, 2017. On April 12, 2017, the jury entered a verdict against the Company’s subsidiary and the other named defendants in favor of the plaintiff of $6,000 in compensatory damages and $6,000 in punitive damages. The compensatory portion of the verdict is fully insured by the Company’s insurance policies. However, the Company's insurance carrier served the Company with a reservation of rights letter stating that insurance coverage may not be provided for punitive damages awarded in this case. As a result, the Company’s potential loss contingency exposure was $6,000. During the quarter ended June 30, 2017, one of the Company's insurance carriers provided a $1,000 payment to the plaintiff.
On July 27, 2017, the plaintiff asserted a demand against the Company’s subsidiary and the other named defendants to settle the lawsuit through arbitration in exchange for an amount less than the total damages awarded. Subsequent to negotiations with the Company's insurance carrier, the Company recorded a $2,447 credit to other expenses related to the partial reversal of its previously recorded loss contingency of $3,000 as of March 31, 2017, to reflect the $553 portion of the final settlement paid by the Company during three months ended September 30, 2017.
Leasing commitments
As of September 30, 2017, one of the Company’s multi-tenant retail assets is subject to a ground lease. The Company records ground rent expense on a straight-line basis over the term of the lease. The lease requires rental payments or rental payment increases based upon the appraised value of the property at specified dates, increases in pricing indexes, or certain financial calculations based on the operations of the respective property. In addition, the Company has non-cancelable operating leases for office space used in its business.
The Company recognized rent expense associated with ground leases of $93 and $160 for the three and nine months ended September 30, 2017, respectively, and $67 and $242 for the three and nine months ended September 30, 2016, respectively. The Company recognized rent expense associated with office space leases of $527 and $1,198 for the three and nine months ended September 30, 2017, respectively, and $359 and $1,052 for the three and nine months ended September 30, 2016, respectively.
Contingent consideration
In connection with the purchase of The Parke, the Company entered into an agreement with the seller whereby up to $17,129 in additional consideration would become payable to the seller upon rent commencement of certain tenants. On August 25, 2017, the Company closed on a portion of the earn-out, resulting in cash transferred to the seller of $7,415. The remaining accrued contingent consideration of $9,714 has been included in other liabilities on the consolidated balance sheet as of September 30, 2017. The Company recognized the contingent consideration related to the asset upon acquisition and included the initial measurement of the contingent considerations in the cost of the acquired assets.
13. Subsequent Events
There were no material events subsequent to September 30, 2017.

27


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in this "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report, other than purely historical information, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. This includes statements about the Company's plans, objectives, strategies, financial performance and outlook, trends, the amount and timing of future cash distributions, prospects or future events and involve known and unknown risks that are difficult to predict. As a result, our actual financial results, performance, achievements or prospects may differ materially from those expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as "may," "could," "expect," "intend," "plan," "seek," "anticipate," "believe," "estimate," "guidance," "predict," "potential," "continue," "likely," "will," "would," "illustrative," "should" and variations of these terms and similar expressions, or the negative of these terms or similar expressions. Such forward-looking statements are necessarily based upon estimates and assumptions that, while considered reasonable by us based on our knowledge and understanding of the business and industry, are inherently uncertain. These statements are not guarantees of future performance, and stockholders should not place undue reliance on forward-looking statements.
There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Quarterly Report. Such risks, uncertainties and other important factors, include, among others, the risks, uncertainties and factors set forth in our filings with the U.S. Securities and Exchange Commission ("SEC"), including our Annual Report for the year ended December 31, 2016, as may be updated in this Quarterly Report and other quarterly and current reports, which are on file with the SEC and available at the SEC’s website (http://www.sec.gov). Such risks and uncertainties, among others, include market, political and economic volatility experienced by the U.S. economy or real estate industry as a whole, and the regional and local political and economic conditions in the markets in which our assets are located; our ability to complete a strategic transaction, enhance stockholder value and provide liquidity to stockholders; our ability to identify, execute and complete disposition opportunities; our ability to identify, execute and complete acquisition opportunities and to integrate and successfully operate any assets acquired in the future and the risks associated with such assets; our ability to manage the risks of expanding, developing or re-developing some of our current or future acquired assets; our transition to an integrated operating platform may not prove successful over the long term; loss of members of our senior management team or key personnel; changes in governmental regulations and generally accepted accounting standards or interpretations thereof; our ability to access capital for renovations and acquisitions on terms and at times that are acceptable to us; changes in the competitive environment in the leasing market and any other market in which we operate; forthcoming expirations of certain of our leases and our ability to re-lease such assets; our ability to collect rent from tenants or to rent space on favorable terms or at all; the impact of leasing and capital expenditures to improve our assets in order to retain and attract tenants; events beyond our control, such as war, terrorist attacks, including acts of domestic terrorism, natural disasters and severe weather incidents, and any uninsured or underinsured loss resulting therefrom; actions or failures by our joint venture partners; the cost of compliance with and liabilities under environmental, health and safety laws; changes in real estate and zoning laws and increases in real property tax rates; the economic success and viability of our anchor retail tenants; our multi-tenant retail assets face considerable competition for the tenancy of our lessees and the business of retail shoppers, including changing consumer preferences and increasing competition from other forms of retailing, such as e-commerce websites and catalogues; our debt financing, including risk of default, loss and other restrictions placed on us; our ability to refinance maturing debt or to obtain new financing on attractive terms; future increases in interest rates; the availability of cash flow from operating activities to fund distributions; our investment in equity and debt securities; our status as a REIT for federal tax purposes; and changes in federal, state or local tax law, including legislative, administrative, regulatory or other actions affecting REITs; and the outcome of legal proceedings.
The following discussion and analysis relates to the three and nine months ended September 30, 2017 and 2016 and as of September 30, 2017 and December 31, 2016. You should read the following discussion and analysis along with our Consolidated Financial Statements and the related notes included in this Quarterly Report.


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Executive Summary
We continue to execute on our strategy to enhance our multi-tenant retail platform as described under "Current Strategy and Outlook." As of September 30, 2017, our portfolio included 70 wholly owned multi-tenant retail assets and two consolidated multi-tenant retail assets, with a combined gross leasable area ("GLA") of approximately 12.8 million square feet, and investments in two operating real estate joint ventures. We manage 15 multi-tenant retail assets with a GLA of approximately 3.0 million square feet owned through an interest in one of our joint ventures, IAGM Retail Fund I, LLC ("IAGM"), an unconsolidated retail joint venture partnership between the Company as 55% owner and PGGM Private Real Estate Fund ("PGGM").
Our multi-tenant retail platform is defined as our 70 wholly owned multi-tenant retail assets, two consolidated multi-tenant retail assets, and the 15 multi-tenant retail assets in our IAGM joint venture.
On a consolidated basis, substantially all of our income and related cash inflows from operations for the nine months ended September 30, 2017 were generated by collecting rental and other payments from our tenants, operating distributions from unconsolidated entities, and interest and dividends. Also, on a consolidated basis, substantially all of our expenses and related cash outflows from operations for the nine months ended September 30, 2017 relate to the operation of our multi-tenant retail platform and the interest expense on our mortgages. Our property operating expenses include, but are not limited to, real estate taxes, recurring repair and maintenance, utilities, and insurance (most of which are recoverable from our tenants).
In evaluating our financial condition and operating performance, management focuses on the following financial and non-financial indicators, discussed in further detail herein:
Property net operating income ("NOI"), which excludes interest expense, depreciation and amortization, general and administrative expenses, net income of noncontrolling interest, and interest and dividends from corporate investments;
Modified NOI, which reflects property NOI exclusive of lease termination income and GAAP rent adjustments (such as straight-line rent and above/below market lease amortization);
Funds From Operations ("FFO"), a supplemental non-GAAP measure to net income determined in accordance with GAAP;
Cash flow from operations as determined in accordance with GAAP;
Economic and physical occupancy and rental rates;
Leasing activity and lease rollover;
Management of operating expenses;
Management of general and administrative expenses;
Debt maturities and leverage ratios; and
Liquidity levels.
Acquisitions and Dispositions
For the nine months ended September 30, 2017, we completed $839.5 million of real estate transactions, including the following:
Acquisition of eight multi-tenant retail assets, representing approximately 1.7 million square feet, for an aggregate gross acquisition price of approximately $633.4 million, and assumed debt on one acquisition of approximately $41.7 million (see Note 3. Acquired Assets, in the consolidated financial statements for details); and
Disposition of six multi-tenant retail assets, representing 1.2 million square feet, for a gross disposition price of approximately $152.6 million and the disposition of our remaining non-core office asset on August 30, 2017, Worldgate Plaza, for a gross disposition price of $53.5 million (see Note 4. Disposed Assets, in the consolidated financial statements for details).
Joint Venture Activity
During the three and nine months ended September 30, 2017, we earned other fee income of $1.0 and $3.2 million, respectively, which are fees derived from property management, asset management, leasing commissions and other fees earned from providing services to IAGM and PGGM.

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Current Strategy and Outlook
We continue to execute our retail strategy to construct a platform with the right centers in the right markets, driven by focused and disciplined capital allocation. The right properties for InvenTrust include open-air grocery-anchored and necessity-based power centers. While there has been recent news regarding the impact of e-commerce on retail performance and the overall strength of bricks and mortar retail, our grocery-anchored community and neighborhood centers bring consumers to our well-located properties, while our larger-format necessity-based power center retailers continue to adapt their business models to embrace omni-channel retail and appeal to consumers' continuing value focus. Additionally, while the number of retail tenant bankruptcies and store closures continues to rise, to date, the impact of these bankruptcies and store closures on our results has not been material. We believe our strong locations will allow us to backfill most of these vacancies.
The right markets for InvenTrust include growing Sunbelt markets, such as Houston, Dallas, Atlanta, Raleigh, Charlotte, Miami, Tampa and Orlando, and southern California, as well as markets such as Denver and suburban Washington, D.C. These markets all have above average population and employment growth, which we believe will lead to future rent increases and sustained occupancy at our properties in these regions. We see ongoing retailer demand for well-located grocery-anchored and power center assets in these markets, further supporting our market approach. With limited new development and controlled retailer expansion, we believe retail rental rates in our target markets will generally be stable.
We have also launched a coordinated program to increase rental income by maximizing re-development opportunities and identifying locations in our current multi-tenant retail platform where we can develop pad sites. We recently hired senior staff with significant retail development experience, and these recent hires will also allow us to expand this program to pursue value-add acquisition opportunities. In addition, we are working with our tenants to expand rentable square footage at select properties where demand warrants. The domestic retail rental market has been mixed. However, rental rates from our properties in Sunbelt markets have shown modest improvements. Our leasing staff is capitalizing on this by leasing space at favorable rates while establishing a more favorable tenant mix and identifying complementary uses to maximize tenant performance. Our property management team is focused on maintaining strong tenant relationships, controlling expenses, and providing an enhanced consumer shopping experience. We continue to implement a property branding program to leverage our market presence in our core markets. We have also implemented a sustainability program at our properties which includes LED lighting, trash recycling, water conservation and other programs to reduce energy consumption and expenses.
Following our transition to self-management, we continue to make a significant commitment to enhancing our operational leadership team with key senior hires in most operational areas of the Company. In 2017, we continue to make meaningful investments in technology, including the implementation of a robust data integrity process that enhances our management reporting capabilities and operational decision making.
While our platform is geographically diverse, approximately 41% of our multi-tenant retail platform's GLA is located in Texas, which leads the nation in job creation. Our properties are located in the top four Texas markets of Dallas, Austin, San Antonio and Houston. We continue to believe our Texas markets will provide growth opportunities for our platform.
We also continue to opportunistically sell assets in low growth markets or where we believe the assets' values have been maximized. We currently operate in 20 markets. As we continue to execute on our strategy, we expect the number of our markets will decrease. This will serve to hone our focus and provide capital for redeployment into our target retail markets.
Our disposition activity could continue to cause us to experience dilution in financial operating performance during the period we dispose of properties. We are redeploying sale proceeds with a disciplined approach into strategic multi-tenant retail assets and intend to continue to do so. We believe this strategy will enhance the overall value of our multi-tenant retail platform over time.
We believe that our debt maturities over the next five years are manageable. While we anticipate interest rates will rise over the long term, we expect low interest rates to prevail through 2017. We will fund our distributions with cash flows from operations as well as distributions received from unconsolidated entities and a portion of the proceeds from our property sales.
As we execute on our retail strategy, our board has been and will continue evaluating our distribution rate and, if the board deems appropriate, adjust the rate to take into account our progress in refining and balancing our multi-tenant retail platform. Our board of directors approved an increase to our annual distribution rate effective for the quarterly distribution paid in April 2017.
We believe that the continuing refinement of our platform will position us for future success, maximize value for stockholders over time, and put us in a position to evaluate and execute on strategic transactions aimed at achieving liquidity for our stockholders. While we believe in our ability to execute on our plan, the speed of its completion is uncertain and may be shortened or extended by external and macroeconomic factors including, among others, interest rate movements, local, regional, national and global economic performance, the impact of e-commerce on the retail industry and government policy changes.

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Multi-Tenant Retail Platform Summary
A significant focus of our strategy will be to continue to maximize the performance of our multi-tenant retail platform by accretive acquisitions in key markets and select dispositions of assets that are generally in markets that we do not believe provide sufficient opportunities for growth. Our multi-tenant retail platform is defined as our 70 wholly owned multi-tenant retail assets, two consolidated multi-tenant retail assets, and the 15 multi-tenant retail assets in our IAGM joint venture.
Assets included in our multi-tenant retail platform are located in 17 states. Of our multi-tenant retail platform GLA, approximately 40.5%, 10.7% and 9.7% is located in Texas, North Carolina, and Florida, respectively. Our multi-tenant retail assets consist of community and neighborhood centers and power centers, which are defined as follows:
Community or neighborhood centers, which are generally open air and designed for tenants that offer a wide array of types of merchandise including groceries, apparel and other soft goods. Typically, community centers contain large anchor stores and a significant presence of national retail tenants. Our neighborhood shopping centers are generally smaller open air centers with a grocery store anchor and/or drugstore, and other small service type retailers.
Power centers are generally larger and consist of several anchors, such as discount department stores, off-price stores, specialty grocers, warehouse clubs or stores that offer a large selection of merchandise. Typically, the number of specialty tenants is limited and most are national or regional in scope.
We have not experienced bankruptcies or receivable write-offs in our multi-tenant retail platform that have had a material impact on our results of operations. Our retail business is not highly dependent on specific retailers nor is it subject to lease roll over concentration. We believe this minimizes risk to our business from significant revenue variances over time.
We will support our key market approach by leveraging our regional offices and further embedding leasing, development and operations staff in these respective markets. We believe this strategy will provide us with strong local market knowledge and enhanced tenant relationships.
The tables below summarize certain key operating performance measures for the nine months ended September 30, 2017 and 2016. The rental rates shown are inclusive of rent abatements, lease inducements, ground rent income, straight-line rent GAAP adjustments, and exclusive of tenant improvements and lease commissions.
The following table summarizes the GLA, economic occupancy and annualized base rent ("ABR") per square foot of the assets included in our multi-tenant retail platform as of September 30, 2017 and 2016.
 
Multi-tenant
Retail Platform
September 30,
 
Wholly owned and Consolidated Multi-tenant Retail Assets
September 30,
 
IAGM Multi-tenant
Retail Assets (a)
September 30,
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
No. of assets
87
 
77
 
72
 
62
 
15
 
15
GLA (square feet)
15,732,401
 
13,729,423
 
12,755,098
 
10,751,655
 
2,977,303
 
2,977,768
Economic occupancy (b)
93.7%
 
95.4%
 
94.4%
 
95.3%
 
90.8%
 
95.7%
ABR per square foot (c)
$16.14
 
$15.45
 
$16.00
 
$15.19
 
$16.77
 
$16.45
(a)
Of the 15 assets owned through an interest in IAGM, one asset is under re-development and has been classified as unstabilized. This asset has been removed from the results shown for GLA, economic occupancy, and ABR per square foot. The asset is included in the property counts at September 30, 2017 and 2016.
(b)
Economic occupancy is defined as the percentage of total GLA for which a tenant is obligated to pay rent under the terms of its lease agreement, regardless of the actual use or occupancy by that tenant of the area being leased. Actual use may be less than economic square footage. Prior year economic occupancy excludes assets sold.
(c)
ABR is computed as revenue for the last month of the period multiplied by twelve months. ABR includes the effect of rent abatements, lease inducements, straight-line rent GAAP adjustments and ground rent income. ABR per square foot is computed as ABR divided by the total leased and occupied square footage at the end of the period. Specialty leasing represents leases of less than one year in duration for inline space and includes any term length for a common area space, and is excluded from the ABR and leased and occupied square footage figures when computing the ABR per square foot. Prior year ABR per square foot excludes assets sold.

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Platform Summary by Center Type
The following table summarizes the GLA, economic occupancy and ABR per square foot of the assets included in our multi-tenant retail platform by center typ