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IRC > SEC Filings for IRC > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for INLAND REAL ESTATE CORP

Form 10-Q for INLAND REAL ESTATE CORP


8-Nov-2012

Quarterly Report


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 on Form 10-Q (including documents incorporated herein by reference) constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Federal Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that do not reflect historical facts and instead reflect our management's intentions, beliefs, expectations, plans or predictions of the future. Forward-looking statements can often be identified by words such as "believe," "expect," "anticipate," "intend," "estimate," "may," "will," "should" and "could." Examples of forward-looking statements include, but are not limited to, statements that describe or contain information related to matters such as management's intent, belief or expectation with respect to our financial performance, investment strategy or our portfolio, our ability to address debt maturities, our cash flows, our growth prospects, the value of our assets, our joint venture commitments and the amount and timing of anticipated future cash distributions. Forward-looking statements reflect the intent, belief or expectations of our management based on their knowledge and understanding of the business and industry and their assumptions, beliefs and expectations with respect to the market for commercial real estate, the U.S. economy and other future conditions. These statements are not guarantees of future performance, and investors should not place undue reliance on forward-looking statements. Actual results may differ materially from those expressed or forecasted in forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors listed and described under Item 1A"Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission (the "SEC") on February 27, 2012 as they may be revised or supplemented by us in subsequent Reports on Form 10-Q and other filings with the SEC. Among such risks, uncertainties and other factors are market and economic challenges experienced by the U.S. economy or real estate industry as a whole, including dislocations and liquidity disruptions in the credit markets; the inability of tenants to continue paying their rent obligations due to bankruptcy, insolvency or a general downturn in their business; competition for real estate assets and tenants; impairment charges; the availability of cash flow from operating activities for distributions and capital expenditures; our ability to refinance maturing debt or to obtain new financing on attractive terms; future increases in interest rates; actions or failures by our joint venture partners, including development partners; and factors that could affect our ability to qualify as a real estate investment trust. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.

In this report, all references to "we," "our" and "us" refer collectively to Inland Real Estate Corporation and its consolidated subsidiaries. All amounts in this Form 10-Q are stated in thousands with the exception of per share amounts, per square foot amounts, number of properties, and number of leases.

Executive Summary

We are a self-managed, publicly traded real estate investment trust ("REIT") that owns and operates neighborhood, community, power and single tenant retail centers. We also may construct or develop properties or render services in connection with construction or development. Through wholly-owned subsidiaries, Inland Commercial Property Management, Inc. and Inland TRS Property Management, Inc., we manage all properties we own interests in and properties managed for certain third party and related party entities. Our investment properties are typically anchored by grocery, drug or discount stores, which provide everyday goods and services to consumers, rather than stores that sell discretionary items. We seek to acquire properties with high quality tenants and attempt to mitigate our risk of tenant defaults by maintaining a diversified tenant base. As of September 30, 2012, no single tenant accounted for more than approximately 7.5% of annual base rent in our total portfolio.

We are incorporated under Maryland law and have qualified and elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), for federal income tax purposes commencing with the tax year ended December 31, 1995. Since we qualify for taxation as a REIT, we generally are not subject to federal income tax on taxable income that is distributed to stockholders; however, we are subject to a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our taxable income to our stockholders, subject to certain adjustments. Moreover, we may be subject to certain state and local taxes on our income, property or net worth and federal income and excise taxes on our undistributed income. If we fail to qualify as a REIT in any taxable year, without the benefit of certain relief provisions of the Code we will be subject to federal and state income taxes on our taxable income at regular corporate tax rates.

We engage in certain activities through our wholly owned taxable REIT subsidiaries ("TRS entities"), Inland Venture Corporation ("IVC") and Inland Exchange Venture Corporation ("IEVC"). TRS entities engage in activities that would otherwise produce income that would not be REIT qualifying income, such as managing properties owned through our joint ventures. TRS entities are subject to federal and state income and franchise taxes.


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Our largest expenses relate to the operation of our properties as well as the interest expense on our mortgages payable and other debt obligations. Our property operating expenses include, but are not limited to, real estate taxes, regular maintenance, landscaping, snow removal and periodic renovations to meet tenant needs. Pursuant to lease agreements, most tenants are required to reimburse us for some or all of their pro rata share of the real estate taxes and operating expenses of the property.

To measure our operating results against those of other retail real estate owners/operators, we compare occupancy percentages and our rental rates to the average rents charged by our competitors in similar centers. To measure our operating results against those of other REITs, we compare company-wide growth in net income and FFO, growth in same store net operating income and general and administrative expenses as a percentage of total revenues and total assets.

As of September 30, 2012, we owned interests in 150 investment properties, including 42 properties that we owned indirectly through our unconsolidated joint ventures but not including our development joint venture properties, as the latter had not reached what we believe to be a stabilized occupancy rate.

Strategies and Objectives

Current Strategies

Our primary business objective is to enhance the performance and value of our investment properties through management strategies that address the needs of an evolving retail marketplace. Our success in operating our centers efficiently and effectively is, we believe, a direct result of our expertise in the acquisition, management, leasing and development/re-development, either directly or through a joint venture, of our properties.

Our focus for 2012 is to continue to grow assets under management through our joint ventures. In April 2012, we substantially completed the overall acquisition goals of our joint venture with PGGM Private Real Estate Fund ("PGGM") and, subsequent to the end of the third quarter, we entered into an amendment to this joint venture agreement to increase the maximum contributions of each partner. Additionally, we formalized a 10-year extension of our joint venture agreement with New York State Teachers Retirement System ("NYSTRS"), which required no additional capital commitment to the joint venture from either partner. Finally, we look to continue to acquire properties through our joint venture with Inland Private Capital Corporation ("IPCC") to provide additional acquisition fee income as well as ongoing management fee income. We will continue to explore opportunities to grow our assets under management including acquiring investment properties for our wholly-owned portfolio and exploring the opportunity to form new joint ventures.

Acquisition Strategies

We seek to selectively acquire well-located open air retail centers that meet our investment criteria. We will, from time to time, acquire properties either without financing contingencies or by assuming existing debt to provide us with a competitive advantage over other potential purchasers requiring financing or financing contingencies. Additionally, we concentrate our property acquisitions in areas where we have a large market concentration. In doing this, we believe we are able to attract new retailers to the area and possibly lease several locations to them. Additionally, we have been successful in leasing additional space to some existing tenants in our current investment properties.

Joint Ventures

We have formed joint ventures to acquire stabilized retail properties as well as properties to be redeveloped and vacant land to be developed. We structure these ventures to earn fees from the joint ventures for providing property management, asset management, acquisition and leasing services. We will continue to receive management and leasing fees for those investment properties under management, however acquisition fees may decrease as we acquire fewer investment properties through these ventures.


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Additionally, we have formed a joint venture to acquire properties that are ultimately sold to investors through a private offering of tenant-in-common ("TIC") interests or interests in Delaware Statutory Trusts ("DST"). We earn fees from the joint venture for providing property management, acquisition and leasing services. We will continue to receive management and leasing fees for those properties under management; even after all of the TIC or DST interests have been sold.

Operations

We actively manage costs to minimize operating expenses by centralizing all management, leasing, marketing, financing, accounting and data processing activities to provide operating efficiencies. We seek to improve rental income and cash flow by aggressively marketing rentable space. We emphasize regular maintenance and periodic renovation to meet the needs of tenants and to maximize long-term returns. We maintain a diversified tenant base consisting primarily of retail tenants providing consumer goods and services. We proactively review our existing portfolio for potential re-development opportunities.

Acquisitions and Dispositions



The table below presents investment property acquisitions during the nine months
ended September 30, 2012 and the year ended December 31, 2011.



                                                                                                       Financial
                                                                                                       Occupancy
                                                                   GLA      Purchase     Cap Rate     at time of
Date             Property               City          State      Sq.Ft.       Price        (a)        Acquisition

09/26/12   Walgreens (b)          New Bedford            MA        10,350   $    2,650       8.14 %           100 %
08/15/12   Walgreens (b)          Villa Park             IL        12,154        4,863       7.51 %           100 %
06/13/12   Walgreens (b)          Milwaukee              WI        13,905        3,025       7.65 %           100 %
           Orland Park Place
04/18/12   Outlots II             Orland Park            IL        22,966        8,750       7.40 %           100 %
           CVS/Walgreens
03/27/12   Portfolio (b) (c)      (c)                       (c)    55,465       23,711       6.50 %           100 %
           CVS/Walgreens
03/19/12   Portfolio (b) (d)      (d)                       (d)    40,113       17,059       6.50 %           100 %
03/16/12   Pick N Save (b)        Sheboygan              WI        62,138       11,700       7.44 %           100 %
           Mt. Pleasant
           Shopping Center (b)
03/13/12   (e)                    Mt. Pleasant           WI        83,334       21,320       7.20 %            98 %
           Westgate Shopping
03/06/12   Center (f)             Fairview Park          OH       241,901       73,405       7.60 %            86 %
           Stone Creek Towne
02/29/12   Center (g) (h)         Cincinnati             OH       142,824       36,000       8.00 %            97 %
           Woodbury Commons (i)
02/24/12   (j)                    Woodbury               MN       116,196       10,300       6.50 %            66 %
           Silver Lake Village
02/24/12   (g) (k)                St. Anthony            MN       159,303       36,300       6.90 %            87 %
12/15/11   Turfway Commons (g)    Florence               KY       105,471       12,980       8.37 %            95 %
12/07/11   Elston Plaza (g)       Chicago                IL        88,218       18,900       6.75 %            90 %
           Brownstones Shopping
11/29/11   Center(g)              Brookfield             WI       137,821       24,100       7.00 %            96 %
11/01/11   Bradley Commons        Bradley                IL       174,782       25,820       7.45 %            93 %
           Champlin Marketplace
09/21/11   (g)                    Champlin               MN        88,577       13,200       6.40 %            89 %
           Walgreens Portfolio
06/14/11   (b) (l)                (l)                       (l)    85,920       32,027            (l)         100 %
06/02/11   Red Top Plaza (g)      Libertyville           IL       151,840       19,762       7.39 %            81 %
           Triple Net Leased
04/13/11   Portfolio (b) (m)      (m)                       (m)   107,962       46,931            (m)         100 %
           Mariano's Fresh
03/24/11   Market (b)             Arlington Heights      IL        66,393       20,800       7.41 %           100 %
01/11/11   Joffco Square (g)      Chicago                IL        95,204       23,800       7.15 %            83 %

                                                                2,062,837   $  487,403



(a) The Cap Rate disclosed is as of the time of acquisition and is calculated by dividing the forecasted net operating income ("NOI") by the purchase price. Forecasted NOI is defined as forecasted net income for the twelve months following the acquisition of the property, calculated in accordance with U.S. GAAP, excluding straight-line rental income, amortization of lease intangibles, interest, depreciation, amortization and bad debt expense, less a vacancy factor to allow for potential tenant move-outs or defaults.

(b)                  These properties were acquired through our joint venture
with IPCC.

(c)                  This portfolio includes one CVS store and three Walgreens

stores, located in Nampa, Idaho; St. George, Utah; Lee's Summit, Missouri and McPherson, Kansas.

(d) This portfolio includes two CVS stores and one Walgreens store, located in Newport News, Virginia; McAllen, Texas and Dunkirk, New York.

(e) The purchase price of this property includes approximately 6,700 square feet subject to a ground lease. Ground lease square footage is not included in our GLA.

(f) The purchase price of this property includes approximately 229,000 square feet subject to ground leases. Ground lease square footage is not included in our GLA.

(g)                  These properties were acquired through our joint venture
with PGGM.

(h)                  The purchase price of this property includes approximately

6,600 square feet subject to a ground lease. Ground lease square footage is not included in our GLA.

(i) This property was sold to our joint venture with PGGM on April 13, 2012.

(j) The purchase price of this property includes approximately 6,200 square feet subject to a ground lease. Ground lease square footage is not included in our GLA.

(k) The purchase price of this property includes approximately 154,000 square feet subject to ground leases. Ground lease square footage is not included in our GLA.

(l) This portfolio includes six Walgreens stores, located in Normal, Illinois' Spokane, Washington; Villa Rica, Georgia; Waynesburg, Pennsylvania; Somerset, Massachusetts and Gallup, New Mexico. The cap rates for the various properties ranged from 7.10% to 7.22%.


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(m) This portfolio includes 16 properties, triple net leased to various tenants. These properties are located in Portland, Oregon; Apopka, Florida; Crestview, Florida; San Antonio, Texas; Lawrenceville, Georgia; Brandon, Florida; Columbia, South Carolina; Lewisville, Texas; Houston, Texas; St. Louis, Missouri; Monroe, North Carolina; Milwaukee, Wisconsin; Fort Worth, Texas; Eagan, Minnesota; Port St. Lucie, Florida and San Antonio, Texas. The purchase price includes a 4,700 square foot ground lease with Bank of America and a 5,300 square foot ground lease with Capital One. Ground lease square footage is not included in our GLA. The cap rates for the various properties ranged from 6.00% to 7.95%.

The table below presents investment property dispositions, including properties disposed of by our unconsolidated joint ventures, during the nine months ended September 30, 2012 and the year ended December 31, 2011.

                                                                     GLA Sq.                     Gain
Date               Property                 City          State        Ft.       Sale Price     on Sale

08/01/12   Walgreens                  Jennings               MO        15,120   $      2,250         349
06/15/12   Riverplace Center          Noblesville            IN        74,414          4,450           -
06/07/12   Grand Traverse Crossings   Traverse City          MI        21,337          1,150           -
           Walgreens Portfolio (a)
02/29/12   (b)                        (b)                       (b)    85,920         36,272           -
           Triple Net Leased
11/30/11   Portfolio (a) (c)          (c)                       (c)   107,962         53,718           -
10/28/11   Orland Park Retail         Orland Park            IL         8,500            975          59
10/07/11   Rose Plaza East and West   Naperville             IL        25,993          5,050         895
           Park Center Plaza
08/18/11   (partial)                  Tinley Park            IL        61,000          3,000         358
           Mariano's Fresh Market
07/21/11   (a)                        Arlington Heights      IL        66,393         23,430           -
           National Retail
07/21/11   Portfolio (a) (d)          (d)                       (d)   108,855         40,313
           University of Phoenix
05/25/11   (a)                        Meridian               ID        36,773         10,698           -
           Schaumburg Golf Road
02/14/11   Retail                     Schaumburg             IL         9,988          2,150         197

                                                                      622,255   $    183,456   $   1,858



(a) This property is included as a disposition because all of the TIC or DST interests have been sold through our joint venture with IPCC. No gain or loss is reflected in this table because the disposition of these properties is not considered a property sale, but rather a sale of ownership interest in the properties. The gains from these properties are included in gain from sale of joint venture interests on the accompanying consolidated statements of operations and comprehensive income.

(b) This portfolio includes six Walgreens stores, located in Normal, Illinois' Spokane, Washington; Villa Rica, Georgia; Waynesburg, Pennsylvania; Somerset, Massachusetts and Gallup, New Mexico.

(c) This portfolio includes 16 properties, triple net leased to various tenants. These properties are located in Portland, Oregon; Apopka, Florida; Crestview, Florida; San Antonio, Texas; Lawrenceville, Georgia; Brandon, Florida; Columbia, South Carolina; Lewisville, Texas; Houston, Texas; St. Louis, Missouri; Monroe, North Carolina; Milwaukee, Wisconsin; Fort Worth, Texas; Eagan, Minnesota; Port St. Lucie, Florida and San Antonio, Texas.

(d) This portfolio includes a CVS store in Elk Grove, California; a Walgreens store in Island Lake, Illinois; Harbor Square Plaza in Port Charlotte, Florida and Copp's in Sun Prairie, Wisconsin.

Critical Accounting Policies

Disclosures discussing all critical accounting policies are set forth in our Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission on February 27, 2012, under the heading "Critical Accounting Policies." We note no significant changes have been made to the critical accounting policies subsequent to December 31, 2011.

Liquidity and Capital Resources

Our most liquid asset is cash and cash equivalents which consists of cash and short-term investments. Cash and cash equivalents at September 30, 2012 and December 31, 2011 were $10,865 and $7,751, respectively. See our discussion of the statements of cash flows for a description of our cash activity during the nine months ended September 30, 2012 and 2011.

We consider all demand deposits, money market accounts and investments in certificates of deposit and repurchase agreements purchased with a maturity of three months or less, at the date of purchase, to be cash equivalents. We maintain our cash and cash equivalents at financial institutions. The combined account balances at one or more institutions could periodically exceed the Federal Depository Insurance Corporation ("FDIC") insurance coverage and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. However, we do not believe the risk is significant based on our review of the rating of the institutions where our cash is deposited. In 2008, FDIC insurance coverage was increased to $250,000 per depositor at each insured bank. This increase will be in place until December 31, 2013, at which time it is expected to return to $100,000 per depositor, unless coverage is further extended. All funds in a noninterest-bearing transaction account are insured in full by the FDIC from December 31, 2010, through December 31, 2012. This temporary unlimited coverage is in addition to, and separate from, the coverage of at least $250,000 available to depositors under the FDIC's general deposit insurance rules.


Table of Contents

Income generated from our investment properties is the primary source from which we generate cash. Other sources of cash include amounts raised from the sale of securities, including shares of our common stock sold under our DRP and ongoing ATM issuance program, draws on our unsecured line of credit facility, which may be limited due to covenant compliance requirements, proceeds from financings secured by our investment properties, earnings we retain that are not distributed to our stockholders and fee income received from our unconsolidated joint venture properties. As of September 30, 2012, we were in compliance with all financial covenants applicable to us. We had up to $120,000 available under our $175,000 line of credit facility and an additional $100,000 available under an accordion feature. The access to the accordion feature requires approval of the lending group. If approved, the terms for the funds borrowed under the accordion feature would be current market terms and not the terms of the other borrowings under the line of credit facility. The lending group is not obligated to approve access to the additional funds. We use our cash primarily to pay distributions to our stockholders, for operating expenses at our investment properties, for interest expense on our debt obligations, for purchasing additional investment properties and capital commitments at existing investment properties, to meet joint venture commitments, to repay draws on the line of credit facility and for retiring mortgages payable.

In November 2009, we entered into a three-year Sales Agency Agreement with BMO Capital Markets Corp. ("BMO") to offer and sell up to $100 million of our common stock from time to time through BMO, acting as sales agent. Offers and sales of shares of our common stock may be made in privately negotiated transactions (if we and BMO have so agreed in writing) or by any other method deemed to be an "at the market" offering as defined in Rule 415 under the Securities Act, including sales made directly on the New York Stock Exchange or to or through a market maker. We have referred to the arrangement with BMO in this report on Form 10-Q as our ATM issuance program. As of September 30, 2012, we have issued an aggregate of approximately 3,816 shares of our common stock through the ATM issuance program, since inception. We received net proceeds of approximately $31,691 from the issuance of these shares, comprised of approximately $32,504 in gross proceeds, offset by approximately $813 in commissions and fees. We used the proceeds from shares issued through the program for general corporate purposes, which included repayment of mortgage indebtedness secured by our properties, acquiring real property through wholly-owned subsidiaries or through our investment in one or more joint venture entities and repaying amounts outstanding on our unsecured line of credit facility, among other things. As of September 30, 2012, shares representing approximately $67,496 remained available for sale under this issuance program. The Sales Agency Agreement for the program expires on November 9, 2012. We are currently negotiating an extension of the ATM issuance program.

We also own marketable securities of other entities, including REITs. These investments are generally liquid and could be sold to generate liquidity. These investments in available-for-sale securities totaled $7,740 at September 30, 2012, consisting of preferred and common stock investments. At September 30, 2012, we had recorded an accumulated net unrealized gain of $858 on these investment securities. Realized gains and losses from the sale of available-for-sale securities are specifically identified and determined. During the three and nine months ended September 30, 2012, we realized gains on . . .

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