Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Dawn Benchelt – IR

Mark Zalatoris – President & CEO

Scott Carr – President, Property Management

Analysts

RJ Milligan – Raymond James

Paul Adornato – BMO Capital Markets

Todd Thomas – KeyBanc Capital Markets

David Wigginton – Macquarie

Jeffrey Donnelly – Wells Fargo

Inland Real Estate Corp. (IRC) Q1 2010 Earnings Conference Call May 4, 2010 3:00 PM ET

Operator

Good afternoon and welcome to the Inland Real Estate Corporation 2010 first quarter earnings conference call. All participants will be in listen-only mode.

(Operator Instructions)

I would now like to turn the conference over to Dawn Benchelt. Please go ahead.

Dawn Benchelt

Thank you for joining us for Inland Real Estate Corporation’s first quarter 2010 earnings conference call. The first quarter earnings release and supplemental financial information package have been filed with the SEC today, May 4, 2010, and posted to our website www.inlandrealestate.com. We’re 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, expectations, representations, plans or predictions of the future. There are numerous risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. For a more 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 the year ended December 31st, 2009.

During the presentation, management may reference non-GAAP financial measures that we believe help investors better understand our results. Examples include but are not limited to 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 on our earnings release and supplemental dated May 4, 2010.

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

Now I will turn the cal over to Mark.

Mark Zalatoris

Good afternoon everyone. Thanks for joining us today. On the call today I want to touch on our performance for the quarter and then review the progress we have made on the principal objectives we have laid out for 2010. Scott will follow with additional detail on our portfolio leasing activities and results for the quarter. Then Brett will provide a report on our financial results and an update on balance sheet initiatives.

For the quarter, funds from operations was $0.13 per share versus $0.31 per share reported for the first quarter of ‘09. After adjusting for aggregate non-cash impairment charges of $0.09 per share that is related to unconsolidated development joint venture projects, FFO per share for the quarter was $0.22. This result was in line with analyst consensus estimates.

With regard to the same store net operating income, there is no question, we are disappointed with the year-over-year decrease reported. That said it’s important to note that the same store NOI in the first quarter of 2009 was the high mark for last year. Going forward same NOI comparison to prior year period should improve.

Most importantly our performance trended in a positive direction on a sequential basis. Excluding the impact of two early lease terminations that we initiated, some same-store NOI declined only 1.2% from the prior quarter.

On our last call I stated that our primary focus this year is on strengthening our financial position and restoring portfolio occupancy and income. I am pleased to reported that we have made important progress on both fronts.

Turning to the balance sheet, we have secured commitments for more than the $300 million requested from our bank group in order to refinance our $155 million line of credit facility and $140 million term loan. We anticipate closing the credit facilities in this quarter.

To date this year we have retired $64 million of consolidated mortgage debt, recently closed on a $20 million secured loan and we are continuing to work on additional financing that will close this year. As we move forward to refinancing and repositioning of outstanding debt or risk profile and overall financial flexibility will continue to improve.

Now moving to operations, we continue to work toward increasing portfolio value through strong lease execution overall as well strategic asset repositioning initiatives. During the quarter we more than doubled the amount of square feet leased over both the prior quarter and year-over-year. This momentum of leasing activity reflects in some cases months of negotiations with retailers that are now bearing fruit as market conditions show signs of improvement.

We have also made substantial headway with the returning of certain vacancies created by big box retailer bankruptcies. Including leases signed during the quarter, we have released 74% of the vacancy created by the bankruptcies of Vicks, Linens and Things bankruptcy, Circuit City, Bally’s Fitness and Filene’s Basement. Another 17% of that vacancy is at least are under letters of intent. I want to emphasize that all of these deals have been executed with strong credit quality in demand retailers like Nordstrom Rack, Marshalls, and buybuy BABY. This is an important point because as we restore occupancy, we are also strengthening our operating platform, which we believe will drive future income growth.

I want to take a moment to outline some of the key long-term benefits we will realize from retenanting with these high quality value oriented retailers. First, credit tenants provide a reliable rental income stream and pay their pro rata share property operating expenses and taxes. Second, in demand retailers drag customer traffic, which in turn drags new tenants to the center. This benefits co-tenant retailers who are then more likely to renew leases and at increased rates. Third best in class retailers enhance the overall complexion of our centers, and finally the higher valuation of scribe to revenue from credit quality tenants increases our portfolio net asset value.

Due to competitor pressures in a few cases, we have signed leases with credit quality best in class retailers for rents that are lower than the formal rents. At other centers, we have negotiated early lease terminations in order to facilitate our strategic retenanting activities. Although in these cases, current income has been sacrifice in the short-term by putting in place a stronger real estate platform. We are creating a more attractive investment opportunities in longer term. We are confident that the negative short-term impact on income will be more than offset by the long-term value we are creating. With this steady progress on balance sheet improvements and asset enhancements, we are taking the right steps to protect and position the company for the future.

Now I will like to turn the call over to Scott to provide additional color on our portfolio performance. Scott?

Scott Carr

Thank you, Mark, hello everyone. There is growing trend of improving retail sales, strengthen balance sheet and stronger profit margins resulting in a renewed focus by retailers on top line growth and expansion of market share to achieve this topline growth. Demand for quality retail centers is increasing and our portfolio is well positioned with proven locations and densely populated infill markets, strong income levels and ever improving co-tenancies. This trend is evident in the increased leasing interest we have been experiencing over the past two quarters and the momentum is building as retailers refine growth strategies for 2011 and beyond.

In this first quarter we executed a total of 88 leases for the rental of over 596,000 square feet of GLA in the total portfolio. This is a company record for first quarter total portfolio leasing volume. 31 new and non-comparable leases were signed in total portfolio aggregating nearly 334,000 square feet of GLA. This volume of new and non-comparable leases is over four times the amount of square feet leased in the first quarter of ‘09 and more than three times the amount leased in the prior quarter.

On the last earnings call we reported that we were in negotiations for over 300,000 square feet of acre space that we anticipated leasing in the coming months. During this quarter, we completed most of those transactions signing 10 leases with anchor tenants for over 280,000 square feet of GLA. Our current deal pipeline includes an additional 100,000 square feet of anchor space that is already at lease or LOI.

We are optimistic that this strong leasing momentum will continue in the coming months as results of improving market conditions for retailers, growing consumer confidence in our own deal pipeline.

I would like to highlight a few of the deals that we closed during the quarter with both national retailers and local independent grocers. We signed a lease with Michael’s Fresh Market, a leading independent grocer in the Chicago area for 56,000 square feet of space at the Shops of Coopers Grove in Country Club Hills, Illinois. We also signed a lease with Tampico Fresh Market, a local grocer in business for over 20 years to relocated into 45,000 square feet of GLA at Oliver Square in West Chicago.

Both of these value-oriented independent grocers recognized the need in the communities and took advantage of the opportunity to expand into our well located shopping centers. These new grocery anchors will revitalize the centers, generating additional foot traffic in serving a draw for other retail tenants.

In the month of March, we signed two new leases and three lease extensions with Old Navy for multiple locations throughout the Chicago area. The Old Navy leases included 17,000 square foot space at Four Flags Shopping Center in Niles, Illinois. Old Navy is relocating to Four Flags from a nearby location in order to join our revitalized retailer line up, which includes (inaudible), Marshalls, PetSmart and Jo-Ann Fabrics among others. Old Navy also signed the new lease for 18,000 square feet at Orland Park Place in Orland Park, Illinois. Already a tenant that the center, Old Navy wanted to remain there because of the asset’s strong demographics and excellent traffic. However Old Navy needed a space that could accommodate their new more profitable store format. We are pleased that we are able to work with Old Navy to find the right space that fit their requirements.

Finally at the end of the quarter, we signed two leases with buybuy BABY, a division of Bed Bath & Beyond. buybuy BABY, a new entrant to the Chicago market signed a lease with us for 33,000 square feet at the (bull farm) marketplace in Crystal Lake, Illinois taking space formally occupied by Linens and Things. buybuy BABY also signed a lease for 33,000 square feet in Orland Park place filling space previously leased by Filene’s Basement. With these leases, buybuy BABY now has five locations in the Chicago area and three of those five locations are in our portfolio. The leases we signed with both buybuy BABY and Old Navy demonstrate that our strong locations in core market concentration are key competitive advantages. These core strengths enhance our ability to lease the best of class retailers and facilitate their market launches, expansions and relocations.

In addition, all of the centers that I have just discussed, Coopers Grove, Oliver Square, Bull Farm marketplace, Four Flags and Orland Park Place are great examples of our ongoing focus on asset repositioning redevelopment initiatives. As Mark outlined, we expect the new anchor tenants of these centers to drive additional leasing with junior anchors and small shop tenants.

In addition to asset repositioning and redevelopment another tool to create portfolio value is adding new gross leasable area to our existing centers. Despite challenging market conditions, since the end of last year, we have brought online 21,000 square feet of additional GLA in our Minnesota portfolio. At Park Place Plaza in St. Louis Park, Minnesota, we added 4,000 square feet of new space which we have leased to Panera Bread and expect to realize a 25.4% return on investment for that project.

At (inaudible) Minnesota, we completed a 17,000 square foot multitenant outlet building that is 100% leased to a mix of strong local and national retailers. The return on investment for that project is expected be 15.2%.

Turning to leasing spreads, as a point of clarification, beginning with this quarter, we have refined our definition of new and non-comparable leases in order to provide the most current information for leasing spreads. Previously our new leases included leases on space that had been vacant for many years, which skewed rental rate comparisons in certain reporting periods. Beginning this quarter, new leases for which there was no prior tenant for one year or more are included in the non-comparable lease category. This revised disclosure is in response to analyst input and is in line with peer practice.

During the quarter we signed 57 renewal leases within the total portfolio with an average rental rate increase on a cash basis of 1.3% of our expiring rents. 19 new leases were signed with an average base rent to decrease 10% from the former rent. This is an improvement from the fourth quarter of 2009, during which average rental rates on comparable leases decreased over 17% from the former base rent.

Finally for those of you who tracked blended rent spreads for the total portfolio, average base rents on combined non-renewal leases in the quarter decreased 2.7% from the former rent. This compares to increases of 1.8% in the blended rent spreads in the prior quarter and 5.4% in the first quarter of 2009.

Moving to occupancy, at March 31st, leased occupancy for the total portfolio was 92.2%, an increase of 10 basis points from the fourth quarter and a decrease of 140 basis points from the year ago quarter. The robust leasing volume we generated during the quarter more than offset the impact on occupancy of certain expected store closings. Expected store closings in the quarter included the early termination of two leases with Office Depot. We proactively negotiated these lease terminations to facilitate our leasing strategies at these specific centers as well as manage our exposure to this particular tenant. We are in active negotiations to fill those vacancies within demand retailers who we believe will strengthen the tenancy and increase the value of those assets.

This is again another example of this strategic retenanting activities that are in process across the portfolio and we will continue to update on these activities in these coming months.

Moving to same store performance, same store financial occupancy was 88.8% for the quarter representing decreases of 150 basis points from the prior quarter and 360 basis points from the first quarter of ‘09. As a reminder, same store financial occupancy is the percentage of GLA for which a tenant is obligated to pay rent under the terms of the lease. It does not include any estimated straight line rents. The sequential decrease in same store financial occupancy is due to extended abatement periods on new leases and the timing of lease completions during the first quarter.

Net operating income for the same store portfolio decreased 13.7% from the first quarter of last year. This decline was due to a decrease of $2.8 million in rental and recovery income driven primarily by the drop in same store financial occupancy and economic challenges facing our tenants. Same store NOI was also impacted by a decrease of over $800,000 in lower lease termination fees and other property income, which can vary significantly from quarter to quarter. In addition, the year-over-year decrease was due to our expectation of rental and recovery income at March 31, 2009, which were lowered in the following quarter to reflect the difficult market condition impacting our tenants.

We are clearly disappointed with the same store NOI results for the quarter. As Mark noted to put these results in perspective, same store revenue in the first quarter of last year was a high point for 2009. We expect year-over-year comparisons of same store NOI to improve in future reporting periods. In addition, on a sequential basis, same store NOI trended in more positive direction. Excluding the two Office Depot early lease terminations, which I previously mentioned, same store NOI declined only 1.2% from the fourth quarter of ‘09. We expect same store performance for the year to be within our projected range of flat to negative 3%. I’ve highlighted the impact of the office depot early lease terminations to emphasize the point that while certain asset repositioning initiatives may have a negative short term impact on results, we believe that these proactive initiatives strengthen the portfolio and will grow income in asset value over time.

Now I’ll turn it over to Brett for a view of the Company’s financial performance. Brett?

Brett Brown

Thank you Scott and good afternoon everyone. I’ll begin discussing the Company’s financial performance for the quarter including some detail on the factors that affected our results then I’ll provide an update on our balance sheet initiatives. FFO per share for the first quarter was $0.13 as Mark mentioned earlier this compares to FFO of $0.31 per share for the first quarter ‘09.

After adjusting for impairment charges and gains on extinguishment of debt in the comparable periods, the FFO per share was $0.22 for the quarter compared to $0.31 for the first quarter of ‘09. As Mark noted adjusted FFO per share was in line with the first call Analyst consensus estimates.

Approximately $0.03 of the decrease in FFO per share was due to an increase in weighted average shares outstanding related to the May ‘09 and aftermarket equity offerings. Remainder of the year-over-year decline in FFO was due to non-cash impairment charges related to development joint venture projects amounting to $0.09 per share, decreased revenue from more vacancy, early termination of certain leases, extended abatement periods on new leases and the overall difficult market conditions affecting our tenants as well as increased reserves for bad debt expense.

Expanding on these major items impacting FFO for the quarter as we have explained on prior calls, we regularly review our investment development joint venture projects. When our review indicates an investment has experienced the loss in value that is considered to be other than temporary according to accounting rules we recorded non cash impairment charge to reflect the investment as fair value.

For the quarter we recorded total non cash impairment charges of $8 million related to development joint venture projects. These charges included a non-cash charge of $2.5 million to recognize an impairment on the North Aurora Town Centre Phase 1 development joint venture project. This impairment was recorded in equity in loss of unconsolidated joint ventures on the income statement and we also recorded a non-cash charge of $5.5 million to recognize and impairment on our investment in the Tuscany Village Development joint venture project which was recorded in provision for asset impairment.

By comparison, for the first quarter 2009 we recorded total non-cash impairment charges of $3.5 million, that were offset in that quarter by gains on extinguishment of debt of $3.6 million. Moving to revenue, total revenues for the quarter, decreased $4.1 million to $42.6 million from the first quarter of 2009. This was due primarily to a decline of $2.8 million in rental and tenant recovery income. In addition, other property income decreased $800,000 from the prior year’s quarter as a result of lower lease termination fees and other property income from our tenants.

Fee income from unconsolidated joint ventures also declined by approximately $500,000 due to a decrease in acquisition fees earn on sales through our IREX joint venture. As a side note while IREX sales were slow in the first quarter, we like the progress in April as one pair of properties is now 80% sold and the other pair is 67% sold and that’s up from 73% and 61% respectively March 31, 2010.

Turning to expenses, property operating expenses increased to $10.3 million from $9 million in the first quarter of 2009. This was due to an increase in bad debt expense over $1 million in the prior year quarter. During the quarter we increased our reserve for bad debt to reflect a conservative estimate of collectible receivables from certain tenants impacted by the economic downturn.

For the quarter, lower interest expense and a gain on sale of investment securities partially offset the negative impact of the items I just discussed and specifically interest expense for the quarter decreased year-over-year by $1.9 million. This decrease was due to lower outstanding balances during the quarter on our mortgages payable and line of credit facility as well as lower interest rates on our variable rate debt.

In addition interest expense on our convertible notes decreased due to our repurchase notes at attractive discounts during 2009. The decrease in FFO was also partially offset by a gain of $1 million on the sale of investment securities recognized in the quarter. The gain was recorded in other income on the income statement in addition during the quarter, we were granted possession of a vacant building at Orland Park Place Outlots previously we have a ground with a restaurant operator and a (inaudible) we added this building to our portfolio resulting in income of almost $900,000.

Turning to the balance sheet, during the quarter we retired one consolidated secured loan of $14.1 million and after the close of the quarter, we closed on one secured financing of $20.5 million with the fixed rate of 6.5% and has a five year term and that was on previously unencumbered consolidated properties and we used the proceeds from that financing as well as draws on the line of credit, cash on hand to repay six consolidated mortgage loans totaling $50 million that were scheduled to mature in the second quarter here, pro forma for these transactions were down to approximately $96.2 million of our secured debt maturing throughout the remainder of this year.

We’re in active discussions with several of lenders and have term sheets in hand, they represent more than enough proceeds to address the remaining amount of secured debt maturing this year. We anticipate the timing of closings on the various loans to correspond to the maturity dates. We’re also expecting the average rate to reset by 100 or 200 basis points as the current average rate on our fixed on variable rate debt maturing it’s just over 4%.

Turning to the unsecured debt, our consolidated unsecured debt includes the $140 million term loan that matures this September and the $155 million line of credit facility that expires in April 2011. As Mark, mentioned we are oversubscribed and fully committed with our bank groups refinance these facilities and expect to close the two new facilities during this quarter and of course that’s subject to standard closing conditions and documentation.

As of March 31, our line of credit facility had an outstanding balance of $50 million with up to $105 million available. I would just like to say we’re very pleased with the progress we’ve made this year and I appreciative of the support from our banking relationships and we look forward to reporting on additional progress on the weeks ahead.

In summary we’re very confident with our plans, we continue to improve our financial position and enhance our balance sheet strength and overall profile. And turning lastly to guidance, we are reaffirming that we expect FFO adjusted for non-cash impairment charges net of taxes per common share will be in the range of $0.83 to $0.90 of the full year 2010. Now I’ll turn the call back over to Mark.

Mark Zalatoris

Thanks Brett. Looking ahead, we’re optimistic that the economy will continue with slow but steady climb. We are encouraged by the rise in consumer confidence reported for April which is the highest score since September of 2008. Job growth will be a key to sustaining that. In the months ahead, we’ll continue to take steps to strengthen our balance sheet and make good progress this quarter towards that objective. Our principal mandate however is to continue to restore portfolio occupancy in income.

Our strategic asset returning initiatives as well as strong lease execution like debt recorded in this first quarter results in better performance over time. We encourage investors to take the longer view as well. Portfolio revitalization efforts underway are the seeds of future value for investors. The end result of these efforts will be a redefined portfolio of high quality credit in demand, value oriented assets. And that real estate platform should reward investors well.

With that we’d like to open up the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from RJ Milligan at Raymond James.

RJ Milligan – Raymond James

Good afternoon guys.

Mark Zalatoris

Hey RJ.

RJ Milligan – Raymond James

With the 30.7 seems to NOI decrease in the first quarter but maintaining the guidance for the year, I’m guessing just from the verbiage that you guys were disappointed with the 30.7. Does that mean for the rest of the year you guys are much more optimistic about your same store NOI numbers?

Brett Brown

That’s correct. That’s still lower when you get to that within that range you’re exactly right.

RJ Milligan – Raymond James

And how do you expect them to trend over second quarter, third quarter, fourth quarter?

Brett Brown

Continuing on those we continue those leases to come online.

RJ Milligan – Raymond James

So by fourth quarter, I’m guessing that would probably have to put you guys over certainly in the positive territory but probably in the four to 5% range or possibly even higher.

Brett Brown

I don’t know if I could get up to that high but it would still keep us in the range of where we expect to be exactly.

RJ Milligan – Raymond James

Okay, great and the Scott for the new leases with the average rental rate down about 10%, can you just talk about the mix, are those junior anchors, or those small shops leases with a mix there?

Scott Carr

The bulk of it was driven by the what we call anchor tenants which is 10,000 square feet and above so that would be the leases signed with the two grosser buybuy Baby and Old Navy. It’s unique to note that one lease in particular for the former Filene’s basements base had the greatest impact on the negative decline. As we played with the numbers if we excluded that one, our decrease actually would have been closer to about 5%.

RJ Milligan – Raymond James

Okay. And so the Filene’s, who took over the Filene’s space?

Scott Carr

buybuy Baby. That was particularly tough negotiation, lot of competition in the trade area.

RJ Milligan – Raymond James

And can you give us an indication as how what the decrease in rental rate was there?

Scott Carr

On that particular lease, it was down about 35%.

RJ Milligan – Raymond James

Okay and when was the Filene’s lease signed. So how old is that lease?

Scott Carr

Filene’s went in 2006.

RJ Milligan – Raymond James

Okay, great. Thank you guys.

Brett Brown

Thanks RJ.

Operator

The next question comes from Paul Adornato at BMO Capital Markets.

Paul Adornato – BMO Capital Markets

Hi good afternoon.

Mark Zalatoris

Hey Paul.

Brett Brown

Good morning.

Paul Adornato – BMO Capital Markets

You mentioned you had signings independent grosser, I was wondering if you could about the credit underwriting that the forms for the (inaudible).

Scott Carr

Sure Paul, this is Scott. It’s interesting because there are two different types of the independents that we dealt with and the first is Michael’s Fresh Market. It’s actually an operator with – this will be his seventh store in the Chicago land area. And there we were able to get pretty good transparency in see the network that he has. We also secured a personal guarantee that will cover the investment that we’re making into this store. So that we have some greater security on recovering our investment should anything go wrong.

And additionally we also have municipal supported that property, we have a sales tax sharing agreement. So that will increase the return on net investment, but overall as an organization, the company had a substantial net worth and the individual guarantee in the leases were substantial net worth. Likewise on the other lease we did, it’s a well established operator. It’s a 20 year business. He is going to be relocating and expanding with us and likewise here we got a personal guarantee to secure actually a little bit more than our investment.

Paul Adornato – BMO Capital Markets

Okay and can you tell us how much cents on TIs are Texas ventures?

Scott Carr

On the first one, we’re committing about $2.5 million and we will be getting about a $1.7 from the city sales tax sharing agreement. The second one we’re only committing about $250,000 because we were able to secure most of the existing FF and E in that store from the prior tenant.

Paul Adornato – BMO Capital Markets

Okay and I know that Wal-Mart has been in the news in terms of being wanting to enter the city limits and I realize that you don’t have you might need to one or two properties inside the city limits but looking broadly at Wal-Mart, one of their strategies is to further penetrate urban markets perhaps with a smaller format and so to that end I was wondering if you evaluated your portfolio with respect to that potential competition and that was just, you had any other thoughts on Wal-Mart’s further penetrating your markets?

Scott Carr

No, it’s something we monitor pretty closely and in the urban areas there is a tremendous amount of demand for grocery and so I think there the markets they’ll be penetrating they won’t be having much impact on existing grocery solely because it doesn’t really exist. It would be a net positive for them to be available to make those inroads. As we look at Wal-Mart across our portfolio and we monitor it very closely, and because of the infill situations, until Wal-Mart does adjust the format, it’s difficult for them to make those commitments.

We are seeing them be much more creative and aggressive in storage size and there we really focus on the existing market share of our grocers. I mean we are primarily exposed to the top one or two grocers in a trade area.

And historically, what we have found is that when a Wal-Mart comes into a trade area, all the existing grocers take a step back in sales, they lose some of their market share. But ultimately the weaker players in the market, maybe the fifth and the fourth tier grocers don’t survive, and that market share gets spread amongst the remaining retailers.

So we have seen pretty demonstrably amongst our grocers and then talking to the likes of Supervalu and Safeway that when a Wal-Mart opens, they generally see a decline in sales for the first year to 18 months, but after period, the sales do restore and often times go above or they were before, because the dollars are just being spread differently amongst the market.

Paul Adornato – BMO Capital Markets

And what percent of your grocers are first or second in the markets?

Mark Zalatoris

I don’t have an exact percentage, but if you look at our top tenants, it’s Supervalu, Safeway around these and Kroger. So in terms of independent grocers off the top of my head, I can think of two in Minnesota and with the addition of the two we have here, four in Chicago and Wisconsin.

Paul Adornato – BMO Capital Markets

Okay, thank you.

Mark Zalatoris

Thanks Paul.

Operator

The next question comes from Todd Thomas at KeyBanc Capital Markets.

Todd Thomas – KeyBanc Capital Markets

Hi, good afternoon. I am along with Jordan Sandler as well.

Mark Zalatoris

Hi.

Todd Thomas – KeyBanc Capital Markets

Hi. It’s sort of a question going back to the guidance, one of the other assumptions that you had made last quarter underlying the guidance was occupancy, was the financial occupancy sort of 90% to 93%, you are 88.8% at the end of March. So I was just wondering what the timing of when those leases would start sort of paying rent and how we should think about the occupancy trending throughout the rest of the year.

Brett Brown

It’s basically just going to be pro rata throughout the year. It will continue to increase, again barring a large falloff from any that we don’t expect. But it’s expected to increase throughout the year and to get us into that range of expected occupancy.

Todd Thomas – KeyBanc Capital Markets

Okay. And then, also, in your prepared remarks, you discussed that April was pretty strong for the IRX properties and you continued to sell interest through April. I was just wondering it’s been a good source of income that platform and what would you want to see before you decided to get more involved. I know you are still on your – you are still selling the interest in those properties, but this is something that you are thinking about and that you are seeing a real improvement there that’s starting to entice you at all or –?

Mark Zalatoris

This is Mark. I would like to make a quick comment on that. We are still very committed to this joint venture and we were actually actively pursuing a couple of new properties for the venture more and typical size that we had originally sourced for the venture in the $15 million, $20 million size. And as the majority of the equity that we had invested in these Bank of America properties has returned to us, we are much more comfortable in revolving that capital to these new acquisitions.

IRX has indicated to us that there is a need for them offer couple of new properties. And interestingly enough, they are on a path to increase their sales over last year by good percentage. Last year was a very quite year for them compared to prior years. However as a percent of their market share, they have increased their market share dramatically. So it is a result of increased demand overall for the product. So we – you will probably see that we will have some new assets for this joint venture as this year progresses. And they also claim that having complementary assets like that helps them to cross-sell the remaining interest in the Bank of America and that’s in our best interest to help them get that accomplished, so it’s completely closed out by yearend.

Todd Thomas – KeyBanc Capital Markets

Okay, that’s helpful. So what type of volume would you anticipate perhaps take place this year?

Mark Zalatoris

Well, I think we are probably comfortable at least in the $50 million range in total asset value, total portfolio property price. As far as the equity goes, it’s probably roughly half of that because typically the profile is a 50% loan placed on there to accommodate the debt needs of the 1031 investors.

Todd Thomas – KeyBanc Capital Markets

Okay, alright that’s helpful. And then just lastly, with regards to the at-the-market program how much remains under that program and how do you plan on managing that throughout the rest of the year.

Brett Brown

Yes, this is Brett. We had a $100 million offering size. We have sold about $7 million through that, so that leaves about $93 million.

Todd Thomas – KeyBanc Capital Markets

And do you plan on using that in the coming quarters?

Brett Brown

We are going to see what uses for availability. As Mark said, we look to acquire new assets, things like that. But right now we have not sold any since the first quarter – since early in the first quarter.

Todd Thomas – KeyBanc Capital Markets

Okay, alright, thank you.

Brett Brown

You’re welcome.

Operator

The next question comes from David Wigginton at Macquarie

David Wigginton – Macquarie

Good afternoon, everybody.

Mark Zalatoris

Hi David.

David Wigginton – Macquarie

Just looking at the same-store NOI results for the quarter, I was wondering if you might be able to break it down into a little more detail for us on the year-over-year basis. I recognize there were two leases that were terminated. But I was particularly interested in knowing kind of a from an attribution standpoint what the result of increased vacancy, how increased vacancy impacted the number, how much of the decline came from the free rent and from rent release and do you happen to have that in front of you?

Mark Zalatoris

We don’t have quite that granular, but it’s going to be a combination of all those really. I mean it’s really on the occupancy side, probably more than anything. Just the tenants that have dropped off really from you go from December 31, ‘09 where you had some tenants in place and also when they are gone on January 1, you lose a lot there. And then it’s just been an expanded timeline between when you sign a lease and when the tenants actually occupying and taking the space. So to get that granular, we could probably get to that detail for you at a later point.

David Wigginton – Macquarie

How about I guess just in the – with the respect to the first quarter leasing. How many of the signed deals included free rent and what was the average abatement period?

Scott Carr

This is Scott, David. On the – looking at those anchored deals, the major ones, the Bye-Bye Baby and Old Navy generally have a time period from delivery of 60 to 90 days and they start paying rent upon store opening. Our grocery deals, we did build in some free rent on those, because they will be investing considerable amount of capital of their own. So to give them a chance to try to some of that off and build up some momentum before they start paying rent, I believe those have about in the area of nine months of abatements.

David Wigginton – Macquarie

Okay, so I guess going forward, when we are thinking about, I mean, obviously there was a question earlier about the how the same-store NOIs going to trend. It sounds like obviously it’s going to be getting better. Is that going to be a result of just selling up vacancies or are your starting rents are going to actually start improving on the leases that are actually coming on line in the upcoming quarters?

Scott Carr

It’s really a combination of rents coming on line from deals that we were put in place last year in 2009. The activity that we just signed this first quarter, we will see some fourth quarter impact from the likes of Old Navy and Bye-Bye Baby, maybe a little bit in the third quarter. But for the most part, the income that’s coming on line it will be the course of 2010, which was put in place in 2009 with that leasing activity.

David Wigginton – Macquarie

Right. I guess my question was is that going to be lease-up a vacant space, so it’s incremental rental income or the actual starting rents on the leases that you signed last year that will be starting this year, are those actually improving from where they were previously?

Mark Zalatoris

I believe it’s the back filling of vacant space more so than anything, since I believe it is back filling of vacant pace, mostly from tenant bankruptcy, et cetera.

David Wigginton – Macquarie

Okay. And then Scott I think you mentioned some of the sort of adding of GLA to existing centers and some of the attractive returns you’ve generated, I think on two properties up in Minnesota. How many more of those potential opportunities do you think exist in your portfolio?

Scott Carr

For us it’s an ongoing basis. Right now for 2010 we have one project that we’re targeting which would be the addition of two outlet pads at one center. We like to get a fair amount of tenant interest before we commit to that and then we’re – that’s all we have on the books right now for this year but as an ongoing asset management process we’re looking at the potential of adding GLA, repositioning GLA and even in some cases looking at where we could expand our property to expand the GLA. But right now with tenant demand a lot of these opportunities are for outlets. So a lot of that is driven by the demand from those tenants, so that’s a little bit down right now. And then the other part of it would be expansion of larger boxes to accommodate larger tenants and that’s more opportunistic as well.

David Wigginton – Macquarie

And I recognize these are sort of one off transactions or I should say opportunities but would you anticipate the returns being, I mean as attractive as the ones you identified earlier in the call?

Scott Carr

Yes, for as long as we’ve – for the past – since 2005, we spent close to $40 million on this type of activity and it’s generated an average return of over 12%. So it’s definitely an accretive activity for us. When you already own the property it’s incumbent upon us to find ways to try to increase that and it is very capable to generate these kind of returns.

David Wigginton – Macquarie

My final question just revolves around the two leases the Office Depot leases that were terminated in the quarter. So you obviously didn’t have replacement tenants lined up with this, you sort of I mean it sounds like you initiated the conversations with Office Depot. Wouldn’t it have made sense to maybe have replacements tenants lined up at this point or are you in active negotiations with replacements tenants at this point in time?

Scott Carr

We are and we did it in anticipation of that. These were two Office Depot stores that had remaining lease terms but they were closed stores. So they didn’t do anything for us from a traffic standpoint. In both instances, we went to Office Depot knowing that we had backfilled tenants ready and worked out the termination doing this for two reasons. One is it gives us the flexibility to be able to do something with this space and two we were trying to manage our exposure to Office Depot. If there was one – if there are particular tenants that you’d want to do this with would be one where you might consider some risk so we have a dark but paying tenant and that tenant is in question. They hire in our radar in terms of trying to replace them.

Now in both cases we are negotiating we’re almost done with the lease on one of the locations and it’s actually going to be expanding the GLA of that store from 17,000 to 24,000 square feet with the national discount of (parallel) retailer, which will totally transform that shopping center.

On the other one that we terminated we’re in LOI negotiations in conjunction with another repositioning at that center which will again be a transformative transaction.

David Wigginton – Macquarie

Do you anticipate any other opening this year?

Scott Carr

Interestingly enough the first one I mentioned the 24,000 square feet we were planning on a 2011 opening and they came to us and said could we push it into 2010 and we said of course we can; so the 24,000 right now is on the verge of being executed and we are going to target a 2010 opening.

Operator

Our next question comes from Jeffrey Donnelly at Wells Fargo.

Jeffrey Donnelly – Wells Fargo

Good afternoon guys. Mark, is there a way to – if you’re interested in rethink I guess the economics of the (IRXJV) because in effect they’re renting your balance sheet to a degree and I would argue you almost had the short end of the stick last one to two years, is there a way to maybe get a the upper hand or a better deal of it JV.

Mark Zalatoris

Well, I am not sure I agree with you Jeff as far as – we get a return on the equity we have invested in these properties. And those Bank of America buildings were providing us over a 9% return on our capital, so that is closer to 10 is very accretive to us. And so it doesn’t hurt us when you look at other than tying up capital.

If were short of capital to put in areas that we thought we could get a higher return, then I would say, yes. That would negative us, but I don’t believe that really happened. Now clearly, we were uncomfortable in having that much capital tied up into one investment so to speak and that’s why we didn’t want to double down and provide any more assets, besides I think their sales slowdown and off that they should just concentrate on selling out those Bank of America buildings, which they worked hard to do it to get our exposure to roughly 20% of the capital remaining.

Going forward, we are talking them actually about some additional modifications in a sense and how we would source properties to them that may result in a change in terms of may not. But their demand for property has picked up somewhat and even on the traditional terms that we have, I think that we may a good return. We have started very well.

We have – as far as the fee income, it’s provided us with ongoing just management fee income is what, Brett, it’s roughly $800,000 a year or something like that on the total of the properties that we sourced and the acquisition fee which is just a one-time fee for property has been in the area of millions of dollars to us. So to us it’s still a good relationship and we just – we need to manage in the amount of capital that we want to commit to it.

Jeffrey Donnelly – Wells Fargo

Okay. And actually just since you mentioned the JV is actually something that caught my eye. This could actually be a typo. But on – in your supplemental on the development joint ventures, I think with Paradise Group, it shows that the loan maturity was September of 2009, it’s only – (inaudible) $9 million balance. Is that – I guess is that correct or has it been extended or what’s the status of that?

Mark Zalatoris

We are currently in negotiations. Our partners are in negotiations on the extension. Their loan has been kept performing and we are just working out the details on the extension on that.

Jeffrey Donnelly – Wells Fargo

You think you will get resolution in the next quarter or so or –?

Mark Zalatoris

Yes.

Jeffrey Donnelly – Wells Fargo

And actually, Scott, in Q1, you anchor leases that you signed, looks there are about I will call 750 a square foot overall and I think 865 a square foot for the new anchor leases. Is that a – I think it’s a good proxy for where we should think about your 2011 anchor lease expirations, because I think they are rolling it close to $10 of square foot and I am not sure it’s just the mix of anchor boxes of if you think that’s a good indication maybe where anchor trends gone in the market.

Scott Carr

I would say we are seeing a little more resilience on the renewal side. So we are still not projecting that kind of downward trend on renewals for the anchor boxes. And I would think we have seen across the market anecdotally decreases of 30% to 40% in anchor leases. We haven’t experienced that across the board. We have experienced it on individual basis. But then, some of the leases have been signed at same or higher rates. So it’s been a blend, but we are seeing a little more leverage on the renewal side.

Jeffrey Donnelly – Wells Fargo

Okay. And just, I guess one last question and maybe it’s little nitpicking Scott, because it also relates bank or leasing. But if I look at your lease expiration schedule from the fourth quarter, I think there are like 26 leases, roughly 725,000, 730,000 square feet expiring in 2011. If you look at the current supplemental, that’s risen to 28 leases and about 765,000 square feet. So we kind of imply you picked up about two leases totaling 40,000 square feet expiring next year. Are you guys signing, I guess anchor leases for like short-term terms or is that how did they appeared or did maybe someone have a renewal option that was fairly short terms or it might have been a 2009 or 2010 expiration that might have had an option that pushed them out a year or two?

Scott Carr

Yes, that’s exactly right. There has been some short-term renewals and it does carry over. We did some short-term renewals with Old Navy – actually it’s ironic. We have an Old Navy in Minnesota that actually has 10 one-year renewal options. So every year, that lease rolls and they want to keep it that way even though the store performs well. And in other instance, we had an Office Depot that we just did a one-year renewal on, because we know long-term they don’t want to stay in the center, they didn’t want to pay the rents we wanted them to pay. We are working on their placement, but we wanted to keep some lights on. So we did a short-term renewal at them.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mark Zalatoris for any closing remarks,

Mark Zalatoris

Well, thank you. I would be remiss if I didn’t remind everyone that please remember Mother’s Day this coming weekend. So visit your local flower shop or gift store to get her token of your affection.

As William Dean Howells, the American realist author and literary critic and contemporary of Mark Twain so succinctly wrote, A man never sees all that his mother has been to him until it’s too late to let her know he sees it.

Thank you for your interest in the company and your time today on our call. I hope to see many of you at either the ICSC Annual Convention later this month or at REIT Week here in Chicago in June.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Inland Real Estate Corp. Q1 2010 Earnings Call Transcript
This Transcript
All Transcripts