Inland Real Estate Corp. Q4 2008 Earnings Call Transcript

Feb.12.09 | About: Inland Real (IRC)

Inland Real Estate Corp. (NYSE:IRC)

Q4 2008 Earnings Call

February 12, 2009 3:00 pm ET


Dawn Benchelt – Investor Relations Director

Mark E. Zalatoris – President & Chief Executive Officer

Brett A. Brown – Chief Financial Officer, Vice President and Treasurer

D. Scott Carr – President of Inland Commercial Property Management, Inc.


Paul E. Adornato – BMO Capital Markets

Jeffrey J. Donnelly – Wachovia Securities

Alex Barron – Agency Trading Group

Stephen Everett – Multi-Financial Securities


Welcome to the Inland Real Estate Corporation 2008 fourth quarter earnings conference call. (Operator Instructions) Now, I would like to turn the conference over to Dawn Benchelt.

Dawn Benchelt

Thank you for joining us for Inland Real Estate Corporation fourth quarter 2008 earnings conference call. The fourth quarter earnings release and supplemental financial package have been filed with the SEC today, February 12, 2009, and posted to our website which is we’re hosting a live webcast of today call, which is accessible on our website.

Before we begin, please note that today’s discussion contains forward-looking statements, which are management’s intentions, beliefs, expectations, representations, plans or predictions of the future. There are numerous risks and uncertainties that could cause the actual results to differ materially from those set forth in the forward looking statements. For a complete discussion of these risks and uncertainties, please refer to the documents filed by the company with the SEC, specifically our annual report on Form 10-K for year ended December 31, 2007.

Participating on today’s call will be Mark Zalatoris, Inlands President and Chief Executing Officer, Chief Financial Officer, Brett Brown, and Scott Carr, President of Property management.

Now I’ll turn the call over the Mark.

Mark Zalatoris

I’d like to start the call with a few comments on the business environment and the steps we’ve been taking to protect and position the company. Beginning in 2007, we recognized that retailers were beginning to slowdown there leasing decisions. We also noted a growing back log of non-secured ties CMBS debt indicating diminished appétit for this investment vehicle.

These were two clear indicators to us in the significantly more challenging business climate ahead. Accordingly, we took the following actions over the last 18 months. We organized our leasing and property management teams to maximums there effectiveness in an increasingly difficult operating environment. We enhanced our internal reporting and analyze capabilities by adding to our software tools. We limited new development joint venture projects, and we further strengthened our balance sheet.

Notwithstanding these proactive measures, it’s fair to say that no one fully anticipated the scope and severity of the current economic crisis, and with the ongoing housing and credit market problems and unemployment continuing to rise the timing of the recovery for a consumer driven economy remains uncertain. Therefore throughout the coming months we plan to maintain an intense focus on disciplined property management and balance sheet strengths.

There is no doubt that the challenges we will face in the months ahead will be formidable. However I’d like to outline what we see as our three key competitive advantages for operating through this environment. We have a portfolio of well located assets that specialize primarily in necessity and value based retail.

We have a relatively stable financial position with very limited near-term secure debt maturities and access to capital through established lending relationships, and our teams of real estate and retail experts have deep roots in our core Midwest markets and experience managing through economic cycles. We believe our business strategy is sound and will continue to resonate with investors. That strategy is to generate our income primarily through a portfolio catering to the everyday needs of consumers in stable Midwest markets.

I’m pleased to note that our total return for 2008, while slightly negative, significantly outperformed the S&P 500, the Mortgage Stanley U.S. freeze index and our shopping center peers. I’d like to briefly review our results for the quarter and the year overall. I’ll also provide an update on our joint venture activities. Scott will follow with a report on our portfolio performance, and then Brett will review our financial results.

For the fourth quarter, we reported funds from operations or FFO of $0.26 per share, a decrease of almost 28% from $0.36 per share in the prior year. Now these results include non-cash charges of $8.4 million or $0.13 per share to record the other than temporary decline in value certain investment securities.

FFO per share for the year 2008 was $1.33, a decrease of 7% or $0.10 from the prior year’s $1.43 per share. Again, FFO for the year included aggregate non-cash charges of $12 million or $0.18 per share related to the other than temporary in decline of value investment securities.

Obviously, we’re very disappointed that our FFO results came in below guidance. The continued deterioration in the equity market and necessitated write-downs for investments that where significantly larger than we had expected. These larger than expected impairments where the main reason our FFO results were below the guidance rage. I’d like to note that excluding the non-cash charges for the investment securities, FFO per share increased 8.3% to $0.39 for the fourth quarter, and 5.6% to $1.51 for the full year 2008.

I’d like to now review our portfolio leasing activities. For the fourth quarter, average base rents on renewal leases increased more than 18% over expiring rates. We believe this reflects the appeal of our infill locations and the strength of our existing tenant relationships.

Resident new leases declined slightly by 60 basis points, this does reflect the sector-wide drop in demand for new space by retailers that have reduced sales projection after recording depressed holiday sales results. For the year, we recorded strong leasing volumes overall. This was in spite of market conditions that worsened dramatically in the second half of ’08.

We leased nearly two million square feet of GLA in the total portfolio during 2008, a 37% increase over 2007. We also delivered solid rental rate increases on both new and renewal leases for the portfolio. For the year, average base rents increased more than 12% on new leases and nearly 11% on renewal leases over the expiring rate.

We believe that our overall portfolio performance for the fourth quarter and the year was respectable, given the current environment, and reflects the resiliency of grocery and value anchored retail assets in strong regional markets. However, looking ahead we expect that overall retailer distress will continue to have an impact on leasing gains and occupancy this year. Scott will provide more detail on the retail environment and leasing a little later in the call.

Moving to the balance sheet, within a tight credit market, we leveraged well established lending relationships and added new ones as well to gain attractively priced access to capital. Last April, we renewed a three-year $155 million revolving line of credit with a group of five banks.

And in September we secured a $140 million term loan, which we used to retire all remaining 2008 debt maturities and pay down our line of credit. And during the fourth quarter, we also reduced leverage on the balance sheet with the repurchase of $15.5 million of our convertible notes at a discount to the original face amount.

As we said on the last call, we expect our line of credit and cash flows from operations to provide more than adequate resources to address secure debt maturities coming due in the future. And Brett will provide statues on the repayment of mortgage debt that is scheduled to expire in 2009.

I’d now like to briefly review our joint venture initiatives. Turning to the IREX joint venture, the capital that we allocate to this venture generates fee income that has proven to be particularly valuable when market turmoil impacts core portfolio performance. Looking at the year, we generated $3.2 million in fee income from the IREX joint venture. That’s an increase of almost 33% over 2007.

Last month we completed syndicated sales to 1031 exchange investors in the Fox Run square property, a 143,000 square foot grocery acreage shopping center in Naperville, Illinois. The current inventory of IREX joint venture properties to be sold includes four Bank of America occupied buildings acquired in the third quarter, and an 18,000 square foot office building in Merrillville, Indiana that is 100% leased to the University of Phoenix.

All these properties have high quality tenants and long-term leases with annual increases. We believe these attributes make them attractive investments. The Bank of America buildings are being marketed to investors in two separate offerings. And currently each of the Bank of America deals are nearly 50% committed with closing expected in the first three quarter of 2009.

We originally anticipated sourcing of $100 million in asset acquisition value for the IREX joint venture in 2008, and I’m pleased to report that we exceeded that amount by 80%. This essentially pre-funds our 2009 acquisition pipeline. We expect that our JV partner, Inland Real Estate Exchange Corporation, will continue to turn to us for product in ’09.

Although overall demand from 1031 exchange investors has slowed due to the market environment, IREX is one of the few sponsors that actually increased its sales to investors in 2008. In fact, IREX is increasing its market share at the expense of under capitalized competitors who have been forced to exit the marketplace. That being said, future acquisition for the IREX JV will depend on the timing of pending syndications, as well as our own capital requirements and the overall acquisitions market.

Turning to our development ventures leasing activities slowed down considerably at the end of the year as many retailers curtailed their near-term expansion plans. It’s important to note that even within this difficult development climate, we have several important factors working in our favor.

First, our partnership approach limits the level of overall risks. Second, we have a relatively short list of projects, and third, retailers continue to express interest in our development sights, although their decision making process has become considerably more deliberate. We expect these retailers to target our development locations when they are ready to reinvigorate their expansion activities.

Our existing developments are now scheduled for completion primarily in 2010 and 2011. We believe we are in a relatively good position as work with our partners and their lenders to extend maturity dates of certain development related loans.

Debt service is current on all of our construction loans, and we achieved principal reductions through proceeds received from all parcel sales. In addition, we are comfortable with the development values we’re carrying, and although the lease up period has lengthened due to economic conditions, we continue to make some progress with certain development projects during 2008.

For example, the lease up of anchor and junior space has been very good at our Orchard Crossing Development in Fort Wayne, Indiana. Target, Gordmans, Famous Footwear, fashion retailers Maurice’s and Rue 21, and quick service restaurant Qdoba all opened stores at Orchard Crossing in the second half of 2008.

In addition, during the fourth quarter, we executed a lease with Dress Barn for a 7,200 square foot store that’s scheduled to open by second quarter of 2009. To date, more than 81% of the square footage of this development is occupied and most of the tenants are already opened for business.

Historically, once anchors and junior anchors are signed, we have filled small shop space relatively quickly, even within a small market. That being said, the credit market crisis has impacted some tenants ability to obtain startup financing, so lease up of new small shop space at this development has been a little slower than expected.

At two of our other development projects, national retailers opened stores on schedule during the fourth quarter. At North Aurora Town Center in North Aurora, Illinois, a Best Buy Build-A-Suit opened for business in October, and a Walgreen’s pharmacy store opened in October at in our Savannah Crossing Development in Aurora, Illinois.

Moving onto dispositions, during 2008, we sold four of our older unanchored properties for a total of $14.8 million. Following the close of the fourth quarter in two separate transactions, we also sold two unanchored neighborhood retail centers in Chicago for a combined sales price of $5.7 million.

Now with that, I would like to turn the call over to Scott to discuss our portfolio operations.

D. Scott Carr

We can all agree that this economic downturn and the troubled credit markets have created an unprecedented difficult operating environment for retailers and landlords alike. We are meeting these challenges head-on drawing on the strength that are core to our business, which include a portfolio of recession resistant assets that cater to the everyday needs of consumers, proven locations and over 40 years collective management experience in retail real estate.

Retailer demand for new stores has been greatly curtailed over the past four months with the weak sales trends of the critical holiday season continuing into the new year. While some retailers are still pursuing opportunities to upgrade their locations, the overall absorption of space is greatly diminished. Our strategy in this difficult climate includes an increased attention on existing tenant base in order to maintain occupancy rates.

Our leasing results for the quarter reflect the new leasing realities, as well as the relative success of our strategy within the current environment. While spreads on new leases were weaker than in the past, during the quarter we recorded 18% increases over expiring rates on renewals for both the total and consolidated portfolios.

Mark highlighted the total portfolio performance, now I’d like to provide some detail on the leasing performance for our consolidated portfolio. This is comprised of properties that we own 100%. For the fourth quarter, we signed 40 leases within the consolidated portfolio comprising over 170,000 square feet of GLA. Seven new leases were signed during the quarter with an average rental rate increase of almost 4% over the former rents. Thirty-two renewal leases were signed with an average rental rate that represents an increase of more than 18% over expiring rents.

For the year 2008, we signed 243 leases for the consolidated portfolio aggregating over 1.3 million square feet of GLA. Fifty-two new leases were signed during the year at an average rental rate that is an increase that is almost 16% over the expiring rents. One hundred eighty-four renewal leases were signed at an average based rent that represents an increase of near 12% over the former rental rate.

Our leasing results for the quarter and the year demonstrate that we are leveraging the value of strong locations by renewing leases with attractive rental rate increases. Our tenant retention rate for 2008 was nearly 75%. This performance illustrates that many retailers remain successful in our centers and are willing to pay market appropriate rents. In addressing 2009 lease expirations, over two-thirds of our expiring leases are either signed or are in documentation.

In an economy in which every dollar counts, we are also aggressively pursuing sources of ancillary income, including leasing to temporary tenants. Although a small percentage of our overall revenue, 2008 ancillary revenue of almost of $800,000 for this type of tenant increased 85% over the prior year.

Turning to same store performance, same store net operating income for the quarter was $30.1 million, a decrease of almost 3% from the fourth quarter of 2007. For the year, same store NOI of $122.2 million was on par with the prior year. Same store NOI for both periods was impacted primarily by certain chain failures during the year. The Wicks and Linens ‘N Things bankruptcies alone accounted for a decline of over $800,000 in same store rental revenue in the fourth quarter.

The Wicks Furniture bankruptcy had the biggest impact on our performance with five Wicks leases representing 1.2% of our annual base rent returned to us last April. We have a good success for mediating the Wicks vacancies, re-leasing four of the five spaces within seven months time.

In November, we signed our fourth replacement lease with Marshalls for 30,000 square feet of the former 57,000 square foot Wicks store at the Four Flags Shopping Center in Niles, Illinois. The deal with Marshall’s, a relocation of an existing store, is especially notable because with this lease we replaced 82% of the lost income by re-leasing only 53% of the former Wicks space. The remaining 27,000 square feet of GLA represents additional upside for us in the future.

The revenue from these re-leasing efforts will come online over the course of 2009, and with leasing four of the five Wicks stores we have replaced 97% of the prior in-place rents. Notwithstanding these and other re-leasing successes in 2008, we expect that same store NOI and occupancy will continue to be impacted throughout 2009 by additional store closings and possible retailer bankruptcies.

Our mom and pop tenant base held its own through 2008 with a number of local tenants who left prior to lease expiration on par with 2007. While this is evidence with the resilient nature of our portfolio, we are concerned by the threats inherent in the continuing decline in consumer spending and the lack of credit availability.

We diligently monitor the health and viability of all of our retailers no matter what their size. And the value of our systems and procedures has never been more apparent. Like all landlords, we are getting our share of requests for rent release, to which we are well equipped to respond with the uniform and rigorous process for evaluating a tenant’s requests.

Borrowing from Ronald and Nancy Regan, our approach ranges from “Just Say No” to “Trust but Verify”. In those instances where rent release is warranted, the objective is to structure deferrals in lieu of reductions, we renegotiate critical lease terms and ultimately get the right to recapture the space. This final condition is the true litmus test as we see many requests withdrawn when we advise tenants that we want the right to replace them.

Turning to occupancy, for the total portfolio, which includes consolidated and unconsolidated properties, at the end of the fourth quarter leased occupancy was 94.1%. This represents a decline of 70 basis points from the prior quarter and 150 basis points from fourth quarter 2007. Leased occupancy for wholly-owned or consolidated portfolio was 93.8% representing declines of 80 basis points from the prior quarter and 120 basis points from the fourth quarter of 2007.

Finally, I would just like to highlight the occupancy rates within our two core markets, Chicago and Minneapolis St. Paul. For 2008, our portfolio occupancy rates were uniformly higher then overall occupancy rates for their respective MSAs.

Leased occupancy for our consolidated Chicago portfolio at year end 2008 was 325 basis points higher then the 89.8% occupancy rate reported for the Chicago MSA by CB Richard Ellis. Leased occupancy in our consolidated Twin Cities portfolio at the end of the year was 167 basis points higher then the 93.6% occupancy rate recorded for the Twin Cities MSA by CB Richard Ellis. So while we are experiencing occupancy declines, we are maintaining our historical precedent of out performing the buyer marketplace.

Now, I will turn it over for Brett for a review of the company’s financial performance.

Brett A. Brown

FFO for the fourth quarter and the year was substantially impacted by non-cash impairment charges related to our portfolio marketable securities, which declined in value and were deemed to be other then temporarily impaired. As Mark reported, excluding the impairment charges, FFO per share for the quarter was $0.39 and for the year it was $1.51.

Our investment securities are primarily comprised of REIT common and preferred equities. We invested in these equities with a dividend income they produce, which still we’re achieving double-digit levered yields of over 11%, and we had the intention of holding them for the long-term. Unfortunately, the volatility of the equity markets has taken a heavy toll on the current market value of certain investment securities.

Generally Accepted Accounting Principles require us to evaluate if the securities are other then temporarily impaired, and if so, the cost basis is written down to fair value as a non-cash charge against earnings. As Mark communicated, these charges were higher then we anticipated for the quarter and the primary reason our FFO results were below guidance.

Specifically addressing the major items impacting FFO for both periods, for the fourth quarter we recorded non-cash charges of $8.4 million or $0.13 per share to record the other then temporary decline in value of investment securities. For the full year ‘08, non-cash charges related to our investments totaled $12 million or $0.18 per share.

The decrease in FFO for both periods was partially offset by the $4.5 million gain on extinguishment of debt we recorded during the quarter. The gain on extinguishment of debt is related to our repurchase during the quarter of $15.5 million of our convertible notes at a discounted face value. The decrease in FFO for the year ‘08 was also partially offset by a $3.2 million deferred partnership gain we recorded in the second quarter.

Reported FFO for the fourth quarter was $17.5 million, a decrease of over 26% compared to the fourth quarter of ’07, and FFO per share of the quarter was $0.26, a decrease of nearly 28% from the prior year. For the year ended December 31, 2008, reported FFO decreased 6% to $88 million, and FFO per share for the year ‘08 was $1.33, which represents a 7% decrease from the prior year.

Turning to revenue, for the quarter total revenue decreased 3.3% to $45.7 million from the prior year quarter. The decline is primarily due to decrease in rental income and tenant recoveries related to bankruptcies of certain big box tenants, which was partially offset by income from properties acquired through the IREX joint venture.

For the year ended December 31, 2008, total revenue was $191.5 million, an increase of 2.5% over the prior year. This increase was primarily due to increases in rental and recovery income from the IREX joint venture properties, as well as an increase in fee income of almost 30% to $5.6 million from unconsolidated joint ventures. And within that revenue item, fee income from the IREX joint venture increased almost 33% to $3.2 million for the full year ‘08.

Moving to the balance sheet, Mark provided a recap of actions that we took during 2008 to strengthen our financial position. We utilized a three-year, $155 million line of credit facility we renewed in April, primarily as a source of opportunity capital for our joint ventures and certain debt maturities. Under current terms, we have an option to extend the line for one year to April 2012.

At our choice, the variable rate applied to borrowings under the line is 100 to 150 basis points over LIBOR or 25 to 30 basis points over the prime rate. The exact credit is determined by the company’s overall debt at the time of borrowing. As of December 31, our line of credit facility had an outstanding balance of $52 million.

Following the close of the fourth quarter, we retired four [inaudible] loans totaling $41.4 million, utilizing funds from the line of credit, cash flows from operations and equity received from sales to 1031 buyers through our joint venture with Inland Real Estate Exchange Corporation.

We were proactive in negotiating the early buyouts from lenders with no pre payment penalties on encumbering eight properties and improving our unsecured debt ratio in the process. For 2009, we have only $7.4 million in secured debt remaining, which we plan to retire on or before its maturity date in October.

We’re also working on 2010 secured debt maturities in finding availability of interest only non-recourse loans from banks and life companies. The rates on the loans are slightly more expensive but more then offset by the lower variable rates we’re enjoying on other debt. In addition, since we have purchased most of these properties at higher cap rates and assuming lower valuations by lenders, we expect to refinance the assets without having to contribute any additional equity.

The two-year $140 million term loan that we secured last September and utilized to pay down debt does not come due until September 2010. That being said, we are already evaluating and comparing the price points of options available to us to retire that debt. Our consolidated debt at quarter end was $836.4 million and had an average interest rate of 4.32%, 70% of that debt was fixed at an average rate of 4.9%, and 30% was flowing with an average rate of 2.9%.

For the year ended December 31, 2008, our EBITDA or earnings before interest, taxes, depreciation and amortization to interest expense coverage ratio was 2.8 times, and our FFO hat ratio was 65%, excluding the non-cash impairment charges.

With respect to guidance, we expect the FFO for common share will be in the range of $1.20 to $1.35 for the full year ‘09. We’re anticipating the same store NOI decrease of 2.2% to 6.3%, average occupancy between 89% and 91%, rental rate increases of 3.5% to 7% for new and renewal leases respectively.

Our guidance assumes that we will sell the remaining interest in properties that we have sourced to date for the IREX joint venture, but does not include any additional acquisitions. We do not anticipate any development related property sales in ’09, and finally guidance does not include estimates of non-cash charges related to our investment securities.

With that, I’ll turn the call back over to Mark.

Mark E. Zalatoris

This is a time when it’s absolutely critical to stay focused on the fundamentals of our business. For us this means taking care of our current tenants and maximizing leasing opportunities. It also means continuing to strengthen our balance sheet. There’s no better way to protect a company in this environment. And finally, it means continuing to utilize proven means, such as our IREX joint venture to Foster Grove.

Our business model is sound. Because of our portfolio focus and our Midwest market dominance, we’ve levered well positioned for the future. As American consumers increasingly turn to a necessity and value oriented retail in a troubled economy, we are there for them.

Now with that, we’d like to open up the call for your questions.

Question-and-Answer Session


(Operator Instructions) Our first question is from Jeff Donnelly – Wachovia Securities.

Jeffrey J. Donnelly – Wachovia Securities

I’ll start with probably a painfully easy and obvious answer for you, but I apologize for asking. But how is it in the supplemental the same store pool of properties has an NOI that is slightly greater then the NOI for the companies as a whole? I think it's page 30. It has like 124 investment properties then NOI of $30.1 million. You kind of just calculate revenues minus operating expenses from your financials on page 8. It’s not much; it just exceeds it. I wasn’t sure what the difference is if you know it off the top of your head.

Mark E. Zalatoris

There’s one item that is not included in there and you have an expense high bid, that expense is taken out on the main page included in the expenses. It’s separated on the same store page and there’s probably some other items that go back and forth like straight line income is not in there, amortization of lease and tangibles. There’s just minor differences between there. We tried to pull this out as the pure operating income of the properties in the same store page.

Jeffrey J. Donnelly – Wachovia Securities

I was just curious. They were close enough. Thinking about your guidance, when I look at your 2009 expirations on page 18, it looks like there’s an average expiring rent type I think give or take roughly 11.75 a foot in 2009. Do you think the mid $12 square foot rents that you signed up in Q4 is applicable to that? That we can actually continue to see rent accruals on that order or are you being cautious because market rents just continue to deteriorate out there?

D. Scott Carr

We were definitely more conservative than we have historically achieved. We’ve modeled in about a 7% increase target on renewals, and we’re hopeful that’s achievable we would love to be wrong on a lot of our assumptions. Because we’ve stretched our models in a variety of ways because we’re just working on handicapping the environment we’re in. And if anything we hopefully err to the conservative side.

Jeffrey J. Donnelly – Wachovia Securities

I guess just as a point of clarification Scott, I guess on that same vein. In Q4 you gave the numbers about your renewal and new leasing spreads of like 18%, I believe for the renewal. Was that comparing the first year rent on the new lease versus the last year rent on the expiring? Or is that straight line?

D. Scott Carr

That’s average rent for the expiring compared to average for the new on a cash basis.

Jeffrey J. Donnelly – Wachovia Securities

I guess the last two questions. I’ll go back to Brett again. I know it’s a way off and you mentioned it in your remarks, but thinking about the $140 million term loan that’s maturing in 2010 and your option for refinancing, I just couldn’t recall, is there an extension option that you have and are you able to give us a sense of maybe what sort of cash or borrowing capacity you think you might have on hand year end 2009?

Brett Brown

There is no extension option on them and as far as availability as far as replacing debt with debt there is capacity on the line of credit, obviously, and so we can tap into that as well as place some debt on some of the unsecured properties as well. So we believe we have definite capacity there and I would expect with the bank group that we have we could easily negotiate extension options if needed.

Jeffrey J. Donnelly – Wachovia Securities

And just last question it looks like you have about $85 to $90 million of debt maturing on your JV developing pipeline in 2009 and 2010. But pre-leasing on many of those projects that I think are associated with those debts it looks like it’s close to 0% for the portion of it that you own. I guess same question I mean are those loans extendable and maybe what terms and conditions.

Brett Brown

Yes they don’t currently have extension options in there but we’re with our joint ventured partners negotiating extensions with the lenders and so far all have appeared amendable and we expect to push those out at the time delay on these has obviously lengthened.

Jeffrey J. Donnelly – Wachovia Securities

Are you partners capable of either retiring their fair share of the debt if necessary or would you have to take a bigger role on with some of these assets?

Brett Brown

Our expectation is that they would be capable, yes.

Jeffrey J. Donnelly – Wachovia Securities

Okay. I’m just thinking to the extent that the lenders require a degree of pay down if they have the cash to themselves to do that. Just one last question then I guess, is there a point at which you may make the determination that it isn’t sensible to extend those loans because your looking at your pre-leases and saying I’m just not going to get there over a 12 to 24-month period so it’s not worth pursuing these developments, or are we just still a ways from that?

Mark Zalatoris

I would tell you that we’re looking at each deal case by case and you can see in some cases like the Fort Wayne deal we’re essentially stabilized to other deals where we don’t have really any pre-leasing. We have letters of interest and things like that, and if there comes a time where we really honestly feel that the timeline is just too far out to make any sense, we’re not going to put good money after bad. There’s going to be some hard decisions that will need to be made if progress isn’t made during this year.


The next question is from Paul E. Adornato - BMO Capital Markets.

Paul E. Adornato – BMO Capital Markets

In the past when tenants have come back to you seeking some release the tardy line has been generally no don’t give it unless there is a very compelling reason to do so. Was wondering if the balance of power has shifted now such that you’re renegotiating, especially I’m interested in what the local tenants are asking for if anything and what you’re giving if anything.

D. Scott Carr

The balance of power has shifted and I’ll tell you our main reason for working with tenants and especially our local tenant base is that what we’re finding is a lot of their issues seem to be temporary and we’re hopeful that they can restore their business.

And secondly, as Mark alluded to on the lease up, that new supply of mom and pop tenants who use to be entering the tenant pool has really diminished. It’s been really hampered by the credit crises and people unable to find financing can’t open new stores.

So it’s prudent for us to work with these tenants, but having said that we really put them through the wringer before we commit to anything. We have a multi-page document they have to fill out that allows us to verify their sales, their current financial condition, their business plan what they intend to do with any relief that we give.

And then we work with them also in terms of getting something in return. We like to think in terms of deferral instead of relief or forgiveness so very often we’re restructuring rents, extending terms and then going within the leases and carving out those things that are less desirable for us as a landlord.

And as I mentioned, the final straw is we get the right to re-tenant that space and when you put that to a tenant that really is the moment of truth and those that go along with it that gives us an indication outside of everything that we’ve assembled that their earnest about this. And that also gives us the opportunity for our leasing staff to focus on those potentials.

On the national side, it’s a little different story because very often there’s a lot of public information available. There it’s often a more case by case basis where we have to consider the overall impact on the center. But first and foremost it’s assessing the health of that location and the health of the retailer because we surely don’t want to throw good money after bad.

Circuit City came to us back in September asking for rent reductions and we said no. We’re not the reason they went bankrupt but we thought that was going to happen so we didn’t want to give them any relief.

Paul E. Adornato – BMO Capital Markets

Right. And what are you using in terms of lease up assumptions for anchor and junior anchor states? What kind of vacancy time periods are you building into your guidance?

D. Scott Carr

Overall, we’ve lengthened a lot of our big box vacancies where we don’t have any current activity we’ve modeled them in vacant for virtually the whole year if there is no sign of activity. Where we’ve had activity we’re able to model something a little more optimistic. And on the rental increases again we’ve dialed that back substantially where we’re looking at 3.5% gains on new leases as opposed to the double digits we’ve enjoyed in the past history.

Paul E. Adornato – BMO Capital Markets

Okay. And looking at the impairment of investment securities just to be clear have you written down that portfolio to December 31 of values?

Mark Zalatoris

Close we’ve had the current value at December 31 as approximately 8.3 million and there was another 1.9 million of unrealized loss at December 31.

Paul E. Adornato – BMO Capital Markets

Okay. So what would trigger that becoming a realized loss or I guess a further impairment.

Mark Zalatoris

Further impairment would be if the stocks stay in this unrealized loss position for greater than another year or if they decline substantially more then we would have to take that throughout the year. I don’t anticipate any in the near-term, but again it’s a function of the market.


Our next question is from Alex Barron – Agency Trading Group.

Alex Barron – Agency Trading Group

I guess I was just wondering if you could give us a little bit of a description of the type of tenants or maybe some names that caused the slight decline in occupancy this quarter.

D. Scott Carr

Well the biggest impact for us were the higher profile bankruptcy with Wicks, Linens ‘N Things, Circuit City and Tweeter Electronics. Those were the big box bankruptcy that affected us most greatly.

Alex Barron – Agency Trading Group

Okay and in terms of any small names where there any trend or anything?

D. Scott Carr

For us in terms of our small shop tenant default it was on par for ’08 with ’07, so we have not seen a significant decline or a shift in trend where that’s getting worse.


Our next question is from Steve Everett – Multi-Financial.

Stephen Everett – Multi-Financial Securities

My question is going to be a little bit less technical, especially than the first two. I guess the one question I got pretty straightforward question is how do you see your dividend, given the current environment, as far as being maintained at the ’08 level?

Mark Zalatoris

I’m going to try and answer that for you. Our dividend is well covered and even given our guidance for 2009, it’s still very well covered. You’ve probably seen in the news a lot of companies have announced dividend cuts or perhaps a switch to paying some or most of their dividend in the form of their company stock, and those are all techniques in a sense to preserve capital.

At this point, we aren’t anticipating changing our dividend policy. We’re very proud of the fact that we have paid a monthly dividend since our inception and that we raised the dividend on an average once per year, and so we’d be hard-pressed to really change that policy. But I will qualify that with a statement saying that we are in unprecedented times in a severely capital constrained environment.

And as we face capital needs with loan maturities and if we have less success with the lenders than we anticipate we’ll have, we may need to revisit that and that’s something that we discuss at both the management level and at the board level on a regular basis. But at this point in time, we are not anticipating a change to our policy.

Stephen Everett – Multi-Financial Securities

So what I heard you just say was that the bigger risk to having to cut the dividends to preserve capital is if the credit markets make it difficult for you to renew terms or to get new loans versus the actual decline in renal rates.

Mark Zalatoris

That’s correct. We have plenty of coverage in our core income stream to cover our dividend and our payout ratio is 77% of our FFO at the midpoint of our guidance range for 2009, and we reduce our guidance in the sense over what our actual results were for 2008. We have a very well covered dividend so that’s not going to be the issue.

But, again, if all of a sudden capital markets tighten up even further than they are, we’re anticipating going the other way. We’re hoping that the government intervention that’s going on right now being put in place is going to ease the credit markets, etc. that loans will be more available than less available. But I couldn’t predict to be honest with you. No one could have predicted how we’d be today when we were looking at a year ago.

So again, it’s a tool that’s available to help us and the first thing we have to do is preserve ourselves and stay alive and take care of maturities and not get properties taken away from us from lenders when we wouldn’t otherwise have to if we can employ all techniques available. But that’s correct. It’s a balance sheet concern for us only.


We show no further questions at this time. I would like to turn the conference back over to Mark Zalatoris for any closing remarks.

Mark Zalatoris

Well, thank you. We appreciate your time and interest on today’s call and I want to give you a little reminder. Valentine’s Day is Saturday and I want to encourage everyone to visit your local retailers; they need you to purchase something for a loved one.

I also want to note that Monday is President’s Day. It’s a good time to take a moment to honor all of those who have chosen to serve our country as Commander in Chief. And in that vein and as a native son of Illinois, today I’d like to recognize one of our most respected presidents, President Lincoln, on the 200th anniversary of his birth. Thanks a lot for joining us and we’ll talk to you next quarter.


The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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