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IRC > SEC Filings for IRC > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for INLAND REAL ESTATE CORP



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 "seek," "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, 2013, as filed with the Securities and Exchange Commission (the "SEC") on February 28, 2014 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 strive to be a leading owner and operator of high quality, necessity and value based retail centers in prime locations throughout the Central and Southeastern United States. We seek to provide predictable, sustainable cash flows and continually enhance shareholder value through the expert management and strategic improvement of our portfolio of premier retail properties.

We have elected to be taxed as a real estate investment trust ("REIT"). Inland Real Estate Corporation is a Maryland corporation formed on May 12, 1994. To date, we have focused on open-air neighborhood, community and power shopping centers and single-tenant retail properties located primarily in the Midwestern United States. 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 for certain third parties and related parties. 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 March 31, 2014, no single tenant accounted for more than approximately 3.9% of annual base rent in our total portfolio, excluding properties owned through our joint venture with Inland Private Capital Corporation ("IPCC").

As of March 31, 2014, we owned interests in 138 investment properties, including 29 properties owned by our unconsolidated joint ventures.

2014 Goals and Objectives
Continue to improve our tenant diversification and expand our geographic concentration, with increased footprints in the Central and Southeastern U.S.

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Continue to enhance the value of our portfolio through additional repositioning and redevelopment initiatives.

Redeploy capital from dispositions of non-core, limited growth assets into acquisitions of high quality retail assets.

Continue to reduce the cost and extend the term of our debt and reduce our overall leverage over time, which will improve our financial flexibility and liquidity by maintaining access to multiple sources of capital.

In executing our 2014 goals, during the three months ended March 31, 2014, we sold three non-core assets for approximately $23,050, the proceeds from which were used to partially fund the acquisition of investment properties. Additionally, we repaid approximately $26,500 of consolidated mortgages payable, resulting in a decrease of our total outstanding debt.

As part of our growth strategy, management implemented external growth initiatives consisting of unconsolidated joint venture activities. Because certain joint ventures are unconsolidated, we are not able to present a complete picture of the impact these ventures have on our consolidated financial statements. We have included pro rata consolidated financial statements in the Non-GAAP Financial Measures section of this Quarterly Report on Form 10-Q to present our consolidated financial statements including our share of the joint venture balance sheets and statements of operations. We believe providing this information allows investors to better compare our overall performance and operating metrics to those of other REITs in our peer group.

Including the accounts of our unconsolidated joint ventures at 100 percent, we managed approximately $2,937,136 in total assets as of March 31, 2014 and earned $96,388 in total revenues during the three months ended March 31, 2014.

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 of properties held either directly or through a joint venture.

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, or seek to have, a large market concentration. In doing this, we believe we are able to achieve operating efficiencies and possibly lease several locations to retailers expanding in our markets.

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 fluctuate with acquisition activity through these ventures.

We believe that joint ventures support our strategic goals of expanding our footprint to improve diversification, while utilizing our partner's capital and preserving liquidity on our balance sheet. Additionally, the joint ventures provide us with ongoing fee income that enhances our results of operations from our core portfolio.

To support our ongoing effort to expand our footprint into new markets, in November 2013, we entered into a joint venture to develop grocery-anchored shopping centers in select markets throughout the southeastern United States in metropolitan areas in the Carolinas, Georgia, Florida, Virginia and Washington D.C. The joint venture agreement also provides that we will purchase each grocery-anchored center at a discount to fair market value after stabilization. A typical project likely will consist of a 50,000 square foot grocery store with approximately 20,000 square feet of additional retail space.

Additionally, we participate in a joint venture with IPCC that acquires properties which are ultimately sold to investors through a private offering of interests in Delaware Statutory Trusts ("DST"). We earn fees from the joint venture for providing asset management, 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 interests have been sold.

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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.

Liquidity and Capital Resources

Our most liquid asset is cash and cash equivalents that consist of cash and short-term investments. Cash and cash equivalents at March 31, 2014 and December 31, 2013 were $12,747 and $11,258, respectively. See our discussion of the statements of cash flows for a description of our cash activity during the three months ended March 31, 2014 and 2013.

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. FDIC insurance currently covers up to $250 per depositor at each insured bank.

Sources of cash

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, cash flows we retain that are not distributed to our stockholders and fee income received from our unconsolidated joint venture properties. As of March 31, 2014, we were in compliance with all financial covenants applicable to us. We had up to $25,000 available under our $180,000 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 market terms at the time of the borrowing and not the terms of the other borrowings under the line of credit facility. The lending group is not obligated to approve access to funds under the accordion feature. 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 the aggregate, our investment properties are currently generating sufficient cash flow to pay our operating expenses, monthly debt service requirements, certain capital expenditures and current distributions. Monthly debt service requirements consist primarily of interest payments on our debt obligations although certain of our secured mortgages require monthly principal amortization.

As noted above, we also fund certain of our liquidity needs through the sale of our common stock in "at the market" or "ATM" issuances. Under this ATM program, we may issue up to $150,000 of our shares of common stock. BMO Capital Markets Corp., Jefferies & Company, Inc. and KeyBanc Capital Markets, Inc. (together the "Agents") act as our sales agent(s) for these issuances which may be made in privately negotiated transactions 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 refer to the arrangement with the Agents in this report on Form 10-Q as our "ATM issuance program." No shares were issued during the three months ended March 31, 2014.

Uses of Cash

Our largest cash outlays relate to the payment of distributions to our preferred and common stockholders, the operation of our properties and interest expense on our mortgages payable and other debt obligations. Property operation outlays include, but are not limited to, real estate taxes, utilities, insurance, regular maintenance, landscaping, snow removal and periodic renovations to meet tenant needs. Pursuant to lease arrangements, 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.

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Since the most recent economic downturn, we have been successful in restoring stability to our portfolio. We believe that the stability of our portfolio, the lack of new supply of retail space, and the continued demand from growing retailers has put us in excellent position to be proactive in upgrading the quality of our tenancy and increasing rents. We continue to focus on leasing vacant spaces, but we are also focusing on right-sizing certain retailers and repositioning other centers to manage tenant exposures and open up space to accommodate larger tenants. These activities may require us to take tenants off-line during construction that may have a temporary adverse effect on our results of operations during the period the tenant is not paying rent. We are proactive in moving forward with these activities, as we believe the long term benefits outweigh the temporary decline in cash flows and net operating income.

One of our goals continues to be to enhance the value of our portfolio through additional repositioning and redevelopment initiatives. We currently have several projects underway and others under consideration. During 2014, we expect to invest approximately $27,000 in capital for tenant improvements and leasing commission on new leases and building improvements related to some of these repositioning efforts, which is similar in spend to prior years. We expect to fund these improvements using cash from operations and draws on our unsecured line of credit facility.

Approximately $134,928 of consolidated debt, including required monthly principal amortization, matures in the next twelve months. Included in the debt maturing in 2014 is an aggregate of approximately $90,247 of outstanding principal, secured by our Algonquin Commons property, which is subject to an $18,600 Payment Guaranty and carve-out guarantees, but generally is non-recourse to us. Algonquin Commons is currently subject to foreclosure litigation through which the plaintiff is also seeking to enforce the Payment Guaranty. We believe the Payment Guaranty has terminated, but we cannot predict the outcome of the litigation or provide assurance that the Payment Guaranty will not be performed. We intend to repay the remaining maturing debt upon maturity using available cash and/or borrowings under our unsecured line of credit facility. Reference is made to the Total Debt Maturity Schedule in Note 5, "Secured and Unsecured Debt" to the accompanying consolidated financial statements for a discussion of our total debt outstanding as of March 31, 2014, which is incorporated into this Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations."

In October, 2012, we entered into a First Amendment (the "Amendment") to the Limited Partnership Agreement of our joint venture with PGGM. Subject to the terms and conditions of the Amendment, the partners increased the potential maximum equity contributions to allow for the acquisition of up to an additional $400,000 of grocery-anchored and community retail centers located in Midwestern U.S. markets, using partner equity and secured debt. The Amendment increased our potential maximum equity contribution to $281,000 and PGGM's potential maximum equity contribution to $230,000. The Amendment allows for a two-year investment period and no contributions are required unless and until both partners approve an additional acquisition. We will fund our equity contributions with draws on our line of credit facility, proceeds from sales of investment properties, proceeds from financing unencumbered properties or the sale of preferred or common stock. As of March 31, 2014, PGGM's remaining maximum potential contribution was approximately $67,050 and ours was approximately $81,950.

Acquisitions and Dispositions

The table below presents investment property acquisitions, including those
acquired by our unconsolidated joint ventures, during the three months ended
March 31, 2014 and the year ended December 31, 2013.

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

Consolidated Portfolio
3/27/2014    Marketplace         Mokena            IL      49,058       4,300     $   13,737        7.25 %          76 %
12/20/2013   Marketplace (c)     Orlando           FL      91,497       6,000         16,580        7.16 %          86 %
             Warsaw Commons
4/24/2013    (d)                 Warsaw            IN      87,826           -         11,393        8.00 %          96 %
4/17/2013    Eola Commons (e)    Aurora            IL      23,080           -            (e)         (e)            78 %
             Winfield Pointe
4/17/2013    Center (e)          Winfield          IL      19,888           -            (e)         (e)            75 %

PGGM Joint Venture
             Fort Smith
12/19/2013   Pavilion            Fort Smith        AR     275,414      13,000         43,312        8.12 %          96 %
             Cedar Center        University
10/8/2013    South               Heights           OH     136,080       2,800         24,900        7.23 %          83 %
             Timmerman Plaza
9/11/2013    (f)                 Milwaukee         WI      40,343           -          5,257        7.90 %          84 %
9/11/2013    Capitol and 124th   Wauwatosa         WI      54,198           -         10,265        6.50 %         100 %
             Pilgrim Village     Menomonee
9/11/2013    (g)                 Falls             WI      31,331      40,600          8,723        6.70 %          69 %
             Evergreen           Evergreen
8/20/2013    Promenade (h)       Park              IL           -           -          5,500         (h)           (h)

IPCC Joint Venture
             Mountain View
3/19/2014    Square              Wausau            WI      86,584       7,600         11,425        6.64 %         100 %
2/26/2014    Academy Sports      Olathe            KS      71,927           -         11,024        6.62 %         100 %
             BJ's Wholesale
2/12/2014    Club                Framingham        MA     114,481           -         26,500        6.43 %         100 %
 1/2/2014    Walgreens           Trenton           OH      14,820           -          4,462        6.50 %         100 %
 1/1/2014    O'Reilly            Kokomo            IN       7,210           -          1,475        6.39 %         100 %
 1/1/2014    CVS                 Port St. Joe      FL      13,225           -          4,303        6.28 %         100 %
11/4/2013    Portfolio (i)       (i)               OH      29,813           -         29,000        6.00 %         100 %
10/18/2013   Mariano's           Elmhurst          IL      76,236           -         20,359        7.25 %         100 %
9/25/2013    Family Dollar       Marion            IL       8,000           -          1,474        7.81 %         100 %
9/11/2013    Dollar General      Warrior           AL       9,100           -          1,089        8.68 %         100 %
9/11/2013    Dollar General      Fortson           GA       9,100           -          1,173        7.41 %         100 %
9/11/2013    Dollar General      Woodville         AL       9,026           -          1,067        7.41 %         100 %
9/11/2013    Dollar General      Midland City      AL      12,382           -          1,393        7.41 %         100 %
9/11/2013    Dollar General      LaGrange          GA       9,100           -          1,145        7.40 %         100 %
9/11/2013    Dollar General      Mobile            AL       9,100           -          1,219        7.40 %         100 %
9/10/2013    Dollar General      Gale              WI       9,026           -            945        7.85 %         100 %
9/10/2013    Dollar General      Lafayette         WI       9,026           -            944        7.85 %         100 %
7/26/2013    Freedom Commons     Naperville        IL      42,218      40,300         24,400        6.74 %          87 %
4/17/2013    Family Dollar       Wausaukee         WI       8,000           -          1,137        8.14 %         100 %
4/17/2013    Family Dollar       Charleston        MO       8,320           -          1,107        8.13 %         100 %
4/17/2013    Family Dollar       Cameron           TX       8,320           -            938        8.11 %         100 %
2/12/2013    Mariano's           Palatine          IL      71,324           -         22,675        6.70 %         100 %
2/12/2013    Mariano's           Vernon Hills      IL      71,248           -         27,883        6.84 %         100 %
1/24/2013    Family Dollar       City              TX       8,320           -          1,009        8.12 %         100 %
1/24/2013    Family Dollar       Abilene           TX       9,180           -          1,142        7.64 %         100 %

                                                        1,533,801     114,600     $  338,955


(a) The purchase price of these properties includes square footage subject to ground leases. Ground lease square footage is not included in our GLA.

(b) 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.

(c) This property is subject to future earnout payments of approximately $2,600.

(d) This property is subject to future earnout payments of approximately $1,800, of which $1,539 has already been paid.

(e) We acquired title to these properties through foreclosure proceedings. We had acquired the notes encumbering these properties in 2012 at a discount to their face value. In conjunction with the acquisition, the notes were extinguished. We recorded Winfield Pointe Center at $2,583 and Eola Commons at $3,994, representing the respective fair value of each property at the time of acquisition.

(f) This property is subject to future earnout payments of approximately $1,260.

(g) This property was subject to future earnout payments of approximately $400, which have been paid.

(h) Our joint venture with PGGM acquired vacant land to develop a 92,512 square foot retail building through a development partnership that is 96% pre-leased to Mariano's Fresh Market and PetSmart.

(i) This portfolio includes twelve 7-Eleven stores, located in Akron, Brunswick, Chagrin Falls, Cleveland, Mentor, Painesville, Stow, Streetsboro, Strongsville, Twinsburg, Willoughby and Willoughby Hills OH.

The table below presents investment property dispositions, including properties disposed of by our unconsolidated joint ventures, during the three months ended March 31, 2014 and the year ended December 31, 2013.

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                                                             GLA Sq.                      Gain (Loss)     for Asset
Date               Property             City       State       Ft.         Sale Price       on Sale       Impairment

Consolidated Portfolio
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