Inland Real Estate's CEO Discusses Q3 2013 Results - Earnings Call Transcript

| About: Inland Real (IRC)

Inland Real Estate Corporation (NYSE:IRC)

Q3 2013 Earnings Call

November 7, 2013, 2:00 PM ET


Dawn Benchelt - Investor Relations Director, Media Relations

Mark Zalatoris - President and Chief Executive Office

Brett Brown - Executive Vice President, Chief Financial Officer and Treasurer

Scott Carr - Executive Vice President and Chief Investment Officer


Paul Adornato - BMO Capital Markets

Todd Thomas - KeyBanc Capital Markets

Tammi Fique - Wells Fargo

R.J. Milligan - Raymond James & Associates


Good afternoon, and welcome to the Inland Real Estate Corporation third quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Dawn Benchelt, Investor Relations Director. Please go ahead.

Dawn Benchelt

Thank you for joining us for Inland Real Estate Corporation's third quarter earnings conference call. The earnings release and supplemental financial information package has been filed with the SEC today and posted to our website, We are hosting a live webcast of today's call, which is also accessible on our website.

Before we begin, please note that today's discussion contains forward-looking statements which are management's intentions, beliefs and current expectations of the future. There are numerous uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. For a discussion of these risk factors, please refer to the documents filed by the company with the SEC, specifically our Annual Report on Form 10-K for the year ended December 31, 2012.

During the presentation, management may reference non-GAAP financial measures that we believe help investors better understand our results. Examples include funds from operations, EBITDA and same-store net operating income. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release and supplemental dated November 7, 2013.

Participating on today's call will be, Mark Zalatoris, IRC's President and Chief Executive Officer; Chief Financial Officer, Brett Brown; and Scott Carr, President of Property Management.

Now, I'll turn the call over to Mark.

Mark Zalatoris

Thank you, Dawn. And welcome, everyone, to our third quarter 2013 earnings call. Today I will begin with a discussion of the results we reported for the quarter and year-to-date, and provide an overview of our recent transactions.

Scott will follow with a review of our portfolio's performance and our leasing activity. Brett will then provide an update on our balance sheet, capital markets activity and financial results. After our prepared remarks, we will open the call for your questions.

Let me begin by saying that with more than three quarters of 2013 in the books, we are extremely pleased with our results so far this year. We have made solid progress on executing the three main strategic goals we laid out at the beginning of the year.

These objectives are; one, to enhance the growth profile of our portfolio through leasing, asset repositioning and capital recycling initiatives; two, to increase the size, diversification and quality of our platform through targeted acquisitions of high-quality assets using our balance sheet and joint venture relationships; and three, to improve our balance sheet metrics and our financial flexibility to support our growth objectives.

As we continue to execute the growth strategies we have spoken of all year, we believe we are well-positioned to drive value for our shareholders going forward. In addition, the economy continues to prove steady albeit modest growth despite a grid lock in Washington and our focus on value and necessity-based centers makes our portfolio particularly stable in this kind of environment.

Turning to our results. We continue to post strong year-over-year growth. FFO per share adjusted for non-cash items was $0.26 for the quarter and $0.73 for the nine months ended September 30, representing increases of 18.2% and 14.1% respectively over comparable periods in 2012.

As Brett will discuss in more detail later, our adjusted FFO for the quarter included the benefit of approximately $2 million of lease termination fee income or about $0.02 per share that had not been anticipated in prior guidance. Operationally, our total portfolio leased occupancy was 94.3% and financial occupancy was 91.3% at the end of the quarter, representing increases of 120 basis points and 70 basis points respectively over one year ago.

We've achieved robust volumes in leasing activity during the first three quarters of 2013, with 283 leases executed for 1.7 million square feet within the total portfolio. This represents an increase in square feet lease to 42% over the same period of 2012. Further, we are successfully driving rents, as average base rents on new and renewal leases signed year-to-date increased 9.3% over expiring rents.

With regard to our same-store portfolio, consolidated same-store NOI increased 5.4% for the first nine months of this year compared to the same period of 2012. Excluding lease termination income, consolidated same-store NOI was up 3.1% for the nine month period ending September 30. As a result of our portfolio's strong performance and the success of our growth initiatives, we are increasing our full year guidance for FFO adjusted per share, as Brett will discuss later in the call.

Moving on to our transaction activity, we remain active with our PGGM joint venture and have closed several transactions at the end of the second quarter. In September, the venture acquired three Wal-Mart anchorage shopping centers in the Milwaukee market from a regional developer in an off-market transaction for a total purchase price of $24.2 million.

The portfolio totals approximately 174,500 square feet of retail space, including ground leases, as a solid roster of retailers and enjoy strong demographics. Expansion in Milwaukee with the Wal-Mart anchor supports our strategic goals to diversify our revenue by market and retailer.

In August, we announced that our JV with PGGM is partnering with two local developers we have previously done business with to construct a 92,500 square foot grocery-anchored shopping center in Evergreen Park, Illinois, which is adjacent to the city of Chicago. The center is 95% pre-leased to Mariano's and PetSmart and we officially broke ground on the project on October 31.

The total cost of development is expected to be approximately $24.9 million and we are developing to yield on cost of 8.9%. We have a right to purchase this center at 7.75% cap rate, which is a significant discount to market cap rates for similar quality assets that are currently trading in the 6% to 6.25% range. Including our share of development profits, our effective purchase cap rates becomes 8.6%. This transaction is a great example of the value of our joint venture growth strategy as well as our ability to leverage strong local relationships to capitalize on opportunities.

Subsequent to quarter-end in October, our venture with PGGM acquired Cedar Center South, a 139,000 square foot shopping center in University Heights, Ohio for $24.9 million. The center is anchored by Whole Foods and CVS and includes a complementary mix of national and local retailers. In total, our PGGM venture acquired $49.1 million of high quality retail centers since the end of the second quarter, bringing the venture's total acquisition since inception to approximately $358 million.

I'd like to reiterate that well-structured joint ventures are a key component of our growth strategies. Having brought the NYSTRS joint venture to its intended conclusion in the second quarter, we demonstrated the value of utilizing partner capital in an efficient way to grow our portfolio, booster near-term retunes with recurring fee income and eventually consolidate high quality assets into our portfolio.

In closing, we are pleased with the strong results for the quarter and year-to-date including solid internal growth metrics, continued portfolio growth and improved balance sheet flexibility. We will continue to execute on our strategic plan going forward, laying the ground work for growth in 2014 and beyond.

I'll now turn the call over to Scott.

Scott Carr

Thank you, Mark, and hello everyone. In my comments today, I will provide more color on our acquisition and disposition activity, then I'll move on to our operating results and leasing activity, and finally I will share with you an update on the progress of our repositioning and redevelopment projects that we believe will drive value for the company in the long-term.

As Mark discussed, since June 30, we have acquired four grocery-anchored properties to our joint venture with PGGM for a total purchase price of $49.1 million. Each of the centers we acquired benefits from strong demographics and the acquisitions advance our strategic goals to diversify our revenue by market as well as retailer.

In addition, the joint venture embarked on a ground up development of a new Mariano's anchored-center in Evergreen Park, our first stream suburb of Chicago with over 227,000 people in the three mile radius. This opportunity is an example of how we are able to use the strength of our balance sheet and local relationships to structure an investment that will create significant value for our shareholders.

On the disposition front, as prudent allocators of capital, we continue to strategically prune our portfolio. During the third quarter we sold three non-core properties and 66 acres of vacant land for a combined total of $14.8 million resulting in a net gain of $1.4 million. And we have sold an additional $23 million of assets after the close of the quarter.

Year-to-date, we have sold eight caters, two outlet properties and 66 acres of vacant land for a total sales price of approximately $54 million. We anticipate that we could sell an additional $12 million to $15 million of non-core assets by yearend. These dispositions advance our stated strategies to enhance the credit quality of our tenant roaster, improve the portfolio's long-term growth profile and provide capital for recycling into new acquisitions.

Turning to portfolio performance for the quarter. Consolidated same-store NOI was $25.7 million, an increase of 11.6% over the year ago quarter. Growth in same-store NOI was driven by higher tenant reimbursements due to improving occupancy levels, as well the lease termination fee of approximately $2 million received during the quarter.

Excluding lease termination income, consolidated same-store NOI increased 3.1% for the quarter. Our leasing pace remains strong with 92 leases executed for approximately 450,000 square feet of space within the total portfolio during the quarter, which was a 6% increase in square feet leased over the third quarter of 2012.

Leasing activity remains steady throughout the portfolio and across the broad spectrum of retail categories. Strength in anchor leasing continues as we executed 10 leases for 221,000 square feet with anchor retailers. We signed four new anchor leases totaling 85,000 square feet with Nordstrom Rack, Fallas Paredes, Goodwill and David's Bridal.

We also signed six renewal leases for approximately 136,000 square feet with Old Navy, Jo Ann, Michael's, Party City, Sports Authority and Schuler Shoes. This brought our total portfolio anchor-leased occupancy to 96.5%, which was in level with the prior quarter and an increase of 120 basis points over one year ago.

Specific to non-anchor tenants, we executed 82 leases for more than 228,000 square feet during the quarter, representing 89% of our leasing transactions for the quarter. Of these 82 non-anchor leases, 29 were new and non-comp leases. Approximately 39% of the new leases were with national retailers for corporate owned stores.

These data points suggest to us a further broadening and improvement in the underlying fundamentals and capital availability for retailers. Examples of the variety of small shops base activity are leases signed with Chase Bank at Thatcher Woods, the UPS Store at Two Rivers Plaza and Shoe Trend at Chatham Ridge, which brought each of these centers to 100% leased occupancy.

National franchise concepts remain active as well. In the third quarter, we signed two leases with established Hallmark franchisees opening additional stores, entering discussion with a third. We also continue to see strengths from mid-box apparel retailers, including Dress Barn, which renewed four leases; and Maurice's, which renewed two leases during the quarter.

Our total portfolio, non-anchor leased occupancy was 88.9% at quarter end, which is essentially level with the prior quarter, and an increase of 120 basis points over one year ago. Given the strong traffic and demographics at our centers, we believe we can continue to increase non-anchor occupancy by an additional 100 basis points to 150 basis points in the coming quarter.

Regarding rent spreads on this quarter's leasing activity, our new and renewal leases was in the total portfolio, were signed with average base rents that increased 4.2% and 8.2% respectively over expiring rent. I am pleased to report that this is the 11 consecutive quarter, in which we have achieved positive spreads on new leases and our track record on uninterrupted positive spreads on renewals continues.

Now, I'd like to discuss our repositioning and redevelopment efforts. With limited new development, demand for existing retail space remains high, as retailers seek to expand their store count. We believe we are well-positioned within our markets to proactively replace underperforming retailers with higher quality tenants, thus increasing the productivity and enhancing the growth profile of our centers.

As mentioned on our last call, the lease we signed with Nordstrom Rack during the quarter for 36,000 square feet at the shops of Orchard Place in Skokie, Illinois, was signed simultaneously with the early termination of a lease with Best Buy.

In this instance, we proactively reduced our exposure to an electronics retailer with higher platform risk, and replaced him with a best-of-class off price retailer that will increase overall traffic and the long-term value of the center. Furthermore, the lease termination fee of nearly $2 million Best Buy paid to us during the quarter will fund our retenanting expenses.

In addition to the higher-end Nordstrom Rack, we continue to look at other off prices necessity based retailers that offer a rapidly changing assortment of merchandise, which attract shoppers who make frequent store business, generating higher levels of consumer traffic, which benefits the entire shopping center.

At our Aurora Commons Center in Aurora, Illinois, we are repositioning a former Jewel Grocery Store with in-demand value oriented retailers. During the quarter, we signed a lease for 20,000 square feet with Fallas Paredes, a large discount retailer based on the West Coast, and a new entrant to the Chicago market. Fallas Paredes, whose retailing philosophy is first place to shop, first place to see, is a natural complement for Ross Dress for Less, which signed a lease for 26,000 square feet at the center in the second quarter.

In addition to driving consumer traffic, these two retailers will pay an average base rent that is more than 40% higher than the rent previously paid by Jewel for the same space. And recently at the Rivertree Court Shopping Center in Vernon Hills, Illinois, we celebrated the grand opening of our new Ross and Pier 1 stores.

With only Shoe Carnival left to be delivered to the tenant by yearend, we are nearing completion of our multi-year $11 million repositioning of this asset. With the redevelopment and retenanting of over 175,000 square feet of this 300,000 square foot center, we have added substantial value and secured Rivertree Court's position as a market dominant power center in the northern suburbs of Chicago.

Finally, I would like to address the news that Safeway will be exiting the Chicago market, where the company currently operates 72 Dominick's stores. Safeway has sold four Dominick's location to Jewel-Osco, and is marketing the remaining locations. At this point, we do not yet know, which of our locations will be sold by Dominick's to other operators.

In the meantime, Safeway has notified its Dominick's employees that all Dominick's stores in the Chicago market will close on December 28.

Our exposure to Dominick's is very manageable with seven stores that represent approximately 3% of total portfolio annual base rent. Six of the stores are in the consolidated portfolio and one is owned by the joint venture with PGGM. Three of the stores in the consolidated portfolio are single-user properties and three are located in neighborhood community shopping centers. We anticipate little, if any financial impact to IRC in the near future for several reasons.

First, Safeway is obligated to pay rent under their leases, which have terms that range from two to eight years, with an average remaining term in excess of four years. Safeway's obligations to pay rent, allows us to maintain our current income stream as replacement tenants are sought.

Second, co-tenancy risk at our neighborhood centers is greatly mitigated by the fact that we typically do not grant contractual co-tenancy to small shop tenants. As well, strong demographic and established shopping patterns should help sustain small shop tenants through the transition. Finally, our Dominick stores will receive maximum exposure as a result of dual marketing efforts by Safeway and our own leasing team.

Our Dominick's locations feature strong demographics with dense populations and high incomes and have attractive sales level that could be further improved upon by new operator, which should mean increased traffic for our centers. The in place rents are at or below market providing potential to increase rental revenue. And finally we can leverage Safeway's lease obligations to give us the flexibility to reposition centers for use by grocery and non-grocery tenants or to accommodate a mix of both by dividing the space.

The exhibit Safeway from the Chicago market exemplifies the dynamic and competitive nature of the resale market and we believe such evolutionary occurrences represent an opportunity for us to improve the quality of our tenancy and the long-term value of our centers.

In summary, we continue to upgrade the quality of our tenant base, improve our portfolios performance and add value to redevelopment and repositioning projects. As we look ahead, we will remain proactive with regard to opportunities to upgrade and improve our existing portfolio. In addition, we will continue to execute on our strategy to grow our company with higher quality properties that enhance the tenant and market diversification of our portfolio.

I'll now turn the call over to Brett who will discuss our balance sheet, liquidity position and financial results.

Brett Brown

Thank you, Scott, and good afternoon everyone. We are pleased to report solid results for the third quarter and year-to-date, further we continue to enhance our balance sheet to support our next phase of growth and lay the ground work to achieve our long-term of an investment grade rating. I am going to share our financing activity and operating results for the quarter and then close with our outlook for the year.

Let me begin with a review of our financing activity during the quarter. As we previously announced, we closed, amended and restated credit facilities totaling $360 million. The new credit facility includes a $180 million unsecured revolving line of credit with a four year term and $180 million unsecured term loan with a five year term.

The amended agreement gives us the option to extend the revolver for an additional 12 months. The amended agreement also lowers the interest rates we pay on borrowings under the revolver and the term loan. The leverage based pricing grids reflect new rates that improved by 5 to 20 basis points for the revolver and by 10 to 25 basis points for the term loan depending on leverage levels.

Additionally, several of the financial covenants were improved increasing our flexibility as a company. From a liquidity standpoint, in addition to the amended credit facility we executed several transactions to enhance our financial flexibility. In July, we paid off the $10.6 million mortgage encumbering with Ravinia Plaza in Orland Park, Illinois in advance of its October maturity date with no prepayment penalty. And in August we repaid at maturity, the $14.8 million on Orchard Crossing, in Fort Wayne, Indiana.

These properties are now unencumbered expanding our unencumbered pool by approximately $40 million. At quarter-end, we had $75 million available on our line of credit. And turning to loan maturities excluding Algonquin Commons we have no remaining debt maturities in 2013, and less than $100 million of loans coming due over the next two years.

As the loans come due, we plan to continue to unencumber properties when appropriate, and I'd like to note that we are focused on opportunities to proactively prepay debt with minimal or no penalties when it is advantageous to swap out the higher rate for lower rates available today.

Through these balance sheet initiatives, improved operations, the consolidation of NYSYTRS joint venture and our equity issuance, we have measurably improved our debt and coverage ratios. Our debt to total market cap ratio improved to $47.7 %, as of quarter-end compared to 54.4%, one year ago.

Debt to total gross assets on a consolidated basis was 46.8%, an improvement of 190 basis points over the third quarter of 2012. Including our share of unconsolidated assets, debt to total gross assets was 49%, an improvement of 290 basis points on a year-over-year basis.

Our adjusted EBITDA to interest expense coverage ratio was 3.6x for the quarter, an improvement from 2.8x for the third quarter of 2012 and our fixed charge coverage ratio improved to 2.6x from 2.1x a year ago. Finally, our net debt to EBITDA including our share of unconsolidated joint ventures was 6.2x for the quarter, an improvement from 7.2x for the year ago quarter.

Turning to our operating results. On a per share basis, we reported FFO of $0.27 and FFO adjusted of $0.26 for the third quarter of 2013. The variance between the two was primarily due to an adjustment of $1 million for income tax expense, which was related to reversal of the valuation allowance associated with previously impaired property sold during the quarter.

On a per share basis, FFO increased 22.7% and FFO adjusted rose 18.2% over the third quarter of 2012. The increase in FFO adjusted for the quarter was due to higher revenues from new unrenewed leases and acquisitions including the consolidation of NYSTRS joint venture assets. FFO also increased as a result of higher tenant recoveries and lease termination fee income, plus increases in NOI from unconsolidated properties. The increases were partially offset by higher real estate tax expense recorded for the quarter.

Our operating success this quarter has much to do with our strategic decision to consolidate the assets previously held in our NYSTRS joint venture as well as new acquisitions.

For the quarter, we reported total revenue of $51.8 million, an increase of $12.4 million or 31.5% over the same quarter of the prior year. Rental income increased by $5.7 million or nearly 20%. Tenant recoveries increased by $4.8 million or over 55%, this was result of a corresponding increase in property operating and real estate tax expense related to new acquisitions as well as the improved rate at which we will recover expenses from increased occupancy. Other property income increased by $1.8 million over the same quarter of the prior year reflecting the lease termination fee, that we received from Best Buy.

Finally, fee income from unconsolidated joint ventures was $1.6 million, a slight increase year-over-year, which we expect to grow, as our recurring fees from the PGGM and IPCC joint ventures had outpaced the comparatively smaller amount of fee income previously received from the NYSTRS joint venture.

Turning to our expenses. Our total expenses increased by $11 million over the third quarter of 2012. Property operating, real estate tax and depreciation and amortization expenses all increased as a result of our expanded portfolio. However, real estate tax expense also increased as a result of changes in tax rates and the assessed values of the properties and depreciation and amortization expense increased due to tenant improvements for new leases.

Additionally, for the quarter our G&A expense rose by $500,000 due to additional staff needed for our growing portfolio of assets under management and legal costs primarily related to our Algonquin Commons. However, annualized G&A expense was only seven-tenth-of-a-percent of total assets under management for both the quarter and nine months ended September 30, which is consistent with the comparable periods of 2012.

I'd also like to note that our interest expense increased by $200,000 for the quarter due to the consolidation of the NYSTRS joint venture assets, but this was partially offset by lower interest expense on our unsecured credit facility as a result of the amendments we negotiated during the quarter.

Rounding out my discussion of operating results. Equity and earnings of unconsolidated joint ventures increased by $1.3 million or more than 152% due to higher NOI from properties owned through the joint venture with PGGM, including both new acquisitions and same-store proprieties.

And finally, regarding our outlook for the year we're pleased to increase our annual guidance for FFO adjusted to a range of $0.94 to $0.96 per common share from $0.89 to $0.93 per common share. We continue to expect consolidated same-store NOI for 2013 to range between 2% and 3% and consolidated same-store financial occupancy at yearend to be within a range of 89% to 90%.

Our revised guidance takes into account the impact of acquiring NYSTRS' interest in the IN Retail joint venture, lease termination fee income that has exceeded our earlier projections and our expectation that full year same-store will be at the high-end of our guidance range, partially offset by the increase share count from our capital raises. Regard to our expectations for 2014, we expect to provide guidance on our or before our fourth quarter earnings call.

In closing, during the quarter, we straighten and streamlined our balance sheet and expanded our asset base, while producing results ahead of our earlier projects. We look forward to communicating our continued achievements as we execute on our operating growth and financing strategies in the future.

With that we will open the call for questions.

Question-and-Answer Session


(Operator Instructions) And our first is question is from Paul Adornato of BMO Capital Markets.

Paul Adornato - BMO Capital Markets

Scott, you talked about small shop occupancy currently about 88% moving up perhaps 150 bps over time. Was wondering if you could talk about what's happening with the other, let's say, 10% of that small shop space? Is it leasable at all or how should we think about that space and what can you do to make it productive?

Scott Carr

100 to 150 basis points we're projecting is our near-term target and there will always be frictional vacancy within the small shop. And then logically we are left with the most challenging spaces to lease, and those are the ones where we're addressing strategies on repositioning, whether we can combine smaller spaces into larger spaces or perhaps relocate tenants and redevelop the centers. But for the most part we would look for small shop occupancy to tap out in the range of about 92% at peak. So we have a little bit of run room, but for the next few quarters, we think we're going to add about 100 to 150 basis points.

Paul Adornato - BMO Capital Markets

And Mark, it seems like transaction activity seems to be picking up for you guys as well as perhaps in the market overall. So was wondering if you could perhaps spend a minute and talk about the transaction market. What types of assets do you see trading? What sort of trends do you see with cap rates and is there any geographic region that's hotter than any of the others now that your footprint seems to be expanding as well?

Mark Zalatoris

Paul, cap rates, what we have seen haven't really moved much. The markets, they are still very tight in a sense for high quality assets. There are a lot of bidders out there, intuitional fellow REITs out there looking at our markets as well as everywhere for these types of assets. Even with the increase in interest rates in the last six months, that we haven't really seen cap rates on the Class A assets move much. They've been compressed for a while. Maybe in the lower quality Class B assets, there has been a little bit of widening.

And as far as the volume of transaction activity, I don't know if it's picked up there as much as we had hoped for. We haven't as much activity, lender-driven activity as we expect. And then I think, that's basically true for the last couple of years. So some sellers taking advantage or thinking about bringing properties to market to take advantage of the lower capital gains rates today, versus what might happen in the future.

So we're out there. We're competitively trying to beat the market by utilizing our relationships with developers and owners in off-market transactions. We close those Wal-Mart grocery-anchored centers in Milwaukee in an off-market transaction and we'll continue to try to do that as best we can. And regarding those Wal-Mart, that was a great opportunity for us to kind of diversify the tenant exposure in the grocery sector because those were for the most part grocery-anchored, the neighborhood Wal-Mart stores.

And as far expanding our geographic footprint, part of our strategic plan has always been to diversify a little wider geographic range and that will help us diversify our tenant concentrations as well. So we're consistently looking for high quality assets in markets that we think the demographics are sound and growing and that we will feel comfortable growing along with.

And we've been looking in those markets for some period of time. So it's something that it makes sense for us. We're exploring areas that within the greater central part of the country that look attractive to us and I think that is a natural evolution for a company of our size as we continue to grow.


And then next question will come from Todd Thomas of KeyBanc Capital Markets.

Todd Thomas - KeyBanc Capital Markets

First question, just curious with Dominick's, I was just wondering if you could talk about what the strategy is at the moment with regard to the seven stores. I understand Safeway is obligated to continue to pay rent, but curious what kind of discussions you're having with Safeway about their intent to sell or vacate these stores, and what sort of plans you have in place today to retenant some of these locations?

Scott Carr

I think, first and foremost with Safeway, it's really never been a question of, if this happen, it's when it happens, and we finally answered that question of when and how. We so we've been proactive in dealing with the situation in terms of identifying prospects f retenanting the spaces as well as working with our existing tenant base in terms of marketing programs and tenant outreach to help the existing small shop tenants through the transition.

But right now the Safeway strategy is they are out marketing the leases. They've had a call for offers and from our understanding been a great deal of interest and in other retailers taking over the leases directly from Safeway.

So we don't have definitive answers, we're expecting that in the relatively near-term. And from that standpoint we've talked to most of the likely replacements. We have ideas of what we would if and when we get control of our locations, but in the end we look at the quality of our real estate and its very well located.

We have high demographics, good income level, proven track record for the sales of the in place grocer and at or below market rents. So we really view this opportunistically. Whether or not we get control, if we get control, we can transform a center, if we don't get control, the Dominick's is going to be replaced by a better retailer, who takes over that location. So either way we're optimistic that this is going to be an opportunity for us.

Todd Thomas - KeyBanc Capital Markets

Are you able to share with us what the average sales at those seven stores are? And then also in the consolidated portfolio I guess, the three single-user properties in the three community centers, any sense which ones might be easier or more difficult to handle here?

Scott Carr

Well, the sales from our boxes range from low about $14 million to $24 million per store, and I bring that up because these are larger stores. So on a per square foot basis, they were generating on average a little over $300 per square foot. But in annual volumes, some of the volumes approaching $20 million to $24 million are attractive.

And again, in terms of which locations will be more challenging, we feel pretty strong about our prospects on all the locations. We regularly deal with retenanting and repositioning spaces. And as I mentioned, we've been out on the street proactively, trying to identify what we would do, if and when we get control.

So we feel this will be a relatively smooth transition. Obviously, it won't be without some impact to some of our small shop tenants, but we're working hard to hopefully mitigate that through our efforts and dealing with our small shop tenants through the transition as well.

Todd Thomas - KeyBanc Capital Markets

And then shifting over to the PGGM venture. The development that you're pursuing, I was curious what's the tolerance for development going forward in the venture? Do you think that there will be more development in the future and does this sort of imply that acquisition cap rates are a little too low perhaps for the venture at this point?

Scott Carr

Well, Todd, I think it's hand-in-hand with kind of our dual approach strategy. We will continue to acquire stabilized assets, and I think the acquisitions of the Wal-Mart centers and the Cedar Center, the Whole Foods-anchored center that we purchased in Cleveland are indicative of that. The cap rates on those range from 6.6% to 7.2%.

On the development side, what we're finding is there are a lot of tenant-driven demand developments by proven developers, who have put in the time in terms of entitlements and lease up in getting everything ready to go, where we're able to lend our capital, we lend a little bit of leasing expertise with that. And we are able to acquire it better than market cap rates.

So we're going to pursue both strategies, we are hoping and working diligently to find more development joint ventures, because it is an obvious competitive advantage if we can acquire those assets. Long-term they'll be good stable assets on the balance sheet or in the PGGM venture. So it's a dual-pronged approach, and we're going to pursue each diligently as we normally have.

Todd Thomas - KeyBanc Capital Markets

And then just one more for you again, Scott, the lease term fee that you received in the quarter on the Best Buy store. Can you just talk about that a little bit, maybe give a little bit of background, just curious whether you approach them or they approached you? And one of your peers had a Best Buy termination during the quarter also. I was wondering if conversations with them have changed at all, do you feel that they are being a little bit more aggressive in rightsizing their stores and footprint a bit?

Scott Carr

With that in particular, we're actually encouraged with the way their strategy is evolving. They've said, all along, they intent to reduce the number of stores, reduce the size of the stores, and they're doing so on a very orderly fashion. For the most part, their stated objective is to downsize through lease expirations.

But that said, where opportunities can be presented to them, they are certainly open to discussing it. As our outcome demonstrates, receiving a pretty generous lease termination fee, they are willing to deal. And in this situation, it evolve from the conversations we have with Best Buy. We're meeting with them and many other tenants between three and five times a year, doing portfolio reviews, not just talking about existing stores, but looking for future opportunities.

And this is one of the situations where in reviewing existing stores, we had a potential replacement tenant, we brought that forward, and it made sense for both of us at the same time. So that will be an ongoing discourse, not only with Best Buy, but with all tenants. I mean our objective is to identify underperforming, underpaying tenants within the portfolio and upgrade or tenancy with better performing retailers. And we will continue to do that as part of the ongoing strategy.


And the next question will come from Tamara Fique of Wells Fargo.

Tammi Fique - Wells Fargo

I guess I was curious, looking at the FFO per share guidance. It looks like for the year you're at $0.73. The guidance range sort of implies a drop off in the fourth quarter of $0.02 to $0.03. Can you maybe give us some color on what would drive that?

Brett Brown

As we look into the fourth quarter, we had some more asset sales teed up there, and so we expect some loss in NOI there. We have the space coming offline there like the Best Buy where we took the lease term fee there. And then most of it is due to the some true ups that we have in tax, the real estate tax true ups in the fourth quarter.

Tammy Fique - Wells Fargo

And so I guess maybe just along those lines, referring to the same-store NOI growth guidance. And it also kind of implies that even at the top-end it would be sub-1%. Is that how we should be thinking about it?

Brett Brown

Yes, you're right on that.

Tammy Fique - Wells Fargo

And then you mentioned that you would be unencumbering some assets, as you look forward to your mortgage maturities. I guess what are your plans for funding the repayment of those mortgages?

Brett Brown

Well, currently we've been just the line that's available, as the cost there is quite advantageous to move there. But we'll continue to look for other opportunistic financing options there going forward as well. But for the time being it is relatively small amount, about $16 million here coming up in December that we're able to take out and we're just going to use the line for that.

Tammy Fique - Wells Fargo

And I guess what are some of these creative options?

Brett Brown

I don't about creative, but some peers in the private placement market, it's very attractive, something we would perhaps look into. So that is definitely one item we like. And there's always the ATM availability too, when the stock price gets into a nice range there to help us de-lever rather than just refinance.

Tammi Fique - Wells Fargo

And then as we look forward to next year, on a wholly owned basis, should we be expecting IRC to be a net acquirer?

Brett Brown

IRC consolidated?

Tammi Fique - Wells Fargo


Brett Brown

I would say we're definitely looking to expand more and because we expect we'll be filled up on the PGGM joint venture, and so for balance sheet we would look to acquire more. Yes.

Scott Carr

Our stated goal is to grow the company and simultaneously diversify geographically as well as tenant base. And I think you're going to see a transition from the growth vehicle of PGGM into balance sheet growth as we go forward.


And the next question is from R.J. Milligan of Raymond James & Associates.

R.J. Milligan - Raymond James and Associates

For the JV properties, the Wal-Mart-anchored or Wal-Mart grocery-anchored properties, do you foresee any upside in those? It's a pretty, relatively small properties or are those just more of a stabilized buy?

Scott Carr

Actually it's a mix. One of them we actually bought to development outlets that come with it, so we're looking to add some value there. We think we can add about 70 basis points to the yield once we get those stabilized. And one of the others has two vacant boxes for lease up in place in line boxes.

But for the most part, one of the things that's appealing about this type of center, you mentioned size, and that the shop space that comes along with it is more of what you'd expect in the modern incarnation of a grocery-anchored center. So we're looking at brand new Wal-Mart grocery, neighborhood grocery store with a very reasonable amount of shops space with it. So where it's stabilized, it's very easy to keep stabilized and then we have the opportunity to add growth through the outlet development.

R.J. Milligan - Raymond James and Associates

And can you remind us where the same-store financial occupancy ended the quarter?

Scott Carr

It ended the quarter at 88.9% for financial -- 89.9% for financial occupancy. And we're projecting the year to be in the range of 80% to 90%, again reflecting -- 89% to 90%, again reflecting what we anticipate in terms of occupancy with the spaces we've taken offline for repositioning.

R.J. Milligan - Raymond James and Associates

And so for the third quarter, part of the same-store NOI growth was due to higher tenant recoveries, it sounds like next quarter you're expecting that to offset. And is that an appropriate way to think about it is that if you have less than 1% same-store NOI growth you've got 3% here sort of back half of the year is 2%, if you even out those recoveries or are they unrelated?

Brett Brown

It's harder to look directly as a percentage, if you look at the total dollars. But we still expect to be likely into the high-end of the same-store NOI range.


And that's concludes our question-and-answer session. I would like to turn the conference back over to Mark Zalatoris for any closing remarks.

Mark Zalatoris

Thank you, operator. I also want to say is, I want to thank you for listening our call today. We look forward to seeing many of you at the NAREIT conference in San Francisco next week. Have a great evening.


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

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